Reconstruction Finance Corp. v. SHERWOOD DISTILL. CO.

• Decision Date: 19 December 1952
• Docket Number: No. 6515.,6515.
• Citation: 200 F.2d 672
• Parties: RECONSTRUCTION FINANCE CORP. v. SHERWOOD DISTILLING CO., to Use of HOFFENBERG.
• Court: U.S. Court of Appeals — Fourth Circuit

200 F.2d 672 (1952)

RECONSTRUCTION FINANCE CORP. v. SHERWOOD DISTILLING CO., to Use of HOFFENBERG.

No. 6515.

United States Court of Appeals Fourth Circuit.

Argued November 10, 1952.

Decided December 19, 1952.

David R. Owen, Baltimore, Md. (Semmes, Bowen & Semmes, Baltimore, Md., on the brief), for appellant.

Wilson K. Barnes, Baltimore, Md. (William Hoffenberg, Baltimore, Md., on the brief), for appellee.

Before PARKER, Chief Judge, and DOBIE, Circuit Judge, and BARKSDALE, District Judge,

DOBIE, Circuit Judge.

This is an appeal from a judgment of the United States District Court for the District of Maryland in favor of Sherwood Distilling Company (appellee here and plaintiff below, hereinafter called Sherwood) against the Reconstruction Finance Corporation (hereinafter called R.F.C.), after a trial before the Court sitting without a jury. The judgment was for $42,544.31, representing expenditures of $33,281 made by Sherwood for the purpose of completing a livestock feed recovery plant on land which was conveyed by it to R.F.C. in accordance with a written agreement between them, together with interest thereon in the amount of $9,263.31. The judgment also ordered R.F.C. to reconvey the said land to Sherwood with the right in R.F.C. to remove the building and machinery.

In the summer of 1945 the Department of Agriculture found that a critical shortage of livestock feed existed and would continue, possibly through 1947. One means of alleviating this shortage was to recover grain from distillery slop, which was then being largely wasted. This process required special drying equipment, operated in conjunction with the distilleries. Sherwood operated a distillery at Westminster, Maryland, which had no feed recovery facilities.

After a lengthy correspondence, instigated by President Mann of Sherwood, an elaborate written contract was entered into, October 22, 1945, between R.F.C. (called the Lessor) and Sherwood (called the Lessee). The case before us involves the interpretation of this contract, so we shall analyze briefly some of its most important provisions.

In Paragraph One, Lessee agreed "forthwith upon the execution of this agreement", to convey to R.F.C. the site for the plant. Subsequently such a conveyance was made. The land in question (80' x 33') was part of Sherwood's tract at Westminster, Maryland, on which its distillery was located. In Paragraph Two, Lessee agreed to prepare and submit to R.F.C. for approval, plans and specifications for the construction and equipping of the plant. Upon securing such approval, Lessee agreed "to proceed in accordance therewith and complete as soon as practicable the construction and equipment of the plant * * * and the acquisition and installation of the Machinery." This paragraph is important as showing that Sherwood assumed the obligation of seeing the job through to a conclusion.

Paragraphs Three and Four provided that, with the approval of R.F.C., Lessee could subcontract the construction of the building and requisition from R.F.C. the necessary funds to pay therefor. In Paragraph Five, Lessee, agreed to purchase the necessary machinery on behalf of R.F.C. and in Paragraph Seven R.F.C. agreed to pay such bills therefor as it had approved.

Paragraph Ten provided:

"Notwithstanding any other provision herein contained, the maximum amount which R.F.C. shall be required to expend hereunder shall not exceed One Hundred Thirty-Five Thousand Dollars ($135,000.)"

Paragraph Eleven specified that title to the buildings and machinery should at all times be vested in R.F.C. Paragraph Twelve, the meat of the case before us, is set forth in full:

"Subject to termination upon the terms hereinafter in this paragraph Twelve provided, R.F.C. hereby agrees to lease, and does hereby lease, the site, buildings and machinery to be acquired hereunder, to Lessee and Lessee does hereby lease the same from R.F.C. for a term ending April 1, 1951, which term, upon its expiration, shall be automatically extended, subject to similar termination for an additional period ending April 1, 1953. R.F.C. and Lessee each agrees, upon the written request of the other to execute and deliver such additional instruments of lease as may be necessary to carry out the provisions of this agreement. This lease or any extension thereof under this paragraph Twelve may be terminated by the parties hereto on fifteen (15) days\' written notice of either party to the other given by registered mail as provided in paragraph Twenty-seven hereof." (Italics supplied.)

In Paragraph Thirteen Lessee agreed to pay R.F.C. a rental of $14.28 for each ton of feed produced by the plant. No rental was payable when the plant was not in operation. Paragraph Fourteen permitted R.F.C. to cancel the lease for cause, without giving fifteen (15) days' notice. Paragraph Fifteen granted to Lessee an option, for a period of thirty days after the expiration or termination of the lease, to purchase the plant by reimbursing R.F.C. for its direct investment, with minor adjustments. The remaining paragraphs contained certain of the usual administrative clauses of a lease.

Sherwood entered into a prime contract with the H. K. Ferguson Company, dated as of August 23, 1945, whereby the latter agreed to act as Engineer-Contractor in constructing and equipping the plant. This contract expressly provided that, should the contract between Sherwood and R.F.C. be terminated, R.F.C. could order this engineering contract to be terminated also, in which event Ferguson should "immediately discontinue the Work" and "procure cancellation of all existing commitments." R.F.C. approved the contract on January 4, 1946.

Pursuant to authority granted by this contract, Ferguson entered into five sub-contracts for the construction of the plant building. Each provided expressly that, should the prime contract be terminated, R.F.C. could order the sub-contracts to be terminated, in which event the sub-contractors should "immediately discontinue the Work" and cancel all commitments. Each of these was approved by R.F.C. and by Sherwood. The prime contract also authorized Ferguson to purchase materials, supplies, machinery and equipment.

In order to insure the proper expenditure of R.F.C. funds, the work was supervised by engineers of R.F.C. Closest to this job was William Bloom, whose duties and authority in the premises were carefully outlined in a resolution of R.F.C's Executive Committee, which was sent to Sherwood January 30, 1946. Bloom sent to Sherwood monthly Status Reports showing the amount of money committed (total Purchase Orders) and the amount disbursed (total Payment Certificates).

By the early part of April, 1946, the Status Reports showed total commitments of approximately $90,000. Since this covered only the machinery and the foundation of the building, Bloom saw that the plant could never be completed within the $135,000 allocated by the government in accordance with the Agreement. Accordingly he told Mann that no money in addition to the $135,000 would be forthcoming from R.F.C. and that Mann should "either put the money into it to complete it, or the building does not get completed." Bloom also said that if the job was completed and if there was any money left in the R.F.C. fund of $135,000, Sherwood would be paid its "reimbursable items" of cost. It was not unusual for a lessee to put its own money into an R.F.C. plant on this basis.

On May 28, 1946, Sherwood signed a private contract with G. Walter Tovell, Inc., contractors, to complete the plant building at a cost of $34,115 to be paid by Sherwood. R.F.C. was not a party to this contract, and it was in no sense an R.F.C. commitment. R.F.C.'s only interest in the contract was from the engineering standpoint. Bloom's estimate of the other costs proved extremely accurate, as shown by the fact that, commencing January 31, 1947, the Status Reports showed total R.F.C. commitments of $134,888.53 out of the appropriation of $135,000 specified in the lease.

On February 3, 1947, R.F.C. sent out to Sherwood and to all lessees of feed recovery facilities notices terminating the contracts, effective fifteen days after receipt, in accordance with the clause contained in all the Agreements. On February 7, a telegram was also received by Sherwood from R.F.C. ordering all work to be stopped immediately. Thereafter no further work was done, except to protect the property. Moreover, R.F.C. and Ferguson proceeded to cancel sub-contracts and Purchase Orders wherever possible, with the result that $8,029.35 was saved for the government from the outstanding commitments, and only $126,940.38 was actually disbursed.

President Mann of Sherwood had said, and R.F.C. had apparently thought, that Sherwood would purchase the plant under the very favorable option granted in Paragraph Fifteen of the lease. Since it could do this by merely repaying R.F.C. for its direct expenditures (with minor adjustments), Sherwood would thus be able substantially to recover its investment. Some distillers did just that. On February 12, 1947, R.F.C. asked Sherwood whether it intended to purchase the property under the option or by negotiation (i. e. at a lower price). However, Sherwood did nothing except to consult its attorney, who averred that the termination was improper. In October R.F.C. had the plant inspected by an industrial engineer, who reported that the cost of dismantling the building and removing the equipment was "almost prohibitive."

Although the alleged cause of action arose on February 3, 1947, this suit was not commenced until July 14, 1949, and was brought to trial February 19, 1952. It was stipulated that the result in this case would govern that in a companion suit filed by Foust Distilling...