United States v. Chichester

• Decision Date: 07 January 1963
• Docket Number: No. 17547.,17547.
• Citation: 312 F.2d 275
• Parties: UNITED STATES of America, Appellant, v. Frank M. CHICHESTER, Trustee in Bankruptcy of The Aircraftsmen Company, Bankrupt, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

312 F.2d 275 (1963)

UNITED STATES of America, Appellant, v.Frank M. CHICHESTER, Trustee in Bankruptcy of The Aircraftsmen Company, Bankrupt, Appellee.

No. 17547.

United States Court of Appeals Ninth Circuit.

January 7, 1963.

William H. Orrick, Jr., Asst. Atty. Gen., Francis C. Whelan, U. S. Atty., Alan S. Rosenthal and Kathryn H. Baldwin, Department of Justice, Washington, D. C., for appellant.

George W. Lupton, Jr., Los Angeles, Cal., Craig, Weller & Laugharn, and H. F. Laugharn, Los Angeles, Cal., for appellee.

Before BARNES, JERTBERG and BROWNING, Circuit Judges.

JERTBERG, Circuit Judge.

Before us is an appeal by the United States from an order of the District Court affirming an order of the Referee in Bankruptcy disallowing the amended claim of the United States.

The jurisdiction of the United States District Court rests upon Title 28 U.S.C. § 1334, and§ 2 of the Bankruptcy Act, Title 11 U.S.C. § 11.The jurisdiction of this Court has been properly invoked under Title 28 U.S.C. §§ 1291and1294, and§ 24 of the Bankruptcy Act, Title 11 U.S.C. § 47.

The basic question presented by this appeal is whether the United States properly terminated for default a contract between the Department of the Army of the United States and The Aircraftsmen Company for the manufacture and delivery of fire bombs.

The following facts are not in dispute and may be summarized as follows:

On June 28, 1954, The Aircraftsmen Company(hereinafter sometimes referred to as "the contractor" and "the bankrupt") entered into a contract with the Department of the Army for the manufacture and delivery of 73,944 fire bombs at a fixed unit price and in accordance with a specific delivery schedule commencing in December, 1954.

The contract per unit price was increased by modification on February 25, 1955, and Modern Metal Spinning and Manufacturing Company, the parent corporation of the contractor, was required to guarantee performance of the contract.On March 8, 1955, the "payments"article of the contract was amended to permit the contracting officer to allow, from time to time, progress payments.

Production delays were encountered and prior to June, 1955, only 4,550 units had been delivered.By a modification dated May 25, 1955, a new delivery schedule for the remaining 69,394 bombs was set up which called for delivery of 5,000 units in June of 1955, 8,000 units per month during July of 1955 through February of 1956, with the balance of 394 units due in March of 1956.This was the delivery schedule under which the contractor was operating at the time of termination.

The contract performance went forward during June of 1955 but deliveries for that month totaled 4,630 units.In July of 1955, the contractor delivered 6,830 units.

On August 12, 1955, the contractor applied for relief under Title II of the First War Powers Act, as amended, 50 U.S.C. Appendix § 611.And on October 28, 1955, the contract was modified by increase in unit prices.This award amounted to almost $1,000,000 of which $95,000.00 was paid in cash to the contractor and the balance was offset against unliquidated progress payments.The parties then executed a supplemental agreement, dated November 14, 1955, which implemented the award and made provision for certain safeguards which the contracting officer considered necessary to the Government's interests.By a supplemental agreement dated December 16, 1955, it was agreed that the contractor would furnish to the Government certain technical data and that delivery of these items was to be made at the time of delivery of the final quantity of bombs.

Through the remainder of 1955, the contractor delivered 6,490 bombs in August; 7,140 in September; 6,134 in October; 7,675 in November; and 8,066 in December.In January 1956, the contractor delivered 7,120 bombs.

In the latter part of January 1956, the contractor advised the contracting officer that it was "in critical financial condition" and discussed the possibility of further financial relief.Under date of February 6, 1956, the contractor applied for further Title II relief which was submitted with the contracting officer's approval.The application stated that the contractor "cannot possibly remain in business longer than another seven (7) days due to pressure from creditors and lack of money to meet operating expenses including payrolls," and it was stated that the Government was over-extended on its progress payments.The last progress payment submitted was paid on February 8, 1956, and the contractor was advised on February 10, 1956 that further progress payments were being withheld.On the same date, the contractor laid off its employees who were working on this contract but not its supervisory personnel engaged in the fire bomb program.No bombs were manufactured after February 13, 1956, but between February 1st and 14th of 1956, 3,920 bombs were delivered, and in March of 1956, 531 bombs were delivered and accepted.

The following table shows monthly deliveries and acceptances of fire bombs for the period June, 1955, through March, 1956; monthly units due for the same period under the delivery schedule; and cumulative monthly shortages.

           Units Due by    Units           Unit Shortage       
                             Month End   Delivered  For Month         Cumulative
                  June 1955    5,000       4,630        370                370
                  July  "      8,000       6,830      1,170              1,540
                  Aug.  "      8,000       6,490      1,510              3,050
                  Sept. "      8,000       7,140        860              3,910
                  Oct.  "      8,000       6,134      1,866              5,776
                  Nov.  "      8,000       7,675        325              6,101
                  Dec.  "      8,000       8,066         66 (overplus)   6,035
                  Jan. 1956    8,000       7,120        880              6,915
                  Feb.  "      8,000       3,920      4,080             10,995
                  Mar.  "        394         531        137 (overplus)  10,858
                

On February 28, 1956, the contractor supplemented its application for Title II relief and requested an immediate cash advance.

On March 1, 1956, a hearing was held before the Army Contract Adjustment Board; and on March 23, 1956, the Board declined to grant the application for relief.

On March 26, 1956, the contracting officer notified the contractor by telegraph, following reference to the contract, that:

"in accordance with the General Provision entitled `Default\' your right to proceed further with delivery of the balance of 10,858 bombs of ItemNo. 1 under said contract is hereby terminated in whole for default, effective upon receipt of this notice.Letter follows.

"The Government hereby asserts title to the raw materials, work in process, finished items and special tooling manufactured or acquired in the performance of, and in accordance with the terms of the contract."

By letter dated March 27, 1956, the contracting officer notified the contractor, after referring to the contract, as follows:

"2.In accordance with the telegraphic notice dated 26 March 1956, your right to proceed further with delivery on the balance of 10,858 Bombs of ItemNo. 1 under said contract was terminated in whole for default.

"3.The acts or omissions constituting a default under said contract are as follows:

"(a) Failure to deliver the quantity of ItemNo. 1 in accordance with the delivery schedule set forth in Supplemental AgreementNo. 25, which required delivery to the Government of 8,000 Bombs per month commencing July 1955; and

"(b) Contractor suspended production on or about 13 February 1956, and contractor advised the Government of its inability to continue performance.

"4.The aforesaid supplies, if required by the Government, will be procured in the open market against your account, and you will be held liable for any excess costs.

"5.The Government reserves all rights and remedies provided by law or under this contract, in addition to charging excess costs.

"6.The Government hereby asserts title to the raw materials, work in process, finished items and special tooling manufactured or acquired in the performance of, and in accordance with the terms of the contract."(Emphasis in quoted material.)

The letter also stated that the notice constituted a Finding of Fact, pursuant to the Disputes Article of the contract from which the contractor had a right to appeal to the Armed Services Board of Contract Appeals, as provided in "disputes"Clause 12 of the contract.

On March 30, 1956, an involuntary petition in bankruptcy was filed against the contractor, and on April 17, 1956, the contractor was adjudicated a bankrupt.A preliminary and contingent proof of claim based upon termination of the contract was filed by the Government in June of 1956.

By letter dated October 25, 1956, the Government terminated, for default, the Trustee's right to proceed with the delivery of the technical data covered by the supplemental agreement dated December 16, 1955, on the ground that the Trustee was in default for failure, within 60 days after adjudication of bankruptcy, either to assume or reject the contract.

Pursuant to authority granted by the Bankruptcy Court, the Trustee instituted and prosecuted appeals to the Armed Services Board of Contract Appeals.¹

Following an extensive hearing before the Armed Services Board of Contract Appeals, the Board rendered its decision under date of March 26, 1958, denying in all respects the three appeals.In short, the Board concluded that the contract reserved options to the contracting officer to terminate the contract exercisable at the end of each month if the contractor failed to meet the month's quota; that neither the contracting officer's action in recommending approval of the Title IIapplication for relief in February of 1956 nor his action in accepting the deliveries in March of 1956 constituted a relinquishment of the Government's right to terminate the contract for the February shortage; that the contract was validly terminable...