This appeal raises the question of whether the United States is entitled to set off in a bankruptcy proceeding an amount it owes the bankrupts on an ex-ecutory contract against its claim for damages arising out of the bankrupts’ failure to- complete that contract.
The bankrupts’ claim arose from their partial performance of a written contract with the Army Engineer Corps, and the claim of the United States is based on a breach of that same contract, occasioned by the filing of a voluntary bankruptcy petition. The contract in question required the bankrupts, Eugene L. Brown and his wife, to manufacture 128,200 small wooden boxes and deliver them to the United States Army Chemical Arsenal in Arkansas at a price of 420 each. The contract provided that not less than 10% of the total number of boxes' was to be delivered on or before June 2, 1958, with additional 10% shipments to follow at 15-day intervals, and complete delivery was to be made not later than October 15, 1958. Under a default clause the United States could terminate the contract if the Browns failed to make delivery of the boxes within the specified times. Upon termination, it could purchase the boxes elsewhere and the contractors would be liable to the United States for the excess cost of repurchase.1 On June 25, 1958, the Browns filed a voluntary petition in bankruptcy and were duly adjudicated
Provision for set-off of mutual debts of a bankrupt and his creditors is found in 11 U.S.C.A. § 108, which reads:
“a. In all cases of mutual debts or mutual credits between the estate of a bankrupt and a creditor the account shall be stated and one debt shall be set off against the other, and the balance only shall be allowed or paid.
“b. A set-off or counterclaim shall not be allowed in favor of any debtor of the bankrupt which (1) is not provable against the estate and allowable under subdivision g of Section 93 of this title; or (2) was purchased by or transferred to him after the filing of the petition or within four months before such filing, with a view to such use and with knowledge or notice that such bankrupt was insolvent or had committed an act of bankruptcy * * .”
The purpose of this section is to make it unnecessary for a creditor to pay the bankruptcy estate the full value of a claim he owes the bankrupt, while at the same time being allowed only partial satisfaction of a claim due him from the estate.2
The issue resolves itself into whether the United States had a provable claim on the date of the filing of the petition in bankruptcy against which there could be an effective set-off. In allowing the claim, the referee recognized that there was an anticipatory breach of the contract caused by the filing of the petition in bankruptcy, from which damages resulted to the United States, but denied the right to set off the amount which was owed the bankrupts on the same contract. It was reasoned that under the circumstances, the United States had no claim until it had exercised its right under the provisions of the contract to purchase the boxes elsewhere, and since this purchase was not made until sometime after bankruptcy, there was no claim in existence or provable at the time of the filing of the petition in bankruptcy. We think this holding is contrary to the provisions of the Bankrupt
Anticipatory breach of contract having been expressly made the basis for a provable claim against the bankruptcy estate, Collier on Bankruptcy, 14 Ed. Vol. 4, § 68.10 points out that “The right of set-off may be asserted in the bankruptcy proceedings even though at the time the petition is filed one of the debts involved is absolutely owing but not presently due, or where a definite liability has accrued but is as yet unliquidated. Nor is it necessary that the debts sought to be set off be due at the date of adjudication. Such claims are provable; but in the case of an unliquidated claim, liquidation must be accomplished within the terms of section 57d [11 U.S.C.A. 93(d)], or it is not deemed provable. * * *»
The Supreme Court has held that the initiation of bankruptcy proceedings is an anticipatory breach constituting the basis for a provable claim.3
The order is reversed and the matter is remanded with instructions that the set-off be allowed and the United States given the statutory priority for the balance of its claim.
1.
The default provision of the contract reads, in part:
“Default: (a) The Government may, subject to the provisions of paragraph (b) below, by written Notice of Default to the Contractor terminate the whole or any part of this contract in any one of the following circumstances: * * *
(i) if the Contractor fails to make delivery of the supplies or to perform the services within the time specified herein or any extension thereof; or * * *
(c) In the event the Government terminates this contract in whole or in part as provided in paragraph (a) of this clause, the Government may procure, upon such terms and in such manner as the Contracting Officer may deem appropriate, supplies or services similar to those so terminated, and the Contractor
2.
See Studley v. Boylston Nat. Bank, 229 U.S. 523, 33 S.Ct. 806, 57 L.Ed. 1313; Prudential Ins. Co. of America v. Nelson, 6 Cir., 101 E.2d 441; In re Progressive Wallpaper Corp., D.C.N.D.N.Y., 240 E. 807; Collier on Bankruptcy, 14 Ed., Vol. 4, § 68.02.
3.
City Bank Farmers Trust Co. v. Irving Trust Co., 299 U.S. 433, 57 S.Ct. 292, . 81 L.Ed. 324. In discussing the right to prove a claim for the breach of an executory contract after bankruptcy, the court, in Central Trust Co. of Illinois v. Chicago Auditorium Ass’n, 240 U.S. 581, 592, 36 S.Ct. 412, 415, 60 L.Ed. 811, said:
“The claim for damages by reason of such a breach is ‘founded upon a contract, express or implied,’ within the meaning of § 68a — 4, and the damages may be liquidated under § 63b. [Frederic L.] Grant Shoe Co. v. [W. M.] Laird [Co.], 212 U.S. 445, 448 [29 S.Ct. 332, 53 L.Ed. 591, 593], It is true that in Zavelo v. Reeves, 227 U.S. 625, 631 [33 S.Ct. 365, 57 L.Ed. 676, 678] we held that the debts provable under § 63a-4 include only such as existed at the time of the filing of the petition. But we agree with what was said in Ex parte Pollard, 2 Low. 411, Fed.Cas.No.il,252, that it would be ‘an unnecessary and false nicety’ to hold that because it was the act of filing the petition that wrought the breach, therefore there was no breach at the time of the petition. And as was also declared in In re Pettingill [& Co., D.C.], 137 F.B. 143, 147: ‘The test of provability under the Act of 1898 may be stated thus: If the bankrupt, at the time of bankruptcy, by disenabling himself from performing the contract in question, and by repudiating its obligation, could give the proving creditor the right to maintain at once a suit in which damages could be assessed at law or in equity, then the creditor can prove in bankruptcy on the ground that the bankruptcy is the equivalent of disenablement and repudiation. For the assessment of damages proceedings may be directed by the court under § 63b (30 Stat. 562).’ It was in effect so ruled by this court in Lesser v. Gray, 236 U.S. 70, 75 [35 S.Ct. 227, 59 L.Ed. 471, 475], where it was said: ‘If, as both the bankruptcy and state courts concluded, the contract was terminated by the involuntary bankruptcy proceedings, no legal injury resulted. If, on the other hand, that view of the law was erroneous, then there was a breach and defendant Gray became liable for any resulting damage; but he was released therefrom by his discharge.’ Of course, he could not be released unless the debt was provable.
“We therefore conclude that the Circuit Court of Appeals was correct in
4.
Continental Motors Corp. v. Morris, 10 Cir., 169 F.2d 315. We find no Kansas decisions holding that filing of a petition in bankruptcy is not an anticipatory breach of an executory contract under Kansas law. See Mabery v. Western Casualty & Surety Co., 173 Kan. 586, 250 P.2d 824.
5.
In Luther v. United States, 10 Cir., 225 F.2d 495, 498, we said: “At the intervention of bankruptcy, no claim for refund of the overpayments of income tax had been filed, and no determination had been made in respect to the existence of such overpayments or amounts thereof. But the overpayments had been made and the liability therefor existed. The amount of such liability was not ascertained and determined until later. But it existed in an undetermined amount at the time of the filing of the petition in bankruptcy. And the mere fact that the amount of the liability was not determined until after the intervention of bankruptcy does not deprive the Government of the right of setoff if it otherwise would have existed.”