In re Italian Cook Oil Corp.

• Decision Date: 14 August 1951
• Docket Number: No. 10334.,10334.
• Citation: 190 F.2d 994
• Parties: In re ITALIAN COOK OIL CORP.
• Court: U.S. Court of Appeals — Third Circuit

190 F.2d 994 (1951)

In re ITALIAN COOK OIL CORP.

No. 10334.

United States Court of Appeals Third Circuit.

Argued February 19, 1951.

Decided August 14, 1951.

Walter J. Bilder, Newark, N. J. (Bilder, Bilder & Kaufman, Newark, N. J., on the brief), for appellant.

Albert Philipson, Washington, D. C. (Newmyer & Bress, Washington, D. C., on the brief), for debtor.

Before BIGGS, Chief Judge, and GOODRICH and McLAUGHLIN, Circuit Judges.

BIGGS, Chief Judge.

On February 11, 1949 Italian Cook Oil Corporation (the "Company" or the "Debtor) was in the business of manufacturing and selling mayonnaise salad dressing. The Company knew that it was about to be awarded a contract by the United States to manufacture and deliver approximately 420,000 pounds of mayonnaise for the Army for a price of about $75,000. The Company needed financing. It endeavored to procure it from Leed Products, Inc. ("Leed") but Leed desired to secure itself by an assignment of the Company's rights under the contract and of the moneys to be received thereunder. The Assignment of Claims Act of 1940, amending R.S. §§ 3477 and 3737, 54 Stat. 1029, 31 U.S.C.A. § 203 and 41 U.S.C.A. § 15, provides that moneys coming due under a contract executed by the United States may be assigned only to a financing institution. For this reason, apparently, Leed arranged with Central National Bank of Richmond, Virginia, ("Central Bank"), for the necessary financing. On February 11, 1949 the Company wrote to Leed and acknowledged the receipt of $10,000 which it agreed was to be used "solely" in connection with the Army contract, and stated also that all money due or coming due under the contract would be assigned to Central Bank as soon as the contract had been awarded officially to the Company. It appears, however, that the $10,000 received by the Company from the loan was deposited by it in its bank account and was used by the Company for its general purposes. It was agreed also that the Company should keep on hand $10,000 worth of oil. The Company seems to have fulfilled its obligation in this regard.¹

On February 18, 1949, the date the Army contract was awarded to the Company, an assignment was executed by the Company to Central Bank. The third paragraph of that assignment provided: "This assignment is made and entered into as security for the payment of any and all loans which have been or may hereafter be made by said Bank to the Assignor at any time or times, and of any and all notes which have been or may hereafter be issued to evidence any such loan or loans, and as security also for any and all other indebtedness which is now or may hereafter become due or owing by the Assignor to said Bank at any time or times. The Assignor covenants that it will receive any monies advanced hereunder by said Bank as a Trust Fund to be applied solely to payments necessary for materials, wages, and other expenses in fulfillment of the Contract or to repayment to said Bank of any monies so advanced by said Bank." On the same day the Company sent the assignment to Central Bank with a letter which stated in part: "* * * Your Bank is hereby authorized and directed to collect * * * the monies due under the contract from the U. S. Government and to turn the monies over to * * * Leed * * *".

On March 23, 1949 the Company filed a petition for reorganization pursuant to Chapter X of the Bankruptcy Act, 11 U.S. C.A. § 501 et seq., and trustees were appointed, one of whom still remains in office. The time for the commencement of delivery of the goods to the Army under the contract had not arrived by March 23 and no goods had been delivered. On April 2, 1949 the trustees began the actual process of manufacturing goods to be delivered and two days later the trustees made the first shipment of mayonnaise under the contract. On April 11, 1949 Central Bank notified the United States that it held the assignment described above.

The trustees proceeded to assume the contract and, pursuant to the arrangements made prior to the Chapter X proceeding, sent the bill of lading and shipping documents for the first shipment to Leed for delivery to Central Bank which in turn forwarded them to the United States for payment. On April 18, 1949, before any payment was made by the United States to Central Bank, the trustees notified the United States that they had been authorized to continue the Debtor's business, that they had been advised of the assignment and would continue to make shipments under the contract but requested that payments for the mayonnaise be made direct to them. The United States advised the trustees on May 19, 1949 that, in view of the assignment to Central Bank, payment could not be made to them as they had requested. The trustees completed the contract nonetheless and made and delivered all mayonnaise contracted for to the Army. The United States refused to pay Central Bank or the trustees until it was determined who was entitled to receive payment under the contract. The trustees filed a petition for a rule to show cause why the United States should not pay the money to them. Leed and Central Bank by stipulation, however, agreed that all sums retained by the United States under the contract should be paid to the trustees under the condition that $10,000 be held in escrow to await the determination of the instant controversy. The court below referred the matter to a special master who concluded that Central Bank was entitled to the $10,000, and the court confirmed the master's report. The appeal at bar followed.

The position of the remaining trustee, as we grasp it, is that the sum of money in controversy is an "account receivable" created entirely by the trustees and therefore Central Bank can have no valid claim to it; that the money is free of any lien or encumbrance in favor of Central Bank; that the adoption of the contract by the trustees did not subject the trustees to any claim of Central Bank under the assignment and, finally, that no part of the money lent by Central Bank can be traced into the fund in escrow or into the goods delivered by the trustees under the contract. The trustee asserts that Central Bank is not entitled to receive the $10,000 now in escrow.

We cannot agree. Section 70, sub. a (6) of the Bankruptcy Act, as amended, 52 Stat. 879-880, 11 U.S.C.A. § 110, provides that the trustee shall be vested by operation of law with "* * * rights of action arising upon contracts * *". There is no assertion in the case at bar that the contract was in any wise affected by fraud or that the assignment effected a voidable preference. A trustee is, of course, under no obligation to complete executory contracts of a debtor. By Section 70, sub. b of the Act, the trustee is given the right to adopt or reject an executory contract. He must do one or the other. If the trustee deems the contract to possess no equity or benefit for the estate he rejects it as burdensome. If, on the other hand,...