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IN RE LUSCOMBE ENGG. CO.

June 30, 1958

In the Matter of LUSCOMBE ENGINEERING COMPANY, Inc., Bankrupt


The opinion of the court was delivered by: GRIM

These are two petitions to review the order of a referee in bankruptcy on the petition of the United States and The First Pennsylvania Banking and Trust Company for an order on the trustee in bankruptcy to pay over certain moneys he received from Chrysler Corporation and Philco Corporation. The facts are undisputed.

Chrysler and Philco made separate and distinct contracts with the government to manufacture different types of military equipment. From time to time each of them entered into separate subcontracts with Luscombe Engineering Company, Inc. for the manufacture of components of this equipment.

 In order to obtain money Luscombe entered into a Loan Agreement in 1951 with The First National Bank of Philadelphia, predecessor of The First Pennsylvania Banking and Trust Company. Under this agreement Luscombe borrowed money from the bank on notes secured by successive assignments of its right to all moneys due and to become due to Luscombe from Chrysler and from Philco on present and future subcontracts with them. The government guaranteed payment of 90% of the loans.

 There was no attempt to secure these loans by liens on machinery, tools, equipment, raw materials, or goods partially or completely manufactured, by chattel mortgage, bailment lease, or any other security device.

 Luscombe was adjudicated a bankrupt December 9, 1955, and ceased deliveries to Chrysler and Philco. At this time the bank held Luscombe's notes dated from August 22, 1955, to November 15, 1955, on which there was owing a total of $ 321,911.81, and assignments by Luscombe dated between September 26, 1952, and February 7, 1955, of moneys payable under Chrysler and Philco contracts. The government paid the bank the amounts it guaranteed and as to those amounts stands as a creditor in the shoes of the bank.

 At the time of bankruptcy, in addition to some partially and fully completed goods for Philco, Luscombe had on hand special dies and tools which it had made to do the work for Philco and Chrysler. The contracts required Luscombe, upon completion of the contracts, to deliver these tools and dies to Philco and Chrysler, who were to pay for them. Chrysler, Philco, and the government exerted extreme pressure on Luscombe's receiver to obtain quickly these tools and dies and the finished and unfinished goods.

 The present controversy concerns the disposition of three funds paid to the receiver and trustee *fn1" by Philco and Chrysler on delivery to them of these tools and dies and finished and unfinished goods within 60 days after the adjudication of bankruptcy. The government and the bank claim the funds on the theory that the receiver and trustee assumed the bankrupt's contracts and that because of the assumptions the funds were payments under the contracts and pass to the bank under the assignments. The trustee contends that the contracts were not assumed, that these post-bankruptcy transactions were mere sales, and that he is entitled to the funds as part of the bankrupt estate. The referee found two issues in favor of the bank and the government and the other in favor of the trustee. Each party has petitioned for review and claims all three funds.

 Chrysler

 The first of the three transactions involved tools and dies, which Chrysler was very anxious to obtain instantly. Its army tank assembly line was at a standstill and would remain stopped until Chrysler could obtain parts made by tools and dies such as the receiver had. To make duplicates would lengthen the delay. The ideal solution, since the bankrupt was not producing, was for Chrysler to get the tools and dies from the receiver and to put them to use. The tools and dies were of substantial value only for the production of these tank parts. Negotiations against this background produced an offer by Chrysler to the receiver on December 16, 1955, seven days after the adjudication of bankruptcy:

 'If said tools and dies are released to our company immediately, our company shall pay to you in accordance with our contract with the bankrupt the sum of $ 4,490.98 within 30 days of such delivery. This obligation to make this payment is absolute and we will not, under any circumstances, set-off or withhold payment on account of any claims which we may have against the bankrupt by reason of breach of contract or otherwise.

 'We realize that you are obtaining a court order to release these dies upon the basis of our commitment as above.'

 On the same day, December 16, 1955, there was presented to the referee a petition entitled 'Petition of Receiver for Leave to Release Property to Chrysler Corporation.' It set forth that the receiver had been appointed and had qualified, that Luscombe had been engaged as a subcontractor of Chrysler in the production of tank parts ordered by the government, that the subcontractor was in default under its contract for failure to make deliveries of the parts, that as a result Chrysler was unable to continue the production of tanks, that Chrysler could not obtain the parts elsewhere because the dies and tools required to make them were in the bankrupt's possession, that

 '6. Under the terms of its contract with Chrysler Corporation the bankrupt was called upon to make the highly specialized tools and dies required to produce the parts in question and the cost thereof was to be paid by Chrysler Corporation in installments amortized over the period of the contract most of which have already been paid.'

 that Chrysler claimed ownership of the tools and dies under the terms of the contract and might be entitled to substantial damages for breach of the contract, that the tools and dies had no value to the estate other than a very nominal value as scrap, 'whereas under the contract between the parties, the balance of the cost thereof, as yet unpaid is the sum of $ 4,490.98,' that the receiver had obtained from Chrysler 'a written commitment to honor its obligations in the above amount within 30 days from delivery of the tools without regard to any set-off or counterclaim * * *,' that the situation was urgent, that Chrysler's failure to receive the dies would seriously hamper military production, and that

 '10. * * * by reason of the scrap value of the dies except for the purposes of the above contract, the release of the same to Chrysler Corporation for the above sum represents the most profitable arrangement which can be made under the circumstances for the disposition of said property and is in the best interest of creditors.'

 The petition prayed 'that an order be entered granting leave to deliver such dies and tools to Chrysler Corporation under the arrangement hereinabove set forth.' The petition did not request permission to assume the contract, nor can any ...


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