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In re McGraw

decided: February 9, 1973.

IN THE MATTER OF F. H. MCGRAW & COMPANY, BANKRUPT FELLOWS CORPORATION, CLAIMANT


(D.C. No. B-30869 In Bankruptcy) APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA.

Aldisert, Adams, and Gibbons, Circuit Judges. Adams, Circuit Judge, dissenting.

Author: Aldisert

Opinion OF THE COURT

ALDISERT, Circuit Judge.

This appeal from the district court's affirmance of an order of the referee in bankruptcy disallowing appellant's proof of claim, presents the question whether the referee erred in concluding that his order constituted a binding release of a subsequent claim.

F. H. McGraw & Co., general contractor for the construction of a five million dollar manufacturing plant for Fellows Corp. in Springfield, Vermont, filed a Chapter XI Petition in Bankruptcy and a receiver was appointed. In order to prevent job delay and weather damage, Fellows elected to complete the construction itself by assuming the responsibility for paying subcontractors and materialmen. After its counsel obtained the receiver's consent to such an arrangement, the receiver suggested that the parties utilize a petition and order form similar to an arrangement previously entered into between the receiver and another corporation. After examination of the submitted form, Fellows consented to the form of the petition and order, and authorized the receiver to proceed. The receiver made the presentation to the referee by petition and proposed order.

The petition and order approved by the referee provided for waiver of certain notice provisions of the original construction contract and payment of materialmen and subcontractors by Fellows. Additionally, the order contained the following paragraph not contained in the model order agreed to by Fellows:

AND IT IS FURTHER ORDERED AND DECREED that Philip F. Newman, Receiver herein, shall not be liable for any claim for deficiency if the costs of completion of the contract exceed the balance of the contract price.

This litigation centers around this additional language. At the time the order was entered, both Fellows and the receiver anticipated that the contract would be completed at a profit. However, according to Fellows' proof of claim, the cost of completion exceeded the contract price by $1,092,251.01, an amount which Fellows seeks to assert as an unsecured claim in the bankruptcy proceedings.

Interpreting the above quoted portion of his order, the referee ruled that "the Receiver was relieved of liability by the agreement, waived his contractual rights and Fellows is estopped to deny the plain meaning of the release."*fn1 Although it is uncontradicted that the parties did not discuss the language in question prior to its inclusion in the referee's order, and that it was included therein only by the ex parte action of the receiver, the referee ruled that "the only reasonable meaning that can be given to the release language is that the release inured to the benefit of the Trustee following adjudication." The district court affirmed.

Central to our review are certain elementary principles of the law of contracts. It is hornbook law that a release covers only such matters as were within the contemplation of the parties at the time the contract was entered into. There being no express contract before him, the referee found one implied in fact: the inaction by Fellows after it had notice of the language introduced ex parte by the receiver constituted an acquiescence, and thereby an acceptance, resulting in a valid contract. Although we agree that Fellows is estopped to attack the technical validity of the provision because it was not timely objected to, we reject the referee's interpretation of that provision.

We are not persuaded that there is only "one reasonable meaning that can be given to the release language." First, we compare the language of the disputed provision with other provisions contained therein.*fn2 Throughout the order reference is continuously and repeatedly made to "McGraw." The receiver was empowered to "Authorize . . . payment . . . to McGraw . . . employees;" to "Authorize direct payments . . . to all subcontractors and material suppliers of McGraw;" to "Authorize assignment by McGraw . . .;" to "Authorize . . . waiver[s] by McGraw," etc. By comparison, in that portion of the order in dispute, the name "McGraw" is not used; instead, it relates, "Philip F. Newman, Receiver herein, shall not be liable" for the cost of completion of the contract should the cost of completion exceed the contract price. Any ambiguity resulting from this deliberate choice of language will be interpreted most strongly against the party who wrote it, in this case, the receiver. Williston, Selections on Contracts, Student Edition, § 621; Restatement, Contracts, § 236.

We find such an ambiguity. The language has the capacity of being interpreted as releasing the named receiver, and thereafter a trustee, from accepting any claim as a debt having priority as "actual and necessary costs and expenses of preserving the estate subsequent to filing the petition." 11 U.S.C. § 104(a)(1). In re Connecticut Motor Lines, Inc., 336 F.2d 96 (3d Cir. 1964). While we do not agree with an alternative interpretation of the provision as releasing the receiver from personal liability only, we do note that in In re I. J. Knight Realty Corp., 370 F.2d 624 (3d Cir. 1967), rev'd on other grounds, sub nom., Reading Co. v. Brown, 391 U.S. 471, 20 L. Ed. 2d 751, 88 S. Ct. 1759 (1968), we indicated that a receiver could be surcharged for excessive costs. In interpreting the provision, the referee could have considered whether the language could have been so interpreted.

Under the circumstances herein presented -- where there is no evidence of prior discussion between Fellows and the receiver as to the inclusion of this language, let alone the drastic consequences flowing therefrom now urged upon this court -- we are unwilling to attribute to this language the full force ...


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