IN RE KELLETT AIRCRAFT CORPORATION

• Decision Date: 09 February 1949
• Docket Number: No. 9728.,9728.
• Citation: 173 F.2d 689
• Parties: In re KELLETT AIRCRAFT CORPORATION.
• Court: U.S. Court of Appeals — Third Circuit

173 F.2d 689 (1949)

In re KELLETT AIRCRAFT CORPORATION.

No. 9728.

United States Court of Appeals Third Circuit.

Argued November 1, 1948.

Decided February 9, 1949.

Rehearing Denied March 28, 1949.

Joseph J. Brown, of Philadelphia, Pa., for appellant.

Charles A. Wolfe, of Philadelphia, Pa., for appellee.

Before BIGGS, Chief Judge, and McLAUGHLIN and KALODNER, Circuit Judges.

McLAUGHLIN, Circuit Judge.

This appeal is from the dismissal of a proof of claim and of a petition for reclamation filed in the proceeding for the reorganization of Kellett Aircraft Corporation under Chapter X of the Bankruptcy Act, 11 U.S.C.A. A further amendment of the petition for reclamation, allowing appellant to present its claim to recover the sum paid by it for certain tools fabricated for it by Kellett and reserving the right to the trustees to offer defenses or setoffs thereto, was suggested by the Master and allowed by the court.

On April 2, 1946 Coldaire, an Illinois corporation licensed to do business in Pennsylvania, and Bob White Organization, a partnership, entered into a contract with Kellett whereby the latter agreed to build and sell to Coldaire 12,500 refrigeration cabinets of various models in accordance with designs and specifications to be furnished by Coldaire. Kellett was to manufacture the necessary tools for the construction of the cabinets at the cost of Coldaire. Shortly thereafter Kellett moved its manufacturing operations from its plant at Primos, Pennsylvania, to its new factory at North Wales, Pennsylvania. Coldaire made various changes in the cabinets from time to time because of operation imperfections which arose and in connection with these there were two amendments to the contract.

Whatever may have been Kellett's financial situation prior to August 1946, it is evident that during that month it was in difficulty. In appellant's proof of claim it states that on August 23rd Kellett terminated without notice all manufacturing operations under its contract with Coldaire and all its other civilian contracts. The Master finds that Kellett continued production under those contracts, including Coldaire's, until September 9, 1946 when it terminated all of its commercial activities except its contract production of helicopters for the United States Army Air Forces. Coldaire asserts that at the time it had unfilled orders for cabinets and a further large potential market for them. After that and prior to October 9, 1946 there were negotiations between the parties for a new contract, and this was entered into on October 9, 1946.

That October contract preliminary stated it was being executed because Kellett was "unable or unwilling" to complete its obligations to Coldaire under the April 2 agreement by reason of which Coldaire had suffered substantial losses, estimated by it to exceed $450,000. The next succeeding clause read: "Whereas said parties desire to compromise and release said claim for damages and release all parties from any further obligations under said contract * * *".

The body of the contract provided that the materials, parts and work in process at Kellett listed in Exhibit "A", were sold to Coldaire for $8,000. Coldaire was also given the right to purchase at named prices the parts and raw materials listed in Exhibit "B". Paragraph five read that "Coldaire will assume obligations for all open purchase commitments of Kellett as set forth in Exhibit `C'." Paragraph eight said that if Wilson Cabinet Company or an affiliated company did not rent that part of Kellett's North Wales plant devoted to production for Coldaire and including machinery and equipment, Coldaire would have the right to lease the particular premises on a basis to be determined by the parties. Exhibits "A", "B" and "C" were made part of the contract. Paragraph eleven read: "Except for the rights and obligations created hereby all contracts, claims, demands, rights, duties, obligations and liabilities existing at any time up to the time of the execution hereof between Kellett and Coldaire and/or Kellett and White are hereby mutually satisfied, discharged and released."

The total cost to Kellett of the materials, parts and work in process listed in Exhibits "A" and "B" was approximately $280,000, and the Master found this sum to be their approximate manufacturing value as of the contract date. This amount was $152,000 in excess of the total purchase price of these items to be paid by Coldaire under the agreement.

On October 14, 1946 Kellett entered into a contract with Wilson Company whereby the latter was to lease the premises, machinery and equipment which are the subject of paragraph eight of the October Coldaire contract above referred to. The Wilson agreement was delivered to Kellett on October 18, 1946, the date the present trustees were appointed. It provided, among other things, that it was subject to the approval of the War Assets Administration.

Between October 18, 1946 and the end of that month the trustees permitted some Coldaire production but, pending their investigation, refused to allow the removal of any cabinets. On October 31, 1946 the trustees notified Coldaire and Wilson that the contracts of October 9th and 14th were invalid. The Wilson agreement was thereafter treated by all the parties as a nullity. On December 4, 1946 the District Court on petition of the trustees granted them permission to reject the October 9th contract without prejudice to any existing rights under the April 2nd agreement. Both the Master and the District Judge found that the April contract was voided by the agreement of October 9, 1946.

As we see it, the clear intent of paragraph eleven of the October agreement was to substitute that agreement for the April contract. The language is plain and unless it is contrary to the governing law, it must control. There is not the slightest intimation that the release depends on performance of the October obligation. It presently releases the parties from all contracts and liabilities existing between them down to the October agreement.

Such action was in accord with the entire situation as it prevailed at the time. Coldaire was dealing with a virtual bankrupt who was finished as a Coldaire cabinet manufacturer. Appellant's brief implies that had conditions remained as they were Coldaire might well have been forced to resort to bankruptcy proceedings against Kellett in an effort to mitigate its losses under the April contract. True, Coldaire had a cause of action under that contract for what it was worth, but to exchange that most unsatisfactory status for an agreement by which Kellett was firmly bound to turn over to Coldaire all uncompleted Coldaire production on extremely favorable terms could have had a strong appeal to Coldaire under the circumstances. In addition, provision was made whereby Wilson or Coldaire itself took over the Coldaire production part of Kellett's plant with its machinery and equipment. Whether Coldaire would have the opportunity to function under the agreement depended on whether Kellett would be able to continue formally as a going business. This can be assumed to have been doubtful, but it could have been thought to have been worth trying since the alternative might have been even worse. In this situation consideration for the substitution of contracts is strongly indicated.

It is not disputed that the October 9th contract was executed in Pennsylvania. The law of that state supports the proposition that where as here there is an evident intent to substitute one agreement for another and consideration appears, such contract is binding.

The controlling case is Meaker Galvanizing Co. v. Charles E. McInnes & Co., 1922, 272 Pa. 561, 116 A. 400, which involved a business contract of sale. The purchaser's consignee being unable to establish credits, the purchaser requested the vendor to cancel. The vendor refused, alleging labor and material expended to the amount of $3,500. After negotiation it was agreed that a compromise payment of $2,000 be made by the purchaser to the vendor. Later the vendor, despite this, sued on the larger claim. In denying the larger claim, the court said, 272 Pa. at page 565, 116 A. at page 401: "Admittedly, the plaintiff is entitled to damages arising from the breach of the contract to purchase, but it is insisted that the agreement to pay $2,000 in settlement of the unliquidated claim constituted merely an accord, which was revocable until actual compliance with its terms. The correctness of this position depends upon the construction of the correspondence, which indicates the understanding. There is no conflict in the facts, and the determination of the intention of the parties, resting solely on the interpretation to be placed on their letters, was properly treated as a question of law. Moers v. Moers, 229 N.Y. 294, 128 N.E. 202, 14 A.L.R. 225. It is undoubtedly true that an agreement to accept a smaller sum in satisfaction of a claim for a larger is an accord, revocable until satisfied by actual and complete performance. There is a distinction to be drawn, however, between an agreement to accept a promise in satisfaction and an understanding requiring performance of the promise. Hosler v. Hursh, 151 Pa. 415, 25 A. 52. When the intention is to substitute the former, the contract made is binding, Laughead v. H. C. Frick Coke Co., 209 Pa. 368, 58 A. 685, 103 Am.St.Rep. 1014; In re Hartzog's Estate, 270 Pa. 172, 113 A. 193; 1 C.J. 530, 567, provided, of course, a consideration appears, In re Dillon's Estate, 269 Pa. 234, 111 A. 919; a requirement sufficiently met when, as here, there is an adjustment of unliquidated demands. Scranton Gas & Water Co. v. Weston, 57 Pa.Super. 355; 1 C. J. 551. The present Chief Justice, in Shoemaker v. Fegley, 14 Pa.Dist.R. 850, 856, after commenting upon the pertinent authorities, thus concisely states the rule: `The performance generally is the carrying out of the agreement of accord; but it may be...