In re Atlantic, G. & P.S.S. Co.

• Decision Date: 28 April 1923
• Docket Number: 3776.
• Citation: 289 F. 145
• Parties: In re ATLANTIC, G. & P.S.S. CO.
• Court: U.S. Court of Appeals — Fourth Circuit

289 F. 145

In re ATLANTIC, G. & P.S.S. CO.

No. 3776.

United States District Court, D. Maryland.

April 28, 1923

F. R Conway, of Washington, D.C., and Amos W. W. Woodcock, U.S Atty., of Baltimore, Md., for the United States.

John Henry Skeen, Sylvan Hayes Lauchheimer, and Malcolm H Lauchheimer, all of Baltimore, Md., for Commercial Credit Co.

Hugh Obear, of Washington, D.C., for International Finance Corporation.

Stuart S. Janney, of Baltimore, Md., for trustee.

ROSE Circuit Judge.

The bankrupt, the Atlantic, Gulf & Pacific Steamship Corporation is a Maryland corporation. It never had more than about $150,000 of paid-in capital, and yet it agreed to buy from the United States six fine ships and to pay $9,300,000 for them. All of them were delivered to it, and it operated them for more than 18 months, but $195,469 was the total it paid on account of them. When, in August, 1922, the government, in consequence of the bankrupt's manifold defaults, repossessed itself of them, the decline in the saleable value of the ships had been so great that they were worth in the market not more than one-fifth of the price the bankrupt had promised to pay for them. Small as were the initial payments on the ships, they used all and more than all of the bankrupt's capital. It began its shipping business without a dollar of cash. For more than a year and a half it nevertheless managed to keep these large ships sailing among the principal ports of this country on the Pacific as well as on the Atlantic seaboard. In doing so, it accumulated many debts for fuel, supplies, repairs, and other things. If it had owned the ships, many of these would constitute maritime liens upon them, but, as the United States now has possession of them, the stevedores, supply and repair men, and the other marine creditors were forced to proceed against it under the Suits in Admiralty Act. More than 50 libels were filed by them, but as a consequence of the principles laid down in United States v. Carver, 43 Sup.Ct. 181, 67 L.Ed. 214, almost all of these have already been dismissed, although without prejudice to the right of the libelants to file their claims in this proceeding as general creditors of the bankrupt.

Some cash the bankrupt had to have. It never had any standing with the ordinary banks. From them it could get nothing. Its only resource was to the so-called credit and finance companies, who lend upon collateral. From two of these, the Commercial Credit Company and the International Finance Corporation, hereinafter styled the Commercial and the International, respectively, it was a steady borrower. These concerns sought to secure themselves by exacting pledges of the freights, so soon as the cargoes were put aboard the ships. At the time the government repossessed itself of the vessels, the bankrupt had on hand a few thousand dollars, said to have come from these assigned freights, and which are consequently claimed by either the Commercial or the International, who also say they are entitled to whatever sums have since come in, or which may be hereafter realized, from the like sources.

The United States asserts a specific lien or charge upon all these, superior both to the rights of the trustee and to those of the lending companies, and it says that under section 3466, R.S. (Comp. St. Sec. 6372), it is entitled to preferential payment out of any assets coming into the hands of the trustee in bankruptcy. These assets will be meager, and, if the government is a preferred creditor for any substantial sum, it will take them all.

In Sloan Shipyards v. U.S. Fleet Corporation, 258 U.S. 549-574, 42 Sup.Ct. 386, 66 L.Ed. 762, the Chief Justice, in a dissent in which he spoke for Justices Van Devanter and Clarke, as well as for himself, expressed the opinion that in bankruptcy the United States had no preference, except for taxes. Apparently this was not the view of the majority of the court. In the subsequent case of United States v. State of Oklahoma, 43 Sup.Ct. 295, 67 L.Ed. . . ., decided February 19, 1923, the assumption throughout all the discussion is that in cases of bankruptcy, section 3466 makes the United States a preferred creditor. Section 64 of the present Bankruptcy Act (Comp. St. Sec. 9648) has unquestionably postponed the government's claims for other things than taxes, to state taxes and to the cost and expense of preserving and administering the estate and to salaries and wages. Guaranty Co. v. Title Guarantee Co., 224 U.S. 152, 32 Sup.Ct. 457, 56 L.Ed. 706. But, after all such demands are satisfied, it directs:

'There shall next be paid, debts owing to any person who by the law of the state or the United States is entitled to priority.'

That language might easily be held broad enough to continue section 3466, R.S., in force, except in the respects in which it has been expressly modified by the Bankruptcy Act. It at least goes very far to negative the suggestion that Congress intended radically to recast the previously existing law as to priorities. The right of the United States to the preferential allowance of its claims has in the last few years been upheld by the Circuit Courts of Appeal of the First, Second, and Seventh Circuits. Davis v. Pullen (C.C.A.) 277 F. 650; In re Tidewater Exchange (C.C.A.) 280 F. 648; In re E. J. Hibner Oil Co. (C.C.A.) 264 F. 667. A District Court of the United States would scarcely be justified in ruling to the contrary.

What does the bankrupt owe the government? At the hearing the United States made two alternative contentions: First, that it was entitled to prove for the difference between the unpaid balance of the price the bankrupt had agreed to pay for the ships, and their sale or market value at the time it repossessed itself of them; second, that, if that were not so, it was at least entitled to claim the difference between the reasonable hire of the ships for the time the bankrupt had them and the sum it had received from the bankrupt.

The unpaid balance of the principal of the purchase price is $9,118, 620.27, to which should be added interest thereon to the time at which the government repossessed itself of the ships, making a total of $9,913,748.90. From this must be deducted the value of the ships when they were taken back. That has not been definitely proved, but it is apparent that it did not at the most amount to as much as $2,000,000; that is to say, if the government's first contention is sound, it has a provable claim for somewhere around $8,000,000. An unpaid seller, who has turned a chattel over to the buyer while retaining title in himself, has the undisputed right to allow the buyer to keep it and to sue him for the balance of the purchase price. No matter what form the parties may have given the original transaction, it is not unreasonable to hold that in substance it was a sale and a mortgage back, and that in consequence the seller should be allowed to have the chattel turned into money, to pocket its net proceeds, and to sue the buyer for whatever still remained unpaid of the contract price. Williston on Sales, 964.

Unless there is something to the contrary in the agreement itself, few will gainsay the seller's right to do so, when he makes it clear that he himself treats the buyer as still having a subsisting interest in that which was sold by seeking to subject that interest to some kind of a foreclosure, formal or otherwise. To invoke the aid of a court of equity is the surest, but not necessarily the only, way of removing all doubt as to what he is trying to do. In the instant case, nothing the government did suggests that it thought the bankrupt had any further concern with the ships. It took them as the owner. At the bar, it was said that it had sold some of them, and still held others; but no evidence on the subject was tendered. So far as appears, the trustee in bankruptcy was never even officially notified of the sales, much less consulted about them, and no court was asked to approve them. The government throughout assumed that what it did with them was of no concern to any one else.

An agreement may give the seller all these rights, as the one before the court does, but the great weight of authority is that when the seller exercises them, he has irrevocably surrendered all claim for the unpaid portion of the purchase price. Manson v. Dayton, 153 F. 258, 82 C.C.A. 588; Russell v. Martin, 232 Mass. 379, 122 N.E. 447; Ohle & Cole v. Standard Steel Sections, 179 A.D. 637, 167 N.Y.Supp. 184; Eilers Music Store v. Oriental Co., 69 Wash. 618, 125 P. 10239 What has been said has been upon the assumption that the parties themselves had made no provision for ascertaining and satisfying the damage which the buyers' default might cause the seller, but in this case the contracts are not silent on this matter. After defining what shall constitute a default on the buyers' part, and after declaring the seller shall have the right at any time thereafter to withdraw the vessels from the buyer, it goes on to state:

'Whereupon all rights and claims against the seller, arising in favor of the buyer hereunder, shall cease and determine, and the seller may retain all amounts paid by the buyer hereunder, and any balance remaining in said trust fund or sinking fund, as liquidated damages.' Adding, it is true:

'But without prejudice to any other claims the seller may have against the buyer hereunder.'

The trust and sinking funds referred to are provided for in the agreement by the terms of which the buyer was to deposit funds received from the operation of the vessels in a special account, and was monthly to set aside a certain sum to provide the means for meeting the next semiannual installment of the purchase price. The payments which the buyer should have made to the...