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In re Double H Products Corp.

decided as amended june 13 1972.: May 31, 1972.


Max Rosenn and James Rosen, Circuit Judges and VanArtsdalen, District Judge.

Author: Rosen


JAMES 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 America ("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 Act.

The bankrupt, Double H Products Corp., entered into a contract with the Government on June 13, 1968 for the construction of 1000 Mark 20 Missile stowage cradles essential to national security. The contract was subsequently amended by a "Progess 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.*fn1

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.

iii. UNDERLYING GOODS AND MERCHANDISE -- All interest of the Debtor, now existing or hereafter arising in goods, merchandise, or other inventory identified to an assigned contract."

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 the 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. ยง 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,*fn2 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 vesting 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.*fn3 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.*fn4

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 titlepassing 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, 168 Ct.Cl. 109 (1964), cert. denied 380 U.S. 972, 85 S. Ct. 1331, 14 L. Ed. 2d 269 (1965).*fn5 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 of a bankrupt Government contractor. In re American Boiler Works, 220 F.2d 319 (3d Cir. 1955). Where unconditional title immediately vests, thus reducing ...

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