United States v. Muschany

• Decision Date: 14 January 1944
• Docket Number: No. 12561,12562.,12561
• Citation: 139 F.2d 661
• Parties: UNITED STATES v. MUSCHANY et al. SAME v. ANDREWS et al.
• Court: U.S. Court of Appeals — Eighth Circuit

139 F.2d 661 (1943)

UNITED STATES v. MUSCHANY et al. SAME v. ANDREWS et al.

Nos. 12561, 12562.

Circuit Court of Appeals, Eighth Circuit.

December 22, 1943.

Rehearing Denied January 14, 1944.

Harry C. Blanton, U. S. Atty., of Sikeston, Mo., and Norman MacDonald, Atty., Department of Justice, of Washington, D. C. (Norman M. Littell, Asst. Atty. Gen., and Russell Vandivort and Drake Watson, Asst. U. S. Attys., both of St. Louis, Mo., on the brief), for appellant.

William R. Gentry, of St. Louis, Mo., for appellees James Karl Muschany and Vera Muschany.

Samuel M. Watson, of St. Louis, Mo. (Webster Karrenbrock, of St. Charles, Mo., and Redick O'Bryan, of St. Louis, Mo., on the brief), for appellees William M. Andrews and Bertha L. Andrews.

Before WOODROUGH, THOMAS, and JOHNSEN, Circuit Judges.

JOHNSEN, Circuit Judge.

The critical question is whether the contracting system used by the War Department in purchasing land for a munitionsplant site at Weldon Springs, St. Charles County, Missouri, which allowed the landowners to fix their selling price and to add five per cent thereto as compensation to the Government's optioning agent, was a "cost-plus-a-percentage-of-cost system of contracting", within the prohibition of section 1 of the National Defense Act of July 2, 1940, 54 Stat. 712, 50 U.S.C.A.Appendix, § 1171.¹

The Secretary of War had directed the Quartermaster General to acquire the land necessary for the site, after the President had approved the Weldon Springs project. In an effort to get the job done speedily, the officer in the Quartermaster Corps to whom the task was assigned decided to avail himself of the proffered services of R. Newton McDowell, of Kansas City, Missouri, as optioning agent, for a commission of five per cent on the landowner's price, to be added into the gross figure of the submitted option. The record is conclusive that, while McDowell's written proposal, which the Quartermaster Department purported to approve and accept, recited that his compensation should consist of a five per cent commission "to be paid by the vendor", and while the purchase-option form, which the Department required McDowell to use, similarly provided that the landowner would "pay to R. Newton McDowell a commission of five per cent (5%) of the gross sales price as full payment for the services of said R. Newton McDowell in procuring such sale, preparing the deed or deeds for the conveyance of said land and arranging for settlement and closing of the transaction", the actual agreement between McDowell and the Quartermaster Department was that McDowell should obtain a price from the landowner which he would be willing to recommend to the Department for approval;² that the landowner should then be allowed to add an additional five per cent as compensation for McDowell; and that the total should be inserted in the option as the gross sale-price figure.³

McDowell procured and submitted 270 options, which the Quartermaster Department approved on his recommendation,⁴ without any supporting appraisal data.⁵ After 129 of these transactions had been closed and conveyances of title completed — approximately $1,000,000 having been paid out in public funds — the situation appears to have been made the subject of investigation by the Department of Justice.⁶ The remaining 149 contracts were thereafter repudiated by the Government, and condemnation proceedings were instituted against the landowners, declarations of taking were filed, deposits of estimated just-compensation were made, and the appointment of commissioners was requested. These estimates were materially less than the theretofore-approved contract prices, and the landowners accordingly set up the contracts as legally having fixed the measure of their compensation rights, and prayed that awards be entered for the contract amounts, without the appointment of commissioners. The Government in reply alleged that the purchase-contracts were invalid and renewed its demand for the appointment of commissioners to appraise the value of the property.

Because individual condemnation proceedings were instituted against the properties involved, resulting cases fell upon the dockets of all of the then-three judges for the district. One case from each judge's docket was taken as a test case, and the three judges sat together to hear the evidence and the argument as to the general invalidity of the contracts. Each judge, however, made disposition of his own case. One judge held that the purchase contract was within the congressional prohibition against any use of "the cost-plus-a-percentage-of-cost system of contracting", and hence was invalid.⁷ That case is not involved in this appeal. In the other cases, each of the two judges held that the contract was not violative of the congressional prohibition, nor was it otherwise invalid, and that the landowner was accordingly entitled to have an award entered for the contract amount, without the appointment of commissioners.⁸ It is these two cases which are now before us, on the Government's appeal.

That purchases of real estate, which allow the landowner to fix his wanted-price and then add a certain percentage of this amount for some special purpose, all to be paid to him solely as consideration for the conveyance, literally may be regarded as constituting cost-plus-a-percentage-of-cost transactions, there can be no doubt. That Congress has the right to prohibit the use of any or all cost-plus-a-percentage-of-cost forms or methods of public contracting, there can equally be no question. The argument made here, however, is that the prohibition in section 1 of the National Defense Act of July 2, 1940, should be construed as being intended to apply only to construction contracts, and not to contracts for the purchase of real estate. This was the view of the trial court.

It may be conceded that cost-plus-a-percentage-of-cost contracts are most commonly used in and associated with the construction and production fields. But it is clear from the record, as heretofore indicated, that what literally constitutes a cost-plus-a-percentage-of-cost method of contracting is also capable of being used in the real estate field, and that it has been so used, not only in this but on other governmental projects.⁹

In this connection, it is to be noted that the construction of munition plants and the acquisition of real estate necessary therefor are co-ordinate authorizations under section 1 of the Act, and that the language of the prohibiting proviso is unqualified and commands generally that "the cost-plus-a-percentage-of-cost system of contracting shall not be used under this section". The record demonstrates further, not only as an apparent possibility but as a reasonable probability, that the use of such a contracting method in acquiring real estate is productive of some of the very evils which Congress manifestly was attempting to prevent, in any expenditure of public funds under section 1 of the Act. In view of all of the foregoing, we do not feel that there is any sound reason or judicial right to impose such a limitative construction upon the general language of the prohibition, as appellees would have us do with respect to real estate transactions.

One of the evils aimed at by Congress undoubtedly was the tendency of any cost-plus-a-percentage-of-cost system to increase prices to the Government. The probability of that general result in the Weldon Springs transactions is, as we have indicated, quite cogently suggested (and indeed demonstrated) by the record. We do not mean to imply that the record establishes that McDowell's recommendations were altogether dominated by his plus-interest in the contracts, even though he knew that the Quartermaster Department was accepting and approving them without appraisal reports or data. In fairness, it must be recognized that McDowell was trying to do a speedy job, and that his instructions from the War Department were to preserve as much good will in the community as possible. It should perhaps also be stated that only a portion of the total 270 transactions involved are attempted to be detailed in the record. But the transactions shown, without any effort to explain or neutralize them (McDowell did not take the stand), necessarily tend to indicate the general course of dealing in the optioning transactions, and, at the least, they can hardly be said to warrant any inference of commission-obliviousness in the general situation.

We have made passing mention in a preceding footnote of McDowell's attempt, in making closing settlements with the landowners, to collect, contrary to his agreement with the Quartermaster Department (but perhaps within the literal language of the option), commissions upon his own commissions, commissions upon the commissions of the Kansas City Title Insurance Company for closing the transactions, and commissions upon the amounts included in the contracts for revenue stamps and recording fees. We have similarly referred to the instance where McDowell first submitted and recommended approval of an option from an attorney in fact for $4,500; later took an option from the landowner personally for $10,000 and made the same recommendation; and finally wound up, after the Government decided to condemn, with the statement that a value of approximately $4,900 was "a fair appraisal for this land". There is another unexplained incident in the record where the landowner testified that, when he named his own price for the property, one of McDowell's men declared that "he would like to add fifty dollars an acre more for the land", but, as the landowner put it, "I said that was all I wanted". In the case that was tried by the third district judge, referred to above but not involved in this appeal, the opinion observes that "The price agreed on with Miss Callaway was probably not much more than double what a jury would have awarded her on the evidence presented."¹⁰ In another...