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November 29, 1949


The opinion of the court was delivered by: KNIGHT

Dec. 29, 1949.

In May and June, 1945, the defendant U.S. Hoffman Machinery Corporation (hereinafter called Hoffman) placed with the Rumsey Manufacturing Company (hereinafter called Rumsey) three purchase orders for machining an aggregate of 654,500 so-called adapters. The total price to be paid was $ 187,500. Rumsey was a subcontractor of Hoffman, the prime contractor with the Navy Department of the United States. These purchase orders were for war materials, and they were subject to the terms and conditions of the prime contract. Under the prime contract, the Navy, as the contracting agency of the government, had the right to cancel these purchase orders prior to completion. They were cancelled; one on August 20, 1945, and two on September 21, 1945. The notice of cancellation read: 'This termination is necessitated by Government's termination of prime contract under which your contract is subcontracted.'

 At the time of the final termination Rumsey had completed and shipped 34,000 adapters; had 4,750 completed adapters on hand, and the balance of the orders was unfinished or not completed. Rumsey had been paid $ 10850.

 Rumsey was given a notice to acknowledge receipt of the notice of cancellation and to indicate the intent to file or not to file a claim for damages by reason of the cancellation. It promptly gave notice of its intent to file and on January 24, 1946, filed a claim for $ 135,376.87. This was sent to Hoffman and later at Hoffman's direction forwarded by Rumsey to the Navy Department. A single claim was first submitted, but the Navy Department required that it be separated as to the three orders. This was done, showing a claim as to Purchase Order No. 5473 of $ 9,225.12, and as to Purchase Order No. 40130 and Purchase Order No. 40131, claim of $ 125,153.27. The claims as so divided were not transmitted to the Navy Department until June, 1946. Numerous conferences followed, and in July, 1946, the cost inspector representing the Navy submitted to Rumsey his recommendations as respects the claim or settlement proposal. In August, 1946, Rumsey submitted to Hoffman a modified statement of its claim. Again conferences followed without result, and on December 8, 1946, Rumsey brought suit. On July 18, 1947, an involuntary petition in bankruptcy was filed against Rumsey, and on August 6, 1947, it was declared bankrupt. Plaintiff McAvoy herein was appointed trustee of the bankrupt's estate, and by order of this court was joined as a party plaintiff.

 Purchase Order No. 5473 was for 52,000 adapters at the unit cost of 25 cents and at a total cost of $ 13,000; Purchase Order No. 40130 was for 300,000 at the unit price of 28 cents and at a total cost of $ 84,000; and Purchase Order No. 40131 was for 302,500 at the unit price of 28 cents and at a total cost of $ 84,700. Hoffman was to furnish the forging and Rumsey the tooling.

 The original complaint contained eight causes of action. Each alleged cause numbered 1, 2, 3 and 4 demands judgment in the sum of $ 9,225.12, and each relates to Purchase Order No. 5473. Recovery on any one of these counts would bar recovery on the others. Each alleged cause of action numbered 5, 6, 7 and 8 demands judgment in the sum of $ 126,153.35, and all relate to Purchase Orders Nos. 40130 and 40131. Recovery on any one of these causes of action would bar recovery on the others.

 This action was commenced in Supreme Court of New York State and was removed by order of that court to the U.S. District Court for the Western District of New York. Defendant answered on April 2, 1948. On February 27, 1948, plaintiffs served an amended complaint setting up an added Ninth cause.

 The Ninth cause of action is said to be for 'expended and incurred settlement expenses and/or continuing costs relating the terminated portion of the purchase orders'. Defendant's amended answer, which was served on May 9, 1948, contains a denial of all of the allegations for damages in the complaint and further alleges that the plaintiff Rumsey is not a proper party plaintiff.

 Trial was commenced on April 2, 1948, and concluded June 10, 1948. Thirteen days were consumed in the trial. Eighteen hundred and one pages of testimony were taken; 122 exhibits introduced and 5 briefs received.

 Informed of the chaotic conditions in settlement of war contracts following World War I and anticipating the early conclusion of World War II, Congress passed and there became law the Contract Settlement Act, hereinafter called Act 41 U.S.C.A. ┬ž 101 et seq. This Act was purposed to and did set up a procedure by which settlement of terminated war contracts might be speedily determined with just compensation to the contractors. To supplement this Act, many regulations, having the force of law, were set up. The Act in detail points its objectives and methods by which they are to be obtained. These may well be quoted, in part.

 'Sec. 1 * * *

 '(a) to facilitate maximum war production during the war, and to expedite reconversion from war production to civilian production as war conditions permit;

 '(b) to assure prime contractors and subcontractors, small and large, speedy and equitable final settlement of claims under terminated war contracts, and adequate interim financing until such final settlement;

 '(c) to assure uniformity among Government agencies in basic policies and administration with respect to such termination settlements and interim financing;

 '(e) to assure the expeditious removal from the plants of prime contracts and subcontractors of termination inventory not to be retained or sold by the contractor; * * * '

 The plaintiffs here sue to obtain relief afforded by the common law as well as relief afforded by the Act. Is this permissible? Admittedly this is a case of first impressions.

 The plaintiffs had the right to sue at common law. This is not controverted by the defendant, and this right is confirmed by certain provisions of the Act, regulations adopted pursuant to the Act, by decisions of the courts, by declarations of law makers in consideration in Congress of the measure. Stevens v. Federal Cartridge Corporation, 226 Minn. 148, 32 N.W.2d 312, impliedly held that such action might be brought at common law, since the decision denied plaintiff relief because it had not filed with the Navy the form required. In Kal Machine Works, Inc. v. United States and Precision Metal & Machine Co. v. United States, 3 CCF 1001 and 1002, the Appeal Board said the contractor had the right of election. The appeals in these cases to the Court of Claims, reported in 68 F.Supp. 436, 107 Ct.Cl. 202, and 68 F.Supp. 437, 107 Ct.Cl. 219, show no consideration of this question. In discussion of the proposed Act in the United States Senate on May 4, 1944, the inquiry was made as to whether the proposed Act provided any method by which subcontractor could force the government to recognize him if he felt the prime contractor was not treating him fairly, and the reply by the introducer of the measure was that: 'He can go into court. He can go into court only against the prime contractor.' 3386-3397 Congressional Record.

 Whether recovery is had under the common law or the Act, plaintiffs are entitled to recover their loss by reason of the cancellation of the orders. The difference in effect lies in the fact that each sets up a different method for the fixation of damages- one under the formula of the Act, the other as for breach of contract.

 In May and June, 1945, Rumsey had been engaged in preparing its tools for use. It was engaged in the actual tooling of the adapters less than three months. At the time of the final termination, it had on hand in its plant a large amount of tools, material and equipment. It was obliged to remove and store this in its plant. The space these materials required when removed shows something of the quantity of materials. This was 9784 square feet. Whether or not Rumsey observed the provisions of Section 112, Title 41 U.S.C.A., does not appear. That section states the policy of the government to be, upon termination of war contracts, to assume the expeditious removal of materials from the plants. It provides that the contractor may submit a statement showing the materials claimed at the termination and his desire to have them removed by the government. This section further provides that the government agency shall arrange for the storage by the war contractor on his premises or elsewhere, or shall remove the government's materials from contractor's plant. It does appear that no date of plant clearance was ever officially set. It does appear that from time to time Rumsey requested directions for the disposition of these materials, but it was not until May, 1946, that the first carload was sold by the Navy Supply officer and not until the following month that the materials were all removed.

 Intervening the submission of the first proposed settlement presented by Rumsey and the time of the commencement of this suit, there were frequent conferences between Rumsey and the Navy Department, and many compilations of figures made, as the record herein shows. The direct labor expense incurred by Rumsey, from July 1 to September 30, 1945, was $ 70,675.51; the indirect factory expense for the same period, $ 235,922.71; and for general and administrative expenses, $ 181,006.66. These included an almost innumerable number of items of charges, all totalling $ 487,615.88, as claimed by plaintiffs. At the termination only 6.7% of the orders had been completed.

 As showing the unreliability of the computations of recommendations made by the Navy cost inspector, plaintiffs point to eight different reports recommending for acceptance amounts ranging from $ 27,093.30 to $ 115,816.39. As to this last amount the plaintiffs are in error in claiming that the inspector recommended any such amount for acceptance. Plaintiff's counsel placed on the blackboard figures totalling that amount, and, in effect, asked the inspector if the computation was correct. He was not asked whether he recommended that amount for acceptance. As to the other computations, they are easily explained. The first was made shortly after the settlement proposal of Rumsey was submitted, and in that it recommended for acceptance $ 27,093.30; $ 25,406.81 for further consideration and $ 82,622.73 for disallowance. Such disallowance included the item of $ 26,450.30 for 'costs', called by Rumsey 'momentum costs', and many charges for indirect factory expense and general and administrative expense which later admittedly were not proper charges. In August, 1945, Rumsey reduced every one of its original charges, altogether in the amount of $ 33,107.58. Later it made other reductions. The inspector made his reports on differing bases, such as on a loss contract, an inventory, a profit contract. Also the earlier computations were based on a different operation period than Rumsey. This resulted in a different burden or overhead rate. Obviously, the burden rate was also changed by the disallowance of items charged. Two of the reports cited, B-1 and C-1, are not in evidence.

 The following tabulations show the charges made by Rumsey in its original proposal and its later adjusted proposal, and two reports made by the inspector: Rumsey's proposed settlement of January, 1946, contains these charges (Plaintiffs' Ex. 28): Direct Labor $ 15,444.55 Indirect factory expense 51,557.00 Dies, jigs, fixtures, special tools 3,258.96 Other costs 26,450.30 General & administrative expenses 39,554.04 Total 136,264.85 Profit 11,032.99 Total 147,297.84 Deduct-Finished product invoiced or to be invoiced 12,175.00 Total 135,122.84 Settlements with subcontractors 254.03 Total $ 135,376.87 On August 9, 1946, Rumsey submitted what it calls an 'Adjusted Proposal', as follows(Plaintiffs' Ex. 30): Direct Material 343.00 Direct Labor 13,753.26 Indirect Factory Expense 45,911.13 Dies, Jigs, Fixtures & Special tools 1,760.32 Other Costs 18,180.94 General Administrative Expense 23,699.66 Total $ 103,648.31 Profit 8,598.27 Total 112,246.58 Finished Product Invoiced 12,175.00 Total 100,071.58 Settlements with Subcontractors 254.53 Allowance for Interest 1,944.68 Total $ 102,270.79 The inspector's report of July, 1946, recommended for settlement (Plaintiffs' Ex. 29): Direct Labor $ 10,554.24 For Non- Acceptance Indirect factory expense 21,153.86 Dies, jigs, fixtures and special tools 1,760.32 Other costs 515.37 General Administrative expense 5,284.51 less * Finished product invoiced 12,175.00 * Total $ 27,093.30 $ 82,622.73 The inspector's report of February 10, 1947, recommended for payment (Plaintiffs' Ex. 61): Direct Labor $ 13,753.26 Indirect Factory 41,939.19 Dies, jigs, fixtures & spec. tools 1,760.32 Other costs 515.37 Gen. & Adm. Exp. 13,116.48 Settlement Exp. 15,000.00 Total $ 86,084.62

 The burden or overhead rate is the proportion which the direct labor costs bear to indirect factory expense and also to general and administrative costs. This rate as used in arriving at these costs differs, as between the parties, quite widely. This is caused by the difference in the total of the items allowed. In its first proposal Rumsey followed a formula by which it determined its momentum costs on the relationship of the dollar value of each order to the total value of all. The total dollar value of Purchase Order No. 5473 was $ 13,000, as claimed by Rumsey, and the total of the purchase orders was $ 181,006.66. The direct labor cost $ 13,000 is 7.15% of $ 181,006. 25% which Rumsey allocated to the other two purchase orders. The inspector, as he claims, found the burden rate from the actual experience of Rumsey from the time cards. The formula used by Rumsey makes no provision for progress performance. The costs would be the same no matter how many units were produced in a certain period of time.

 The item $ 343, for direct material is allowed.

 The direct labor charge of $ 15,444.55 is allowed at the amount of the original claim, less certain charges which were disallowed as charges for direct labor and transferred to indirect labor charges, or $ 13,375.26.

 Computed on a burden rate of 333.82%, as determined by Rumsey, the indirect factory expense would be $ 45,911.13. The inspector used a burden rate of 304.94% in computing that expense, and this resulted in total of $ 41,939.19 for that. In Rumsey's first proposal, the charge for indirect factory expense was $ 51,557. In arriving at total of $ 41,939.19 by the inspector, it is evident that he recommended for non-acceptance certain direct labor charges of $ 5,645.87 and certain direct labor of $ 3,971.94. It is believed that the inspector's computation is correct and the claim for indirect factory expense is allowed at $ 41,939.19.

 The charge of $ 1,760.32 for dies, jigs, etc. is allowed.

 In computing the amount of general and administrative expenses, we find wide difference in the burden rates as used by the parties. Rumsey's burden rate was 256.11% in its original computation, but this was reduced to 153.45% in its adjusted proposal. The inspector's rate was 95.37%. This difference results from the non-acceptance of $ 113,602.14 of Rumsey's claim for administrative charges, together with the fact that the period used by Rumsey and the inspector to establish overhead rates differed, one being from July 1 to September 30, 1945, and the other from May 1 to September 30, 1945. In the adjusted proposal Rumsey deleted charge for experience and development, $ 30,005; bad debts, $ 20,125.19; selling expense, $ 15,115; and financing fees, $ 7,309.29. The original charge for general and administrative expenses was $ 39,554.04. This was reduced to $ 23,699.66. The cost inspector recommended $ 13,116.48.

 The general and administrative items of charges include many which are not allowable and were not allowed by the cost inspector. The larger items not acceptable are for salaries, legal fees, telephone and telegraph, travel expenses, automobile operation, general expense, experiment and development, bad debts, fiscal fees and selling expense. As to the charge for accountants' fees, it is to be said that this had been charged in other related settlement proposals. Rumsey was working on subcontracts for Packard and Chrysler and Baldwin Locomotive during most of the period that Rumsey was operating under Hoffman. The travel expense has been reduced 75% because this was used by Rumsey's auditor in determining the rate applicable to work performed under another terminated subcontract. A fifth percent of the automobile charges only was acceptable to the inspector, because that was the amount charged in the proposed Packard settlement. The general and administrative expense, as submitted, contained a contingent amount of $ 10,000, and obviously this was not allowable. The fiscal fees were on account of services in procuring a loan in 1941, and the inspector allowed a proportionate charge, or one-fifth, inclusive. Other items including experiment and development have been withdrawn by the plaintiffs, aggregating $ 45,000.

 It is not possible for the court to arrive at exact amount allowable for this type of expense because it appears many items can not be properly charged as expense and were not directly traceable to items charged on the books. It is allowed at $ 18,190.

 The item of profit will be allowed in the amount of 10% on all sums allowed herein, excepting on such profit.

 In the first settlement proposal, item of 'other costs' was referred to by Rumsey as 'momentum costs.' 'Momentum costs' is not known to the Joint Termination Regulations though the term is used by certain tax services. It is defined by plaintiffs as a charge to replace settlement costs up to the time of the submission of the settlement proposal. The item of charges of 'other costs' in the first proposal was $ 26,450.30; in the adjusted proposal the charge is $ 18,180.94. The cost inspector accepted $ 15,000 as a 'settlement expense' in the place of or on account of the claim for 'other costs.' The $ 18,180.94 seems to have been largely made up of a storage charge of $ 10,704.84; salaries of employees, $ 6,664; certain payroll taxes and insurance and photostating.

 Section 112 of the Act, 41 U.S.C.A., states the policy of the Government on the termination of a war contract to be 'to assure the expeditious removal from the plants * * * of the termination inventory not to be retained or sold by the war contractor.' That section provides that the war contractor furnish a statement showing the materials which he claims to be termination inventory; that within sixty days after the submission of such inventory the Government agency shall provide for disposition of the inventory, unless a longer period is agreed upon; that no contracting agency shall postpone or delay any termination settlement beyond the period fixed as aforesaid. It does appear that no date for plant clearance was ever officially set. The final removal was not till May, 1946. However, none of the rights of the parties for failure to observe Section 112 are affected. The parties kept on negotiating for a settlement down to August 1, 1947, when there was the adjudication in bankruptcy. The plaintiffs' charge is for the removal and storage from September 21, 1945, to May 23, 1946, while the inspector allows storage for sixty days, from January 24, 1946. Plaintiffs claim the storage space required was 9784 square feet. The inspector says 3636 square feet. Plaintiffs claim $ 10,704.48 for this item. (It appears that Rumsey did not segregate on its books directly costs allocable to termination expenses.) Included in the 'cost' item is a charge of $ 5,906.40 ...

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