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In re McLean

April 16, 1934


Appeal from the District Court of the United States for the Northern District of New York.

Author: Chase

Before MANTON, AUGUSTUS N. HAND, and CHASE, Circuit Judges.

CHASE, Circuit Judge.

C. M. McLean & Sons, Inc., made a contract with the state of New York on June 12, 1931, to furnish materials and erect an armory at Kingston in that state for an agreed price to be paid to the contractor at times and on conditions as stated in the agreement. Two paragraphs of the contract follow:

"102. If the Contractor shall abandon the work under his contract, or fail or refuse to conform with the requirements of the contract, either in workmanship or material, or if at any time the Chief Engineer shall be of the opinion that the Contractor is wilfully violating any of the conditions of the contract, or executing the same in bad faith, or that the Contractor has failed to furnish an adequate plant or to supply a sufficient number of workmen to prosectue the work diligently, or that any part of the work is being unnecessarily delayed, or if the contract or any part thereof shall be assigned or sublet without the written consent of the Chief Engineer, and the Chief Engineer shall so certify to the State, the contract may be declared null and void, the security may be forfeited and the materials delivered at or built into the work, and the machinery, implements and tools of every description which may be found at the location of the work, shall become the property of the state.

"103. The State through the Chief Engineer, may thereupon call the surety to complete the contract as provided for in the bond, or the State may, at its option, proceed to complete the work, either by day work or contract, and any funds retained by the State and any sum realized from the material and equipment reverting to the State shall be applied to pay the increased cost of the work. If the contract is annulled under this article, the Contractor shall not be entitled to any damages on account thereof, nor shall such annullment affect the right of the state to recover against the Contractor or his surety damages which may arise, or extra costs which may be incurred by it as the result of the failure of the Contractor to carry out the terms of the contract."

McLean & Sons, Inc., purchased to use in the building structural steel of the appellant of the value of $29,400, which was shipped to it on credit, and the greater part of this steel was delivered at the location of the armory. Some of it was used in constructing the armory which was partially built when the state notified the contractor on November 30, 1931, of a claimed default in performance of the contract and gave it seven days' notice to improve the progress of the work. The contractor replied to this notice on December 7, 1931, that it would not complete the contract, and waived the notice given. On December 9, 1931, the contract was duly declared void in behalf of the state in accordance with the provisions already quoted.

There was then 249 tons of fabricated steel at the building site which had not been used. The state advertised for bids for the completion of the work, and inserted therein the following:

"Material on site. No payment has been made by the state on the following material, delivered at the site but not incorporated in the work, and therefore bidders shall not assume the right to use this except by arrangement with the owners of the same."

The contract to complete the building was awarded to Lyman T. Schoonmaker for an amount some $90,000 less than the original contract price. Schoonmaker made a contract with the appellant to supply the necessary fabricated steel. It did so, and the 249 tons left by McLean & Sons, Inc., was part of the steel it supplied.

On February 8, 1932, McLean & Sons, Inc., was adjudicated a bankrupt, and on March 1, 1932, a trustee was elected. The trustee had some negotiations with the appellant in which he claimed in behalf of the bankrupt's estate to be entitled to pay for this steel, and the appellant acquiesced in this claim and paid the trustee $15,438 for it on April 4, 1932.

Thereafter the armory was completed. The state retained part of the contract price, and mechanics' liens have been filed by several parties, including the appellant, against the money so held by the state. Apparently that is not sufficient to pay all in full.

Some time in May, 1933, the appellant learned of the above-quoted provisions of the contract made by the state with McLean & Sons, Inc., and applied to the District Court for a summary order in the bankruptcy proceedings directing the trustee to return the amount received from the appellant for the steel. Appellant then took the position that the trustee had no title to the steel when it was sold to the appellant and consequently no right to retain what had been paid for it. The order was denied on several grounds, and an appeal was allowed by the District Judge.

The appellee insists that no controversy, as distinguished from a proceeding in bankruptcy, is presented and that the appeal should be dismissed because not allowed in this court. That the disposition of funds in the hands of the trustee, and so in the custody of the court, involves merely a matter of administration furnishes a plausible ground for the position the appellee has taken. See Hutchinson v. Le Roy (C.C.A.) 113 F. 202; In re Antigo Screen Door Co. (C.C.A.) 123 F. 249. But this dispute, although the bankrupt was indebted to the appellant, does not relate to the claim of a creditor of the bankrupt. it is a dispute between the trustee, as the representative of all the creditors, against what is virtually a third party claiming the right to recover money paid to the trustee by mistake which has unjustly enriched the bankruptcy estate. The fact that the method used to bring the matter before the court was by application for a summary order, as to which the parties stipulated to save time, makes no difference. A summary proceeding to compel a third person to account for property held adversely to the right of a trustee in bankruptcy is appealable under section 24a of the act (11 ...

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