United States v. Cottrell

• Decision Date: 16 July 1968
• Docket Number: Civ. No. 8554.
• Citation: 287 F. Supp. 877
• Court: U.S. District Court — Eastern District of California
• Parties: UNITED STATES of America, Plaintiff, v. Richard F. COTTRELL aka R. F. Cottrell, Defendant.

287 F. Supp. 877

UNITED STATES of America, Plaintiff, v. Richard F. COTTRELL aka R. F. Cottrell, Defendant.

Civ. No. 8554.

United States District Court E. D. California.

July 16, 1968.

John P. Hyland, U. S. Atty., James H. Daffer, Asst. U. S. Atty., Sacramento, Cal., for plaintiff.

Crimmins, Kent, Bradley & Burns, San Francisco, Cal., for defendant.

OPINION

EAST, District Judge.

In this action the plaintiff seeks to recover from the defendant as an endorser of the following written promissory note viz.

DEPARTMENT OF THE NAVY BUREAU OF SHIPS Washington 25, D. C.

JACKSONVILLE, FLA., 29 April 1955.

FOR VALUE RECEIVED, the Georgia Shipbuilding Corporation promises to pay to the order of the Treasurer of the United States the principal sum of Seventy-five Thousand Dollars ($75,000) in installments as hereinafter provided, and to pay interest on the unpaid balance of the principal sum as hereinafter provided at the rate of four (4) per centum per annum from the date hereof until final payment of the principal sum.

This note evidences an indebtedness incurred under and secured by Amendment No. 5 to Contract NObs-5626 dated 29 April 1955, between the United States of America (Department of the Navy) and the Georgia Shipbuilding Corporation.

The principal sum of this note shall be paid in installments together with interest on such installments and the unpaid balance as follows:

(here follows 7 future installment payments of principal in stated amounts plus accrued interest on unpaid balances at stated future times.)

Both the principal sum of the note and interest thereon shall be payable at Supervisor of Shipbuilding, Jacksonville, or at such other place or places as may be designated by the Contracting Officer. Each payment of an installment of principal shall be noted on the back of this note.

This note shall be redeemable, in whole or in part, at the option of the undersigned, at any time before its maturity by payment of the unpaid balance of the principal sum hereof and the interest accrued thereon to date of payment. Any such prepayments of principal shall be applied to the payment of the said unpaid principal installments last to become due on this note and shall be noted on the back of this note.

On failure to meet installments as prescribed herein or in case of issuance of notice of default, as defined in Contract NObs-5626, the principal of this note may be declared and may become due and payable immediately upon written notice of the holder to the undersigned.

This note is issued for valid corporate purposes of the Corporation.

IN WITNESS WHEREOF, the Georgia Shipbuilding Corporation by its President has caused this note to be signed and its corporate seal to be hereunto fixed and attested by its Secretary all in the City of Jacksonville, Florida, as of the date hereof.

GEORGIA SHIPBUILDING CORP. By (S) R. F. COTTRELL, President Attest SEAL (S) JOHN R. MACDONELL Secretary. Endorsers: (S) JOHN R. MACDONELL (S) JOHN R. MACDONELL Executor for the Estate of Alex H. MacDonell. (S) R. F. COTTRELL.

The defendant concedes his endorsement of the Note together with the other named endorsers and the execution and delivery in due course by the named maker, Georgia Shipbuilding Corporation.

The plaintiff made a prima facie case by the production of the Note and the defendant came forward with his proof of alleged defenses.

It appears from the pre-trial order stipulations of the parties inter alia that:

On or about August 18, 1952 MacDonell Boats, a partnership consisting of John R. MacDonell, Alex H. MacDonell and Sidney J. Gefen, entered into a written contract with the United States for the construction of certain ships. (Contract) Thereafter the MacDonell partnership was incorporated as Georgia Shipbuilding Corporation, a Florida corporation which succeeded to the Contract under agreement with the plaintiff dated September 1, 1953. The defendant had been an employee of MacDonell Boats and held various officer positions of Georgia Shipbuilding Corporation.

The Contract was at all times under the administration of the Navy Department's Bureau of Ships and the September 1 agreement with plaintiff held the former MacDonell partners personally liable for the performance of the Contract.

Thereafter when the Contract was substantially completed Georgia Shipbuilding Corporation found itself in financial difficulties, involving lack of working capital and pressure from creditors on past due obligations to the extent that its ability to complete the Contract was threatened (Emphasis supplied) due to losses under the Contract in the estimated amount of $180,000 caused by late delivery of and errors and omissions in government furnished plans and specifications. It was apparent that in order to complete the Contract an unspecified additional amount would be required.

On March 10, 1955, Georgia Shipbuilding Corporation through the defendant as vice-president submitted to Navy Department's Bureau of Ships the following notarized advice:

"In response to your request we have determined by personal inquiry to each significant creditor of this Corporation that no action will be taken by our creditors which will prejudice the completion of * * * the Contract provided the Navy Board of Contract Adjustment enables the Corporation to complete the contract. It is our intention to use whatever funds are generated from other work (repairs, etc.) to reduce our trade obligations."

Then followed negotiations among various Navy departments and Georgia Shipbuilding Corporation culminating in a decision of Navy Cost Inspection Service (NCAB) on April 18, 1955 viz:

"Based on all the facts of the case, the Navy Contract Adjustment Board hereby authorizes an amendment increasing the price of contract NObs 5625 * * * in the total amount of $68,551, said price increases to be administered by means of and through the existing advance payment controlled account. * * *

"In consideration of the said increase in contract price, the corporate contractor and the individual guarantors shall acknowledge themselves indebted to the United States, severally and jointly, in the amount of the said $68,551. * * *

"The Board finds its action in this case will facilitate the national defense."

Thereupon Navy Department's Bureau of Ships drafted an amendment—5 to the Contract under date of April 21, 1955 providing inter alia that the total contract price of the contract be "increased by $68,551.00", procedures for the establishment of a controlled account and withdrawals therefrom with the proviso—"that such withdrawals shall be limited to the payment of costs which are incurred from and after the date of this amendment 5." And further, that any remaining balance in the controlled account "shall revert to the government and shall be credited against the note to be furnished under the terms of this amendment." (Italics added.)

The April 21 draft was not executed and under date of April 29, 1955, Navy Department's Bureau of Ships redrafted amendment 5 changing the contract price increase to $75,000, omitting the above italicized words from the provisions as to withdrawals from the controlled account and provided only that

"Withdrawals from said account shall be in accordance with the terms and conditions of the `Use of Funds' Clause (3) and (14) (d)¹ of the Advance Payment Agreement; provided that any balance remaining in said account upon the completion of Contract NObs-5626 shall revert to the Government and shall be credited against the note to be furnished under the terms of this amendment, as hereinafter described. (Emphasis supplied)

The April 29 draft further provided inter alia that Georgia Shipbuilding Corporation acknowledged itself indebted to the United States in the amount of said $75,000 in addition to the then indebtedness outstanding and owed to the United States, and set forth a schedule of repayment thereof. Further, such increased indebtedness shall be evidenced by the note attached hereto (the above described promissory note) executed by the Corporation with endorsements as indicated thereon. "The covenants, representations and warranties under the advance payment provisions shall continue under and be extended to the note."

The April 29 draft of Amendment 5 was executed by plaintiff and Georgia Shipbuilding Corporation. The note was executed and delivered by Georgia Shipbuilding Corporation as maker and the defendant as one of the endorsers on the note as of April 29, 1955.

Plaintiff thereupon deposited $75,000 in the controlled account as established under Amendment 5. Thereafter Georgia Shipbuilding Corporation made two requests for withdrawals covering in part expenses incurred on the Contract prior to March 1, 1955. Both requests were granted.

By letter dated May 12, 1955, Navy Department's Bureau of Ships issued certain instructions with regard to withdrawals from the controlled account while acknowledging that the "Use of Funds Clause" referred to in the Amendment 5 permitted "withdrawals for Contract costs regardless of the period within which they were incurred"; nevertheless instructed that "inasmuch as the $75,000 (the increase of the price of Contract) is predicted principally on cash run-out costs as of first March, 1955, except for certain—taxes—insurance premiums, it is necessary that some limitations be placed at this time on future withdrawals from the advance controlled account—." These instructions admonished "that withdrawals from said account shall be limited to each run-out costs as of 1 March 1955, except for" certain taxes and insurance premiums.

This unilateral change of position by Navy Department's Bureau of Ships under the letter of May 12 was protested by Georgia Shipbuilding Corporation through its letter of May 26, 1955. By letter of June 12, 1955 the defendant renounced his "guarantee" of the note. However, under threats by Navy Department's Bureau...