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In re Kellett Aircraft Corp.

decided: August 10, 1951.


Author: Staley

Before BIGGS, Chief Judge, and MARIS and STALEY, Circuit Judges.

STALEY, Circuit Judge.

This is an appeal from the decree of the district court allowing certain claims of the Coldaire Corporation ("Coldaire") in the proceedings for reorganization of the Kellett Aircraft Corporation ("Kellett") under Chapter X of the Bankruptcy Act, 11 U.S.C.A. § 501 et seq.*fn1 A total recovery of $45,260 was allowed on the basis of the second amendment to the amended reclamation petition filed by Coldaire. $40,260 of this sum represents the amount paid by Coldaire to the debtor for certain tooling manufactured by Kellett for the purpose of fabricating refrigeration cabinets for Coldaire; the remaining sum, $5000, represents the value of certain engineering drawings.

To untangle the basic factual strands, we must go back to the contract of April 2, 1946, entered into by Coldaire, the Bob White Organization*fn2 (a partnership), and Kellett. This contract provided that Kellett was to manufacture and sell to Coldaire 12,500 refrigeration cabinets at prices set forth in the contract. The units were to be produced according to the designs, specifications, and detailed production drawings ("drawings") furnished or approved by Coldaire, which drawings were to be the property of Coldaire.Kellett further obligated itself to determine the amount of tooling which would be necessary and sufficient for production of the number of units contemplated by the contract, and it was to fabricate such tools, jigs, dies, and fixtures ("tools"). Coldaire agreed to pay Kellett the sum of $40,260 upon completion of the tools. The tools were duly fabricated and payment made by Coldaire pursuant to the contract.

All parties obviously anticipated a mutually advantageous relationship. Their hopes and plans were based upon a quick tapping of the huge pent-up demand for consumer goods in the immediate post-war era. But realization lagged behind expectation, for production never rose above a trickle. Each party asserts that the delay was the fault of the other. It is apparent, however, that in August and September of 1946, Kellett was becoming very short of working capital. On September 9, production on the Coldaire contract was suspended or terminated; all Kellett's other civilian production had been terminated by that time.

With bankruptcy or reorganization thus imminent, the parties entered into another contract on October 9, 1946. By way of recital, the contract stated that Kellett had stopped production of Coldaire cabinets; that it was unable or unwilling to resume production; that Coldaire had suffered losses estimated by it to exceed $450,000; and that the parties desired to compromise and release this claim for damage and to release all parties from any further obligations under the April contract. The October contract provided that Coldaire was to purchase, at specified prices, certain raw materials, parts and work in process applicable to the production of the Coldaire cabinets. The contract gave Coldaire an option to purchase certain other raw materials and parts. It was further provided that should the Wilson Company, for whom Kellett had been producing home freezer units, or its affiliate, not desire to lease that part of the Kellett plant heretofore used for the production of Coldaire cabinets, Kellett would lease the premises to Coldaire. It was specifically provided that all designs, production drawings, etc., relating to Coldaire cabinets were to be turned over to Coldaire without any charge, but there is no reference whatsoever in the contract to the tooling. Paragraph 11 of the October contract, a mutual release clause, will be discussed later in this opinion.

Nine days after that contract was signed, trustees were appointed for the debtor in reorganization and were authorized to conduct the business. Soon afterwards, the trustees petitioned the court for permission to reject the October contract, and an order to that effect was entered. The trustees have refused to turn over to Coldaire the tools or the drawings.

Coldaire filed a proof of claim, seeking damages in the sum of $424,000 for an alleged breach by Kellett of the April contract; it also filed a reclamation petition, seeking possession of the tools. Coldaire subsequently amended its prayer for relief in the reclamation petition to seek $100,000 in damages for conversion of the tools. The special master recommended that neither claim be allowed.*fn3 He was of the opinion that any rights Coldaire may have had under the April contract were extinguished under the October contract, which operated as an accord and satisfaction. Kellett's right to the tools was upheld by the special master on the basis of Section 26 of the Uniform Sales Act, which allows a creditor of a vendor to treat a sale as void where the seller has retained possession under circumstances constituting legal fraud. 69 Purdon's Pa.Stat.Ann. § 204.*fn4 The special master suggested, however, that the reclamation petition be amended to a claim for the $40,260, representing the sum paid by Coldaire to Kellett for the fabrication of the tools. Its reclamation petition was duly amended by Coldaire in accordance with the special master's suggestion. The district court adopted the special master's recommendations and allowed the amendment (the second amendment to the amended reclamation petition), recommitting the matter to the special master to allow possible defenses and setoffs.

Following a further hearing, the special master, on June 15, 1950, filed his report and recommendations with respect to Coldaire's claim for the sum paid by it for the tools. This report recommended that the claim should not be allowed because it arose out of the April contract and, as such, was released by the October contract. Upon reconsideration, however, the special master changed his recommendation, concluding that the claim should be allowed. This was set forth in the special master's supplemental report, which also recommended that Coldaire be allowed $5,000 as the value of the drawings retained by Kellett. These recommendations were adopted by the district court in its decree of December 20, 1950, and it is from that decree that Kellett has taken this appeal.

The special master and the district court were of the opinion that title to the tools vested in Coldaire when it made the agreed payment pursuant to the April contract. While the April contract provided that Coldaire was to pay Kellett the above sum when the tools were completed, the contract nowhere stated in whom title was to vest. This is in marked contrast with the specific provision that the drawings were to be the property of Coldaire. The only other paragraph of the contract shedding any additional light on the problem is Article IX, the relevant part of which is as follows: "Article IX. Delays and Termination. (a) In the event of any arrearage in deliveries in any month resulting from any cause or causes, and Kellett's failure to make up such arrearage within one month thereafter, Coldaire may, at its option, partially terminate this contract to the extent of such arrearage by notice in writing to Kellett within ten (10) days following. * * * Kellett may, in its discretion, after the completion of the unterminated balance of this contract, complete and sell any such arrearages so terminated and retain and use the tools provided for herein for such purpose. * * * (b) In the event of any such default by Coldaire in any of its obligations hereunder as would entitle Kellett to terminate this contract, and termination by Kellett accordingly, Kellett may in its discretion, sell any completed units that may be undelivered at the time of such termination, and complete all work then in process and sell the resulting units. For the purpose of completing any such work in process, Kellett shall have the right to retain and use the tools provided for herein. * * *"

It is argued by Coldaire that the clear implication of this paragraph is that title must be in it, or else why the need in the contract to specify that under the circumstances contemplated by that paragraph Kellett had the right to retain and use the tools. This argument, based on the implication derived from Article IX, is persuasive. And it may very well be that title vested in Coldaire when it made the payment pursuant to the April contract. We shall assume in this opinion that title vested in Coldaire upon payment.

Whether the October contract released any claim by Coldaire for the return of the $40,260 constitutes the principal question on appeal. It has already been noted that the parties, in drafting the October agreement, were completely silent with respect to the disposition of the tools. The key paragraph of the agreement is the mutual release clause, Paragraph 11. It declares: "(11) Except for the rights and obligations created hereby all contracts, claims, demands, rights, duties, obligations and liabilities existing at any time up to the time of the execution hereof between Kellett and Coldaire and/or Kellett and White are hereby mutually satisfied, discharged, and released." In the earlier appeal, 173 F.2d 689, this court held that the October contract was intended to be a substitute for the April contract, and operated as an accord and satisfaction. It is clear that if Coldaire's claim arises out of the April contract, it has been extinguished by the mutual release clause.

Whether Coldaire's claim does or does not arise out of the April contract is the crucial issue on this appeal. A proper construction of the October contract must depend, at least in part, on a consideration of the April contract and the relationship between the parties under it. The well-known rule of construction that a court may give consideration to the subject matter of the contract and the surrounding circumstances seems especially appropriate here. Slonaker v. P.G. Pub. Co., 1940, 338 Pa. 292, 13 A.2d 48; Ziff v. H. Daroff & Sons, Inc., 1947, 357 Pa. 326, 53 A.2d 729.

The reasoning of the special master and the district court was that since the October contract was silent on the subject of the tools, it was not intended to affect Coldaire's title. Hence, the trustees' subsequent refusal to turn over the tools to Coldaire has unjustly enriched the ...

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