In re Eastern Shore Shipbuilding Corp.

• Citation: 274 F. 893
• Decision Date: 15 June 1921
• Docket Number: 208.
• Parties: In re EASTERN SHORE SHIPBUILDING CORPORATION. v. WOOD. UNITED STATES SHIPPING BOARD EMERGENCY FLEET CORPORATION
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

274 F. 893

In re EASTERN SHORE SHIPBUILDING CORPORATION.

UNITED STATES SHIPPING BOARD EMERGENCY FLEET CORPORATION v. WOOD.

No. 208.

United States Court of Appeals, Second Circuit.

June 15, 1921

Francis G. Caffey, U.S. Atty., of New York City (Edward F. Unger Asst. U.S. Atty., of New York City, and Henry J. Gibbons and Wm. Y. C. Anderson, both of Philadelphia, Pa., of counsel) for appellant.

Rosenberg Ball & Marvin, of New York City (Godfrey Goldmark, of New York City, of counsel), for appellee.

Before ROGERS, HOUGH, and MANTON, Circuit Judges.

ROGERS Circuit Judge.

This case presents two questions of very considerable importance:

(1) Is the United States Shipping Board Emergency Fleet Corporation organized under the laws of the District of Columbia for and on behalf of the United States in connection with the World War, such an agent of the United States that a debt due to it from the bankrupt is in fact and in law a debt due to the United States; and is the corporation as representing the United States entitled to claim whatever right of priority of payment the United States might be entitled to assert in the case of a debt owing to the government?

(2) If the court finds that the Fleet Corporation is such an agency, and may assert such rights to priority as the United States has, is the United States itself, under the Bankruptcy Act (Comp. St. Secs. 9585-9656), entitled to the prior payment of ordinary debts due to it as against the general creditors of the bankrupt?

It may be said concerning the second question that there seems to be no authoritative decision determining whether or not the United States itself is entitled under the existing Bankruptcy Act to prior payment of debts due to it, as distinguished from unpaid taxes. This is rather remarkable, as the act has been in force since 1898. It will, of course, not be necessary for this court to consider the second of these questions, if we find that the Fleet Corporation is not such an agent of the United States that a debt due to it cannot be regarded as a debt due to the United States.

The first question which is here presented has received no consideration in any other case, at least in none which has come under our observation, or which has been brought to our attention. As contracts running into many millions of dollars have been entered into with the Fleet Corporation, and many of the contractors have been made bankrupt in attempting to perform them, and there are large sums due from them to the corporation, as well as to private creditors, the importance of the questions involved is readily appreciated.

It appears that on August 22, 1918, the United States Shipping Board Emergency Fleet Corporation entered into a contract with the Eastern Shore Shipbuilding Corporation, hereinafter referred to as the Eastern Shore Corporation, for the construction of six wooden harbor tugs for the United States. For each of these tugs the Eastern Shore Corporation was to receive $145,000, to be paid in ten installments as the work progressed. After the signing of the Armistice on November 11, 1918, the work under this contract was stopped, but was later resumed under supplemental agreements which it is not necessary to consider. In March, 1919, the Eastern Shore Corporation became involved in financial difficulties and receivers were appointed for it, and shortly thereafter, on March 20, 1919, it was adjudicated a bankrupt. At the time of adjudication none of the six tugs in course of construction was completed sufficiently to launch. The Eastern Shore Corporation had been paid by the Fleet Corporation under the contract on account $428,017.72. And after the adjudication of bankruptcy the Fleet Corporation was compelled to expend the additional sum of $135,161.65 in order to be able to launch the tugs and remove them from the bankrupt's shipyard. At the time of the bankruptcy the tugs were appraised at the sum of $100,000 and this was found to be their value by the referee in bankruptcy, who deducted that amount from the sum of $428,017.72, and allowed the balance of $328,017.72 as a general claim of the Fleet Corporation against the bankrupt's estate, but disallowed priority to said claim on the ground that the debt represented thereby is not a debt due to the United States. On petition to review the order of the referee, the District Judge affirmed it in all respects. On the appeal to this court no question is raised as to the amount due from the bankrupt. The only questions involved are those stated in the beginning of this opinion.

The argument presented to us is that the Fleet Corporation, by virtue of its incorporation and organization under the acts of Congress and by virtue of an executive order of the President of the United States issued in pursuance of an act of Congress, was at the time of and in the transaction out of which this controversy grew, and still is, the appointee of the President of the United States, and the agent and representative of the United States, and that, the contract with the bankrupt having been made for and on behalf of the United States by the Fleet Corporation, as the appointee of the President and the agent and representative of the United States, the debt due thereunder is a debt due and owing to the United States, and therefore entitled to priority of payment under the provisions of section 64 of the Bankruptcy Act (Comp. St. Sec. 9648) and of section 3466 of the Revised Statutes (Comp. St. Sec. 6372). The pertinent provisions of section 64 ^[1] and section 3466 ^[2] are found in the margin.

In determining the question of whether the Fleet Corporation is such an agency of the United States that a debt due to it is to be regarded as a debt due to the United States, it is necessary to examine the acts of Congress under which the Corporation came into existence. The Act of Congress of September 7, 1916, is entitled:

'An act to establish a United States Shipping Board for the purpose of encouraging, developing, and creating a naval auxiliary and naval reserve and a merchant marine to meet the requirements of the commerce of the United States with its territories and possessions and with foreign countries; to regulate carriers by water engaged in the foreign interstate commerce of the United States; and for other purposes. ' U.S. Stat. at Large, vol. 39, c. 451, p. 728.

The act created a board of five commissioners, to be appointed by the President. It authorized the board, with the approval of the President, to cause to be constructed and equipped, in American shipyards or elsewhere, or to purchase, lease, or charter, vessels suitable, as far as the commercial requirements of the marine trade of the United States may permit, for use as naval auxiliaries or army transports, or for other naval or military purposes, and also to charter, lease, or sell to any citizen of the United States any vessel so purchased or constructed. Section 11 of the act (Comp. St. Sec. 8146f) provided for the formation of a Shipping Corporation, if found necessary. It reads as follows:

'That the board, if in its judgment such action is necessary to carry out the purposes of this act, may form under the laws of the District of Columbia one or more corporations for the purchase, construction, equipment, lease, charter, maintenance, and operation of merchant vessels in the commerce of the United States. The total capital stock thereof shall not exceed $50,000,000. The board may, for and on behalf of the United States, subscribe to, purchase, and vote not less than a majority of the capital stock of any such corporation, and do all other things in regard thereto necessary to protect the interests of the United States and to carry out the purposes of this act. The board, with the approval of the President, may sell any or all of the stock of the United States in such corporation, but at no time shall it be a minority stockholder therein: Provided, that no corporation in which the United States is a stockholder, formed under the authority of this section, shall engage in the operation of any vessel constructed, purchased, leased, chartered, or transferred under the authority of this act unless the board shall be unable, after a bona fide effort, to contract with any person a citizen of the United States for the purchase, lease, or charter of such vessel under such terms and conditions as may be prescribed by the board. * * *

'At the expiration of five years from the conclusion of the present European War the operation of vessels on the part of any such corporation in which the United States is then a stockholder shall cease and the said corporation stand dissolved. The date of the conclusion of the war shall be declared by proclamation of the President. The vessels and other property of any such corporation shall revert to the board. The board may sell, lease, or charter such vessels as provided in section 7 and shall dispose of the property other than vessels on the best available terms, and, after payment of all debts and obligations, deposit the proceeds thereof in the treasury to its credit. All stock in such corporations owned by others than the United States at the time of dissolution shall be taken over by the board at a fair and reasonable value and paid for with funds to the credit of the board. In case of disagreement, such value shall be determined in the manner provided in section 10.'

Section 13 of the act (Comp. St. Sec. 8146g) provided for a bond issue not to exceed $50,000,000, to be used for the purpose of carrying out the provisions of the act. It contained the following among other provisions:

'The proceeds of such bonds and the net proceeds of all sales, charters, and leases of vessels and of sales of stock made by

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