US Metal Products Co. v. United States

• Decision Date: 08 July 1969
• Docket Number: No. 68-C-913.,68-C-913.
• Citation: 302 F. Supp. 1263
• Parties: U. S. METAL PRODUCTS CO., Inc., Plaintiff, v. The UNITED STATES of America, Defendant.
• Court: U.S. District Court — Eastern District of New York

302 F. Supp. 1263

U. S. METAL PRODUCTS CO., Inc., Plaintiff, v. The UNITED STATES of America, Defendant.

No. 68-C-913.

United States District Court E. D. New York.

May 27, 1969.

On Application to Reargue July 8, 1969.

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Levin & Weintraub, New York City, for plaintiff; H. Stephen Edelman, New York City, of counsel.

Vincent T. McCarthy, U. S. Atty., E. D. New York, for defendant; Cyril Hyman, Asst. U. S. Atty., of counsel.

BARTELS, District Judge.

This action has been instituted under Section 1346(a) (2), 28 U.S.C.A., for the recovery from the Government of $6,237.44, representing the balance due to the plaintiff under a contract with the Government, which has interposed as a defense, an offset in the same amount, claimed to be due the Government under another contract. Plaintiff moves to strike the answer and for summary judgment under Rule 56, Fed.Rules Civ. Proc., 28 U.S.C.A.

There were two contracts between the plaintiff and the Government, the first made on February 9, 1965, and the second on June 28, 1965. The contract upon which this suit is brought is designated as the "Second Contract", but the offset springs from a prior contract, designated as the "First Contract". The offset is the amount of damages caused by plaintiff's failure to perform the First Contract after it had filed a petition for an arrangement under Chapter XI of the Bankruptcy Act (Act), which arrangement was subsequently confirmed by the Referee in Bankruptcy. In the arrangement proceeding the defendant did not file a proof of claim for the amount of the offset, which amount plaintiff asserts was a provable claim and was discharged by the confirmation. The pertinent facts may be recited as follows:

(1) On February 9, 1965, plaintiff was awarded the First Contract by the Defense Electronics Supply Center (DESC) through the Defense Supply Agency (DSA) located at Dayton, Ohio, providing for the supply of a number of Jack Boxes to the Government. On June 28, 1965, plaintiff was awarded the Second Contract by the Department of Navy but was not required to perform thereunder until notice from the defendant, which was not given until March, 1967, after the date the Referee in Bankruptcy had confirmed the arrangement. Performance was completed by May 31, 1968, and final payment made to the plaintiff on that date with notice of defendant's intention to withhold the sum of $6,237.44.

(2) Although the First Contract was awarded in Ohio, plaintiff was advised by the Government on November 1, 1965, that responsibility for administration of the First Contract would be transferred to the Defense Contract Administration Services Region, New York, and that all correspondence relating to the Contract should be directed to the New York office.

(3) The First Contract provided for delivery to the Government of a number of Jack Boxes pursuant to three calls in specified quantities at future times as required by DSA. Call 1 was made on February 10, 1965 and was met by the plaintiff. Call 2, dated November 24, 1965, required delivery beginning January 31, 1966 and ending March 31, 1966. Call 3 was made February 1, 1966 and required delivery on March 1, 1966 to May 31, 1966. As appears in the subsequent paragraphs, the 2nd and 3rd calls were not met and are the subject of this litigation.

(4) On December 15, 1965, plaintiff wrote DESC, Ohio, that due to the failure of its brass supplier, it did not "look possible for us to meet the delivery schedule based upon the promises we have from the brass company."

(5) On February 1, 1966, DESC, Ohio, made a request of plaintiff for delivery on Call 2, which was followed by a letter, dated February 9, 1966, from the Department of Commerce mandating plaintiff's supplier to supply brass to the plaintiff.

(6) On March 17, 1966, plaintiff filed a petition for an arrangement under Chapter XI of the Act and continued the operation of its business. In its schedule of creditors and in its report of executory contracts required by Section 324(1) of the Act (11 U.S.C.A. § 724(1)), plaintiff did not list the United States as a creditor or a party to an executory contract.

(7) Notice of the first meeting of creditors was mailed by the Referee on March 29, 1966, fixing the last day to file claims as October 19, 1966.

(8) Although DESC received no notice of creditors' meeting, plaintiff by letter of March 22, 1966, notified DESC, Ohio, of the filing of the Chapter XI petition, stating that it was required by court order to operate profitably but could not do so at the present contract prices and appealed to the Government for a price increase on Jack Boxes.

(9) On March 29, 1966, DESC denied this request and asked for a reply as to plaintiff's "anticipated future action", to which plaintiff responded on April 7, 1966:

"We believe there is a regulation which does permit an increase in price under certain distress conditions and we respectfully request that you investigate the possibility of an increase in price. In the meantime, as explained above we are preparing to start manufacturing the Jack Boxes in about two weeks." (Emphasis supplied.)

(10) Eight days later, however, on April 15, 1966, plaintiff wrote DESC, Ohio, that it could not manufacture the Jack Boxes at the contract prices without a loss and petitioned for either one of the following alternatives:

"1. that we be let out of the contract without completing Call 2 or 3; or,

2. that we be given relief under Section 17 of Statute 85-804 § 1 of P.L. 85-804 and that the price of the Jack Boxes be increased to $7.08 each which would cover our labor, material and overhead costs only."

(11) On May 26, 1966, the Terminating Contract Officer of the Government at Ohio informed the plaintiff that it was not entitled to a price increase but that the final decision rested with DESC, to whom plaintiff could forward information for a formal determination.

(12) On May 31, 1966, plaintiff requested further information with regard to a price increase but on June 14, 1966, the Government informed the plaintiff that it was considering termination, in response to which plaintiff, on June 15, 1966, requested that "consideration be given to terminating this contract without prejudice." (Emphasis supplied.)

(13) On October 31, 1966, the Government sent plaintiff a notice of immediate termination of the Contract for failure to complete deliveries required by Calls 2 and 3.

(14) On November 4, 1966, plaintiff filed an appeal from the default termination to the Armed Services Board of Contract Appeals (Board).

(15) On December 13, 1966, the Referee in Bankruptcy confirmed the arrangement, thus discharging all provable claims in accordance with the provisions of the Act.

(16) On March 9, 1967, the Board found that plaintiff had no excusable cause for non-performance of Calls 2 and 3 and concluded that the termination was justified.

(17) On April 13, 1967, DSA notified plaintiff that it was liable to the Government for $6,237.44 as excess costs incurred in reprocuring the supplies required by Calls 2 and 3 of the terminated contract.

(18) From the April 13, 1967 assessment plaintiff again appealed to the Board and argued that the claim had been discharged in bankruptcy, but the Board, on August 16, 1967, affirmed the assessment.

Plaintiff contends that the defendant had a provable claim in bankruptcy for the damages arising from a breach of contract, which could have been filed before the order confirming the arrangement in bankruptcy and that the claim was therefore discharged and unavailable as a defensive offset.¹ This contention is based upon two theories: (1) the Government's claim arose out of an anticipatory breach of contract existing at the time the petition was filed and thereafter, or at all events it was a contingent claim at that time which could have been filed as a provable claim at that time pursuant to Section 63a(8) and (9) of the Act (11 U.S.C.A. § 103(a) (8) and (9)) and Section 57d of the Act (11 U.S.C.A. § 93(d)), and (2) upon formal termination of the contract by the Government prior to confirmation, the Government had a claim analogous to the claim of a creditor arising from the rejection of an executory contract by a debtor under Section 313(1) of the Act (11 U.S.C.A. § 713(1)), and was compelled to prove this claim in the arrangement proceeding.

The first theory advanced by plaintiff in support of its contention is fallacious. While the filing of a petition in a straight bankruptcy proceeding may constitute an anticipatory breach of an executory contract, United States v. Brunner, 282 F.2d 535 (10th Cir. 1960), such is not the case upon filing of a petition for an arrangement under Chapter XI of the Act. This is implicit from the very purpose of Chapter XI, which is to permit the debtor to continue the operation of his business under Court supervision. See United States v. National Furniture Company, 348 F.2d 390 (8th Cir. 1965). A party to an executory contract with the debtor has no right to terminate by reason of the filing of the petition and does not have a provable claim until there has been a rejection under Section 313(1), resulting in injury to such party. In re Greenpoint Metallic Bed Co., 113 F.2d 881, 884 (2d Cir. 1940); Collier on Bankruptcy, Vol. 8, ¶ 3.1510, p. 230 (14th ed.). Further, before the plaintiff requested termination in this case, the logistics of the correspondence between the parties indicated an intention to perform and demonstrated that both parties expected and consented to a delayed performance. For instance, on April 7, 1966, plaintiff stated that it was preparing to manufacture Jack Boxes in two weeks. Again, on April 15, 1966, plaintiff asked for relief under Section 17 of Statute 85-804 § 1 of P.L. 85-804 and requested the Government to consent to a price increase. This is not the language of refusal to perform or threatened breach by simply an appeal for relief from loss arising...