In re Double H Products Corporation

• Decision Date: 31 May 1972
• Docket Number: No. 71-1206.,71-1206.
• Citation: 462 F.2d 52
• Parties: In the Matter of DOUBLE H PRODUCTS CORPORATION, a New Jersey corporation, Bankrupt. Appeal of the NATIONAL STATE BANK, ELIZABETH, N. J.
• Court: U.S. Court of Appeals — Third Circuit

462 F.2d 52 (1972)

In the Matter of DOUBLE H PRODUCTS CORPORATION, a New Jersey corporation, Bankrupt Appeal of the NATIONAL STATE BANK, ELIZABETH, N. J.

No. 71-1206.

United States Court of Appeals, Third Circuit.

Argued March 16, 1972.

Decided May 31, 1972.

As Amended June 13, 1972.

William A. Dreier, MacKenzie, Welt & Dreier, Elizabeth, N. J., for appellant.

Jerome L. Merin, Asst. U. S. Atty., Newark, N. J., (Herbert J. Stern, U. S. Atty., by Frederick W. Klepp, Asst. U. S. Atty., James J. Kelly, New York City, Counsel, George Chernoff, Asst. Counsel, New Rochelle, Defense Contract Administration, Services Region, on the brief), for appellee.

Before MAX ROSENN and JAMES ROSEN, Circuit Judges and VAN ARTSDALEN, District Judge.

OPINION OF THE COURT

JAMES ROSEN, Circuit Judge.

This appeal is taken from a district court order granting recovery pursuant to a reclamation petition filed by the United States of America ("Government") against its prime contractor, Double H Products Corp. ("Double H") following an adjudication in bankruptcy after failure to confirm a plan of arrangement under Chapter XI of the Bankruptcy Act.

The bankrupt, Double H Products Corp., entered into a contract with the Government on June 13, 1968 for the construction of 1000 Mark 20 Missile stowage cradles essential to national security. The contract was subsequently amended by a "Progress Payments" addendum, under which title to all parts, materials, inventories, and work in progress vested in the United States as of the date of the contract and title to all like property thereafter acquired or produced vested in the Government upon acquisition or production.¹

The National State Bank, Elizabeth, New Jersey is the holder of a first lien represented by a valid security agreement executed by Double H Products (designated as "Debtor" in security agreement) on December 6, 1968, in the sum of $50,000. The bank was granted a security interest in

"(a)

i. CONTRACT RIGHTS—All rights of the Debtor under the particular contracts assigned to the Bank from time to time including all money due or to become due to Debtor for performance of the assigned contracts.

* * * * * *

iii. UNDERLYING GOODS AND MERCHANDISE—All interest of the Debtor, now existing or hereafter arising in goods, merchandise, or other inventory identified to an assigned contract."

On the same date, Double H assigned to the National State Bank all monies and claims for monies due and to become due to Double H under the contract and all amendments thereof between Double H and the Government. The Referee in Bankruptcy included in his memorandum opinion of January 21, 1970, a finding that "proper notice of said assignment of said contract was given by the National State Bank, Elizabeth, New Jersey to the proper authorities of the Department of the Navy of the United States of America, and financing statements as hereinafter described were duly filed" on December 9, 1968 in the office of the Secretary of State of New Jersey and in the office of the Clerk of Middlesex County.

On October 1, 1969, Double H filed a petition in the United States District Court for the District of New Jersey seeking an arrangement under Chapter XI of the Bankruptcy Act (11 U.S.C. § 701 et seq.). On October 21, 1969, the contract between Double H and the Government was terminated under the default clause of the "General Provisions" (Standard form 32) of the contract.

After Double H was adjudicated a bankrupt, the Government filed a petition for reclamation of certain "progress payment" inventory, i. e., inventory covered by the progress payment addendum to the contract. The bank contested the petition, claiming that it held a first lien on the property superior to the Government's claim of title since the bank had filed its financing statement under its security agreement with the bankrupt and the Government had not filed any document to protect its interest. The Referee concluded that the reclamation petition of the United States of America should be allowed, and entered a conforming order on February 10, 1970. On petition for review, the district court adopted and affirmed the decision of the Referee on January 14, 1971. The bank seeks a reversal.

Although the bank attempts to frame the issue in terms of conflicting priorities,² we find for reasons hereinafter set forth that this question is not presented. The basic rule of contract law that a contract is governed by the presumed intent of the parties, when applied to self-evident language in a contract, would seem to make this a case for easy disposition. However, the Bank challenges the apparent simplicity of the issue, by directing our attention to cases which were made primarily in the context of state and federal tax controversies, in which title vesting provisions were deemed insufficient to bar tax assessments against Government contractors. The issue is further complicated by Defense Department characterizations of Government methods of "financing" defense contractors.³ In the final analysis, it is the force of the relevant contractual language employed, and the practical realities underpinning contracts made by an agency charged with the national defense, which determines the outcome.⁴

The Bank's position rests squarely on the proposition that the Government's title to the work inventory is a mere "paper title," intended for use as a type of security device. It contends that at most the Government receives a simple security title to protect its advances of cash made prior to the final delivery and acceptance of the completed stowage cradles, at which time a "sale" is effected. Contentions such as these have frequently been advanced over the years in attempts to escape the effect of title-passing provisions of fixed-price Government contract partial payment clauses. "At least to the extent of the partial payments, the courts have, in a variety of situations, almost unanimously sustained the provision as effecting a full and complete passage of title or ownership, and as not creating only a lien or security interest." Boeing Company v. United States, 338 F.2d 342, 345, 168 Ct.Cl. 109 (1964), cert. denied 380 U.S. 972, 85 S.Ct. 1331, 14 L.Ed.2d 269 (1965)⁵. Indeed, a title-passing provision standing alone and "without being incident to a partial payment provision" has been held by this Court to be effective as against the creditors of a bankrupt Government contractor. In re American Boiler Works, 220 F.2d 319 (3d Cir. 1955). Where unconditional title immediately vests, thus reducing the badges of a conventional loan arrangement that are present in a typical advance and progress payment situation the Bank's argument loses further vitality. We adopt the language of the court in Shepard Engineering Co. v. United States, 287 F.2d 737 (8th Cir. 1961), and apply it to the contract language involved in this dispute:

"There is no ambiguity in the words of the contract that the material `shall forthwith vest in the Government\' and there is no reason why the contract should not be enforced by the courts." (287 F.2d at 741)⁶

We take cognizance of the several state court decisions which have construed provisions in Government contracts in order to determine immunity for state tax purposes, but find them to be inconclusive for purposes of this case.⁷ In Burroughs Corp. v. City of Detroit, 18 Mich.App. 668, 171 N.W.2d 678 (1969), defendants city and county argued that, notwithstanding government ownership of the tooling and inventory, the incidence of the tax as applied fell on the plaintiff defense contractor as "beneficial" owner and not on the government. This contention was rejected on the ground that the relevant tax statute under which the assessment was made authorized only an ordinary ad valorem tax on tangible personal property without providing for the taxation of intangible interests in such property. This holding was a reaffirmation of Continental Motors Corp. v. Township of Muskegon, 365 Mich. 191, 112 N.W.2d 429 (1961), in which the court rejected the United States Supreme Court's construction of Michigan's ad valorem tax as a use tax in City of Detroit v. Murray Corp. of America, 355 U.S. 489, 78 S.Ct. 458, 2 L.Ed.2d 441 (1958). In Detroit, the court in a footnote assumed for the purposes of its decision that full title vested in the Government under a partial payments clause in a Government contract, and not just a bare security interest. However, it pointed to a series of Minnesota State tax cases where the assessments made against private contractors were upheld against claims of Governmental immunity, on the basis that the Government's title was in the nature of a security interest. However, upon close examination, it is apparent that the cases cited for comparison are not only factually distinguishable, but involve questions of real estate law, such as equitable conversion and mortgages, which make them sui generis.⁸

"The fact that for certain general policy purposes partial payments may be considered as a form of contract financing and in the category of loans does not . . . put them in that category when it is necessary to ascertain the legal relationships they create, including the passage of title, in accordance with specific contract provisions . . ." Boeing Company v. United States, supra, 338 F.2d p. 352. In determining the legal relationships, where the terms of the contract providing for vesting title contain no suggestion that it is taken for security only, this court will not invite itself to rewrite the contract.

At the heart of the issue lurks a very substantial question of the relationship between the federal and state governments. The Bank argues that, although the earlier cases construed titlevesting provisions in Government contracts as conveying absolute title, these cases were decided before adoption by the states of the Uniform Commercial Code, and cites United States v. Allegheny, supra, for authority...