1. business and industrial
2. company
3. bankruptcy

ARE OUTPUT AND REQUIREMENT
CONTRACTS PROVABLE CLAIMS
IN BANKRUPTCY?
Alphonse M. Squillante*t
INTRODUCTION
A agrees with B that A will buy all his timber requirements
from B who agrees to fill those needs. The objective standards
needed to create a non-illusory' contract are the requirements of A.
Conversely, if B agrees to sell and A agrees to buy all of B's timber
the objective standard needed to create a non-illusory contract is
B's output.
Output or requirements contracts are not based upon continuing
orders or shipments flowing from the seller to buyer; rather each
party grounds his request upon his need or his use. Such need or
use can be demonstrated by prior dealings between the parties, custom and usage of the trade or by any other commercially reasonable
standard. Courts have not always been kind to those businessmen
who, because of their business' idiosyncrocies, imprecisely, or even
incorrectly worded their contracts, but such- wording gave them the
2
flexibility needed to continue in business.
A promise to buy of another person or company all of some commodity
or service that the promisor may thereafter need or require in his
business is not an illusory promise; and such a promise is sufficient
consideration for a return promise.'
Because the issues and treatment of output and requirements
contracts are identical, the concept of requirements will include output when mentioned hereafter.
At common law, in a proper case, 4 the courts had little trouble
* A.B., Wagner College, 1954; M.S. Columbia University, 1957; LL.B., Fordham
University, 1962; Assistant Professor of Law, University of Denver.
f The author wishes to thank Mrs. Susan G. Barnes, J.D., University of Denver,
1966, member of the Colorado State Bar, for her assistance in preparing this article.
1 Where courts have consistently denied relief in these contracts they have used
terms like "vague" or "illusory." E.g., Bailey v. Austrian, 19 Minn. 535 (1873)
Schlegel Mfg. Co. v. Cooper's Glue Factory, 231 N.Y. 459, 132 N.E. 149 (1921).
2 E.g., G. Loewus & Co. v. Vischia, 2 N.J. 54, 65 A.2d 604 (1949) (wine purchased to be bottled under purchaser's label; lacked mutuality).
3 1A A. CORBIN, CONTRACTS § 156 (1963).
4 E.g., El Rio Oils (Canada), Ltd. v. Pacific Coast Asphalt Co., 95 Cal. App. 186,
GONZAGA LAW REVIEW
[Vol. 3
in enforcing requirements contracts except where jobbers or new
businesses were parties to the transaction.' On the issues of whether
once a requirements contract is entered into the parties thereto had
the duty to remain in business while the agreement was executory
and whether there is any duty to have requirements, there is a variety of answers. 6
Knowing the vagaries of the courts on the problem of requirements contracts the draftsmen of the Uniform Commercial Code
did little to promote uniformity, modernize commercial law, and
permit continued expansion of commercial practices7 when they
comment on § 2-306, "This article takes no position as to whether
a requirements contract is a provable claim in bankruptcy."' A single
sentence is supposed to palliate the requirements contract problem:
A term which measures the quantity by the output of the seller or the
requirements of the buyer means such actual output or requirements
as may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate or in the absence of a stated
estimate to any normal or otherwise comparable prior output or requirements may be tendered or demanded. 9
Of the approximate 124 sections in Article Two of the Code,
that is all that is said about requirements contracts. The common
law is codified ° and the jobbers and new businesses are probably
included in the section's coverage." Does the Code give us a workable rule against which not only requirements contracts are measured but also whether they are provable claims in bankruptcy?
I. GOOD FAITH
Section 2-306(1) imposes the duty of good faith on those parties dealing under a requirements contract. 2 The imposition of
213 P.2d 1 (1949) (plaintiff to sell oil to defendant for the manufacture of asphalt) ;
Byrne v. Shell Oil Co., 295 F.2d 797 (7th Cir. 1961) (oral agreement to buy advertising devices); Randolph McNutt Co. v. Eckert, 257 N.Y. 100, 77 N.E. 386 (1931)
(lowest bidder competition must be made in good faith) ; Great E. Oil Co. v. DeMert
& Dougherty, 350 Mo. 535, 166 S.W.2d 490 (1942) (requirements of denatured
alcohol). Caveat-UNIFORM COMMERCIAL CODE (hereafter U.C.C.) § 2-204.
5 Requirements Contracts Under the U.C.C., 102 U. PA. L. REV. 654, 655 (1954).
6 Oregon Plywood Sales Corp. v. Sutherlin Plywood Sales Corp., 246 F.2d 466
(9th Cir. 1957) (where it is commercially impossible to remain in business there is no
obligation to stay in business); Western Fuel & Oil Co. v. Kemp, 245 F.2d 633 (8th
Cir. 1957)
(where one party discontinues performance in bad faith an obligation will
be implied).
7 U.C.C. § 1-102.
8 U.C.C. § 2-306, Comment 2.
9 U.C.C. § 2-306(1).
10
1
W. HAWKLAND,
TRANSACTIONAL GUIDE TO THE UNIFORM COMMERCIAL CODE,
§ 1.1704 (1964).
11 U.C.C. § 2-306, Comment 1.
12 U.C.C. § 1-201(19) defines good faith as honesty in fact in the conduct or
transaction concerned.
PROVABLE CLAIMS
Spring, 1968]
dealing in good faith relieves the parties to the transaction of the
necessity of minutely detailing the rights, duties and obligations
owing to each and yet builds in the fluidity of commercial change
which allows adjustment of transactions as the change is needed.
Not only is the duty of good faith a mandate of the Code but
also it has various shades of meaning from class to class of parties
to the transaction. 3 The standard of good faith is an objective one.
Good faith "has nothing to do with a state of mind .. . [T]he inquiry goes to decency, fairness or reasonableness in performance or
enforcement." 4
The latter statement in the foregoing paragraph is supported
by a recent holding of the New Mexico Supreme Court.15 In this
case the prime contractor sued his subcontractor for failure to complete his contract within the time required. The subcontractor counterclaimed for damages resulting from the prime contractor's failure
to deliver sufficient materials to allow the subcontractor to meet the
specifications of the Highway Department. The trial court allowed
a "backcharge" against the prime contractor for causing the subcontractor to conform the preparation of the specifications as were
required of the prime contractor. The supreme court reversed the
trial court stating that the agreement was a requirements contract
under § 2-306(1) and that the lower court had made no proper
finding as to amounts of materials used by the subcontractor in
conforming the prime contractor's performance to the required specifications and as to the question of good faith. The court said that:
Whether Adams (the prime contractor)
in good faith delivered a
quantity of material which was not unreasonably disproportionate to
the normal requirements for the purpose for which it was delivered is
a question of fact necessary to the determination of the issue upon
which no finding was made. 16
The actual needs of the parties measured by commercial reasonableness coupled with the lack of good faith makes the failure
to perform a contractual duty a breach of that contract by the nonperforming party.'
18 U.C.C. § 2-103(1) (b) requires not only that every contract be entered into in
good faith but also that reasonable commercial standards of fair dealing in the trade
be followed by merchants. See U.C.C. § 2-104(1) for the definition of merchant.
14 Farnsworth, Good Faith Performance and Commercial Reasonableness Under
the Uniform Commercial Code, 30 U. CHI. L. REv. 666, 668 (1963). However, another
author suggests that a close scrutiny of the motives underlying a purchase is appropriate on some occasions. See 1 W. HAWKLAND, A TRANSACTION GUIDE TO THE UNIFORM
COMMERCIAL CODE, § 1.1705 (1964).
15 Gruschus v. C. R. Davis Contracting Co., 75 N.M. 649, 409 P.2d 500 (1965).
16 Id., 409 P.2d at 503.
17 For an excellent and more detailed discussion on output and requirements
contracts see, R.
DUESENBERG
& L. KiNc,
SALES
& BULK
SALES UNDER THE UNIFORM
GONZAGA LAW REVIEW
II.
COMMON LAW,
BANKRUPTCY
AND
[Vol. 3
REQUIREMENTS
CONTRACTS
A.
The Bankruptcy Act
The issue of provability in bankruptcy arises most often when
the party is not performing because he is insolvent."8 Voluntary or
involuntary bankruptcy leaves the aggrieved party to seek his remedy in the bankruptcy court. Whether or not he will share in the
assets of the bankrupt depends on whether his claim of debt or demand is provable19 and allowable2 1 under the Bankruptcy Act.
The Bankruptcy Act defines debt as including "any debt, demand or claim provable in bankruptcy."' 21 Of the nine species of
provable debts in bankruptcy two are of special interest to us-those
grounded on an open account or an express or implied contract and
those involving claims of an anticipatory breach of a contract executory in part or whole.2 2 As to the provable debt based on an open
account or on express or implied contract the United States Supreme
Court has said such claims are provable when they are fixed in
amount or susceptible of liquidation. 3
Apparently, nothing in the Bankruptcy Act precludes inclusion
of requirements contracts as long as the claim is susceptible of liquidation. However, it must be remembered that the claim, debt or
demand must be in existence at the time that the petition in bankruptcy was filed.2' The claimant, in order to fall within this principle,
must illustrate that the voluntary or involuntary bankruptcy itself
is a breach, anticipatory or otherwise, of a contractual obligation. 25
COMMERCIAL CODE § 4.05 (1966). It is also a possibility that § 2-306, new to uniform laws, might run afoul of the anti-trust provisions of the Clayton Act.
18 See 1 H. REMINGTON, BANKRUPTCY § 60 (5th ed. 1950).
19 11 U.S.C. § 103(a) (1964).
20 11 U.S.C. § 93(d) (1964). Before a creditor may participate in the distribution
of the assets he must show that his claim is provable debt, demand or claim; and
failure to so prove will bar any recovery. Assuming he can show the debt, demand or
claim is provable then he must meet the test of whether it is allowable. Only after the
creditor has filed his claim, then evidenced that it is both provable and allowable,
may he participate in the bankruptcy proceeding. C. E. NADLER, BANKRUPTCY § 214
(2d ed. 1964).
21 11 U.S.C. § 1(11) (1964).
22 11 U.S.C. § 103(a) (1964).
23 Maynard v. Elliott, 283 U.S. 273, 275 (1931).
24 Allen v. See, 196 F.2d 608 (10th Cir. 1952).
25 U.C.C. § 2-610. Insolvency by one of the contracting parties is not within the
remedy provisions of the Code. Of course there are procedures that either the buyer
(U.C.C. § 2-502) or the seller (U.C.C. § 2-702) may follow in the event that an insolvency interrupts performance of their contract. However, the procedure extends to
how each party may recover the goods against the failing party and not to any
monetary damages (unless, under U.C.C. § 2-502, the buyer has paid all or part of the
purchase price in which case he can recover the goods contracted for or his money).
Spring, 1968]
B.
PROVABLE CLAIMS
The Duty to Stay in Business
Is there any obligation for a merchant to remain in business
for the duration of a requirements contract? Does bankruptcy, voluntary or not, constitute a breach of a requirements contract? The
intent of the drafters of the Code is not to create new law but rather
26
to expand, clarify, modernize and simplify existing law.
The intent of the drafters being known, it must be the reasonable construction of § 2-306(1) that there are limitations on the
requirements contract beyond which the courts will not travel. The
language of these courts establish an outer limit for the output contract but not a lower limit under which a party could not specify
and still have a requirements contract:
Reasonable elasticity in requirements is expressly envisaged by this
section and good faith variations from prior requirements are permitted even when the variation may be such as to result in dis27
continuance.
There is an essential element in all terminations of requirements
contracts-good faith. While the courts may allow a shutdown for
lack of orders, a shutdown merely to minimize losses may not be
allowed. The test would be whether the party closing down was
acting in good faith.28
Of course the use of good faith is referable to dealings between
parties. The owner who in good faith closes down his plant to stop
any further losses is not within the purview of the Code. The Code's
mandate is that in every agreement there exists an obligation of
good faith performance or enforcement.29
For this reason, I suggest that the claimant must show that the bankruptcy is a
breach of contract.
26 U.C.C. § 1-102.
27 U.C.C. § 2-306,
Comment 2. Economic disaster would seem to preclude the
necessity for remaining in business. Accord, Fort Wayne Corrugated Paper Co. v.
Anchor Hocking Glass Corp., 130 F.2d 471 (3d Cir. 1942) (buyer locked up shop when
his market disappeared); Sheesley v. Bisbee Linseed Co., 337 Pa. 197, 10 A.2d 401
(1940) (tariff rate makes continued production impossible); RESTATEMVENT OF CONTRACTS § 454-67 (1932)
(supervening force prevents continued enforcement; e.g.,
destruction of business of output seller).
28 While some courts will hold there is no duty to remain in business at all
(e.g., Drake v. Vorse, 52 Iowa 417, 3 N.W. 465 (1879)) the majority of courts will
not allow anyone to go out of business merely to curtail losses. Accord, Diamond
Alkali Co. v. P. C. Tomson & Co., 35 F.2d 117 (3d Cir. 1929) (failure to provide
for a contingency does not relieve party of duty to perform) ; Great Lakes & St.
Lawrence Trans. Co. v. Scranton Coal Co., 239 F. 603 (7th Cir. 1917) (specific
enforcement of contract which if not enforced would leave complainant without
adequate remedy) ; Wigand v. Bachman-Bechtel Brewing Co., 222 N.Y. 272, 118
N.E. 618 (1918) (production must continue as agreed upon but damages is a question
of fact for jury).
29 U.C.C. § 1-203.
GONZAGA LAW REVIEW
[Vol. 3
Not considering § 2-306 for the moment we must look to those
cases upon which the drafters of the Code must have grounded their
decision to include the section in the Code. Perhaps the most cited,
most distinguished, most useful but not overruled pre-code case in
point was argued in 1934.30
The bankrupt, United Cigar Co., entered into an agreement
wherein the bankrupt was to buy all its needs from the claimant.
The agreement was to last for ten years. In addition the bankrupt
agreed that it would try to get its subsidiaries to purchase their needs
from the claimant. In return the claimant-seller would sell at high
volume discount rates to the bankrupt or any subsidiary joining in
the agreement. In fact, one subsidiary did sign such an agreement
with the claimant. The parties performed until 1932 when the buyers
voluntarily filed in bankruptcy. The seller's claims were not allowed,
the trustee successfully showing that when the buyer's requirements
stopped so did his obligation to perform. Agreeing the court stated:
[I]t seems clear that where the buyer makes a contract to purchase his
requirements of a commodity for a term, he has not broken his
contract when his requirements diminish or when he ceases to have
any requirement by reason of retirement from business, voluntary or
involuntary. A provision that he shall continue to have requirements is
not ordinarily implied.3 1
The appellate court affirming the lower court felt that a claim in
32
bankruptcy based on non-performance was only a contingent issue
because the primary question was whether there was any breach at
all. Bankruptcy, the court continues, does not necessarily excuse a
breach, but it may have so changed the requirement that the contract was not broken.33
The United case has been the warehouse from which other
courts have withdrawn sustenance, 34 holding that the obligation to
30 In re United Cigar Stores, 8 F. Supp. 243 (S.D.N.Y. 1934), aff'd, 72 F.2d 673
(2d Cir. 1934), Consolidated Dairy Prod. v. Irving Trust, 293 U.S. 617 (1934) (Irving
Trust was trustee in bankruptcy for United Cigar Stores).
31 In re United Cigar Stores, 8 F. Supp. 243, 245 (S.D.N.Y. 1934).
32 In re United Cigar Stores, 72 F.2d 673, 674-75 (2d Cir. 1934).
33 Id.
34 Accord, Neofotistos v. Harvard Brewing Co., 341 Mass. 684, 171 N.E.2d 865
(1961)
(there is no obligation to stay in business and a good faith termination of
business is consistent with that obligation); HML Corp. v. General Foods Corp., 236
F. Supp. 719 (E.D. Pa. 1965) (must show bad faith to recover). On the other hand
there are courts who have no concern for the motive of termination of the requirements contract-if there are in fact no requirements there is no duty to remain in
business. E.g.: H. M. Pfann & Co. v. J. C. Turner Cypress Lumber Co. 194 F. 69
(5th Cir. 1912), cert. denied, 225 U.S. 706 (1912) ; Rubinger v. International Tel. &
Tel. Corp., 193 F. Supp. 711 (S.D.N.Y. 1961), aff'd, 310 F.2d 552 (2d Cir. 1962),
cert. denied, 375 U.S. 820 (1963).
Spring, 1968]
PROVABLE CLAIMS
35
remain in business rests on the motive for termination. Corbin and
Williston36 believe that it is not the function of the courts to form
contracts by implying nonexistent terms where terms are not clearly
stated or even present. These writers feel that, subject to the test
of good faith, the obligation of the parties does not extend to remaining in business. Still, there is precedent stating that there is an obligation to remain in business.17 Certainly if a buyer or seller is
required to do certain acts in order that requirements contract be
performed, you must imply, if it does not already exist by estoppel,
the obligation to remain in business for whatever duration the contract may be."8 Going out of business to reorganize your operating
base is not in good faith and the implication is that lacking good
faith there will be no cessation of the business. 9 However, the case
of Humble Oil & Refining Co. v. Cox,4" states that even in the
minority jurisdictions, where circumstances change, e.g. as in bankruptcy, there may be no obligation to remain in business.
While decisional law does not favor the requirements contract
as a provable claim in bankruptcy, it is apparent from the above
discussion that the law is far from settled. It is significant that the
cases constantly use the lack of good faith upon which to ground
their decisions on both sides of the problem of requirements contracts being provable claims in bankruptcy.
C. The Duty to Start a New Business
The Code is the first commercial document to explicitly define
the standard of good faith.4 1 By this definition the problem as to
the validity of requirements contract is not or should not be in doubt.
The possible exception to removal of doubt of the validity of a requirements contract is a contract that requires the formation and
opening of a new business to meet the requirements. The requirements contract is a bargained-for assumption of risk as to the completion of the contract by an established business. Will a requirements contract necessitate the establishment of a new business? The
35 3 A. CORBIN, CONTRACTS § 569 (1960).
36 2 S. WILLIS TON, SALES § 464 (1948).
37 Seller, plaintiff, sued the owners of a steamship line who had agreed to buy the
coal for their steamships from him. Prior to the end of the contract the owners sold
their ships and were held liable. The court stated that the contract did not terminate
in the event of a sale or other disposition of the boats by the defendants. Wells v.
Alexandre, 130 N.Y. 642, 646, 29 N.E. 142, 143 -(1891).
38 Diamond Alkali Co. v. P. C. Tomson & Co., 35 F.2d 117 (3d Cir. 1929) (one
party moved his plant to a new city in order to be near the source of the requirements).
39 Western Fuel & Oil Co. v. Kemp, 245 F.2d 633 (8th Cir. 1957).
40 207 Va. 197, 148 S.E.2d 756 (1966).
41 U.C.C. § 1-201(19).
GONZAGA LAW REVIEW
[Vol. 3
Code is silent as to whether there is a duty to open the business;
however, it would not be unreasonable to state that the contract is
valid only if the business is in fact started.
The Code is prepared for such a problem in that where there
is an "occurrence of a contingency the non-occurrence of which was
a basic assumption on which the contract was termed," there is no
breach of contract for non-performance.4 - The drafters of the Code
have cast this section not in terms of impossibility of performance
or frustration of intended business venture but rather in terms of
commercial practicalness. 3 The exemptions are not applicable when
the parties could reasonably foresee, at the time of the making of
the contract, that there was some danger in assuming the risks of
the contract which required that a new business be started.
Section 2-615 is applicable equally to the requirements contract
involving an established business as well as the business that is to
be formed-there is no excusing of performance if that which prevents performance was foreseeable at the time of the making of the
contract.4 4 Of course, an event not contemplated at the time of the
making of the contract would excuse the nonperformance of the
contracting party. The test of exemption from performance is commercial practicalness and good faith in the situation at hand.4"
46
In Oregon Plywood Sales Corp. v. Sutherlin Plywood Corp.,
defendant, not yet in production agreed to supply the plaintiff with
up to 80% of its produce. The plaintiff was to make loans to the
defendant to help commence production. It was a business failure
from its inception-the defendant stopped production within four
months and sold its assets to another company. The court found for
the defendant stating that the plaintiff was able to foresee the peril
of a business failure of this new company.
The new or contemplated business problem has just one real
decision to make: whether there is the duty to first commence production of those items contemplated by the contract negotiations or
to have real requirements for which production is geared.
Generally, there is no reason to hold either of the negotiating
parties liable if there is a delay in commencement of production.
But, where the plaintiff agreed to buy and the defendant agreed to
sell the defendant's seasonal output of cotton linters and the de42 U.C.C. § 2-615.
43 U.C.C. § 2-615, Comments 6, 8.
44 Applicability of the section is uniform no matter whether the business is one
currently operational or one to be formed.
45 U.C.C. § 1-205.
46 246 F.2d 466 (9th Cir. 1957).
Spring, 1968.1
PROVABLE CLAIMS
fendant closed his mill prior to the end of the season for reasons not
connected with the contract, the court held that the closing of the
mill did not violate the contract. 47 In Texas Co. v. Pensacola Maritime Corp.4" the purchaser agreed to buy oil from the defendant up
to a certain amount. The purchaser was not in the oil resale business
but was in the fuel business. The court found that in spite of the
purchaser not having any requirements for the first six months of
the contract it was a valid contract.
III.
A.
BANKRUPTCY
ACT V.
UNIFORM
COMMERCIAL
CODE
Generally
In stating, "Unless displaced by the particular provisions of
this Act, the principles of law and equity, including ... bankruptcy,
or other validating or invalidating cause shall supplement its provisions,"" the Code draftsmen are not quite accurate with the law
of the land. Where the Code and the Act are in conflict, there is little
doubt as to the outcome-the Bankruptcy Act prevails.5" Should
we advance the argument that the law of the land as set forth by
the Act is subservient to the Code as enacted by the entire United
States?;"
Those claims that are provable in bankruptcy are often provable
only because the bankruptcy courts have been traditionally liberal
with the provability and allowability of claims in bankruptcy.
Equity is the base from which these courts apply the Act:
It is manifest that the touchstone of each decision on allowance of
interest in bankruptcy, receivership and reorganization has been a
balance of equities between creditor and creditor or between creditors
52
and the debtor.
The devotion to equity in bankruptcy cases is evidenced again and
again throughout the federal judiciary. The lance of the Referee is
imbued with the magic of equity. The court in In re Laskin5"
47
1919).
48
49
50
Kennan, McKay & Spier v. Yorkville Cotton Oil Co., 260 F. 28
(4th Cir.
279 F. 19 (5th Cir. 1922).
U.C.C. § 1-103.
U.S. CONST., art. VI. In spite of the supremacy clause which has a long history
of litigation one wonders whether an argument could be made for the Code's supremacy over the Act. Public Law 88-243 was enacted by Congress to provide the
District of Columbia with the Uniform Commercial Code. As an expression of Congressional intent and arising after the Act it may be argued that the Code prevails
over the Act where they are inconsistent. At least in the District of Columbia the Code
will prevail over the Act because the Code is a later statement of Congressional intent.
As to the efficacy of this thought the author confesses there is no plethora of support.
51 Louisiana is the sole remaining jurisdiction that has not enacted the U.C.C.
52 Vanstron Bondholders Protective Comm. v. Green, 329 U.S. 156, 165 (1946).
53 316 F.2d 70 (3d Cir. 1963).
GONZAGA LAW REVIEW
[Vol. 3
allowed the Referee to make a determination on the circumstances
surrounding the presentation and execution of a promissory note by
the president of a corporation as to what his capacity was when he
signed the note, a determination not permitted by Article Three of
the codeP4 The court's language was quite clear as to what the
Referee may do:
The District Court erred in its view that the Pennsylvania law estopped
the Referee from looking to all the circumstances attending the presentation and execution of the note in the exercise of the equitable jurisdiction vested in him . . .
,
and his specific authority . . . to reject
claims already allowed "according to the equities of the case."
55
As to the relationship of provability, which is probably a matter of
state law, allowability, which is passed upon by the bankruptcy
court, and equity, it is apparent that the concepts guiding or determining each of these is not known or knowable. "It is not entirely
clear whether the validity of a bankruptcy claim is a matter of federal law or whether it is a matter of state law subject to the bankruptcy court's equitable power to subordinate or disallow claims." 6
B.
Anticipatory Breach of Contract and Bankruptcy
Debts of the bankrupt which are provable and allowable against
his estate may arise out of claims for anticipatory breach of contract, executory in part or whole.57
Definitionally what is an anticipatory breach of contract is not
a problem:
Strictly an anticipatory breach is one committed before the time has
come when there is a present duty of performance. It is the outcome
of words or acts evincing an intention to refuse performance in the
future. 58
It is the application of what is an anticipatory breach that causes
some concern." 9 Whether or not the trustee will execute a contract
U.C.C. § 3-403(2).
Laskin, 316 F.2d 70, 74 (3d Cir. 1963).
56 Thompson v. England, 226 F.2d 488, 491 (9th Cir. 1954).
57 11 U.S.C. § 103(a)(9) (1964). That bankruptcy amounts to anticipatory
breach of contract does not conjure up any special spectre of commercial change. The
U.S. Supreme Court in Central Trust Co. v. Chicago Auditorium Ass'n, 240 U.S. 581
(1916) so held. This rule has been applied again and again. For a collection of cases
see, In re Owl Drug Co., 12 F. Supp. 431, 439, 447 (D. Nev. 1935). For a tantalizing
group of questions revolving about this point see J. W. MOORE & W. R. PHILIPS,
DEBTORS' AND CREDITORS' RIGHTS 8-45 (1966).
58 New York Life Ins. Co. v. Viglas, 297 U.S. 672, 681 (1936).
59 Anticipatory breach follows an absolute refusal to perform an executory contract, Roehm v. Horst, 178 U.S. 1 (1899) ; the act of repudiations must be a positive
one, Steinberg Press v. Charles Henry Publications, 68 N.Y.S.2d 793 (1947); refusal
to make disability payments, Lauro v. Metropolitan Life Ins. Co., 80 F. Supp. 377
54
55 In re
Spring, 1968]
PROVABLE CLAIMS
for the bankrupt depends on the terminology of the contract and
the benefits to be derived therefrom." ° If the trustee elects not to
perform the contract, then whether or not the nonperformance is an
anticipatory breach of that contract is unsettled."' Whether or not
breach rests on the law of the
the bankruptcy is an anticipatory
2
jurisdiction of the bankrupt.
Section 2-610 is the Code's resolution of the anticipatory breach
problem. Whatever prevents, impairs or otherwise makes performance of the contract impossible or impairs the value of the contract
to the nonbreaching party creates in that party the power to treat
the contract as having been breached and he may resort to any
remedy available in the Code.6 3
The Code does not deal with anticipatory breach vis-6t-vis bankruptcy, but the non-breaching party must have his remedy if his
non-performing opposite party is insolvent and enters into bankruptcy. Section 2-610 is his remedy where the trustee elects not to
perform the executory portions of a contract.
C. Seller's Bankruptcy
The bankruptcy of the seller conjures up strong reactions in the
creditors who become most concerned with the trustee of the bankrupt. The trustee is in the position of the bankrupt.
[A]s a subrogee to the collective rights of the creditors of the bankrupt, .. . In sum, the section (referring to § 70 of the Bankruptcy Act)
confers on the trustee the combined rights the debtor and all his creditors could have asserted against property under non-bankruptcy law,
which is largely state law, on the date of filing of the petition. The
trustee's status as successor to the title of the bankrupt is defined by
§ 70a and his position as subrogee to the rights of the creditors of the
estate derives from sub-divisions §§ 70c and 70e. The secured creditor
or other adverse claimant who has already perfected his rights under
creditor of the bankrupt
state law as against any subsequently levying
64
prevails as against the trustee under § 70c.
(D.N.J. 1948). These cases are but a few instances of what courts have held to be
anticipatory breaches.
60 W. M. COLLIER, BANKRUPTCY MANUAL 57.11 (KELLIKER ed., 1948).
61 C. E. NADLER, BANKRUPTCY § 243 (2d ed. 1965). See Ballantine, Anticipatory
Breach and the Enforcement of Contractual Duties, 22 MIcH. L. REV. 329 (1924).
62 Id. at § 242. Accord, Continental Motors Corp. v. Morris, 169 F.2d 315 (10th
Cir. 1948) (bankruptcy constitutes an anticipatory breach of contract and creates
provable claims for damages if the trustee elects not to perform) ; William S. Gray Co.
v. Western Borax, 99 F.2d 239 (9th Cir. 1938) (where there is a good faith cessation of
production there is no breach).
63 W.
HAWKLAND, A TRANSACTIONAL GUIDE TO THE UNIFORM COMMERCIAL CODE
§ 1.380404 (1964).
64 Kennedy, The Proper Relation Between the Bankruptcy Act and the Uniform
Commercial Code, 36 N.Y.S.B.J. 444, 447 (1964).
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In the days of the Uniform Sales Act, when the seller became
bankrupt, the success of the buyer in obtaining the goods which
were the subject matter of the contract depended on the location of
title.6 5 In order for the buyer to claim the goods the buyer had to
show that the goods were ascertained and set aside (appropriated)
for him by the seller.6 If the goods were so ascertained and agreed
upon the law created the fiction that the seller was the bailee for the
buyer and upon the tender of the purchase price the goods were
delivered to the buyer. Without this presumption the buyer would
have had to show the uniqueness of the goods led6 7to no damages
remedy; therefore, he had to gain title or suffer loss.
Today the concept of title is no longer critical and is, in fact, not
important unless the Code specifically so states in its text.6" The
determination of property rights, duties and obligations between
seller and buyer are defined in terms of risk of loss," insurable
interest, 7° rights to goods on seller's insolvency, 71 action for price, 2
and the buyer's right to specific performance or replevin. 73 Title is
not a prerequisite of the Code and ought not control the allowability
or provability of the buyer's claim.
When viewing the applicability of the Code and Bankruptcy
Act one must recognize the protective intent of the Act. Stategranted priorities, of which § 2-502 is an example, are overshadowed
by the Act, for the benefit of general creditors. 4 Where the state
attempts to forestall the operation of the Act as to its distribution of
the bankrupt's estate the Act will prevail.75 It would seem that
§ 2-502 is not a determinant of the buyer's right to claim goods from
the bankrupt.
Section 70a 76 empowers the trustee in enumerated instances to
assume the title to the bankrupt's estate on the date of the filing of
the petition in bankruptcy. These enumerated duties of the trustee
are further examples of the trustee's power over state laws.
Executory contracts are those contracts in which some duty of
65 Uniform Sales Act §§ 18, 19. These two sections state the rules as to intention
and how to ascertain intention in sales contracts.
66 See S. WILLISTON, SALES §§ 273-278 (rev. ed. 1948), for discussion of Doctrine
of Appropriation.
67 4 J. N. POMEROY, EQUITY JURISPRUDENCE § 1401 (5th ed. 1941).
68 U.C.C. § 2-401. See,.W. HAWKLAND, SALES & BULK SALES 90 (1958).
69 U.C.C. §§ 2-509, 2-510.
70 U.C.C. § 2-501.
71 U.C.C. § 2-502.
72 U.C.C. § 2-709.
73 U.C.C. § 2-716.
74 3 W. M. COLLIER, BANKRUPTCY § 64.01 (14th ed. 1940).
75 See 79 HARV. L. REV. 598 (1966) for an interesting discussion on this point.
76 11 U.S.C. § ll0(a) (1964).
Spring, 1968]
PROVABLE CLAIMS
either or both of the parties still remains. As to these contracts the
trustee may, in his discretion, perform or not perform the remaining
portion of the contract." If the trustee elects to perform, he subjects
himself to those claims the buyer could assert against the seller
under the contract. By electing to reject the performance, either by
explicit rejection or failure to act within sixty days of adjudication
of bankruptcy, the buyer has only a claim for breach of contract and
upon proving it becomes a general creditor.7" Should the buyer have
completed his obligations under the contract, the trustee has no right
of election as to performance or nonperformance. 79 Should the buyer
have completed performance but not paid or paid in part for the
goods and attempts to recover the goods from the trustee then the
trustee can treat the contract as executory. 0
Where a buyer has made an advance payment for the goods less
than ten days prior to the filing of a petition in bankruptcy, there is
a possibility that his standing may be defeated by a secured creditor. l If a secured creditor can defeat the buyer then it is possible
that the trustee, arguably a secured creditor, can also defeat the
buyer.8 2 The prepaying purchaser stands naked before the trustee
where a requirements contract is in dispute. The inaction or rejection
of the trustee leaves the buyer in no better position than that of a
general creditor. If the buyer is faced with such a situation as insolvency of the seller within ten days of the prepayment of the
goods his only umbrage can come from Article Nine of the Code
and quick compliance therewith. 3
D. Buyer's Bankruptcy
The bankrupt buyer poses no inscrutable concepts to the Code
or Act. If the buyer becomes bankrupt 4 before delivery the unpaid
seller may withhold delivery, 5 may refuse to deliver until paid, 6 or
77 11 U.S.C. § 1106 (1964). In re N.Y. Investors Mut. Group, Inc., 143 F. Supp.
51 (S.D.N.Y. 1956). The trustee's right of election in this case was superior to the
buyer's right in equity to specific performance. But see In re Phila. Penn. Worsted Co.,
278 F.2d 661, 664 (3d Cir. 1960). See generally 4 W. M. COLLIER, BANKRUPTCY
§ 70.43.
78 4 W. M. COLLIER, BANKRUPTCY § 70.43 (14th ed. 1959), 11 U.S.C. § 103(c)
(1964).
79 In re Forney, 299 F.2d 503 (7th Cir. 1962).
80 U.C.C. § 2-502. 11 U.S.C. § 110(b) (1964).
81 U.C.C. §§ 2-502, 2-402(1).
82 See generally Shanker, Bankruptcy and Article Two oj the Uniform Commercial Code, 40 REF. J. 37 (1966). Article Two of the Code does not define what is
a lien creditor, but reference is made to such a creditor in § 9-301(3) of Article
Nine of the Code.
83 U.C.C. § 2-502, Comment 2.
84 The code says insolvent. Insolvency is defined in U.C.C. § 1-201(23).
85 U.C.C. § 2-702.
86 Id.
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require cash for any goods already delivered.17 If the goods are in
transit the unpaid seller may stop delivery or, if they are in the
hands of a bailee, prevent delivery.88 In some circumstances the
seller may reclaim goods in the hands of the buyer, which goods were
delivered based on buyer's receiving credit from seller.8 9
Where does the trustee fit into the picture? Where the trustee
elects to perform the contract the seller, upon being paid, will be
delighted to deliver his goods to the trustee. The Code's sanction of
the buyer is only for not paying the seller. Payment palliates all ills.
If the goods are delivered and the seller remains unpaid the contract
should be handeld in the manner prescribed by § 2-702(3). The
caveat inserted in the Code is that the seller must take some action
within the time limitation set forth by Article Two.9 ° The drafters
are not trying to grant a sanctuary to the seller but rather to smooth
the flow of commerce consistent with concomitant commercial
principles. The seller who could have prevailed on the buyer to
give cash or to give security does not prevail over other creditors
except for those instances where bankruptcy9 ' takes place under
circumstances that no one could expect a risk.92 By giving the seller
special rights in such situations the Code is not inconsistent with
commercial usages nor with the Act.
The seller's success in recovering from the trustee depends on
the seller showing that his interest, created by § 2-702, is a security
interest which he has perfected under § 9-113"2 or that the interest
§ 2-702 speaks of is a reservation of title that amounts to a security
interest94 or both. However, § 2-702 is not a credit-securing device
87 U.C.C. § 2-702(1), See Murphy, Some Problems Concerning Seller's Remedies
Under the Uniform Commercial Code, 33 TSImp. L.Q. 273 (1960).
88 U.C.C. § 2-702,
position of title is not relevant to seller's power to prevent
goods from reaching buyer's hands (U.C.C. § 2-702, Comment 1).
89 U.C.C. § 2-702(2). Metropolitan Distributors v. Eastern Supply Co., 107
Pittsburgh Legal J. 451, 21 Pa. D. & C.2d 128 (C.P. Alleghany County, 1959) (a
demand for the return of goods, not an actual physical repossession, is sufficient to
recover goods from the buyer).
90 U.C.C. § 2-502, Seller's Insolvency; § 2-702, Buyer's Insolvency.
91 The Code does use the word insolvency but the effect on the seller is the
same whether the buyer is bankrupt or insolvent.
92 E.g., a false financial statement in reliance on which the seller makes an unsecured delivery on credit. See U.C.C. § 2-702.
93 U.C.C. § 9-113. This section relates directly to Article Two (Sales) of the
Code. Its mandate is that even though a security interest arises under the sales article
that interest must comply, for enforceability, with the secured transaction portions of
Article Nine. In the event that the buyer has not lawfully obtained possession of the
goods from the seller then the seller needs no. security agreement to enforce his
security interest (U.C.C. § 9-133(a)), he is not required to perfect his security by
filing (U.C.C. § 9-113(b) and his rights upon the buyer's default are set by Article
Two of the Code (U.C.C. § 9-113(c)).
94 79 HARV. L. REV. 598, 610 (1966).
Spring, 1968]
PROVABLE CLAIMS
but rather a shield to the seller to secure him from criminal9 5 or tort
conduct of the buyer." Nor is it likely that the trustee, a statutory
lien creditor, would subserve the seller who has not perfected his
security interest. Nor can a seller who has not perfected a security
interest given by Article Two but governed by § 9-113 expect to
succeed against a trustee whose buyer has lawfully obtained the
goods from the seller. The trustee is a levying creditor and will succeed over the rights granted to the seller who has not perfected his
interest, of course, only if buyer lawfully obtained seller's goods. One
commentator states that if the trustee can prove no illegality on the
part of the buyer in obtaining the goods from the seller then such
proof precludes the seller from recovering the goods from the buyer. 7
E. Does Bankruptcy Breach the Requirements Contract?
Turning once more to the introductory hypothetical where A
and B agree that A will buy and B will fill all of A's timber requirements. After several years of performance A wishes to end his contract with B in order to deal with C who can give A much better
prices. A is sufficiently clever to know that if he merely quits performing or reorganizes his business under a new name that such
action may constitute breach of contract leaving him no better status
than he holds now. Further, if he merely reorganizes under a new
name B will still be his supplier since the new-named business will
have the same requirements as the old and B would be able to enforce that contract. Seeing no alternative and still desirous of C's
better deal A files in bankruptcy. A's assets are not sufficient to
satisfy all creditors.98 B seeks to share in those assets. Results?
United Cigar Stores.99 The defendant filed voluntary bankruptcy and refused to make any more purchases on his contract. It
was held that bankruptcy, by itself, of one of the parties does not
excuse that party from performing his contract. The court was not
concerned with nonperformance of the bankrupt but whether or not
there was a breach. The rationale was not that bankruptcy was a
breach but that bankruptcy so altered the bankrupt's position that
the contract was not broken. The parties to a requirements contract
must assume the risk that future events would change or could
95 E.g., N.Y. PENAL LAW § 1293-b (McKinney 1944) (a false financial statement
is a misdemeanor punishable by fine or imprisonment or both). See generally F.
WHARTON, CRMINAL LAW AND PROCEDURE §§ 477, 582, 607, 1261. (R. ANDERSON ed.
1957).
96 U.C.C. § 2-702, Comment 2.
97 79 HARV. L. REV. 598, 611 (1966).
98 1 H. REMINGTON, BANKRUPTCY § 60 (5th ed. 1950).
99 8 F. Supp. 243 (S.D.N.Y. 1934), aff'd, 72 F.2d 673 (2d Cir. 1934).
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[Vol. 3
change the status of the contract. Providing that the nonperforming
party's conduct is in good faith he is free to deal with his business
in whatever manner he deems consistent with good business practices.1"0 The rationale is, after all, that no discernible delineation
exists between decreases in requirements which are short of no
requirements and those requirements that are totally stopped.
The above discussion had some play in a case that arose before
the Code became effective in New York but which mentioned the
Code in its holding. HML Corp.' contains dictum that despite the
fact that the Code is not applicable to the present case the Code is
not going to establish any new doctrine.1 °2 At any rate A's claim is
not provable in bankruptcy because of the United Cigar Store holding. Nor can the claim be maintained because the condition precedent to liability under the contract between A and B, that A hav6
requirements, never took place. 3 A's claim would be contingent and
not allowable in bankruptcy. Should B claim that A's bankruptcy
was evidence of bad faith, A's rebuttal is that there is no historicity
of the obligation to have requirements"0
nor is history created
by the Code.' 0 5
The obvious lack of good faith by A, the deviousness of his
circumvention of his duties, the lack of honesty in fact is the single
greatest thrust to A's black and malignant heart. The fact that a
filing of a petition in bankruptcy is not in itself an act of bad faith
and so a breach of the requirements contract contravenes the purpose of the Code. Why the filing of the petition is not bad faith and
so a breach is incomprehensible.
100 Accord, Brawley v. United States, 96 U.S. 168 (1877) ; H. M. Pfann & Co. v.
C. Turner Cypress Lumber Co., 194 F. 69 (5th Cir. 1912).
101 HML Corp. v. General Food Corp., 236 F. Supp. 719 (E.D. Pa. 1965), aff'd,
365 F.2d 77 (3d Cir. 1966).
102 The Court preferred to rely on U.C.C. § 1-102 of the Code rather than the
statement in Comment 2 of U.C.C. § 2-306 which clearly states that a cessation of
requirements merely to "curtail losses" would not be permissible. See 3 A. CORBIN,
CONTRACTS § 569 (1960) for an analysis of the implication of promises in requirements
contracts. Other pre-code cases involving the minimum requirements problem are:
Western Oil & Fuel Co. v. Kemp, 245 F.2d 633 (8th Cir. 1957); William C. Gray &
Co. v. Western Borax Co., 99 F.2d 239 (9th Cir. 1938); Diamond Alkali Co. v.
P. C. Tomson & Co., 35 F.2d 117 (3d Cir. 1929).
103 Thomson v. England, 226 F.2d 488 (9th Cir. 1954).
104 HML Corp. v. General Food Corp., 365 F.2d 77 (3d Cir. 1966) (in order to
recover for failure to deliver required food ingredients bad faith must be shown);
Neofotistos v. Havard Brewing Co., 341 Mass. 684, 171 N.E.2d 865 (1961) (no
obligation to remain in business); Rubinger v. International Tel. & Tel. Corp., 193
F. Supp. 711 (S.D.N.Y. 1961) (motives not relevant to ending an exclusive agency).
105 U.C.C. § 2-306 has no mandate indicating that the filing of a bankruptcy
petition is per se bad faith. Of course the Code's mandate is to perform the contract
in good faith.
J.
Spring, 1968]
PROVABLE CLAIMS
CONCLUSION
The Code doctrine of anticipatory repudiation. 6 is an excellent
vehicle to ride a requirements contract into the bankruptcy court.
Even before the motivity of the Code the courts were predisposed
towards the requirements contract and so there is no reason to
believe that the Code has changed the status of the requirements
contract.
There are instances when bankruptcy terminates the requirements contract even where all the parties are acting in good faith.
Such good faith terminations probably could not be provable claims
in bankruptcy. Yet, there must be, and probably are, instances when
the non-bankrupt party ought to be allowed to prove his claim in
bankruptcy.
The requirements contract is directly involved not only with the
Code but also with the Act, where a bankruptcy petition is filed
while the contract is executory. Thus the attorney is faced with the
dilemmatic duad-state versus federal law. The dilemma ought not
to be resolved in terms of federal power but rather in terms of coextensive, consistent laws seeking similar results.
The ruminating by the courts over the problem of the breach is
to be expected. It is more difficult to find a breach when your requirements decrease or cease than when your requirements abruptly
increase. However, even good faith decreases founded upon economic motivation is frowned upon by the Code." 7
Among the problems created by the vagaries of the decisions is
what to do about the breach of the requirements contract by an
established business as compared to a business to be formed to meet
the terms of the contract. The best answer now available would be
that when both parties entered into the agreement they were aware
of commercial impracticality and that there will be no exemption
from the duty to perform extended to either party.'
Not only is
there the question of whether in fact a breach has been committed
but who is the bankrupt.
If the seller is the bankrupt the buyer's right to recover rests
106 U.C.C. § 2-610.
107 U.C.C. § 2-306, Comment 2 (a shutdown to curtail losses is not favored).
108 U.C.C. § 2-615 (excuse for failure to perform because of failure of pre-supposed conditions upon which the contract was formed). Section 2-615 of the Code is
applicable to sellers and is intended to illustrate another criterion for failure to perform. See U.C.C. § 2-615, Comment 3. Comment 9 of this section says that § 2-306
makes it quite clear that there is an allocation and assumption of relevant risks of any
output .or requirements contract.
GONZAGA LAW REVIEW
[Vol. 3
on the fact that the Code10 9 gives him a special right to recover
identified goods for which he has paid the full purchase price. 0 if
the seller became insolvent within a prescribed time period thereafter (ten days). The buyer is given a security interest in those
goods for that prescribed time. But the buyer can attain no greater
status than that of a general creditor unless he has secured himself
by complying with Article Nine of the Code.11 ' Section 2-402 of the
Code clearly indicates that without compliance with Article Nine
the buyer's rights to the goods may be defeated in certain instances
by a creditor." 2
If the buyer is the bankrupt the seller will rely on § 2-702(3)
of the Code. This section is the equivalent of § 2-502. Of course
both § 2-702 and § 2-502 are subject to one serious limitation-when
invoked both parties assume the posture of a creditor subject to the
superior interest of the lien creditor who is the trustee. Unless the
seller or buyer have perfected their interests in compliance with
Article Nine the trustee in bankruptcy will prevail over their
interests.
As to those situations where the non-bankrupt party ought to
be allowed to prove his claim is our example in the hypothesis
given in section III E of this paper. The bankruptcy of A was a
wrongful intent to escape his contractual obligations. There was no
reason to file bankruptcy except to accept the better deal that C
offered. Such bad faith ought not to be rewarded by discharge of
obligations. A second example is the hardship created by seller's
bad faith (or lack of any faith) declaration of bankruptcy. The
buyer has requirements incurred in reliance on the seller's ability to
produce the required materials. How can the seller be allowed to
negate his obligations under § 2-306? When either party ignores the
mandate of the good faith," 3 unconscionable11 4 commercial fluidity
109 U.C.C. § 2-502.
110 Where the buyer has partially paid for the goods he must make and keep
good a tender of the remainder due to the seller as a condition precedent to his
recovering these goods. The ten-day period begins to run after payment of the first
installment. See U.C.C. § 2-502(1).
111 U.C.C. § 2-502, Comment 2.
112 E.g., where the seller retains the goods in contravention of state law which
treats such retention as fraudulent. Accord, Kentucky Ref. Co. v. Globe Ref. Co., 104
Ky. 559, 47 S.W. 602 (1898) (with certain exceptions retention of possession of
property is fraudulent); CaUahan v. Union Trust Co., 315 Pa. 274, 172 A. 684
(1934) (retention of possession is fraud on seller's creditors). A second illustration
would be fraudulent transfer acts such as a Bulk Transfer Act or Fraudulent Conveyances Act. See 3 S. WILLISTON, SALES § 639 (rev. ed. 1948) for discussion in point.
Of course U.C.C. § 2-402(3)(a) gives a secured creditor rights prior to those of the
unsecured buyer in the goods that are in dispute.
11 U.C.C. § 1-201(19) (defined as honesty in fact).
114 U.C.C. § 2-302 (unconscionable is not defined but is a grant of power to the
court to do what is fair in that situation).
Spring, 1968]
PROVABLE CLAIMS
47
tests of the Code, the bankruptcy court should take that mandate
into consideration before discharging the bankrupt. Where either or
both of the parties are merchants, the Code holds these people to
higher standards of commercial conduct than non-merchants-the
bankruptcy court should also.1 15
In sum the Code is an equitable document based on the needs of
the business community and the innovation of fluid contract law.
The Act seeks only to preserve on the estate, also in an equitable
manner. Which of the two equities ought to prevail?
115 U.C.C. § 2-104(1) (defines merchant as one who deals in those goods which
are the subject matter of the contract or has special knowledge of that subject matter
or to whom such knowledge can be attributed). See Cook Grains Inc. v. Fallis, 239
Ark. 962, 395 S.W.2d 555 (1965) for a case that tells what is not a merchant.