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C.A. 3rd Circ. (1972) No. 71-1206
17 CCF 18,593

ROSEN, Circuit Judge:

"This appeal is taken from a district court order granting
recovery pursuant to a reclamation petition filed by the
United States of Americ ('Government') against its prime
contractor, Double H Products Corp. ('Double H'), following
an adjudication in bankruptcy after failure to confirm
a plan of arrangement under Chapter XI of the Bankruptcy

The bankrupt, Double H Products Corp., entered into contract with the Government on June 13, 1968 for the construction of 1,000 Mark 20 Missile stowage cradles essential to national security. The contract was subsequently amended by a "Progress Payments" addendum, under which title to all parts, materials, inventories, and work in progress vested in the United States as of the date of the contract and title to all like property thereafter acquired or produced vested in the Government upon acquisition or production.

The National State Bank, Elizabeth, New Jersey, is the holder of a first lien represented by a valid security agreement executed by Double H Products (designated as "Debtor" in security agreement) on December 6, 1968, in the sum of $50,000. The bank was granted a security interest in


i. CONTRACT RIGHTS All rights of the Debtor under the particular contracts assigned to the Bank from time to time including all money due or to become due to Debtor for performance of the assigned contracts.

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the Debtor, now existing or hereafter arising in goods,
merchandise, or other inventory identified to an assigned

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On the same date, Double H assigned to the National State Bank all monies and claims for monies due and to become due to

Double H under contract and all amendments thereof between Double H and the Government. The Referee in bankruptcy included in his memorandum opinion of January 21, 1970, a finding that "proper notice of said assignment of said contract was given by the National State Bank, Elizabeth, New Jersey to the proper authorities of the Department of the Navy of the United States of America, and financing statements as hereinafter described were duly filed" on December 9. 1968 in the office of the Secretary of State of New Jersey and in the office of the Clerk of Middlesex County.

On October 1, 1969, Double H filed a petition in the United States District Court for the District of New Jersey seeking an arrangement under Chapter XI of the Bankruptcy Act (11 U.S.C. § 701 et seq.). On October 21, 1969, the contract between Double H and the Government was terminated under the default clause of the "General Provisions" (Standard Form 32) of the contract.

After Double H was adjudicated a bankrupt, the Government filed a petition for reclamation of certain progress payment" inventory, i.e., inventory covered by the progress payment addendum to the contract. The bank contested the petition, claiming that it held a first lien on the property superior to the Government's claim of title since the bank had filed its financing statement under its security agreement with the bankrupt and the Government had not filed any document to protect its interest. The Referee concluded that the reclamation petition of the United States of America should be allowed, and entered a conforming order on February 10, 1970. On petition for review, the district court adopted and affirmed the decision of the Referee on January 14, 1971. The bank seeks a reversal.

Although the bank attempts to frame the issue in terms of conflicting priorities, we find for reasons hereinafter set forth that this question is not presented. The basic rule of contract law that a contract is governed by the presumed intent of the parties, when applied to self-evident language in a contract, would seem to make this a case for easy disposition. However, the Bank challenges the apparent simplicity of the issue, by directing our attention to cases which were made primarily in the context of state and federal tax controversies, in which title versus provisions were deemed insufficient to bar tax assessments against Government contractors. The issue is further complicated by Defense Department characterizations of Government methods of "financing" defense contractors. In the final analysis, it is the force of the relevant contractual language employed, and the practical realities underpinning contracts made by an agency charged with the national defense, which determines the outcome.

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The Bank's position rests squarely on the proposition that the Government's title to the work inventory is a mere "paper title, intended for use as a type of security device. It contends that at most the Government receives a simple security title to protect its advances of cash made prior to the final delivery and acceptance of the completed stowage cradles, at which time a "sale" is effected. Contentions such as these have frequently been advanced over the years in attempts to escape the effect of title-passing provisions of fixed-price Government contract partial payment clauses. "At least to the extent of the partial payments, the courts have, in a variety of situations, almost unanimously sustained the provision as effecting a full and complete passage of title or ownership, and as not creating only a lien or security interest.' Boeing Company v. United States, 338 F. 2d 342, 345 (Ct. Cl. 1964) cert denied, 380 U.S. 972 (1965). Indeed, a title-passing provision standing alone and "without being incident to a partial payment provision" has been held by this Court to be effective as against the creditors or a bankrupt Government contractor. In re American Boiler Works, 220 F. 2d 319 (3d Cir. 1955). Where unconditional title immediately vests, thus reducing the badges of a conventional loan arrangement that are present in a typical advance and progress payment situation, the Bank's argument loses further vitality. We adopt the language of the court in Shepard Engineering Co. v. United States (7 CCF § 71,450), 287 F. 2d 737 (8th Cir. 1961), and apply it to the contract language involved in this dispute:


"There is no ambiguity in the words of the contract
that the material 'shall forthwith vest in the
Government' and there is no reason why the contract
should not be enforced by the courts." (287 F. 2d
at 741)

We take cognizance of the several state court decisions which have construed provisions in Government contracts in order to determine immunity for state tax purposes, but find them to be inconclusive for purposes of this case. In Burroughs Corp. v. City of Detroit, 18 Mich. App. 668, 171 N. W. 2d 678 (Court of Appeals of Michigan, 1969), defendants city and county argued that, notwithstanding government ownership of the tooling and inventory, the incidence of the tax as applied fell on the plaintiff defense contractor as "beneficial" owner and not on the government. This contention was rejected on the ground that the relevant tax statute under which the assessment was made authorized only an ordinary ad valorem tax on tangible personal property without providing for the taxation of intangible interests in such property. This holding was a reaffirmation of Continental Motors Corp. V. Township of Muskegan, 365 Mich. 191, 112 N. W. 2d 429 (Supreme Court of Michigan, 1961), in which the court rejected the United States Supreme Court's construction of Michi

gan's ad valorem tax as a use tax in City of Detroit v. Murray Corp. of America (7 CCF 871,009), 355 U.S. 489 (1958). In Detroit, the court in a footnote assumed for the purposes of its decision that full title vested in the Government under a partial payments clause in a Government contract, and not just a bare security interest. However, it pointed to a series of Minnesota State tax cases where the assessments made against private contractors were upheld against claims of Governmental immunity, on the basis that the Government's title was in the nature of a security interest. However, upon close examination, it is apparent that the cases cited for comparison are not factually distinguishable, but involve questions of real estate law, much as equitable conversion and mortgages, which make them sui generis. "The fact that for certain general policy purposes partial payments may be considered as a form of contract financing and in the category of loans does not . . put them in that category when it is necessary to ascertain the legal relationships they create, including the passage of title, in accordance with specific contract provisions Boeing Company v. United States, supra, p. 352. In determining the legal relationships, where the terms of the contract providing for vesting title contain no suggestion that it is taken for security only, this court will not invite itself to rewrite the contract.

At the heart of the issue lurks a very substantial question of the relationship between the federal and state governments. The Bank argues that, although the earlier cases construed titlevesting provisions in Government contracts as conveying absolute title, these cases were decided before adoption by the states of the Uniform Commercial Code, and cites United States v. Allegheny, supra, for authority that "Federal statutes may declare liens in favor of the Government and establish their priority over subsequent purchasers or lienors irrespective of State recording acts . . Or the Government may avail itself, as any other lienor, of State recording facilities We do not read Allegheny to imply that, in the absence of federal statutes granting paramount liens, state recording statutes must be complied with by the Government. We hold that unless a federal statute requires recording with the State, the United States is not required to conform to State law in order to create a valid federal lien."

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That federal law controls the question herein was stated in unequivocal terms in United States v. Allegheny, supra:

"Procurement policies so settled under federal
authority may not be defeated or limited by state
The purpose of the supremacy clause was to
avoid the introduction of disparities, confusions

and conflicts which would follow if the Government's
general authority were subject to local controls.
The validity and construction of contracts through
which the United States is exercising its constitu-
tional functions, their consequences on the rights
and obligations of the parties, the titles and
liens which they create or permit, all present
questions of federal law not controlled by the law
of any State. (citations omitted).'

The Bank has attempted to cast itself as an innocent party without knowledge of the legal relationship created by the contract between the Government and Double H. It states that it filed its financing statement after a search revealed no other filed financing statements, but the evidence indicates, and the Referee in Bankruptcy so found, that the Bank was actually aware of the Government's contract with the bankrupt at the time of filing the financing statement. The Referee observed:

"There can be no question but that the Bank was,
at the time of the filing of its Financing Statement
in the Office of the Secretary of State of New
Jersey, aware of the contract entered into between
The bankrupt and the Government, for it gave to the
Government timely notice of its interests under the
Assignment of Claims Act, the bankrupt having
assigned to it the proceeds of the contract

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The Bank's final argument falls with its initial premise. It stresses that its decision to make the loan to Double H was made after a search of the financing statement records in the Office of the Secretary of State revealed no prior liens, and that, since the Government's title was merely a security device, filing was required to protect the Government's interest unless it complied with the statutory provisions governing advance or progress payments. The intended effect of this argument is to place the Government in an estopped position. There is the additional contention that, after receiving notice of the Bank's succession under the assignment to the contractual rights of Double H, the Government mistakenly continued to make progress payments to the bankrupt. The Bank urges that the Government should be estopped from avoiding its own actions in disregard to the Bank's rights under the assignment, by retaining the fruits of its improper conduct. The Bank concedes that its claim under the Assignment of Claims Act (31 U.S.C. § 203) may be a matter for disposal by the Court of Claims, but insists that "the Government's conduct bears upon the decision to be made by this Court." The Government argues in its brief that "If and when the bank institutes suit in the correct forum the evidence will indicate that after the assignment of the monies due under the contract to the bank and notice to the Government, the bank learned to the error in payment in January 1969, yet the bank did nothing

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