Murdock Mach. and Engineering Co. of Utah, In re

• Decision Date: 01 May 1980
• Docket Number: No. 78-1547,78-1547
• Citation: 620 F.2d 767
• Parties: 27 Cont.Cas.Fed. (CCH) 80,617, 28 UCC Rep.Serv. 1351 In re MURDOCK MACHINE AND ENGINEERING CO. OF UTAH, Bankrupt. RAMCO STEEL, INC., Plaintiff-Appellee, v. Lindsey KESLER, Trustee, Defendant-Appellee, and United States of America, Defendant-Appellant.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 767

620 F.2d 767

27 Cont.Cas.Fed. (CCH) 80,617, 28 UCC Rep.Serv. 1351

In re MURDOCK MACHINE AND ENGINEERING CO. OF UTAH, Bankrupt RAMCO STEEL, INC., Plaintiff-Appellee, v. Lindsey KESLER, Trustee, Defendant-Appellee and United States of America, Defendant-Appellant.

No. 78-1547.

United States Court of Appeals Tenth Circuit.

Argued March 10, 1980.

Decided May 1, 1980.

Glen E. Clark of Fabian & Clendenin, Salt Lake City, Utah, for plaintiff-appellee.

Krege B. Christensen and David S. Dolowitz of Parsons, Behle & Latimer, Salt Lake City, Utah, for defendant-appellee.

Sara Sun Beale, Asst. Sol. Gen., Dept. of Justice, Washington, D. C. (Barbara Allen Babcock, Asst. Atty. Gen., Washington, D. C., Ronald L. Rencher, U. S. Atty., Salt Lake City, Utah and William G. Kanter, Atty., App. Staff, Civil Division, Dept. of Justice, Washington, D. C., with her on brief), for defendant-appellant.

Before SETH, Chief Judge, McWILLIAMS and BARRETT, Circuit Judges.

BARRETT, Circuit Judge.

The United States appeals from a judgment of the District Court, which affirmed the judgment of the Bankruptcy Court. The Bankruptcy Court dismissed the government's counterclaim for possession of certain cold drawn bar steel and awarded possession of the steel to appellee Ramco Steel, Inc. (Ramco).

Factual and Procedural Background

Ramco sold the steel on credit to Murdock Machine and Engineering Company of Utah (Murdock), delivery F.O.B. Buffalo, New York, the place of shipment. The steel was shipped to a warehouse in Indiana for reshipment to Murdock at Clearfield, Utah, the final destination.

The last shipment of steel left Ramco's plant on May 22, 1975. The Bankruptcy Court made no findings about the dates on which other shipments occurred. Murdock had become insolvent on May 13, 1975. Ramco learned of this fact on May 23, 1975. On that same day, Ramco stopped delivery of that steel which was then being held at the Indiana warehouse. In addition, Ramco stopped delivery of one truckload of steel on June 11, 1975.

Unknown to Ramco, Murdock had ordered the steel to fulfill a contractual obligation to the United States to supply fins and nozzles for missiles. The contract between Murdock and the United States contained a title-vesting clause reading as follows:

Title. Immediately upon the date of this contract, title to all parts; materials; . . . acquired or produced by the contractor (Murdock) and allocated or properly chargeable to this contract under sound and generally accepted accounting principles and practices shall forthwith vest in the Government; and title to all like property thereafter acquired or produced by the contractor and properly chargeable to this contract as aforesaid, shall forthwith vest in the Government upon said acquisition, production, or allocation.

After Murdock filed its petition to be adjudged a bankrupt, Ramco filed a complaint with the Bankruptcy Court seeking reclamation of the steel it had shipped to Murdock on credit. Ramco joined both the trustee in bankruptcy and the United States as defendants. The United States filed a counterclaim, asserting its ownership of the steel by virtue of the contract it had entered into with Murdock.

The Bankruptcy Court conducted a hearing on the conflicting claims of Ramco and the United States. The Bankruptcy Court ruled that Ramco was entitled to reclaim the steel based upon the "applicable law (of) . . . the Uniform Commercial Code" whereby Ramco had exercised its right to stop delivery in transit of the steel following its discovery of Murdock's insolvency. (R., Vol. II, p. 69). The Bankruptcy Court concluded that "the provisions of the contract between the United States of America and the bankrupt are not binding upon the plaintiff (Ramco)." (R., Vol. II, p. 70). The District Court affirmed the judgment of the Bankruptcy Court in all respects.

The government has informed us that, "Pursuant to the agreement of all parties, the steel (which was deteriorating in the warehouse) has been sold, and it is the proceeds from this sale which are at issue here." (Brief of appellant, p. 5, n. 6).

Contentions on Appeal

On appeal, the United States contends that the District Court erred, in that: (1) Ramco's right (as seller) to stop delivery of the steel in transit under state law is subject to the superior right of the United States to the steel inasmuch as title to the steel passed to the United States, pursuant to its contract with Murdock, immediately after Murdock "acquired" title to the steel, and (2) Ramco's right to stop delivery of the steel in transit pursuant to § 2-705 of the Uniform Commercial Code was not effective against the United States, because the United States was a bona fide purchaser of the steel for value.

Discussion and Disposition

I.

The United States contends that Ramco's right to stop delivery of the steel in transit under state law is subject to the superior right of the United States to the steel because title to the steel vested in the United States, pursuant to its contract with Murdock, immediately after Murdock "acquired" the steel.

The United States, of course, relies upon the "title-vesting clause", heretofore quoted verbatim, in advancing its contention that it obtained title to the steel immediately after Murdock acquired title to it at the point of shipment, inasmuch as under U.C.C. § 2-401(2) the effect of the delivery term between Ramco and Murdock, i. e., F.O.B. Buffalo, New York, the place of shipment, was to pass title to the steel from Ramco to Murdock at the time and place of shipment. Ramco, however, reasons that because Murdock did not acquire possession of the steel, the United States did not obtain title to it.

The Bankruptcy Court made no finding relative to the contract term "acquired". However, for purposes of this opinion only, we will assume that the interpretation urged by the United States is correct.

"The validity and construction of contracts through which the United States is exercising its constitutional functions, their consequences on the rights and obligations of the parties, the titles or liens which they create or permit, all present questions of federal law not controlled by the law of any state." United States v. Allegheny County, 322 U.S. 174, 183, 64 S.Ct. 908, 913-914, 88 L.Ed.2d 1209 (1944), overruled in part by United States v. City of Detroit, 355 U.S. 466, 78 S.Ct. 474, 2 L.Ed.2d 424 (1958), and companion cases. "In (the) absence of an applicable Act of Congress it is for the federal courts to fashion the governing rule of law according to their own standards." Clearfield Trust Co. v. United States, 318 U.S. 363, 367, 63 S.Ct. 573, 575, 87 L.Ed. 838 (1943); accord, United States v. Kimbell Foods, Inc., 440 U.S. 715, 726, 99 S.Ct. 1448, 1457, 59 L.Ed.2d 711 (1979). The government asserts that the United States must be awarded the proceeds of the sale of steel to which it had legally obtained title. The government urges us not to follow the Uniform Commercial Code.

The government's argument is tied to the principle that no creditor "may obtain a lien, without the consent of the United States, against any public work . . . to which the United States has taken title". (Brief of appellant, pp. 5-6). See: United States v. Ansonia Brass & Copper Co., 218 U.S. 452, 31 S.Ct. 49, 54 L.Ed. 1107 (1910); Armstrong v. United States, 364 U.S. 40, 80 S.Ct. 1563, 4 L.Ed.2d 1554 (1960). The critical inquiry which the government ignores is when Ramco obtained its "lien". Ramco's right to withhold possession of the steel attached when Murdock became insolvent. (U.C.C. § 2-702(1)). Title to the steel did not vest in the government until immediately after it was shipped from Buffalo, New York.

(a).

As to steel not yet shipped when Murdock became insolvent, Ramco's right was prior in time to the government's. Ramco is entitled to the proceeds of that steel if the analysis of Armstrong v. United States, supra, is applied. In Armstrong v. United States, supra, the Court held that state-created materialmen's liens which attached to, but had not been enforced against, a privately owned vessel under construction for the government, remained valid after title to the vessel vested in the government under its contract with the shipbuilder.

The Armstrong court relied on its earlier holding in United States v. Alabama, 313 U.S. 274, 61 S.Ct. 1011, 85 L.Ed. 1327 (1941), that a state tax lien on real property, though inchoate, remained valid as against the United States, which later took title to the property. In United States v. Alabama, supra, the Court reaffirmed the principle that lands owned by the United States cannot be taxed by a state. That principle, however, was held not to apply to the prior state tax liens:

Our present inquiry is whether, assuming the validity of the state statute creating a lien as of October 1, 1936, as against subsequent purchasers, it should be deemed invalid as against the United States. The question is not whether such a lien could be enforced against the United States. The fact that the United States had taken title and that proceedings could not be taken against the United States without its consent would protect it against such enforcement. But that immunity would not be predicated upon the invalidity of the lien. . . .

. . . (W)e perceive no reason why the United States, albeit protected with respect to proceedings against it without its consent, should stand, so far as the existence of the liens is concerned, in any different position from that of other purchasers of lands in Alabama who take conveyances on and after the specified tax date. It is familiar practice for grantees who take title in such circumstances to see that provision is made for the payment of taxes and the Government could easily have protected itself in like manner. . . .

313 U.S. at pp. 281, 282, 61 S.Ct. at p. 1014. (Emphasis supplied.)

In Armstrong the Court flatly rejected the argument...