HERMETIC SEAL PRODUCTS COMPANY, PR v. United States

• Decision Date: 30 August 1962
• Docket Number: No. 5951-5953.,5951-5953.
• Citation: 307 F.2d 809
• Parties: HERMETIC SEAL PRODUCTS COMPANY, P. R., Defendant-Appellant, v. UNITED STATES of America, Plaintiff-Appellee.
• Court: U.S. Court of Appeals — First Circuit

307 F.2d 809 (1962)

HERMETIC SEAL PRODUCTS COMPANY, P. R., Defendant-Appellant, v. UNITED STATES of America, Plaintiff-Appellee.

Nos. 5951-5953.

United States Court of Appeals First Circuit.

Heard June 6, 1962.

Decided August 30, 1962.

Louis A. Tepper, New York City, with whom Stuart F. Cartoon, Tarrytown, N. Y., was on briefs, for appellant.

David L. Rose, Atty., Dept. of Justice, with whom William H. Orrick, Jr., Asst. Atty. Gen., Francisco A. Gil, Jr., U. S. Atty., and John G. Laughlin, Atty., Dept. of Justice, were on brief, for appellee.

Before WOODBURY, Chief Judge, and HARTIGAN and ALDRICH, Circuit Judges.

WOODBURY, Chief Judge.

Three actions under § 105(b) (3) of the Renegotiation Act of 1951, 65 Stat. 14, 50 U.S.C.A.Appendix, § 1215(b) (3), were brought on behalf of the United States in the United States District Court for the District of Puerto Rico against the appellant, a corporation organized under the laws of Puerto Rico, to recover excess profits on defense subcontracts as determined in three unilateral orders of the Renegotiation Board. In one action recovery is sought for excessive profits determined for the appellant's fiscal years ending on July 31, 1952 and on July 31, 1953; in another, recovery is sought for similar profits determined for its fiscal year ending on July 31, 1954, and in the third like recovery is sought for the year ending on July 31, 1955. In the first action the United States moved for summary judgment and to strike special defenses. The motion for judgment was denied but several defenses were stricken including the defense that the Renegotiation Act of 1951 did not apply in Puerto Rico. The actions were then consolidated and trial was had by the court of the issue whether the renegotiation claims of the United States were barred by failure to assert them in certain arrangement proceedings under Chapter XI of the Bankruptcy Act in the United States District Court for the District of New Jersey involving the appellant and affiliated corporations to be considered in detail presently.

The court below held that it did not have jurisdiction to consider the applicability of the Renegotiation Act to the appellant's business in Puerto Rico and that the claims were not discharged by the arrangement proceedings. It accordingly entered a judgment for the plaintiff in each action in the amount of each unilateral order, that is to say, in the respective amounts of $650,000, $225,000 and $100,000 with interest at 4%. The present appeals are from those judgments.

Hermetic Seal Products Company, P. R., Seal Products hereinafter, is one of a group of allied corporations with their principal places of business in Newark, New Jersey. It was organized under the laws of Puerto Rico in 1951 and since that time it has engaged in Puerto Rico in the business of manufacturing and assembling hermetically sealed glass-metal components of electronic equipment such as thermostats, crystals, relays, condensers, transformers and tubes. It did no business directly with the United States but it sold its products under contracts with firms which in turn sold both to private industry and to the United States.

Since the first case stands on a somewhat different footing from the other two, we shall now describe the cases in order.

Although the Renegotiation Act of 1951, 65 Stat. 7 et seq., in its section 105 (e) (1), as it stood at the pertinent times, 50 U.S.C.A.Appendix, § 1215(e) (1), required contractors to file financial statements with the Renegotiation Board on or before the first day of the fourth calendar month following the close of their fiscal years, the appellant did not file its statement for its fiscal year ending July 31, 1952 until March 1953, or its statement for its fiscal year ending July 31, 1953 until February 1954. The Board commenced formal renegotiation proceedings for those years on May 5, 1953 and July 1, 1954, respectively. One Sidney A. Gutkin, a stockholder of the appellant and its former counsel represented the appellant in those proceedings. In the course of them Gutkin took the position that the Act did not apply to the appellant's contracts because they were performed in Puerto Rico by a Puerto Rican corporation. And he testified that the representative of the New York Regional Renegotiation Board with whom he negotiated agreed with him. The renegotiator to whom the matter was assigned, Mr. Summerfield, however, categorically denied that he had made any such concession, and, indeed, asserted that he had been advised by higher authority that the Act did apply in Puerto Rico and that he repeatedly so informed Gutkin. Negotiations having come to nothing the appellant and the New York Regional Board entered into an agreement on June 20, 1956, extending the time within which a determination of excessive profits for fiscal 1952 could be made to March 1, 1957. On March 21, 1956, a similar agreement was made extending the time for the determination for fiscal 1953 to July 1, 1957.

On August 8, 1956 the appellant jointly with four New Jersey corporations alleged to constitute a single economic unit because of common stock ownership and because all five corporations had substantially the same officers and the same directors, filed a petition for an arrangement under Chapter XI of the Bankruptcy Act in the United States District Court for the District of New Jersey. The petition alleged that the corporations had their principal place of business in Newark, that they were unable to pay their debts as they matured and proposed an arrangement for payment of their unsecured creditors. Pursuant to the petition the court immediately appointed a receiver who assumed management of the corporations' affairs with the aid of his counsel and accountant.

During August, September and October creditors' meetings were held which eventually resulted on November 9 in an agreement by the creditors on a plan of arrangement and on November 13, 1956, the District Court held a hearing on the plan and confirmed it.

In the meantime Gutkin, unknown to the referee, had continued to represent the appellant in the renegotiation proceedings being conducted with Summerfield for the Regional Board in New York but he never disclosed that the appellant had filed a petition for an arrangement with its creditors under Chapter XI of the Bankruptcy Act. Nor were the government's renegotiation claims for fiscal 1952 and 1953 listed by the appellant in its Statement of Affairs in the Chapter XI proceeding or disclosed by anyone on behalf of the appellant to the referee, his accountant or his counsel. Consequently notices of the creditors' meetings etc. were not sent to the Renegotiation Board. However, on October 19, 1956, one Klebanoff, a former officer and principal stockholder of the appellant, who also held some of its largest secured notes, called Mr. Summerfield for information about the renegotiation claim against the appellant and in the course of the conversation told Summerfield that the appellant and its New Jersey affiliates were in a Chapter XI proceeding. Summerfield immediately confirmed that fact by a telephone call to the office of the clerk of the district court which advised him that no date had been set for the filing of proofs of claim. On the same day the Regional Board in New York notified the Board in Washington and it promptly brought the matter to the attention of the Department of Justice which in turn promptly referred the case to the General Accounting Office for preparation of a proof of claim.

In the meantime, without making any further attempt to secure a bilateral agreement for the elimination of excessive profits, the Regional Board on October 23, 1956, issued a unilateral order in the amount of $200,000 for the appellant's 1952 fiscal year and sent notice of the same by mail to the appellant's Puerto Rican address with a carbon copy to its president at his New York office. And, on November 7, 1956, the New York Regional Board issued a unilateral order determining that the appellant had received excessive profits for its fiscal year ending on July 31, 1953 in the amount of $300,000. This order was also mailed to the appellant at its address in Puerto Rico and a copy mailed to one Glickman, a stockholder officer, and secured creditor of the appellant and the one who proposed the plan of arrangement finally approved. Although it was stipulated that these notices of determinations were received by the recipients in the normal course of the mails, they were never brought to the attention of the receiver or his counsel or mentioned at the formal meeting of creditors held on November 9 at which Glickman's plan of arrangement was approved.

The appellant's 1952 and 1953 cases were transferred by the New York Regional Board to the Board in Washington for review on October 25, and November 2, 1956, respectively, and on November 13 the Board wrote to the Department of Justice and the General Accounting Office requesting the preparation and filing of preliminary and contingent proofs of claim in the Chapter XI proceeding and also requesting that objection be made to any plan of arrangement which did not provide for the claims of the United States arising under the Renegotiation Act of 1951. At this time no employee or member of the Regional Board, or the Board itself or anyone in the Department of Justice had any knowledge or notice of the fact that the creditors' meeting on November 9 had approved a plan of arrangement for the appellant or that the court had confirmed the plan on November 13. Indeed, the Board's letter of November 13 constituted the first information that anyone in the Department of Justice had of any renegotiation proceeding against the appellant or that it was in an arrangement proceeding under Chapter XI. The Department of Justice at once on November 15 instructed the United States Attorney in Newark to take the steps necessary to establish the government's...