Virginia Shipbuilding Corporation v. United States

• Decision Date: 18 October 1927
• Docket Number: No. 2598.,2598.
• Citation: 22 F.2d 38
• Parties: VIRGINIA SHIPBUILDING CORPORATION et al. v. UNITED STATES.
• Court: U.S. Court of Appeals — Fourth Circuit

22 F.2d 38 (1927)

VIRGINIA SHIPBUILDING CORPORATION et al. v. UNITED STATES.

No. 2598.

Circuit Court of Appeals, Fourth Circuit.

October 18, 1927.

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Wm. A. Barber, of New York City, Wm. L. Day, of Cleveland, Ohio, J. K. M. Norton, of Alexandria, Va., and H. Starr Giddings, of New York City (James R. Caton, of Alexandria, Va., Wolcott, Wolcott & Lankford, of Norfolk, Va., and Carlin, Carlin & Hall, of Alexandria, Va., on the brief), for appellants.

Chauncey G. Parker, of Newark, N. J., and W. W. Nottingham, of Washington, D. C. (Paul W. Kear, U. S. Atty., and H. H. Rumble, both of Norfolk, Va., on the brief), for the United States.

Before PARKER and NORTHCOTT, Circuit Judges, and SOPER, District Judge.

PARKER, Circuit Judge (after stating the facts as above).

The questions presented by this appeal relate solely to the credits to which the shipbuilding corporation is entitled in connection with the ships constructed by it under its various contracts with the Fleet Corporation and the Shipping Board representing the government; for there is no dispute as to the amount of the loans and advancements made to the shipbuilding corporation or as to its liability therefor. The first position of the shipbuilding corporation is that it is entitled to credit for the amount which was to be paid under the contract of December 7, 1917, for the construction of the vessels in controversy, and that this credit will extinguish its indebtedness to the government and will moreover entitle it to recover a considerable balance. Its second position is that, even though it be not entitled to recover for the construction of the vessels under the contract of December 7, 1917, it is entitled to credit for their value at the time they were seized by the government; that their value at that time was as much as $185 per dead weight ton; and that to charge the government with this value would entirely extinguish its claim and entitle the shipbuilding corporation to a decree for a balance amounting to $2,572,955.12.

With respect to its first position, the shipbuilding corporation contends that it did not purchase from the government the ten ships which were sold under foreclosure; that only two of these ships were ever conveyed to it, and that these were conveyed back to the government pursuant to the contract of July 19, 1920; that at the time the ships were seized by the Shipping Board there existed merely an executory contract to sell them to the shipbuilding corporation or its nominee; and that the seizure of the ships by the government constituted an abandonment or rescission of the executory contract to sell, and relegated the parties to their rights under the original construction contract. The contention of the government is that its obligation to pay for the construction of the vessels was modified and superseded by the contract of September 25, 1919; that the purpose and effect of that contract was to release the government from its obligation to take and pay for the vessels under the construction contract and to provide for the reimbursement of the government for the moneys which it had advanced; that this reimbursement was to be accomplished by having the shipbuilding corporation complete and take over the vessels and execute mortgages upon them as security for the moneys which the government had advanced and which the shipbuilding corporation was bound to repay; that pending the completion of the vessels and the execution of these mortgages legal title was retained in the government as security for the amount due it with beneficial ownership of the vessels in the shipbuilding corporation; that the government, because it held the legal title to the vessels as security, was justified in seizing them for the protection of its interest, such seizure being also expressly authorized by the contract of July 19, 1920; and that in this suit it was proper to decree foreclosure of the equity of the shipbuilding corporation and, after applying the proceeds of the sale of the vessels in partial satisfaction of the debt due the government, to enter decree in favor of the government for the balance due it.

Intricate legal arguments have been advanced with great ingenuity of reasoning and wealth of learning in support of these conflicting contentions; but the answer to the questions involved is to be found, not in technical reasoning from legal definitions applied to the forms in which the parties have clothed their transactions, but in a careful study of the facts conducted with a view of ascertaining the real relationship which existed between the parties and the substance, not the form, of the agreements into which they entered. Such a study has convinced us that the position of the government is essentially correct.

There can be no dispute, of course, as to the meaning of the first contract, that of December 7, 1917. Under it the government was the absolute owner of ships constructed as well as ships in process of construction and ship material on the yards of the shipbuilding corporation. It made loans and advancements for which the shipbuilding corporation became indebted to it, and upon the completion of the ships it was to pay the price provided in the contract.

The meaning of the contract of September 25, 1919, is, we think, equally clear, although "in clothing the reimbursement in the language of a sale" (to quote the letter of September 10, 1919), some ground was given for technical argument. The war was over and the government did not need the vessels which it had contracted with the shipbuilding corporation to construct. There was a large demand for such vessels, however, and the shipbuilding corporation itself, or those who controlled it, thought it could use to advantage the vessels embraced in the contract. The government, however, had advanced for the construction of these vessels over $12,000,000 for which it would have to be reimbursed if the vessels were to be taken over by the shipbuilding corporation. To meet this situation, the contract of September 25, 1919, was executed. Its purpose, as appears from the contract itself as well as from the letter of the shipbuilding corporation, was to let that corporation take over the ships and reimburse the government by giving it notes secured by mortgages on the ships taken over. Initial payments were to be made, but these were to be returned to the shipbuilding corporation to enable it to complete the ships under construction. A price was fixed for the ships, which the shipbuilding corporation says was merely to determine the amount of the initial payments; and it is clear that under the plan adopted the higher the price fixed the fewer ships would be subject to mortgage. As soon as the notes and mortgages given together with the initial payments provided for should equal the amount due the government, all parties were to be absolved from further liability under the contracts, and all ships and ship material were to be conveyed to the shipbuilding corporation. Until the initial payments were made and the mortgages given, the title to ships completed and under construction and to shipbuilding material on the ground remained in the government under the provisions of the contract of December 7, 1917; but this title of the government was subject to the right of the shipbuilding corporation to proceed with the completion of the ships, all of which remained in its possession, and to have title thereto placed in its name upon making the payments, which were to be loaned back to it, and executing the mortgages provided for.

When we come to the dealings of the parties under the contract, we find that from the time of its execution the shipbuilding corporation conducted itself and was treated by the government as the beneficial owner of the vessels. Of course, the shipbuilding corporation had possession of the uncompleted ships and the ship material at the time of the execution of the contract, but, as soon as the contract was executed, the three completed ships were delivered back to it, although initial payments and mortgages were delivered as to only two of them. It was at once credited with the earnings of the two ships which had been under commitments. And six other ships were delivered as fast as they were completed, although the initial payments required by the contract were not made, nor were mortgages delivered as to any of them. All of these vessels were thereupon operated and continued to be operated by the transferee of the shipbuilding corporation until they were seized by the government.

Construing the contract of September 25, 1919, therefore, in the light of the purpose for which it was executed and the practical interpretation placed upon it by the parties themselves, we think there can be no doubt that it was intended to be and was a contract under which the ships completed and under construction were taken over by the shipbuilding corporation, with provision for completion of ships and execution of mortgages in reimbursement of the government for moneys advanced, and with title remaining in the government as security until the contract should be carried out. We think it is clear, and this is the vital point in the case, that, after the execution of this contract the government was no longer under obligation to take and pay for ships constructed under the contract of December 7, 1917, but became, in effect, a mere creditor, holding title to ships and ship materials as security for the money which it had advanced to the shipbuilding corporation, and bound to surrender its rights in the ships and ship material when the indebtedness due it should be repaid or funded in accordance with the provisions of the contract. See Heryford v. Davis, 102 U. S. 235, 26 L. Ed. 160; U. S. v....