United States v. Star Const. Co.
| Decision Date | 20 May 1948 |
| Docket Number | Civil Action No. 3254. |
| Citation | 77 F. Supp. 758 |
| Court | U.S. District Court — Western District of Oklahoma |
| Parties | UNITED STATES v. STAR CONST. CO., Inc., et al. |
Robert E. Shelton, U. S. Atty., of Oklahoma City, Okl., for plaintiff.
Roy C. Lytle, of Keaton, Wells, Johnston & Lytle, and Charles E. France, of France, Johnson, Gordon & Cook, all of Oklahoma City, Okl., for defendants.
This is an action by the United States of America against the defendants to recover the sum of $110,000 excessive profits upon four contracts renegotiated under section 403, 6th Supplemental National Defense Appropriation Act of April 28, 1942, Title 50, U.S.C.A.Appendix, § 1191.
A brief resume of the facts, as admitted or undisputed, is necessary to a proper consideration of this case.
On May 20, 1942, D. H. Rowland organized the Star Construction Company, Inc., an Oklahoma corporation. He associated with him in this corporation the defendants H. C. Adams and B. L. Miracle. The capital stock of the corporation consisted of 100 shares of the par value of $500 per share. One share was issued each to Adams and Miracle and the other 98 shares were issued to Rowland. Rowland paid into the corporation $1500 in cash and gave his note to the corporation for $48,500. This corporation secured four government contracts: Two dated June 7, 1942, one dated June 21, 1942, and one dated August 14, 1942. The note of Rowland was used by the corporation in securing and establishing credit. Rowland also furnished to the corporation certain trucks and equipment. The corporation required in excess of $200,000 as working capital and this was secured through the personal credit of Rowland. The four contracts were secured by surety bonds. Rowland provided those bonds and indemnified the surety by his personal credit.
The four contracts were let upon competitive bids and involved a total consideration of $895,216.70. In securing the services of Adams, Rowland employed him through the corporation at a stipulated salary with the additional understanding that upon the completion of the contracts, Adams was to participate in some undetermined way in the profits. In the Fall of 1942, after the first contract was completed and at a time when the remaining three contracts were approximately eighty per cent completed, the question as to the amount of profits which Adams was to receive, required consideration. This resulted in an agreement between Rowland and Adams by the terms of which Rowland disposed of his interest in the corporation to Adams, Rowland selling and transferring by a bill of sale all of the stock of the corporation to Adams for the sum of $178,500, taking in payment therefor Adams' note for the amount without any security, due ninety days after date, with interest at the rate of four per cent. At that time Adams was a man of small means, being worth approximately $10,000 to $15,000. It appears that thereafter Rowland had no further connection with the corporation or completion of the contracts. The bill of sale of November 28, 1942, contained the following:
"That D. H. Rowland of Dallas, Texas, has on this 28th day of November, 1942, bargained, sold, conveyed, transferred and by these presents does bargain, sell, convey, transfer and deliver unto H. C. Adams, One Hundred (100) shares of the capital stock of the Star Construction Co., Inc., an Oklahoma corporation, of a par value of Fifty Thousand Dollars ($50,000.00), together with all and every right which now exists or which may have at any time heretofore existed in favor of the said D. H. Rowland, as owner of such shares of stock, for and in consideration of the sum of One Hundred Seventy-eight Thousand, Five Hundred Dollars ($178,500.00), * * *." (Emphasis supplied.)
On November 30, 1942, H. C. Adams, as the owner of all the capital stock of the Oklahoma corporation, transferred all of said stock to the corporation in exchange for all of its assets, including the then uncompleted contracts, taking formal assignments of the contracts and assuming all the liabilities of such corporation. This transaction had the effect of liquidating the Oklahoma corporation. No notice of this transaction was given to the proper officers of the government. Following the acquisition of all the assets of the Oklahoma corporation, H. C. Adams organized a Delaware corporation, using the name Star Construction Company, on December 1, 1942. Adams then sold all of the assets he had acquired from the Oklahoma corporation to the Delaware corporation, including the three uncompleted contracts, the Delaware corporation taking formal assignments of the contracts from Adams. The consideration in this transaction was $178,500, represented by an unsecured note of the Delaware corporation to H. C. Adams, dated December 1, 1942, for $178,500, due seventy five days from date with interest at four per cent per annum. No notice of this transaction was given to the proper officers of the government. The Delaware corporation continued to use the office and place of business occupied by the Oklahoma corporation.
The Delaware corporation had an authorized capital stock of $100,000, divided into 1000 shares of the par value of $100 per share. The outstanding issued stock of the corporation had a stated value of $1500 and was issued to and owned by H. C. Adams although two qualifying shares were issued to other parties.
The Delaware corporation completed the three unfinished contracts on or about April 1, 1943. There was no default in any of the contracts. All bills were paid. From money received from the government on the contracts by the Delaware corporation, the note to Adams was paid by the checks of the Delaware corporation as follows: February 10, 1943, $123,500; March 13, 1943, $15,000; March 13, 1943, $40,000; and April 26, 1943, $1595.29, interest. The Adams note to Rowland for $178,500 was paid to Rowland by checks drawn by Adams as follows: February 10, 1943, $123,500; March 13, 1943, $55,000; and April 26, 1943, $1595, interest. At this time there were no unpaid creditors of either corporation, nor was there any actual notice or intimation that the government had any claim, or would seek to renegotiate the contracts.
It is admitted that the only assets which the Oklahoma corporation had at the time it entered into these contracts were the $1500 which had been paid it by Rowland and Rowland's note to it for $48,500. At the time of the sale by Rowland of his stock in the corporation to Adams, the other assets of the corporation consisted principally of the proceeds which would be received from the government upon the completion of the contracts. In determining the value of the stock sold by Rowland to Adams the following financial statement was used by the parties:
Properties
Cash in Banks $ 96,227.77
Accounts Receivable and
Advances 4,636.68
Notes Receivable 48,500.00
Inventory
Works in
Progress $239,537.57
181,588.94
183,812.73 604,939.24
___________
Bonds and Stamps 81.00
Deposits 163.00
Prepaid Insurance 1,114.86
Machinery and
Equipment $5,148.82
Less Depreciation 347.31 4,801.51
_________
Furniture and
Fixtures $ 725.50
Less Depreciation 15.98 709.52
_________
Autos and Trucks $3,965.80
Less Depreciation 1,638.42 2,327.38
_________
Total $763,500.96
Liabilities, Claims, et cetera
Accounts Payable (Trade
etc.) $ 89,259.06
Accounts Payable (on contracts) 117,238.66
Accrued Wages 4,973.47
Accrued Taxes 5,091.90
Badge Deposits 27.00
Deposits on Incomplete
Contracts 325,573.89
Accrued Federal Income
Tax 17,836.98
Reserve for Contingencies 25,000.00
___________
Total $585,000.96
After completion of the contracts and after the payments had been made by the government, as hereinbefore stated, the Delaware corporation paid its note to Adams, Adams paid his note to Rowland, and Rowland paid his note of $48,500 to the Star Construction Company.
On November 8, 1944, the Price Adjustment Board addressed a letter to the Star Construction Company, Inc., an Oklahoma corporation, the Star Construction Company, a Delaware corporation, and H. C. Adams, c/o Star Construction Company, relative to the renegotiation of the four contracts and advised the said corporations and Adams that after reviewing the contracts, it was determined that there were excessive profits in the four contracts of $110,000, representing $20,000 on the first completed contract, and $90,000 on the last three completed contracts. In other words, the actual profits on the four contracts amounted to $191,752, from which the government should deduct $110,000 as excessive profits. Following this letter and a hearing, the Price Adjustment Board entered an order fixing the excessive profits at $110,000 on the four contracts. It is not for this court to say whether or not the $110,000 was a fair deduction for excessive profits. Upon the face of the order it is apparently an arbitrary order, but it is beyond the jurisdiction of this court to question, review or modify said order.
In the present action the government sues the above-named defendants, including D. H. Rowland, H. C. Adams and B. L. Miracle, for the recovery of said sum of...
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