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February 2, 1954

UNITED STATES of America, Plaintiff,
LENNOX METAL MANUFACTURING COMPANY, Inc., and Frank Margiotta and Herbert B. Pearl, as Co-Trustees of the Lennox Metal Manufacturing Company, Inc., Defendants

The opinion of the court was delivered by: ABRUZZO

This action was instituted by the United States of America against the Lennox Metal Manufacturing Company, Inc., a contractor, and its trustees appointed pursuant to Chapter 10 of the Bankruptcy Act, § 101 et seq. thereof, 11 U.S.C.A. § 501 et seq.

The trustees are mere nominal defendants, and all subsequent references hereinafter shall relate solely to the Lennox Metal Manufacturing Company, as defendant, and to the United States of America, as plaintiff.

The Government seeks to recover from the defendant certain materials, machinery, and equipment, and to recoup the sum of $ 149,118.38 partial payments advanced by it to the defendant under a written agreement and various supplemental agreements and change orders A to J.

 The defendant denies the Government's right to any equipment or recoupment, sets up several defenses, and asks for a money judgment against the plaintiff. More will be said later in this opinion with respect to the plaintiff's claims and defendant's answer and counterclaims.

 In order to understand clearly what I term the crux of this case, it will be necessary to comprehensively set forth a complete historical background of the defendant and, in addition thereto, a comprehensive statement of facts from the date of the agreement between the parties to the date of cancellation of this agreement by the plaintiff.

 The defendant was created in 1944. In 1946 the defendant was incorporated. For some time its work was primarily that of a sheet metal subcontractor for prime contractors who were doing Ordnance work, Signal Corp work, and other departmental work for the Government. Herbert B. Pearl, its president and one of the trustees in the reorganization proceeding, has been continuously connected with the defendant since its inception in 1944. He has been in the sheet metal business for more than 22 years, has a thorough knowledge of this type of business, and has studied mechanical engineering.

 On April 25, 1951, Lennox procured a letter contract from the Department of the Army, New York Ordnance District. This agreement was terminated by the Government on October 31, 1952, but in that period of time many things happened and much water flowed under the bridge. Pursuant to this contract the defendant was to make a .50-caliber ammunition box made of metal. At the time the defendant procured this contract it was a going concern and thoroughly solvent, having an approximate net worth of $ 90,000. Thereafter arrangements were made by the defendant with Mastan Company, Inc., a private banking organization, for the granting of $ 250,000 credit for the purpose of financing this contract. During the period of time the contract was in being, Lennox procured approximately $ 230,000 of this loan from Mastan, and gave three chattel mortgages covering its fixtures, machinery, and equipment, and an assignment of the moneys that were to become due to the defendant under this contract. The record shows beyond dispute that the money so procured from Mastan was spent entirely in the performance of this contract.

 While the contract was in existence, defendant continued with its civilian business which it operated at a profit, devoted its profit from its civilian business to the Government contract, and its capital of $ 90,000 was also devoted to the contract. Before the defendant entered into this contract of April, 1951, with the plaintiff, Pearl attended a meeting at the Frankford Arsenal in Philadelphia for the purpose of negotiating for the contract. There he saw a non-dimensional or non-scale drawing applicable to a .50-caliber box. He estimated the price to be paid by the plaintiff for these boxes on the basis of this drawing. The letter contract was thereafter entered into (Exhibit 1).

 In order to understand the problem the defendant was confronted with in making what looks to me to be a very simple metal box, an explanation must be made of each step that took place, to wit:

 On June 14, 1951, a more formal agreement designated supplemental agreement No. 1 (Exhibit 2) was entered into. It provided for a unit price of $ 1.449 and a total price of $ 1,285,987.50. It contained a delivery schedule providing for specified monthly deliveries, first delivery to be made on or before July 31, 1951, and a final delivery on or before February 29, 1952. This took in a period of about 10 months.

 Paragraph 2 of the General Provisions provides in part that the contracting officer may at any time by a written order make changes within the general scope of the contract in (1) the drawings, designs, or specifications, (2) method of shipment or packing; and (3) place of delivery. It also provided:

 'If any such change causes an increase or decrease in the cost of, or the time required for, performance of this contract, an equitable adjustment shall be made in the contract price or delivery schedule, or both, and the contract shall be modified in writing accordingly. * * *'

 Paragraph 11(f) of the General Provisions provides in part for the payment of liquidated damages for each calendar day of delay, and also provides that the contractor shall not be charged with liquidated damages when the delay arises out of causes beyond the control and without the fault and negligence of the contractor as defined in Paragraph 11(b). This Paragraph 11(b) of the General Provisions also provides that the contractor shall not be liable for any excess costs if any failure to perform the contract arises out of causes beyond the control and without the fault or negligence of the contractor. Such causes included acts of the Government and strikes.

 Change Order 'A' (Exhibit 6) was issued on August 15, 1951, changing the width of the handle link and directing a change in the type of carton used in packaging the ammunition box.

 Prior to the execution of Supplemental Agreement No. 2 on January 31, 1952, the defendant wrote to Ordnance calling its attention to a discrepancy on a certain drawing with regard to mash welding and to the impossibility of performance of the mash welding of the end seams, recommending changes in drawings and specifications to correct the discrepancy. It wrote several other letters to Ordnance regarding other variations and requesting permission to deviate. It later wrote to the Small Arms Ammunition Section at the Frankford Arsenal, informing it that defendant had not received notice of acceptance of its recommendations and would be unable to furnish a production box that fully complied with the drawings and specifications until it received written acceptance of the deviations recommended by it. On August 29, 1951, and on September 28, 1951, Change Orders 'B' and 'C' (Exhibits 7 and 8) were issued which changed the method of mash welding and changed the dimensions of the box in conformity with defendant's recommendation. It took from June 1, 1951, to September 28, 1951, to effect these changes. The fabrication of the box pursuant to the contract and these changes required retooling of defendant's equipment, both as to blanking and forming dies, as well as the creation of welding jigs and fixtures for spot welding and seam welding. It also included the fabrication of a good deal of specialized testing equipment to test the accuracy of the parts insofar as the prevailing drawings were concerned. Defendant in its plant built and in some cases had built by outside contractors tools, dies, jigs, and fixtures. The defendant in its plant also built specialized welding equipment and specialized testing equipment, and facilities for painting, baking, and packaging of the boxes. Prior to the contract it had baking and painting equipment, but it had to develop special means of controlling the ammunition boxes after painting and before they could be baked. This necessitated a delay and expense not contemplated or foreseen by the defendant.

 Defendant, after it received the letter contract, ordered steel as specified in the drawings, but was unable to fabricate the boxes because the steel was unworkable and unsuited to several parts of the boxes that required drawing or deformation of the metal without breakage. In September, 1951, a meeting was held at the Frankford Arsenal at which were present defendant's representatives, representatives of two other companies who had been awarded contracts for the .50-caliber ammunition boxes, representatives of steel mills supplying the various contractors, representatives of the Ordnance Districts involved in administering the contracts of the three contractors fabricating the boxes, and representatives of the Arsenal. The conference had been called to determine the validity of the claims by the contractors that the materials as specified in the specifications were unworkable and unsuitable. The conference resulted in a change in the Rockwell hardness scale and the chemistry of the carbon content of the steel.

 After this meeting, the Government rewrote the specifications of the steel content, and on November 23, 1951, issued Change Order 'D' (Exhibit 9) changing the carbon content of the steel.

 On December 28, 1951, Change Order 'E' was issued providing for a slight indentation on the bottom of 25,000 boxes. With these various changes it can readily be seen that it was impossible for defendant to comply with the delivery schedule set forth in Supplemental Agreement No. 1.

 On January 31, 1952, a supplemental agreement designated as Supplemental Agreement No. 2 (Exhibit 3) was executed, changing the delivery schedule. Up to this time defendant had not been able to deliver a single ammunition box.

 Whereas Supplemental agreement No. 1 provided for a final delivery of the ammunition boxes on or before February 29, 1952, under the provisions of Supplemental Agreement No. 2, the date of February 29, 1952, became the date of the first delivery of the boxes. This agreement contained the following:

 'Whereas, it has been administratively determined that the Contractor was excusably delayed from 1 September 1951, by reason of unforeseeable delays in delivery of materiel and by reason of acts of the Government,

 '2. It is determined that the Contractor was excusably delayed in the performance of the contract from 1 September 1951.'

 In December, 1951, Pearl, defendant's president, spoke to Lt. Col. Blois, the contracting officer, and Mr. Statler, negotiator for Ordnance Purchase Branch. He had previously written them requesting some type of interim payment which would enable defendant to recoup some of its extra expenditures and, because of these written requests, he was invited by Col. Blois to a discussion. Col. Blois authorized Mr. Statler to negotiate for a partial payment clause to be included in the contract. Pearl met with Statler several times and in January, 1952, he prepared an analysis of his incurred costs to that date and gave it to Statler. On February 19, 1952, he prepared an invoice, No. Z650, showing the costs incurred by defendant up to that time, totaling $ 437,285.39, and requested a partial payment. Statler told Pearl that defendant could receive a partial payment of 75% or $ 327,964.04, but that he, Statler, could not go ahead with the completion of the partial payment arrangement because it constituted a change in the contract and there was no consideration for making the change. After some calculations Statler arrived at a consideration which was exactly 1% of the 75% of the incurred costs, and this consideration was agreed to by Pearl. On February 28, 1952, Statler wrote to the Awards and Settlements Board recommending that the contract be changed by the insertion of a 75% standard partial payment clause and providing for a decrease of $ 3,279.64 in the contract amount, to be deducted from any invoice or vouchers submitted by defendant. A memorandum from the Fiscal Officer dated February 21, 1952, advising that defendant was financially able to perform under the contract as amended by the proposed partial payment agreement was forwarded with Statler's recommendation.

 On March 3, 1952, Supplemental Agreement No. 3 providing for partial payments to defendant was executed. It provided in part as follows:

 '(a) The Contracting Officer may, from time to time, authorize partial payments to the Contractor upon property acquired or produced by it for the performance of this contract: Provided, that such partial payments shall not exceed 75 per cent of the cost to the Contractor of the property upon which payment is made, which cost shall be determined from evidence submitted by the Contractor and which must be such as is satisfactory to the Contracting Officer: Provided further, that in no event shall the total of unliquidated partial payments (see (c) below) and of unliquidated advance payments if any, made under this contract, exceed 80 per cent of the total contract price of supplies still to be delivered.

 '(b) Upon the making of any partial payment under this contract, title to all parts, materials, inventories, work in process and nondurable tools theretofore acquired or produced by the Contractor for the performance of this contract, and properly chargeable thereto under sound accounting practice, shall forthwith vest in the Government; and title to all like property thereafter acquired or produced by the Contractor for the performance of this contract and properly chargeable thereto as aforesaid shall vest in the Government forthwith upon said acquisition or production: Provided, that nothing herein shall deprive the Contractor of any further partial or final payments due or to become due hereunder; or relieve the Contractor or the Government of any of their respective rights or obligations under this contract.

 '(c) In making payment for the supplies furnished hereunder, there shall be deducted from the contract price therefor a proportionate amount of the partial payments theretofore made to the Contractor, under the authority herein contained.'

 Immediately after signing the supplemental agreement, Pearl requested payment of $ 327,964.04, but payment was refused. He spoke to Statler who referred him to Captain LeBeau, Chief of the Fiscal Office. LeBeau told Pearl that Colonel Blois had instructed him not to pay the full amount and that he was authorized to pay only a part of it. Pearl spoke to Colonel Blois and was advised by the Colonel that the payment was discretionary with him and that, in his opinion, it was not good business to pay the $ 327,964.04 at that time, and that he was doing all that he felt was necessary to be done in paying defendant approximately $ 150,000. The amount of $ 327,964.04 was accurate and not in dispute. The defendant was put to a great additional expense not contemplated when the initial agreement was entered into.

 At Colonel Blois's direction, Pearl saw Captain LeBeau again and advised him that he did not know how to prepare a new invoice approximating $ 150,000. Captain LeBeau then marked off the first four items on the February 19th invoice totaling $ 208,245.21, stating that 75% of these items would amount to a little over $ 150,000. He advised Pearl to prepare a new invoice of these four items and he would pass it immediately for payment. Subsequently a payment of $ 152,904.27 was made to Mastan Company as assignee of defendant. This payment was based on 75% of $ 208,245.21 which came to $ 156,183.90, from which was deducted $ 3,279.64, the consideration for the partial payment agreement.

 Two other partial payments were subsequently made; one of $ 56,786.08 was made on June 2, 1952, and the other of $ 80,244.24 was made on July 24, 1952. These were also paid to Mastan Company as assignee of defendant. The $ 56,786.08 payment on the suggestion of Captain ElBeau was figured on the last four items in the February 19, 1952, invoice. In the interim, Change Orders 'F' and 'G' were put into effect, but neither of these orders are of importance to the issues involved here.

 The evidence indicates without dispute that after the agreement of March 3, 1952, known as Supplemental Agreement No. 3, went into effect the defendant endeavored to make some headway with production and some deliveries were made. The testimony is obscure as to how many boxes were delivered, but there was some measure of production and the defendant was endeavoring to make production in compliance with the agreement. The testimony indicates that there was no complaint on the part of the plaintiff with respect to the production between March and June 2nd.

 Another halt in production was caused in June. There was a steel strike. It caused restriction in the fabrication or manufacture of the boxes. The defendant was also restricted by the Control Materiels Plan which was an attempt by the properly constituted governmental authorities to limit the amount of critical and semi-critical raw materials available to contractors. Recognizing that the steel strike interrupted the defendant's ability to produce, a Supplemental Agreement No. 4 dated July 17, 1952, was executed. It read in part as follows:

 'Whereas, it has been administratively determined that the Contractor has been excusably delayed in the performance of the contract, and

 'Said schedule is subject to delay in receipt of steel as the result of the pending steel strike.

 '4. It is understood and agreed the aforesaid adjusted delivery schedule constitutes a complete adjustment of all of the Contractor's claims by reason of the facts of the Government to the date of this agreement.'

 The delivery schedule contained in subdivision 4 reverted to the schedule set up in Supplemental ...

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