In re American Pouch Foods, Inc.
| Decision Date | 20 June 1983 |
| Docket Number | 80 B 14821 and 80 A 2375.,No. 81 C 1616,81 C 1616 |
| Parties | In re AMERICAN POUCH FOODS, INC., Debtor. UNITED STATES of America, Plaintiff, v. AMERICAN POUCH FOODS, INC., Defendant. |
| Court | U.S. District Court — Northern District of Illinois |
Dan K. Webb, U.S. Atty. by Mary Anne Mason, Asst. U.S. Atty., Chicago, Ill., J. Christopher Kohn, Tracy Whitaker, David Nerkle, Dept. of Justice, Civ. Div., Washington, D.C., for plaintiff.
Sharon Riley, Louis W. Levit, Levit & Miller, Ltd., Chicago, Ill., for defendant.
On January 29, 1979, American Pouch Foods Company, Inc. ("APF") and the Defense Logistics Agency ("Government") entered into a contract to produce combat rations known as "Meals, Ready to Eat." This product is a replacement for the C-Ration, intended for use principally by the United States Army and, to a lesser extent, by other branches of the armed services.
Under the terms and conditions of the contract, APF could receive up to 90% of the amount of its total costs incurred under the contract in the form of "progress payments." As one of the terms or conditions for making these progress payments, subsection (d) of the contract provided:
(d) Title. Immediately, upon the date of this contract, title to all parts; materials, inventories; work in process; . . . theretofore acquired or produced by the Contractor and allocable or properly chargeable to this contract under sound and generally accepted accounting principles . . . shall forthwith vest in the Government; and title to all like property thereafter acquired or produced by the Contractor and allocable or properly chargeable to this contract as aforesaid shall forthwith vest in the Government upon said acquisition, production or allocation.1
APF has received approximately $13 million in "progress payments."
On November 7, 1980, the Defense Personnel Support Center terminated the Government's contract with APF for default. On November 10, 1980, APF filed a petition under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 101, et seq. At that time APF had in its possession raw materials, work in process, and finished products held at various facilities. The Government claimed all of this property by virtue of the "title vesting" clause of the contract. However, as a result of APF's petition for reorganization, an automatic stay was imposed pursuant to 11 U.S.C. § 362 (1976), preventing the Government from obtaining possession of the property.
On December 5, 1980, the Government filed an adversary complaint for relief from the automatic stay. On January 16, 1981, APF filed an answer and counterclaim. In its counterclaim, APF alleged that the contract termination was unlawful and improper and that as a result of it, APF sustained damages in the aggregate sum of approximately $13 million. Hearings were held, and, on February 9, 1981, the Bankruptcy Court granted the Government relief from the automatic stay and permission to take immediate possession of the property. In its decision, the Court found that as a matter of law, the Government held absolute title to the property by operation of the "title vesting" clause of the contract. The bankruptcy judge did not rule on APF's counterclaim. APF appealed.
On February 1, 1982, this Court concluded that the bankruptcy judge erred in granting relief to the Government because of the existence of two factual questions regarding: (1) the termination of the contract between the Government and APF, and (2) the characterization of the interest held by the Government in the property to which it claimed title. Accordingly, the cause was remanded to the bankruptcy judge for a full evidentiary hearing on both issues.
The case is now before this Court on the Government's motion for reconsideration. The Government argues that the bankruptcy court properly treated the title issue as a question of law, and that the case law squarely holds that "title-vesting" clauses, using language substantially identical to that in the contract between the Government and APF, are sufficient to vest absolute title in the Government and allow it to reclaim materials allocable to the contract upon termination for default. The Government also contends that the circumstances concerning the termination of the contract are irrelevant to the title issue. APF, on the other hand, argues 1) that the title asserted by the Government is a security interest only, 2) that this interest was not perfected in the manner prescribed by applicable state law, and 3) that such title to the extent otherwise valid at all, is subordinate and inferior to the rights of the debtor as debtor-in-possession in this proceeding and to the rights of creditors and other parties in bankruptcy. APF also contends that the Government may not assert title under a contract which it has wrongfully terminated.
For reasons that will be made clear, this Court holds that, as a matter of law, the Government holds absolute title to the property. Additionally, the Court rejects APF's assertion that the Government's title is in any way affected by the allegedly wrongful termination of the contract between APF and the Government. Finally, the Court declines to address the question, presented in APF's counterclaim, of whether the contract was in fact wrongfully terminated, thus entitling APF to damages. That issue is properly brought before the administrative agency empowered to address such claims.
There is a substantial body of case law supporting the Government's position as to title. That fact should make this case one of easy disposition. A recent opinion which seemingly supports APF's argument has complicated the picture, however. That decision is Marine Midland Bank v. United States, 687 F.2d 395 (Ct.Cl.1982). Because that case calls into question some fundamental assumptions implicit in earlier opinions, this Court believes the title issue demands re-examination. Although ultimately this Court's conclusion is in accord with most of the precedent on this question, it is hoped that the following discussion offers an analytical framework that will eliminate any unnecessary confusion.
Before proceeding to an analysis of prior precedent, some discussion of Marine Midland is in order. In that case, the plaintiff bank brought suit against a government contractor which had agreed to guarantee the indebtedness of a third party. Pursuant to this agreement, the bank secured a floating lien on the contractor's property, including its inventory. Upon the third party's default, the bank sought to obtain possession of the contractor's property. At this point, the Government intervened, claiming that the bank could not take possession of the property because it belonged to the Government in accordance with the "title vesting" clause contained in its written agreement with the contractor.
The Court in Marine Midland initially focused on the nature of the interest taken by the Government in order to determine whether the Government's possessory right to the property resulted in a compensable taking. After analyzing the enabling legislation and regulations as well as the text of the "title vesting" clause itself, the Court proceeded to distinguish a fairly large and impressive body of precedent, concluding:
In sum, we hold that the Government\'s title vesting clause and regulations provide for the taking of an interest in the nature of a lien. Full title, in the plain sense, certainly is not meant, as an examination of the clause and regulations show. We recognize that the Government\'s use of the word "title" has had an important history, both to avoid the ban on advances of public money and as a way to circumvent floating lien interests of general creditors, and that it has an important present use in insuring that the Government may take actual possession of the inventory of a bankrupt contractor. There is no other reason, however, in theory or case law to read the word for more than that.
Marine Midland, 687 F.2d at 403-04. The Court then went on to hold that as to the priority of the conflicting security interests between the Government and the bank, the rule of decision "is to make the Government's security interest under its title vesting procedures paramount to the liens of general creditors." Id. at 404.
Although the Government "won" the Marine Midland case, in that it was found to have a paramount lien interest, it is possible that if the Court's reasoning were applied to the instant case, the result would be different, requiring a judgment for APF. This is because of a case relied on by APF entitled United States v. Lennox Metal Mfg. Co., 225 F.2d 302 (2d Cir.1955). In that case, the Court apparently assumed that the interest held by the Government, on the peculiar facts of the dispute, was in the nature of an equitable lien. Id. at 317 (opinion of Medina, J., and Hincks, J.). After so finding, the Court then went on to hold that this lien could not be asserted by the Government because of its inequitable conduct in its relationship with Lennox. Thus, if the Government in this case possesses a lien interest, and if it wrongfully terminated its contract with APF, it might be foreclosed from asserting its interest under the contract by a combined reading of Lennox and Marine Midland. It is for this reason that this Court must determine whether Marine Midland was in fact correctly reasoned. As has already been stated, the Court has concluded that it was not.2
It is impossible to explain the nature of the interest established by the "title vesting" clause of the Government's contract with APF without first providing some background. The "title vesting" clause is simply one element of a scheme of federal procurement based on "progress payments." Such payments are unique, and it is this uniqueness which gives...
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