Petition for Writ of Certiorari — Paddock v. United States

No. S79

IN THE |

SUPREME COURT OF THE UNITED STATES

October Term, 1949

BURTON B. PADDOCK, Trustee in Bank-

ruptcy of the Estate of GLOBE AIRCRAFT

CORPORATION, Bankrupt,

Petitioner,

vs.

UNITED STATES OF AMERICA,

Respondent.

PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

JACOB I. WEINSTEIN

2200 Girard Trust Building

Philadephia 2, Pennsylvania

FRANK B. APPLEMAN

Sinclair Building

Fort Worth 2, Texas

RICHARD U. SIMON

302 Life of America Building

Fort Worth 2, Texas

Attorneys for Petitioner

COMMERCIAL RECORDER, FORT WORTH, TEXAS—5-15-50—75

INDEX

Page

Caption wise 1

ND a ERAN TILE NEO PN ME EN 2

Jurisdiction 2

Statutes Involved ih 2

Summary Statement 8-11

Questions Presented j 11-15

Reasons Relied Upon For The Allowance Of This Writ ....15-34

Prayer 35

Appendix 36-46

First War Powers Act 1941 ... 36

Executive Order 9001 38

Armed Services Procurement Act, 1947 ............... 42

43

44

Bankruptcy Act, Sec. 2 ...

Bankruptcy Act, Sec. 11-2020...

Bankruptcy Act, Sec. 57 _.... 3 44

Bankruptcy Act, Sec. 63 = 44

Renegotiation Act -...... Geile Sesccuuhscsanlaitess.cnicb absnaiiloancubspieaas 45

RARE SiR AE 47

CASES CITED

In re Barrett & Co., 27 F 2d 159, 29 F 2d 787 -.....000...... 65

Bradford v. Durkee Marine Products Corp, 40 N.Y.S.

2d 448 ....... . 50

Bradley v. American Radiator Corp., 159 F 2d 39 ....... 16,49

Collier on Bankruptcy, 14th Ed. .28,61,63,65

Ebeling v. Swaime Mfg. Co., 209 S.W. 2d 892 —....02..... 49

preva W. Webebiee,.. 176. Bs Fa Gk sso ssh cls 52

Hazelton v. Sheckles, 202 U.S. 71, 50 L.E. 989 ......0...... 51

Hughes v. Dupont, 37 F. 2d 726 ......... . 47

Leahy v. Terminal Corp., 69 N.Y.S. 2d 596 50

Lichter v. U.S., 334 U.S. 742 _.W............ . 61

on

ii

INDEX—(Continued)

Page

In the Matter of Paramount Publix Corp., 31 Am.

B.R. (N.S.) 718, 85 F. 2d 42 33,65

People of the State of N.Y. y. Irving Trust, 288 U.S. 329... 61

Pepper v. Litton, 308 U.S. 295, 84 L.E. 281 28

Permutit Co. v. Massasoit Mfg. Co., 61 F. 2d 529 53

Pollard v. Bailey (1874) 87 U.S. 520, 22 LE. 376 18,52

Priebe & Sons v. U.S., 332 U.S. 407, 92 L.E. 32 20,55

Providence Tool Co. v. Norris, 69 U.S. 45, 17 L.E. 868._._.17,51

Reynolds v.. Goodwin-Hill Corp., 154 F. 2d 553... 16,49

US. v. Ameriean Surety Co., 322 U.S: 96, 88 L-B. 1158 __ 54

U.S. v. Fidelity & Guaranty Co. v. Bray, 225 U.S. 205,

56 L.E. 1055 28

U.S. v. Great Northern Ry., 287 U.S. 144, 77 L.E. 223 __. 56

US. v. Wurts, 303 U.S. 414, 82 L.E. 932 56

STATUTES

First War Powers Act

36

Executive Order 900i ie 38

42

Armed Services Procurement Act, 1947

Bankruptcy Act

Sec. 2

Sec. 11

Sec. 57

Sec. 63 .

Renegotiation Act .

& REESG

IN THE

SUPREME COURT OF THE UNITED STATES

October Term, 1949

BURTON B. PADDOCK, Trustee in Bank-

ruptcy of the Estate of GLOBE AIRCRAFT

CORPORATION, Bankrupt,

Petitioner,

vs.

UNITED STATES OF AMERICA,

Respondent.

PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

Burton B. Paddock, Trustee in Bankruptcy of the

Estate of Globe Aircraft Corporation, Bankrupt, prays

that a writ of certiorari issue to review the judgment

of the United States Court of Appeals for the Fifth

Circuit, entered December 9, 1949, with petition for

rehearing overruled February 18, 1950, reversing a

judgment of the United States District Court for the

Northern District of Texas.

Tape

OPINIONS BELOW

The memorandum opinion of the District Court (R.

506) is not officially reported. The opinions of the

Court of Appeals (R. 530, 583, 585) are reported

in 178 F (2d) 394 and 180 F (2d) 121.

JURISDICTION

The original opinion of the Court of Appeals for the

Fifth Circuit was filed December 9, 1949, and judg-

ment was entered on December 22, 1949. The petition

for rehearing was timely filed and entertained by the

said Court, which, on January 26, 1950, withdrew a

portion of its original opinion, and, on February 18,

1950, denied the petition for rehearing and filed an ad-

ditional opinion.

The jurisdiction of this Court is invoked under Sec-

tion 24c of the Bankruptcy Act (11 U.S.C.A., Sec.

47); under Section 1254 of the Judicial Code, as a-

mended, (28 U.S.C.A., Sec. 1254) and Section 2101

‘(e’ of the Judicial Code, as amended, (28 U.S.C.A.,

Sec. 2101(c)).

STATUTES INVOLVED

The applicable portions of the statutes involved are

set forth in the appendix, infra, pages 36 to 46.

sntiblins

SUMMARY STATEMENT

This case involves two claims set forth in a proof of

claim filed by the United States of America (Govern-

ment) in the bankruptcy proceedings of Globe Air-

craft Corporation (Globe), pending in the District

Court of the United States for the Northern District

of Texas. (R. 3). After hearing the evidence, the Ref-

eree in Bankruptcy made certain findings of fact and

conclusions of law, and entered an order disallowing

both claims. (R. 467). Upon petition for review, the

Referee made additional findings of fact and conclu-

sions of law (R. 482). The District Court, adopting

the findings of the Referee, affirmed his order (R.

507). The Court of Appeals for the Fifth Circuit re-

versed the judgment of the District Court, and ren-

dered judgment for the Government, allowing both

claims (R. 530). A petition for rehearing (R. 546)

was thereafter filed by the Petitioner herein, and after

submission of briefs, the petition for rehearing was

denied (R. 591).

The bankruptcy proceedings herein were initiated

by an involuntary petition in bankruptcy filed against

Globe on Decmeber 27, 1946. A petition for reorganiza-

tion under Chapter X of the Bankruptcy Act was filed

in the pending bankruptcy proceedings, in which re-

organization proceedings trustees were appointed. The

petition for reorganization was dismissed on April 21,

1947. In the reinstated bankruptcy proceedings an ad-

judication in bankruptcy was entered and, on May 5,

1947, the Petitioner herein was appointed and duly

qualified as Trustee.

—h ee

The consideration for the first Government claim

was recited in a “Certificate of Settlement” (R. 7) of

the General Accounting Office, dated February 12,

1948, attached to and made part of the prooz of claim,

in which certificate it is stated that various contracts

between Globe and the War Department cae agnes the

following warranty :-

“Covenant Against Contingent Fees.-The Con-

_ tractor warrants that he has not employed any per-

son to solicit or secure this contract upon any agree-

ment for a commission, percentage, brokerage, or

contingent fee. Breach of this warranty shall give

the Government the right to annul the contract, or,

_ in its discretion, to deduct from the contract price

or consideration the amount of such commission,

percentage, brokerage, or contingent fees. This war-

ranty shall not apply to commissions payable by

contractors upon contracts or sales secured or made

through bona fide established commercial or selling

agencies maintained by the Contractor for the pur-

pose of securing business.” ;

that under an agreement between Globe and Produc-

tion Engineering Co., Inc. (Production), dated Janu-

ary 19, 1942, as amended, it was provided that certain

percentages as commissions for service rendered would

be paid to Production by Globe for securing Govern-

ment contracts and subcontracts; that Production was

not a bona fide established commercial or selling agent

maintained by Globe for the purpose of securing busi-

ness; that the commissions paid by Globe to Produc-

tion were in violation of the covenant against contin-

gent fees; and that the amount “for refund” to the

Government was $383,527.47.

ae eS

The consideration for the second claim was recited

in a like “Certificate of Settlement” (R. 11), dated

February 12, 1948, attached to and made part of the

proof of claim, in which certificate it is stated that

claims for refund of excessive profits realized by Globe

under Government contracts and subcontracts had been

determined for 1944 and 1945 by the War Contracts

Price Adjustment Board. The excessive profits for

1944 were not in dispute and are not involved in this

petition for certiorari. As to the excessive profits for

1945, the Certificate of Settlement states that it was

determined by the War Contracts Price Adjustment

Board, by order dated April 4, 1947, that Globe had

derived gross excessive profits of $200,000.00 for that

year (R. 13).

To the proof of claim, as last amended, the Trustee

(Petitioner herein) filed amended objections, answer

and counterclaim (R. 125-142). Upon the issues

raised, testimony was presented before the Referee

(R. 156-466). After hearing and argument, the

Referee made findings of fact and conclusions of law,

and entered an order disallowing both the contingent

fee claim of $383,527.47 and the renegotiation claim

of $200,000.00. (R. 467-473).

With regard to the contingent fee claim, the Referee

had found that Globe and Production had entered into

a contract whereby Production was to act as sales re-

presentative for Globe to assist in the sale of Globe

products to foreign governments, the United States

and private companies and that such contract, <s

amended and supplemented, was in continuous opera-

mer Eee

tion until the ear!y: part of 1946 and was duly carried

out: by the said parties (R. 469) ; that Production was

a qualified selling agency within the intent and mean-

ing: of the.exceptive clause (last sentence) of the cov-

enant against contingent fees (R. 468) ; that, through-

out, the Government had full knowledge of the con-

tract between Globe and Production and was fully

advised of all payments due and made thereunder by

Globe to Production (R. 469, R. 483) ; that the Secre-

tary of War, acting properly within the seope of the

authority granted to him under Executive Order No.

9001, did not annul any of the contracts with Globe

and did not deduct from the contract prices the amount

of any commissions due Production (R. 469); that

Globe’s government contracts and subcontracts were

fixed price contracts and there were no illegal wrong-

ful or oppressive influences or circumstances surround-

ing the entering of such contracts (R. 483) ; that Pro-

duction represented several other concerns and receiv-

ed compensation for services rendered to them. (R.

484); that all such contracts were fully, faithfully

and diligently performed by Globe and the Govern-

ment received full value for the work porformed there-

under (R. 483) ; and that, even if there were a breach

of the warranty as contended, the Government did not

sustain any damage as a result thereof (R. 469, R.

483).

Based upon the foregoing findings, the Referee

concluded with respect to the contingent fee claim.

“__that the existence of the contract between Globe

and Production Engineering Company, Inc., as well

scien

as the making cf payments there-under, did not

constitute a breach of the warranties against con-

tingent fees as contained in the contracts between

Globe and Claimant; that in any event, Claimant

rightfully elected as to the course of action which

it desired to pursue, and no additional remedy is

available to Claimant; that in any event, the war-

ranties against contingent fees as contained in the

contracts between Globe and Claimant were not

liquidated damage clauses; that in any event, the

allowance of the claim in the amount of $383,527.-

47 would be a penalty within the intent and mean-

ing of Section 57(j) of the Bankruptcy Act; that

in any event, the Claimant is stopped to assert a

claim herein in the amount of $383,527.47 against

the Trustee and this bankrupt estate.” (R. 471).

With regard to the renegotiation claim covering

1945 excessive profits, the Referee had found that the

proceedings before the War Price Adjustment Board

were held after the date of the filing of the bankrupcy

petition and were conducted without knowledge

and consent of the bankruptcy court and without any

participation therein by the Trustee under direction

of the bankruptcy court (R. 470); that, in 1945,

Globe did not earn any excessive profits requiring any

refund under the provisions of the Renegotiation Act

(R. 471, R. 483) ; that prior to the date of the filing

of the bankruptcy petition, the War Contracts Price

Adjustment Board called upon Globe to furnish cer-

tain information with regard to its income and profits

for 1945 (R. 484); and that there was no competent

evidence before the bankruptcy court with regard to

itll

the proceedings conducted by the War Price Adiust-

ment Board in conformance with the law relating to

the 1945 excessive profits (R. 470).

Based on such findings, the Referee concluded

with respect to the renegotiation claim, —“‘that the

,.1945 profits of Globe were reasonable, and that

no refund is due under Renegotiation. It is the fur-

ther opinion of this court that even if it can be said

that there is evidence of profits subject to some ex-

tent to refund by way of Renegotiation for the year

1945, there are no pleadings to authorize this court

to either estimate the amount thereof, or to pre-

scribe a manner for the liquidation of same; that

if there is any available procedure for the liquida-

tion of any such claim for refund of excess profits,

the orderly administration of this estate would be

unduly delayed thereby; that Claimant objected to

the jurisdiction and right of this court to in any

manner consider and establish the amount of the

refund, if any, aue for excess profits; that for all

such reasons it is the opinion of the court that the

claim for refund of 1945 excess profits is not al-

lowable;” (R. 472).

After hearing and argument on the Government’s

petition for review, the District Court adopted the

original and additional findings of fact and conclusions

of law of the Referee and affirmed his order disallow-

ing the contingent fee claim and the 1945 renegotia-

tion claim. (R. 508-510).

: Upon appeal by the Government to the Un‘ted States

~ Court of Appeals for the Fifth Circuit, that Court

—— Qin

eversed the judgment of the District Court and al-

owed both claims (R. 530).

In construing the exceptive viause of the covenant

\ainst contingent fees providing that

“This warranty shall not apply to commissions

payable by contractors upon contracts or sales se-

cured or made through bona fide established com-

mercial or selling agencies maintained by the con-

tractor for the purpose of securing business”,

the Court of Appeals ruled that Production did not

meet the required test of the exception, in that Pro-

juction was an independent agency retained, but not

“supported”, by Globe, and therefore was not “main-

tained” by Globe within the dictionary definition of

that term, and that the payment of contingent fees by

Globe to Production constituted a breach of the cov-

enant (R. 532).

In construing the Government’s “right to annul

the contract, or, in its discretion, to deduct from the

contract price—the amount of such—contingent fees”,

the Court of Appeals ruled that such right of action

was not created by the Executive Order, but was

wholly contractual; that the two permissive self-help

remedies given by this clause did not exclude judicial

remedies; and that the Government, by its claim, is

asserting this right of recovery as a judicial remedy

independent of the self-help remedy “to deduct” (R.

534).

aia.

Having decided that the right to recover was a:ju-

dicial remedy that was not excluded but was available

to the Government for a breach of the covenant ayainst

contingent fees, the Court of Appeals ruled that the

Government’s claim was allowable in the amount of

the contingent fees and, although the contract self-

help remedy was not exercised, allowed the same re-

covery as though it had been exercised, and did not

restrict the amount of the claim to the actual damages

sustained which otherwise would have been legally

recoverable under the judicial remedy invoked.

In construing the Government’s “right,— in its dis-

cretion, to deduct from the contract price—the amount

of such—contingent fees,” the Court of Appeals ruled

that the Government’s claim was for liquidated dam-

ages and not for a penalty (R. 535).

With regard to whether the payments made by the

Government to Globe, with full knowledge ofall the

facts, constituted a proper exercise of “its discretion”’,

as provided in the covenant, the Court of Appeals

treated such payments as voluntary. and ruled that “the

defense of voluntary payment is not good against the

United States” (R. 535).

With regard to the jurisdiction of the bankruptcy

court to consider and determine on the merits the

Trustee’s objection to the renegotiation claim for 1945

excessive profits, the Court of Appeals ruled that under

the Renegotiation Act of 1942 the jurisdiction to hear

and determine whether or not amounts accrued or re-

ceived on contracts with the Government were exces-

sive, was vested exclusively in the War Contracts

—]j1—

Price Adjustment Board, subject to review by the

Tax Court only (R. 542) that the Trustee was

“precluded under the terms of the renegotiation act

from asserting any defense to said claim” (R. 543).

On rehearing the Court held that the initiation of the

renegotiation proceedings prior to the filing of the

petition in bankruptcy and the determination by the

Board, by its order entered after the filing of the pe-

tition in bankruptcy, “created a situation within the

contemplation” of Section 63a(5) of the Bankruptcy

Act, “wherein ‘provable debts reduced to judgment

after the filing of the petition—’ were * * * debts that

may ue proved and allowed against the esta wai *

588).

The Court of Appeals did not, in this situation, con-

sider the applicability of the provisions of Section

57d of the Bankruptcy Act, requiring a claim unliqui-—

dated at the date of bankruptcy to be liquidated ‘‘with-

in the time and in the manner directed by the court”.

QUESTIONS PRESENTED

i.

(Under Contingent Fee Claim)

Where, ix War Department contracts for the pro-

duction of war materials, the warranty against con-

tingent fees made a part thereof as prescribed by Ex-

ecutive Order No. 9001 (promulgated under the War

Powers Act, 50 U. S. C. A., App., sec. 611) provided

that

? “This warranty shall not apply te commissions

payable by contractors upon contracts or sales se-

cured. or made through bona fide established com-

mercial or selling agencies maintained by the. con-

tractor for the purpose of securing business.”,

is a bona fide established selling agency, employed by

the contractor on a contingent fee basis for the pur-

pose of generally selling the products of the contractor

to foreign governments, the United States and private

companies, and otherwise independent of and not sup-

ported by the contractor, maintained by the contractor

for the purpose of securing business within the intent

and meaning of the Executive Order and warranty?

2.

(Under Contingent Fee Claim)

Is the Government’s “right to annul the contract,

or, in its discretion to deduct from the contract price

. the amount of such . . . contingent fees”, a right

which is wholly contractual, or a right which is created

solely by the Executive Order No. 9001.so that such

remedies are an essential part of the right to annul

or deduct, and, therefore, exclusive?

3.

(Under Contingent Fee Claim)

If the remedies to annul or deduct do not exclude

judicial remedies to which the Government may resort

for alleged breach of the warranty, may the Govern-

ment, proceeding under a judicial remedy, invoke the

contract remedy for the determination of the amount

recoverable, namely, the amount of the contingent fee

oes

paid a contractor to a selling agency, or is the Govern-

ment limited in its recovery, in the judicial remedy in-

voked, to the actual ioss sustained by it by reason of

the alleged breach?

A

(Under Contingent Fee Claim)

Under fixed price contracts is the Government’s

“right . . . to deduct from the contract price .. . the

amount of such . . . contingent fees”, a claim for li-

quidated damages or a debt due to the Government as

a penalty not allowable under Section 57j of the Bank-

ruptey Act (11 U.S. C. A., sec 93j) except to the ex-

tent of pecuniary loss sustained as therein provided?

5.

(Under Contingent Fee Claim)

Where, upon breach of the warranty against con-

tingent fees, the Government does not annul the con-

tract, but permits the contractor to complete perform-

ance, is there a discretion in the War Department,

upon payment to the contractor of the contract price,

to deduct or not to deduct the amount of the contingent

fees?

6.

(Under Contingent Fee Claim)

Where, with full knowledge of an agreement be-

tween a contractor and a selling agency for the pay-

ment of contingent fees and of all payments due and

made thereunder, the Government did not anrul the

contract with the contractor and did not deduct the

contingent fees from the contract price, but paid the

contractor the contract price, did such payment by the

Government to the contractor constitute the exercise

by the Government of its discretion not to deduct?

i

(Under Renegotiation Claim)

Whether the bankruptcy court under the Bankrupt-

cy Act or the War Contracts Price Adjustment Board

and the Tax Court on review under the Renegotiation

Act (50 U.S.C.A., App., Sec. 1191 (c)(1) and (e) (1)

has the exclusive jurisdiction to liquidate an unliqui-

dated claim for excessive profits against a bankrupt

estate, where the renegotiation proceedings have been

commenced prior to the filing of the petition in bank-

ruptcy, but the claim for excessive profits had not

been determined as of the date of such filing?

8.

(Under Renegotiation Claim)

Assuming that the jurisdiction to determine a claim

for excessive profits is exclusively in the War Con-

tracts Price Adjustment Board, is the Government,

nevertheless, required by Section 57d of the Bankrupt-

cy Act (11 U.S.C.A., sec. 93d), to apply to the bank-

ruptcy court and obtain its consent to the determina-

tion by the War Contracts Price Adjustment Board,

where such determination had not been made at the

time of the filing of the petition in bankruptcy?

ite Bhinan

9.

(Under Renegotiation Claim)

Where an unliquidated claim against a bankrupt is

reduced to judgment in another tribunal after the fil-

ing of the petition in bankruptcy and before the bank-

rupt’s discharge, without the consent of the bankrupt-

cy court, as required by Section 57d (11 U.S. C. A.,

sec. 93d), does Section 63a(5) of the Bankruptcy Act

(11 U.S. C. A., sec. 103a(5) ) make such judgment

conclusive and allowable in the bankruptcy proceed-

ings?

REASONS RELIED UPON FOR THE

ALLOWANCE OF THIS WRIT

I

(Contingent Fee Claim)

The warranty against contingent fees, made a part

of contracts with the Government, as prescribed by

Executive Order No. 9001, raises several important

unsettled questions of Federal law.

1. It should be settled by this Court whether an

independent bona fide established agency retained by a

contractor under a contingent fee agreement for pro-

curing business, including contracts with the Govern-

ment, was “maintained by the contractor for the pur-

pose of securing business” within the intent and mean-

ing of the exceptive clause of the warranty.

—{G—

The Judge Advocate General of the Army, in a gloss

written in 1945 (set forth in a footnote to the case of

Reynolds v. Goodwin-Hill Corp., (C. C. A. 2d 1946),

154 F. 2d 553), said, as to the exceptive clause in

the warranty against contingent fees: :

“This provision is directed against payment of

fees for the use of influence, real or imaginary, in

obtaining Government contracts. It does not pro-

hibit payments by a contractor to (1) a bona fide

agent or (2) bona fide selling agencies or commer-

cial agencies engaged in business of representing

more than one contractor in dealing with other

parties generally”

In the Reynolds case above cited, and later in Brad-

ley v. American Radiator Corp. (C. C. A. 2d 1947),

159 F. 2d, 39, involving suits on claims for commis-

sions by a selling agent against a contractor, the Court

of Appeals, construing the scope and meaning of the

exceptive clause, differentiated, by way of dictum,

with respect to the payment of contingent fees be-

tween an agent employed generally to drum up busi-

ness for the contractor and a person employed to pro-

cure a specific contract.

The Court of Appeals for the Fifth Circuit, in the

decision herein sought to be reviewed, held that “main-

tained by the contractor” excluded a bona fide inde-

pendent established selling agency.

A definitive interpretation is vital to the determina-

tion of rights arising under such contracts with the

a fy Pe

Government, not only as between the Government and

contractors but also as between contractors and selling

agencies.

2. It should be settled by this Court whether a war-

ranty against contingent fees made a part of a con-

tract, as required by Executive Order No. 9001 prom-

ulgated pursuant to Section 611 of the War Powers

Act of 1941, is statutory in its origin, so that the rem-

edies expressed in the warranty are an essential part

of the right to annul the contract or to deduct the com-

missions, and are exclusive of judicial remedies.

Prior to Executive Order No. 9001, an agreement

by a contractor to pay contingent fees to a selling a-

gency for securing Government contracts was held, as

between the contractor and the agency, to be against

public policy. (Providence Tool Co. v. Norris, 69 U.S.

45, 17 L. E. 868). But we find no statute or decisional

law which gave or recognized any right in the Gov-

ernment to make a money recovery from the contract-

or as a consequence of such agreement. Nor do we find,

since the promulgation of the Executive Order, any

reported cases in which the Government’s right to an-

nul the contract or to deduct from the contract price

the amount of the contingent fees was litigated.

If this right to annul or to deduct be regarded as

statutory in its origin, then the express remedies pro-

vided are exclusive and the maxim invoked by the

Court of Appeals, “ubi jus, ibi remedium”, permitting

a judicial remedy, is not applicable.

wf 3

In the leading case of Pollard v. Bailey (1574), 87

US. 520, 22, L. Ed. 376, 378, it is said:

“A general liability created by statute without

a remedy may be enforced by an appropriate com-

mon-law action. But where the provision for the lia-

bility was coupled with the provision for a special

aay) that remedy and that alone, must be em-

ploy ”

It is therefore important to settle the question

whether the remedies expressed in the warranty stem

from the Executive Order, are statutory in origin, and

are exclusive.

3. If it should be decided by this Court that the

right to annul the contract or to deduct the contingent

fees does not exclude judicial remedies, it should nev-

ertheless be settled by this Court whether the Govern-

ment, invoking a judicial remedy, may resort to the

contract remedy for the measure of its damages, name-

ly, the amount of the contingent fees, or be restricted

to the common law measure of damages recoverable

under the judicial remedy, namely, the actual loss di-

rectly and naturally resulting in the ordinary course

of events from the breach of the warranty.

The Court of Appeals, after ruling that the con-

tract self-help remedy to deduct the commissions did

not exclude a judicial remedy, expanded the self-help

remedy as if it read “to deduct or recover”, and there-

by, under the guise of a judicial remedy, gave the

me NBs

Government a remedy which was neither the contract

self-help remedy nor a common law judicial remedy.

A subsidiary question involved, which should be de-

termined by this Court, is whether the Court of Ap-

has not, in actual effect, reformed the contract by

granting to the Government a right to recover in the

invoked judicial proceeding the amount of contingent

fees as liquidated damages, and thereby added to the

contract right “to deduct” the amount of contingent

fees.

4. It should be settled by this Court whether, in a

fixed price contract with the Government, under which

contingent fees are not deductible if payable to a qual-

ified selling agency but are deductible if payable to a

non-qualified selling agency, the right to deduct from

the contract price the amount of the contingent fees,

or, as the Government contends, the right to recover

such amount, gives rise to a claim for liquidated dam-

ages, or to a penalty not allowable under Section 57j

of the Bankruptcy Act.

Prior to Executive Order No, 9001, it was against

public policy to employ a person to secure a govern-

ment contract upon a contingent fee basis. However,

except in the case of collusion or fraud in which govern-

ment officials participated, there was no right of action

in the Government to make a money recovery against

contractor no matter how evil the tendency of the em-

ployment might have been. Executive Order No. 9001

attempted to give the Government such a right, to be

ctl e

exercisable under certain conditions ‘and in’ a:specified

manner.

It is important to determine whether ‘the right to

deduct, under the cireumstances attending the situa-

tions involved in the warranty against contingent fees,

is‘ directed toward compensating the Government a-

gainst loss or, in terrorem, toward deterring the en-

tering into agreements for securing government con-

tracts. The Court of Appeals ruled in effect that it

was compensatory. However, in the case of fixed-price

contracts, could the question of a loss to the Govern-

ment be involved, where the same price is agreed to

be paid, whether the selling agency qualifies or does

not qualify under the exceptive clause, and, more par-

ticularly, in the case of a sub-contract, where the war-

ranty in the prime contract is not breached?

It is also important to settle this question because it

affects the equitable distribution under the Bankrupt-

ey Act which Section 57j seeks to accomplish.

Aside from the inhibitions of Sectiom 57j of the

Bankruptcy Act, the right to deduct as given in the

warranty is unenforceable under the holding of this

court in Priebe v. United States, 332 U.S. 407, 92 L.

E. 32, and there is a probable conflict on this Federal

question between such decision and the decision of

the Court of Appeals herein.

5. It should be settled by this Court whether the

Government, acting by those authorized to deal with

= a

the contractors and who dealt with the contractors

throughout, had the discretion to deduct or not to de-

duct the proscribed contingent fees.

Under the declared objective of the First War Pow-

ers Act of 1941 and of Executive Order No. 9001,

promulgated pursuant thereto, looking to the success-

ful prosecution of the War by the effective utilization

of “resources and industries’, the facilities of those

dealing with the Government, whether prime contract-

ors or subcontractors, were to be utilized in the manner

which would best accomplish the desired objective.

Thus, the Executive Order was directed to “an all out

industrial mobilization . . . in order that the materials

necessary to win the War may be produced in the

shortest possible time”.

The exigencies of the War period made it plain to

Congress that it could not, by statute, precisely define

the authority to be granted to the Executive Depart-

ment. Therefore, broad flexible powers were granted

to the President, who, in turn, in issuing his execu-

tive orders, was likewise unable narrowly to define

the powers delegated by him to the various depart-

ments, and, of necessity, left to their broad discretion

the manner and means of exercising the authority

vested in them. With respect to the War Department,

Executive Order No. 9001 vested in it equally broad

authority, exercisable by the Secretary of War, and,

in his discretion and by his direction, through any of-

ficer or civilian official of the War Department, to pro-

cure the “all out industrial mobilization”. To this end

22

contracts and subcontracts, amendments, modifica-

tions, performance, termination, and other aspects:

thereof, were put on the broad basis of results rather

than upon rigidity of application, and provided for

the exercise of the sound discretion of those in the Gov-

ernment charged with entering into, regulation and:

performance of the contracts and subcontracts.

The public policy, holding improper the payment

of contingent fees, was carried into the Executive Ord-

er, but it yielded to the needs of the emergency by per-

mitting the employment of bona fide established a-.

gencies in the procurement of government contracts,

and the exercise of discretion as to the payment of

contractors who dealt with agencies on a contingent

fee basis, even though such agencies were not strictly

within the exceptive clause of the warranty.

Consequently, it is important to clarify and deter-

mine whether the clause in the warranty. “to annul,

or in its discretion, to deduct”, vested in the War. De-

partment a discretion not to deduct.

6. If the Government had the discretion not to de-

duct the proscribed contingent fees, it should be set-

tled by this Court whether such discretion was exer-

cised by the Government by not annulling the con-

tract, by making payment in full of the contract price,

and by not deducting therefrom the amount of the con-

tingent fees, where the Government, throughout, had

full knowledge, by those who acted for it:in the enter-

ing into, supervision and performance of the contracts,

i.

of the agreement between the contractor and the selling

agency for the payment of contingent fees and of all

payments thereunder.

The Court of Appeals, in its opinion, cited cases of

voluntary payments, in which it was declared that the

defense of voluntary payment is not good against the

United States, cases where payments were made er-

roneously to one having no just right to the funds,

cases where payments were made under misconstruc-

tion of the law, and cases where payments were made

without warrant of law; but did not deal with the ques-

tion as to whether, as found by the Referee, the Sec-

retary of War had exercised a discretion not to de-

duct.

Therefore, it is important that it be settled whether,

where the contractor has performed and the Govern-

ment, with knowledge of all the facts, has paid the

full contract price without deduction, the payment in

full constitutes a proper exercise by the War Depart-

ment of the discretion not to deduct, or whether, as

held by the Court of Appeals, such payment may be

recovered, to the amount of the contingent fees, either

as a voluntary payment erroneously made, or as a

payment made under a misconstruction of the law, or

as a payment made without warrant of law.

Each of the questions presented as to contingent

fees has been discussed as it arose in the instant case,

but such questions have a much more general import-

ance. The case at bar is not an isolated one, nor are

—24-—

the questions herein presented peculiar to it. There:

are undoubtedly hundreds of like contractors:who have:

fully performed under War contracts and who have:

been paid the full contract prices, without deduction,

and who have been finally renegotiated. Under the de-

cision of the Court of Appeals, sought to be: reviewed;

these contractors may nevertheless: be called upon,

without limitation as to time, to account for an assert-

ed violative payment of contingent fees: Not only is it

important that the contractors: know of this lurking,

latent liability, but it is equally important: to:the per-.

sons who extend credit to them. In each such situation

there is the risk of impairment of the financial sound-

ness of the contractor.

And, generally, in proceedings in bankruptcy, these

very questions must be determined whenever the Gov-

ernment presents a claim for the amount of contingent

fees.

The settlement. by this Court of each of these ques-

tions is also important to the Government for the as-

certainment of its rights. It should know when the war-

ranty has been breached; whether the: remedies pro-

vided are exclusive; whether the remedies are

for liquidated damages or fora penalty; whether the

Government has the discretion to deduct or not to de-

duct; and whether, if it has such discretion, the pay-

ment of the contract price in full constitutes an exer-

cise of such discretion:

While not involved-in the case at bar; the questions

herein: presented may arise under Section 153 of the

<a

Armed Services Procurement Act of 1947 (Title 41

U.S. C. A., See. 151 et seq.). Section 153 of that Act

has substantially adopted and incorporated the require-

ment of Executive Order No. 9001 with respect to the

warranty against contingent fees. The settlement of

the questions herein presented would apply equally tc

the warranty made part of contracts under the Pro-

curement Act of 1947.

So far as our research has disclosed, the case at

bar is the only case dealing with a claim of the Gov-

ernment asserting a right to recover from a contractor

the amount of contingent fees paid in breach of the

warranty. It may be regarded as a test case.

It is important, therefore, that all the questions

presented herein should be settled by this Court.

II

(Renegotiation Claim)

The Government’s claim for excessive profits under

the Renegotiation Act raises several important un-

settled questions of bankruptcy law.

7. It should be settled by this Court whether the

bankruptcy court under the Bankruptcy Act, or the

War Contracts Price Adjustment Board under the Re-

negotiation Act, has the exclusive jurisdiction to li-

quidate, as against a bankrupt estate, an unliquidated

claim of the Government for excessive profits.

The Bankruptcy Act, as here relevant, provides -

f

AU

V

Bik

ake “Sec. 2. Creation of Courts: of Bankruptcy and

‘Their Jurisdiction.

“a. The courts of the United States ... as

courts of bankruptcy .... are hereby.vested .

with . . . such jurisdiction as will enable them to

exercise original jurisdiction in proceedings under

this Act, .

“(2) Allow claims, disallow claims, recon-

sidey allowed or disallowed claims, and allow or

disa. ow them against bankrupt estates;”..

“See. 57. Proof.and Allowance-of Claims,

“qd. Claims which have been duly proved. shall

be allowed . ... unless objection to their allowance

shall be made by. parties in interest . . .: Provided,

however, That an unliquidated claim . . . shall not

be allowed unless liquidated . . . in the manner and

within the time directed by the court; and such

claim shall not be allowed if the court shall deter-

mine that.it is not.capable.of liquidation... . or that

such liquidation . .. would eo ussas Aeiae the admin-

istration of the estate .

“Sec. 63. Debts Which May Be Proved.

“a. Debts of the bankrupt may be proved and

allowed against his estate which are founded up-

on...

“(4) ...a-contract express or implied ;”.

“d. Whereany.. . unliquidated claim has been

proved, but, as provided in subdivision d of Sec-

an, a

tion 57 of this Act, has not been allowed, such claim

shall not be deemed provable under this Act.”

The Renegotiation Act, Seer 1191, as here relevant,

provides?

“(c) (1) Whenever, in the opinion of the Board,

the amounts received or accrued under contracts

with the Departments and subcontracts may reflect

excessive profits, the Board shall give to the con-

tractor or subcontractor, as the case may be, reas-

sonable notice of the time and place of a conference

to be held with respect thereto. The mailing of such

notice by registered mail to the contractor or sub-

contractor shall constitute the commencement of

the renegotiation proceeding. At the conference, . . .

the Board shall endeavor to make a final or other

agreement with the contractor or subcontractor

with respect to the elimination of excessive profits

_ If the Board does not make an agreement

. , it shall issue and enter an order determining

the amount, if any, of such excessive profits, and

forthwith give notice thereof by registered mail to

the contractor or subcontractor. In the absence of

the filing of a petition with The Tax Court of the

United States under the provisions of and within

the time limit prescribed in subsection (e) (1),

such order shall be final and conclusive and shall

not be subject to review or redetermination by any

court or other agency.”.

“(e) (1) Any contractor or subcontractor ag-

grieved by an order of the Board determining the

amount of excessive profits ... may, within ninety

days .. . after the mailing of the notice of such

order under subsection (c) (1), file a petition with

—

—23—

The Tax Court of the United States for a redeter-

mination thereof. Upon such filing such court shall

have exclusive jurisdiction, by order, to finally de-

termine the amount, if any, of such excessive prof-

its ... , and such determination shall not be re-

viewed or redetermined by any court or agency. .

A proceeding before the Tax Court. to finally deter-

mine the amount, if any, of excessive profits shall

not be treated as a proceeding to review the deter-

mination of the Board, but shall be treated as a pro-

ceeding de novo. ... ”

Thus, there are two Acts of Congress, each of which

involves the question of jurisdiction with regard to

provable claims allowable against a bankrupt estate.

The Bankruptcy Act, by Section 2a(2), vests in the

bankruptcy court the jurisdiction to allow or disallow

claims against bankrupt estates. The jurisdiction to

allow or disallow is exclusively in the bankruptcy

court, In U. S. Fidelity and Guaranty Co. vs. Bray,

225 U..S. 205, 217, 56 L. Ed. 1055, 1062, this Court

said:

“We think it is a necessary conclusion that the

jurisdiction of the bankruptcy courts in ‘all pro-

ceedings in bankruptcy’ is intended to be exclusive

of all other courts, and that such proceedings in-

clude, among others, all matters of administration,

such as the allowance . . . of claims”.

See also Pepper vs. Litton, 308 U. S. 295, 304, 84 L.

Ed. 281, 288, and cases in notes 5, 7 in 1 Collier on

Bankruptcy, 14th Ed., pages 147, 149.

Soa

b>?

—29—

The Renegotiation Act vests in the Board Jurisdic-

tion to initiate renegotiation proceedings and, where

agreement cannot be reached, to enter an order deter-

mining the amount, if any, of excessive profits. Absent

a petition for the review and redetermination of such

order by the Tax Court, the Board’s order is made final

and conclusive, and is not “subject to review or rede-

termination by any Court or other agency”.

The Renegotiation Act does not specifically amend or

modify the Bankruptcy Act, nor does it, by any express

provision or otherwise, oust the jurisdiction of the

bankruptcy court under Section 57 d of the Bankruptcy

Act to direct the manner and time within which an un-

liquidated claim shall be liquidated, to determine

whether the unliquidated claim is capable of liquida-

tion or can be liquidated without unduly delaying the

administration of the estate, and to disallow such

claims against the estate.

The Court of Appeals ruled, generally, that the de-

termination of excessive profits was exclusively in the

Board and the Tax Court, on proper review, and that

the intervention of a petition in bankruptcy did not

divest such jurisdiction.

The determination of the question vitally affects the

proper application of the Bankruptcy Act and of the

Renegotiation Act within their respective spheres. Ref-

erees in Bankruptcy, and the administrators of the

Government charged with determining excessive prof-

its of contractors, will be in doubt as to which Act gov-

erns. Therefore, where a renegotiation proceeding has

—

—30—

been initiated before, but not determined by the Board’s

order at the date of, the filing of the petition in bank-

ruptey, it should be settled by this Court whether the

bankruptcy court may itself determine the claim on

its merits, or whether the Board may nevertheless pro-

ceed to enter its order without securing the consent of

the bankruptcy court.

8. Assuming, arguendo, that the jurisdiction to de-

termine a claim for excessive profits is vested by the

Renegotiation Act exclusively in the Board, and may

be reviewed and determined only by the Tax Court, it

should be settled whether the Government is not never-

theless required, by the provisions of Section 57d of

the Bankruptcy Act, to apply to the bankruptcy court

and obtain its consent to the determination by the

Board, where such determination has not been made

by the Board at the time of the filing of the petition in

bankruptcy.

Section 57d of the Bankruptcy Act, above quoted in

its relevant provisions, vests in the bankruptcy court

the jurisdiction, which the bankruptcy court alone:can

and must exercise, to direct the manner and the time

within which an unliquidated claim shall be liquidated

and, further, to determine, for the purpose of allowing

the claim, whether such unliquidated claim is capable

of liquidation or such liquidation would unduly delay

the administration of the estate.

Clearly, the objective of Section 57d is to insure an

orderly, speedy and controlled administration of es-

tates in bankruptcy.

— wa

It should, therefore, be settled by this Court whether

a claim of the Government, based for its consideration

upon an order entered by the Board after the filing of

a petition in bankruptcy, without first obtaining from

the bankruptcy court, pursuant to Section 57d, con-

sent to the determination of the excessive profits in a

pending renegotiation proceeding, is an allowable

claim in the bankruptcy proceedings.

9. It should be settled by this Court whether Sec-

tion . ja(5) of the Bankruptcy Act precludes a de-

fense by a trustee in bankruptcy to a proof of claim on

a judgment by default against the bankrupt, entered

in another tribunal after the filing of the petition in

bankruptcy, in a suit or proceeding upon an unliquid-

ated claim provable under Section 63a(4) of the Bank-

ruptcy Act, where the claimant did not obtain the con-

sent of the bankruptcy court for its liquidation in such

other tribunal, as provided for that purpose by Sec-

tion 57d of the Bankruptcy Act, and thus, whether a

judgment so obtained is to be deemed conclusive a-

gainst the trustee in bankruptcy and the bankrupt es-

tate.

The Bankruptcy Act, as here relevant, provides -

“See. 63. Debts Which May Be Proved. (U. S. C.

A., Title 11, Sec. 10).

“a Debts of the bankrupt may be proved and

allowed against his estate which are founded upon

NS

“(4) ...a contract express... ;

“(5) provable debts reduced to judgments

after the filing of the petition... ”.

_ “See. 57. Proof and Allowance of Claims. (11

U.S.C.A., Sec. 93).

“qd. Claims which have been duly proved shall

be allowed . . . unless objection to their allowance

shall be made by parties in interest... : Provided,

however, That an unliquidated . . . claim shall not

be allowed unless liquidated .. . in the manner and

within the time directed by the court;.and such

claim shall. not be allowed if the court shall deter-

mine that it is not capable of liquidation . . . or that

such liquidation . . . would unduly delay the admin-

istration of the estate... ”.

“Sec. 11. Suits By and Against Bankrupts. (11

U:S.C.A., Sec. 29).

“b. The court may order the . . . trustee to en-

ter his appearance and defend any pending suit a-

gainst the bankrupt.”.

The Court of Appeals, in the case at bar, departed

from the decisional law construing and interpreting

the scope of Section 63a(5). It ruled, without qualifica-

tion, that “debts of the bankrupt may be proved and

allowed against his estate which are founded upon

provable debts reduced to judgments after the filing

of the petition in bankruptcy’ and thus relied on the

bare language of Section 63a(5), ignoring, however,

welt es

the related provisions of Sections 11d and 57d which

restrict the scope of Section 63a(5).

A claim for excessive profits under the Renegotia-

tion Act, until determined, is an unliquidated claim,

provable upon a “contract express” under Section

68a(4). It is the type of provable claim which may be

reduced to judgment after bankruptcy, as permitted

by Section 63a(5). However, where, as here, an un-

liquidated claim is being liquidated, before the judg-

ment thereon may become a provable claim under Sec-

tion 63a(5), the consent of the bankruptcy court to

such liquidation, under the mandate of Section 57d,

must first be obtained.

In the Matter of Paramount Publix Corporation,

(C. C. A., 2, 1936), 31 Am, B. R. (N. S.) 718, 714, 85

F. (2d) 42, the Court said:

“ we take it as law that a judgment obtained

after bankruptcy petition filed does not liquidate a

claim for purposes of distribution. In re Brady

Foundry Co. (C. C. A., 7th Cir.), 5 Am. B. R. (N.

S.) 602, 3 F. (2d) 437; In re Barrett & Co. (D. C.,

Ga.), 12 Am. B. R. (N. S.) 157, 27F. (2d) 159,

affirmed (C. C. A., 5th Cir.), 29 F. (2d) 737; In

re Hoey, Tilden & Co. (D. C.), 292 F. 269; In re

Service Appliance Co. (D. C., N. Y.), 15 Am. B. R.

(N. S.) 478, 39 F. (2d) 632; In re Kenwood Stor-

age & Warehouse Corporation (D. C., N. Y.), 27

Am. B. R. (N. 8.) 373, 4 F. Supp. 561. The fact

that Section 63b, Bankr. Act (11 U.S. C. A., See.

103b), allows unliquidated claims to be liquidated

‘in such a manner as it’ (the court) ‘may. direct,’

ie

would seem to give it control over liquidation. See,

also, section 11 and section 57d (11 U. 8. C. A.,

Sees. 29, 93d).

The claim at bar for excessive profits was allowed by

the Court of Appeals, even though it was reduced to

an order by an administrative agency (Board) after

the filing of the petition in bankruptcy and without

the consent or direction of the bankruptcy court’ for

its liquidation. It is not an isolated case. The question

involved is of every-day occurrence in the administra-

tion of bankruptcy law. The departure by the Court of

Appeals from the weight of authority in the decisional

law, with the resulting doubt created thereby, needs

an authoritative settlement in the interest of a uni-

form, orderly and speedy administration of bankrupt-

cy cases, and, equally, in the interest of the Govern-

ment for its guidance in the renegotiation of claims

for excessive profits in situations, attended by circum-

stances, as presented by the case at bar.

It is, therefore, of considerable importance that, for

the reasons above outlined, the questions presented

under the “Renegotiation Claim” should be definitively

settled by this Court.

WHEREFORE, petitioner prays that this petition

for a writ of certiorari be granted, and that a writ of

certiorari be issued out of this Honorable Court to the

United States Court of Appeals for the Fifth Circuit

for a review of its decision and jvdgment entered in

cause No. 12738 on December 9, 149, with petition

for rehearing denied February 18, 1950; and that

coils

the judgment of said court be reversed, and your pe-

titioner prays for such other relief as may be proper.

JACOB I. WEINSTEIN

2200 Girard Trust Building

Philadelphia 2, Pennsylvania

FRANK B,. APPLEMAN

Sinclair Building

Fort Worth 2, Texas

RICHARD U. SIMON

302 Life of America Building

Fort Worth 2, Texas

Attorneys for Petitioner

Buif F ¢7

ceils

Appendix A

(Contingent Fee Claim)

FIRST WAR POWERS ACT, 1941

(55 Stat. 838, 50 U.S.C.A. App. 601)

TITLE I—COORDINATION OF EXECUTIVE

BUREAUS IN THE INTEREST OF THE

MORE EFFICIENT CONCENTRATION

OF THE GOVERNMENT

§601. Coordination of executive bureaus, offices,

etc., by President for national defense and to prosecute

the war; issuance of regulations

For the national security and defense, for the suc-

cessful prosecution of the war, for the support and

maintenance of the Army and Navy, for the better

utilization of resources and industries, and for the

more effective exercise and more efficient administra-

tion by the President of his powers as Commander in

Chief of the Army and Navy, the President is hereby

authorized to make such redistribution of functions

among executive agencies as he may deem necessary,

including any functions, duties, and powers hitherto

by law conferred upon any executive department, com-

mission, bureau, agency, governmental corporation,

office, or officer, in such manner as in his judgment

shall seem best fitted to carry out the purposes of this

title [sections 601-605 of this Appendix], and to this

end is authorized to make such regulations and to is-

sna

sue such orders as he may deem necessary, which regu-

lations and orders shall be in writing and shall be

published in accordance with the Federal Register Act

of 1935 [sections 301-810, 311-314 of Title 44] : Pro-

vided, That the termination.of this title [sections 601-

605 of this Appendix], shall not affect any act done.or

any right or obligation accruing or accrued pursuant

to this title [sections 601-605 of this Appendix] and

during the time that this title [sections 601-605 of this

Appendix], in in force: Provided further, That the

authority by this title [sections 601-605 of this Ap-

pendix], granted shall be exercised only in matters re-

lating to the conduct of the present war: Provided fur-

ther, That no redistribution of functions shall provide

for the transfer, consolidation, or abolition of the whole

or any part of the General Accounting Office or of all

or any part of its functions. Dec. 18, 1941, c. 593,

Title I, § 1, 55 Stat. 838.

TITLE II—CONTRACTS

§611. War contracts exempt from certain restric-

tions upon authorization by President

The President may authorize any department or a-

"gency of the Government exercising functions in con-

nection with the prosecution of the war effort, in ac-

cordance with regulations prescribed by the President

for the protection of the interests of the Government,

to enter into contracts and into amendments or modi-

fications of contracts heretofore or hereafter made and

to make advance, progress and other payments there-

on, without regard to the provisions of law relating

a aa

to the making, performance, amendment, or modifica-

tion of contracts whenever he deems such action would

facilitate the prosecution of the war: Provided, That

nothing herein shall be construed to authorize the use

of the cost-plus-a-percentage-of-cost system of con-

tracting: Provided further, That nothing herein shall

be construed to authorize any contracts in violation of

existing law relating to limitation of profits: Provided

further, That all acts under the authority of this sec-

tion shall be made a matter of public record under

regulations prescribed by the President and when

deemed by him not to be incompatible with the public

interest. Dec. 18, 1941, c. 593, Title II, § 201, 55 Stat.

839.

EXECUTIVE ORDER NO. 9001

Dec. 27, 1941, 6 F.R. 6787, as amended Ex. Ord. No.

9296, Jan. 30, 1943, 8 F. R. 1429, eff. as of

Dec. 27, 1941

WAR AND NAVY DEPARTMENTS AND MARI-

TIME COMMISSION EXERCISE OF CERTAIN

FUNCTIONS AND POWERS

The successful prosecution of the war requires an

all-out industrial mobilization of the United States in

order that the materials necessary to win the war may

be produced in the shortest possible time. To accomp-

lish this objective it is necessary that the Departments

of War and the Navy and the United States Maritime

—39—

Commission cooperate to the fullest possible degree

with the Office of Production Management in the en-

deavor to:make available for the production of war

material all the industrial resources of the Country-

It:is expected: that in the exercise of the powers here-

inafter granted, these Agencies and the Office of Pro-

duction Management will work together to bring about

the conversion of manufacturing industries to war

production, including the surveying of the war potent-

jal of industries, plant by plant ; the spreading of war

orders; the conversion of facilities; the assurance of

efficient and speedy production; the development and:

use of subcontracting to the fullest extent: and the con-

servation of strategic materials.

TITLE I

1. By virtue of the authority in:me vested by the Act

of Congress, entitled “An Act to expedite the prosecu-.

tion of the War effort”; approved December 18, 1941,

(hereinafter called “the Act’) [sections 601 et. seq.

of Appendix to Title 50] and as President of the Unit-

ed States and Commander-In-Chief: of the: Army and:

Navy of the United States, and deeming-that such ac-

tion will facilitate the prosecution ofthe war, I do

hereby order that the War Department; the Navy De-

sion be and they hereby” respectively” are ‘authorized:

within the limits of the amounts appropriated therefor

to enter into contracts and into: amendments or modi-

fications of contracts hertofore or hereafter made, and

to make advance, progress, and other payments there-

sniilein

on, without regard to the provisions of law relating to

the making, performance, amendment, or modifica-

tion of contracts. The authority herein conferred may

be exercised by the Secretary of War, the Secretary of

the Navy, or the United States Maritime Commission

respectively or in their discretion and by their direc-

tion respectively may also be exercised through any

other officer or officers or civilian officials of the War

or the Navy Departments or the United States Mari-

time Commission. The Secretary of War, the Secre-

tary of the Navy, or the United States Maritime Com-

mission may confer upon any officer or officers of their

respective departments, or civilian officials thereof,

the power to make further delegations of such powers

within the War and Navy Departments, and the U-

nited States Maritime Commission.

2. The contracts hereby authorized to be made in-

clude agreements of all kinds (whether in the form of

letters of intent, purchase orders, or otherwise) for

all types and kinds of things and services necessary,

appropriate or convenient for the prosecution of war,

or for the invention, development, or production of, or

research concerning any such things, including but not

limited to, aircraft, buildings, vessels, arms, arma-

ment, equipment, or supplies of any kind, or any por-

tion thereof, including plans, spare parts and equip-

ment therefor, materials, supplies, facilities, utilities,

machinery, machine tools, and ary other equipment,

without any restriction of any kind, either as to type,

character, location or form.

—_44i—

3.. The War Department, the Navy Department, and

the United States Maritime Commission may by agree-

ment modify or-amend or settle claims under contracts:

heretofore or hereafter made, may make advance, pro:

gress; and other payments upon such contracts of any’

percentum of the contract price, and may enter into a-:

greements: with contractors and/or obligors,; modify--

ing: or releasing accrued obligations of: any. sort, in--

* duding accrued: liquidated. damages or liability un-

der surety or other bonds, whenever, in the judgment.

of the: War Department, the Navy Department,

or the United States Maritime Commissiom respective-'

ly the prosecution of the- war- is- thereby facilitated.

Amendments and modifications of contracts may be

with or without consideration and may be: utilized

to accomplish the same things as any original con-

tract could have accomplished hereunder, irrespective

of the time or circumstances of the making of or

the form of the contract amended or modified, or of the

amending or modifying contract, and irrespective: of

rights which may have: accrued under the contract, or

the amendments or modifications thereof.

4. Advertising, competitive bidding, and bid, pay-

ment, performance or other bonds or other forms of

security, need not be required:

TITLE If

5. Every contract entered into pursuant to: this

order shall contain a warranty by the contracter’ in

substantially the following terms:

illic

The contractor warrants that he has not employed

any person to solicit or secure this contract upon any

agreement for a commission, percentage, brokerage,

or contingent fee. Breach of this warranty shall give

the Government the right to annul the contract, or, in

its discretion, to deduct from the contract price or con-

sideration the amount of such commission, percentage,

brokerage, or contingent fees. This warranty shall not

apply to commissions payable by contractors upon con-

" tracts or sales secured or made through bona fide es-

tablished commercial or selling agencies maintained

by the contractor for the purpose of securing business.

Armed Services Procurement Act of 1947

(41 U.S.C.A. § 151)

“Every contract negotiated pursuant to section

302 (c) shall contain a suitable warranty, as de-

termined by the agency head, by the contractor

that no person or selling agency has been employed

or retained to solicit or secure such contract upon

an agreement or understanding for a commission,

percentage, brokerage, or contingent fee, except-

ing bona fide employees or bona fide established

commercial or selling agencies maintained by the

contractor for the purpose of securing business, for

the breach or violation of which warranty the Gov-

ernment shall have the right to annul such contract.

without liability or in its discretion to deduct from

the contract price or consideration the full amount

of such commission, percentage, brokerage or con-

tingent fee.”

—43ih—

Bankruptcy Act$57j>

(11 U.S.C.A. §93(j)*):

§57(j) Debts owing to the United States or any

State or subdivision thereof as a penalty. or forfeiture

shall not be allowed, except for the amount of the pe-

cuniary loss sustained by the act, transaction, or pro-

ceeding out of which the penalty or forfeiture arose,

with reasonable and actual costs occasioned: thereby

and such interest as may have accrued thereon accord-

ing to law.

Appendix B

(Renegotiation claim)

Bankruptcy Act

(11 U.S.C.A:)

“See, 2. Creation of Courts of Bankruptcy and

Their Jurisdiction. (11 U-S.C.A., § 11).

“a The courts of the United States . . . as

courts of bankruptcy . . . are hereby vested . . . with

_.. such jurisdiction as will enable thenr to exercise

original jurisdiction in proceedings under this Act,

wee tO" 7

“(2) Allow claims, disallow claims, recon-

sider allowed or disallowed claims, and allow or dis-

- allow them against bankrupt estates ;”.

* * * *

“See, 11. Suits By and Against, Bankrupts. (11

U.S.C.A., § 29).

peer’ ee

“b. The court may order the. . . trustee to en-

ter his appearance and defend any pending suit a-

gainst the bankrupt.”

“Sec. 57. Proof and Allowance of Claims. (11

U.S.C.A., § 93(d)).

_ “d. Claims which have been duly proved shall

be allowed ... unless objection to their allowance

shall be made by parties in interest ...: Provided,

however, That an unliquidated claim . . . shall not

be allowed unless liquidated . . . im the manner and

within the time directed by the court; and such claim

shall not be allowed if the court shall determine that

it is not capable of liquidation . . . or that such li-

quidation ... would unduly delay the administration

of the estate ...”.

“Sec. 63. Debts Which May Be Proved. (11 U.

S.C.A., § 108).

“a. Debts of the bankrupt may be proved and

allowed against his estate which are founded up-

See

“(4) ...a contract express or implied;”.

“qd. Where any . . . unliquidated claim has been

proved, but, as provided in subdivision “d” of Section

57 of this Act, has not been allowed, such claim shall

not be deemed provable under this Act.”

Renegotiation Act

(50 U.S.C.A. App. §1191(c) )

“(¢) (1) Whenever, in the opinion of the Board,

the amounts received or accrued under contracts

= \

AB.

with the Departments and subcontrac.s mr" reflect

excessive profits, the Board shall give:to the contrac-

tor or subcontractor, as the case may be, reasonable

notice of the time and place of a conference to be-held

with respect thereto, The mailing of such notice»by

registered mail to the contractor or subcontra: *or

shall constitute the commencement of the renegotia-

tion proceeding. At the conference, . . . the Board

shall endeavor to make-a final or other agre. nent

with the contractor or subcontractor with respect to

the climinatior of excessive profits . . . If the Board

does not make an agreement... , it shall issue and

enter an order determining the amount, if any, of

such’ excessive profits; and forthwith give notice

thereof by registered mail to the contractor ‘or: sub-

contractor. In the absence of the filing of a petition

with The Tax Court of the United States under the

provisions of and within the time limit prescribed

in subsection (e) (1), such-order shu’. ve final and

conclusive and shall not be subject.to. review or re-

determination by any court or other agency.

“(¢) (2) Upon the making ofan agreement, or

the entry of an order, undér paragraph (1) by the

Board, or the entry of an order under: subsection

(e) by The Tax Court of the United States, deter-

mining excessive profits, the Board shall forthwith

authorize and direct the Secretaries or any of them

to eliminate such excessive profits: (A) by. reduc-

tion in the amounts otherwise payable to the con-

tractor under contracts with the Departments, or

by other revision of their terms; or (B) by with-

holding from amounts otherwise due to the con-

ee ee

tractor any amount of such excessive profits; or

(C) by directing a contractor to withhold for the

account of the United States, from amounts other-

wise due to a subcontractor, any amount of such ex-

cessive prifits of such subcontractor; or (D) by re-

covery from the contractor, through repayment,

credit, or suit any amount of such excessive prifits

actually paid to him; or (E) by any combination of

these methods, as is deemed desirable. Actions on

behalf of the United States may be brought in the

appropriate courts of the United States to recover

from the contractor any amount of such excessive

prifits actually paid to him and not withheld or

elimitated by some other method under this sub-

section.”

“(@) (1) Any contractor or subcontractor ag-

grieved by an order of the Board determining the a-

mount of excessiv eprofits . . . may, within ninety

days... after the mailing of the notice of such order

under subsection (c) (1), file a petition with The

Tax Court of the United States for a redetermina-

tion thereof. Upon such filing such court shall have

exclusive jurisdiction, by order, to finally determine

the amount, if any, of such excessive profits... ,

and such determination shall not be reviewed or re-

determined by any court or agency. ...A proceed-

ing before the Tax Court to finally determine the

amount, if any, of excessive profits shall not be

treated as a proceeding to review the determination

of the Board, but shall be treated as a proceeding

de novo. ...”.

a...

IN THE

SUPREME COURT OF THE UNITED STATES

October Term, 1949

NO.

BURTON B. PADDOCK, Trustee in Bank-

ruptcy of the Estate of GLOBE AIRCRAFT

CORPORATION, Bankrupt,

Petitioner,

VS.

UNITED STATES OF AMERICA,

Respondent.

BRIEF IN SUPPORT OF PETITION

FOR CERTIORARI

STATEMENT

The facts have been sufficiently stated in the petition

for writ of certiorari.

ARGUMENT

1,

Contingent Fee Claim

Executive Order 9001 was equivalent to a statutory

enactment. Hughes v. Dupont, 37 F. 2d 725.

— ww

Under the mandate of the Executive Order, all con-

tracts for the procurement of war materials after De-

cember 18, 1941, included the warranty against con-

tingent fees.

We know of no instance during the course of the

war where, on account of a breach of the warranty a-

gainst contingent fees, the War Department, Navy

Department or Maritime Commission either annnuled

a contract or deducted the amount of the commissions

due thereunder. This indicates that with reference to

contractors who used the services of selling agencies

mon contingent fees, the War Department, Navy De-

* partment and Maritime Commission were of the opin-

ion that the particular agencies came within the ex-

® ceptive clause of the warranty, or that such Depart-

= ments exercised a discretion to not make the deduction

= under the belief that such actions best forwarded the

fsuccessful prosecution of the war.

The program for procurement of materials during

the war was successfully carried out. With reference

to the cost of such procurement, the Government pro-

tected itself against: excessive charges under its rene-

gotiation procedures.

The question is, having during the war failed to

annul a particular contract or make any deduction

therefrom, can the Government now re-inquire as to

whether the selling agency which the contractor used

came within the approved category, and dependent up-

on its conclusion, can the Government now recover

—

from such a contractor the amount of the commissions

which the contractor has therefore paid to such a

selling agnecy?

This general question resolves itself into the six

specific questions set forth in the petition for certior-

ari (pp. 11-14 supra).

First: What kind of a selling or commercial agen-

cy comes within the approved class?

Does the approval extend to an agent and employee

in the ordinary sense, and also to the independent

selling agency which represents more than one con-

tractor and deals generally with prospective purchas-

ers? The Judge Advocate General so ruled (Footnote -

Reynolds v. Goodwin Hill, 154 F. 2d 558).

Should the distinction between approved and unap-

proved agencies depend upon whether the particular

agency has been employed to drum up business gener-

ally and not for the purpose of obtaining one specific

contract? The Second Circuit so held in the Reynolds

case just above mentioned, and in Bradley v. American

Radiator Corp., 159 F. 2d 39.

Where a contractor had no regular commercial or

selling agency, and engaged the services of his inde-

pendent insurance agent to assist in procuring war

contracts, did such independent agency come within

the exceptive clause? The Missouri Supreme Court held

that he did in Ebeling v. Swaime Mfg. Co., 209 S.W.

2d 892.

— i

In suits by an agent to collect contingent fees

from the contractor, where the defense was offered

that Executive Order 9001 was violated, the courts

have disallowed the defense. See Bradford v. Durkee

Marine Products Corp., 40 N.Y.S. 2d 448; Leahy v.

Terminal Corp., 69 N.Y.S. 2d 596.

Do the terms “commercial or selling agencies” ex-

clude the salaried employee. Contrawise, does the

term “maintained by the contractor for the purpose

of securing business” exclude the independent com-

mercial agency representing more than one contractor

which is engaged on a contingent fee basis only?

The Court of Appeals for the Fifth Circuit held that

the word “maintained,” as a matter of law and regard-

less of what might have been the findings of the Ref-

eree and the District Court, meant that the agency,

in order to come within the exceptive clause, must

have been supported by the contractor in some man-

ner other than and in addition to the payment of con-

tingent fees, and also that the relationship between the

contractor and such agency must have been in exist-

ence prior to the time that the agent was instructed

to render the procurement services in question. This

construction is at variance with all such previous in-

terpretations.

The Armed Services Procurement Act of 1947, which

controls in current contracts, requires a warranty sub-

stantially the same as that required by Executive Or-

der 9001 (41 USCA, Sec. 153).

—d1—

It is important not only to contractors who may. at

this late date be called on by the Government to remit:

for the amount of contingent fees paid by such contrac-

tors many years ago, but also to contractors now

dealing with the Government, as well as the

legitimate selling agencies serving such contractors, to

know with certainty what kind of an agency came and

now comes within the exceptive clause of the manda-

tory warranty against contingent fees.

Second; Is the discretionary right to deduct, a right

created solely by Executive Order 9001; and therefore

exclusive?

Even though certain decisions of this Supreme Court

held that contracts to pay contingent fees for the pro-

curement of Government work were unenforceable as

between the agent and the contractor (Providence

tool Co. v. Morris, 69 U.S. 45, 17 L.E. 868; Hazelton

v. Sheckles, 202 U.S. 71, 50 L.E. 939); there had been

no decisional law, as of date of Executive Order 9001, —

that recognized in the Government the right to recover

from such a contractor a sum of money equal to the

amount of the contingent fees which the contractor

had agreed to nay the agent. And as of the effective

date of Execi:cive Order 9001, there were no statutes

in effect granting to the Government the right to

make such a recovery against a contractor.

The Executive Order was issued pursuant to a stat-

ute, First War Powers Act, and the Executive Order

mandatorily required that the warranty be included

in all war procurement contracts.

ii.

The Executive Order provided specific remedies

which the Government might exercise in the event of

the breach.

This being creative legislature, providing its own

remedies, the same were exclusive. Pollard v. Bailey,

87 U.S. 520, 22 L.E. 376.

The discretionary right to deduct, as provided in the

Executive Order warranty, was necessarily exercisable

at the time of or prior to final payment by the Govern-

ment to the contractor. Likewise, the annulment of

the contract had to be exercised during the perform-

ance period. The remedial parts of the Executive Or-

der, in effect, provided a period of limitations for the

exercise thereof, and it was necessary that the Gov-

ernment exercise the remedies in the time and manner

as provided. Ewing v. Risher, 176 F. 2d 641.

Had it been intended that the Government, in addi-

tion to its discretionary right to deduct, should, after

payment, have the additional right to make an affirma-

tive recovery of the contractor, the Executive Order

would have so provided. By comparison, see the Rene-

gotiation Act (50 USCA, App., Sec. 1191(c)(2) )

wherein the Government is granted the right to elimi-

nate excessive profits by reduction and withholding,

but is also granted the specific right to eliminate the

profits “by recovery from the contractor, through re-

payment, credit, or suit, etc.”

—§Re-

Third; If the Government: has a remedy by con-

pn ce ARO GRA SORE ee Pee

» soup eam meanena oer gene | a

The point should first be made that if the Geiahesl

ofithe Court of Appeals for the Fifth Circuit is recog-

nized: that: the remedies of the Government, upon

preach of the warranty, were contractual; the problem

as to exclusive remedies is by no means'settled: Where

a warranty provides specifically for the remedy, upon

breach, and where the remedy is adequate, the same is:

exclusive. Permutit Co. v. Massasoit” n Sys Co:, 61 Fo

2d 529.

Cam it be said that the warranty as contained in

war contracts, was an agreemént between the Govern-

ment and the contractor for the payment of liquidated)

damages in the amount of the commissions which the —

contractor had theretofore paid a selling agency? The

language of the warranty does notiallow for such a’

construction. When it is recalled that all war contracts,

printed forms, which were ‘used during the war, con-

tained ‘an express provision for liquidated damages in

event: of delay, as well as the warranty against contin-

gent fees, it seems unanswerable that had it been in-

tended by the Government and contractor to make an

agreement for liquidated damages upon breach of the

contingent fee warranty, they would have drawn and

a

anges terminology. veyet

¢

Had it been the intention of the Geinelnateactanpecs

vide for liquidated damages upon breach, it should

3

have included a specific agreement to that effect. It can

not be expected that the court wili rewrite the contract

for the parties. U. S. v. American Surety Co., 322 U.S.

96; 88 L. E. 1158.

ee.

Fourth; Is the right to deduct the amount of the

contingent fees a penalty? The Government, in its

procurement program during the war, was in a posi-

tion to sustain pecuniary damages through excessive

charges by the contractor and through defective ma-

terial. The usage by the contractor of the non-approved

agency as distinguished from the approved agency,

could not have contributed to either of such loss possi-

bilities. In its original opinion, the Court of Appeals

for the Fifth Circuit sought to uphold its decision by

making the assumption that the contractor paying a

contingent fee will increase the price of his bid to the

Government by the amount thereof. (R. 535). It being

pointed out in the Petition for Rehearing that the as-

sumption was not only contrary to the record, but that

the same was unjustifiable in that the contractor us-

ing an approved agency would by the same token in-

crease the amount of his bid to the Government, the

Court of Appeals withdrew that portion of its opinion

(R. 583).

It is difficult to see how the Government thought

that it would, or in fact did, either save money ir its

procurement program or obtain better materials, where

the contractor used the approved type of agency rather

than the unapproved type. This demonstrates that the

warranty was designed as a deterrant—it was not in-

cea Bis

tended to provide a reasonable measure for the dam-

ages which the Government’ anticipated that it: would

sustain in event of a breach. This being so, the right of’

deduction is unenforceable under the ruling of this

court in Priebe & Sons v. U. S., 382 U.S. 407, 92:L.E.

32. Without reference tc the Priebe decision, the claim

was not allowable in bankruptcy under the specific pro-

visions of Section 57(j) (938 USCA, Sec. 93(j) ).

Fifth: Did the War Department; during the pro-

gress of the war, have the right to deductior not to de-

duct? , rt stts |

The Executive Order warranty itself provided that

the right of deduction was in the: Government’s dis-

cretion.

Section 3 of Title 1 of Executive Order9001 provid-

ed specifically that the War Department, Navy De-

partment and Maritime Commission might release ac-

crued obligations, including accrued liquidated dam-

ages. ots

A reading of the Executive Order. and of the First

War Powers Act shows very clearly the intention to

vest in the War Department, Navy Department: and:

Maritime Commission the unlimited and unreviewatile:

authorization to make decisions as to modification of

the contracts and as to settlement of claims, including

release of liquidated damages, during the progress of

the performance of the contract, with: the sole object-

ive in-so doing of. furthering. the: successful prosecu-..

eution of the war. It should be determined whether

pa hie

the words “‘in its discretion” meant just that, or wheth-

er the same meant nothing, as held by the Court of

Appeals.

Sixth: Did payment by the Government to the con-

tractor constitute an exercise of a discretion not to

deduct?

Where the Government, at the time of the execution

of the contract and continuously during the perform-

ance thereof, had knowledge of all facts as te contrac-

tor’s arrangement with a particular selling agency on

a contingent fee basis, and where the contractor faith-

fully performed his contract and was paid in full by

the Government, can it be said that the payment was

illegally made? Isn’t the contrary conclusively shown

by such facts, namely that the payments were properly

made in the exercise of diseretions specifically vested.

It is important that an authoritative decision be

made as to whether payments under such circumstanc-

es are properly made and not recoverable under the

principle of law announced in U. S. v. Great Northern

Ry., 287 U.S. 144; 77 L.E. 223, or whether the same

constitute illegal payments under the principle an-

nounced in U. S. v. Wurts, 303 U.S. 414; 82 L.E.

932.

II.

Renegotiation Claim

Prior to the filing of the petition in bankruptcy a-

gainst Globe, renegotiation proceedings had been in-

ellie

stituted against:Globe by the War Contracts Price Ad-

justment Board.* At: this: time, there was no. definite

or liquidated sum claimed to be owing by Globe: for

alleged excessive.profits. After: the filing of the peti-

tion in bankruptcy;'the War Contracts Price Adjust-

ment Board, ‘by its ‘order of ‘April 4,:1947; found that

Globe earned $200,000.00:in excessive profits'for 1945,

and was, accordingly, indebted to the United States

for such amount.” The Referee in Bankruptcy, affirmed

by the District Court, found that Globe earned no ex-

cessive profits for 1945. Thus, two fact-finding tribun-

als reached opposite conclusions as to whether Globe

had, in truth and in fact, earned excessive profits dur-

ing 1945 from Government contracts. !

The Referee (R. 470-471) held that the proceedings

ofthe ‘War Contracts Price Adjustment Board were

conducted without the knowledge and consent of the

PThis in itself is extremely doubtful. 50 U.S.C. App. Sec.

1191(a)(1) requires that the notice initiating the renegotia-

tion proceeding :shall give to the contractor “reasonable. no-

tice of the time.and place of a conference to be held with re-

spect thereto.” The notice in this case stated that, “It is not

nevessary ‘to hold any conference with your company for

purposes, of instituting renegotiation.” (R..463) Under such

circumstances, failure strictly to comply. with the jurisdiction-

al statute would seem to render the entire based

thereon null and void and of no force or effect. = = 5

‘#This order was entered without prior notice to the Trus-

tee in Bankruptcy and in face of the fact that the Board knew

of the bankruptcy and knew that “the contractor is unable at

the present time to enter into any agreement by reason of

bankruptcy proceedings instituted on’ December 31, 1946 be-

fore the United States. District Court for the Northern Dis-

trict of. Texas, Fort Worth Division, Case No. 2153 in Bank-

ruptcy.” See “Special Report of Impasse with Globe Aircraft

Corporation” dated January 21, 1947 (R. 415, 416-420).

aii

Bankruptcy Court and without participation by the

Referee under proper directions of said Court, and that

the proceedings and order of such Board interfered

with the orderly administration of the bankrupt es-

tate; were a nullity; and in no manner binding on the

estate and the Bankruptcy Court. The District Court,

in affirming the Referee, held:

“It would be a strange thing if a creditor could

come into the Bankruptcy Court after the appoint-

ment of a Trustee, file a claim and secure its al-

lowance based on proceedings elsewhere before any

Board or any Court, held during the bankruptcy in

this Court, and before the appointment of a trus-

tee, who, of necessity, had no opportunity te be

heard in such proceedings.” (R. 507)

The Court of Appeals reversed. In its first opinion,

it held that the Trustee in Bankruptcy could have par-

ticipated in the renegotiation proceedings but failed

to do so, and having failed to do so, was “precluded

under the terms of the renegotiation Act from assert-

ing any defense to said claim. U.S. Code, Title 50, App.

Sec. 1191(c) (1) and (2) and (d)(1).” On rehearing,

the Court of Appeals shifted its ground for reversing

the District Court. In its opinion denying the petition

for rehearing, the Court resorted to the Bankruptcy

Act itself and held that under Section 63(a)(5) (11

U.S.C.A. §103(a)(5) ), a provable debt could be re-

duced to judgment after the filing of the petition and

before the application for discharge by the bankrupt,

by any other court or administrative tribunal with-

out the consent or direction of the Bankruptcy Court,

and that such judgment so obtained was conclusive a-

gainst the trustee of the bankruptcy estate. The Court’

did not even mention §57(d) (11 U.S.C.A., Sec. 93

(d),) which provides:

“That an unliquidated-or contingent claim: shall

not be allowed unless liquidated or the amount.

thereof estimated in the manner and within the

time directed by the Court, and such claim shall not

be allowed if the. court shall determine that it is

not capable of liquidation or of reasonable estima-

‘tiort of such liquidation would unduly delay the ad-

recyenee aa of the estate or ‘any proceeding under

is title.” ; ;

Nor did it mention Section 57n of the Bankruptcy

Act (11 ULS.C.A., §93(n) ) specifically providing that

“all claims provable under this Act, including all claims

of the United States, shall be proved and filed in the

manner provided by this Section.”

The Referee found that there were no pleadings to

authorize the Bankruptcy Court either to estimate the

amount of the claim or to prescribe a manner for the

liquidation ; and that if there were any available pro-

cedure for the liquidation of the claim for refund of

excess profits, the orderly administration of the es-

tate would be unduly delayed thereby. (R. 472).

The Court of Appeals, by its two opinions, thus de-

cided three separate and distinct questions, which are

of great public importance and command authorita-

iS.

tive disposition by this Honorable Court. These are the

questions set forth at pages 14 and 15 hereof as Num-

bers 7, 8 and 9.

Seventh; Whether the Bankruptcy Court or the

War Contracts Price Adjustment Board has exclusive

jurisdiction?

The answer to this question involves the construction

of two Congressional Acts of vital importance to the

public welfare: the Bankruptey Act and the Rene-

gotiation Act. This Court held, in Straton v. New, 283

U.S. 318, 75 L.E. 1060,

“The purpose of the Bankruptcy Act (11 U. S.

C. A.) passed pursuant to the power of Congress

to establish a uniform system of bankruptcy

throughout the United States, is to place the proper-

ty of the bankrupt, wherever found, under the con-

trol of the court, for equal distribution among the

creditors. The filing of the petition is an assertion

of jurisdiction with a view to the determination of

the status of the bankrupt and a settlement and

distribution of his estate. This jurisdiction is ex-

clusive within the field defined by the law, and is so

far in rem that the estate is regarded as in custodia

legis from the filing of the petition. Acme Hard-

ware Co. v. Beekman Lumber Co., 222 U.S. 300,

32 S. Ct. 96, 56 L. Ed. 208. It follows that liens

cannot thereafter be obtained nor proceedings be

had in other courts to reach the property, the dis-

trict court having acquired the exclusive right to

administer all property in the bankrupt’s posses-

sion.”

callie

Again, in People of State of New: York v. Irving

Trust: Co., 288 U.S. 329, 77 L.E. 815, the Supreme

Court. quoted from an earlier decision the following’

rule:

“We think it is a necessary conclusion from these

and other provisions of the act that the jurisdiction

of the bankruptcy courts in all ‘proceedings in bank-

ruptcy’. is. intended to be exclusive of. all other

courts, and that such proceedings include, among.

other, all matters of administration, such as

the allowance, rejection, and reconsideration of

claims, the reduction of the estates to money, and ©

its distribution, the determination of the preferenc-

es and priorities to be accorded to claims presented

for allowance and payment in regular course, and.

the supervision and control of the trustees and oth-

ers who are employed to assist them. * * * A distinct

purpose of the bankruptcy act is to subject the ad-

- ministration of the estates of bankrupts to the con-

trol of tribunals clothed with authority and charged

with the duty of proceeding to final settlement and

distribution in a summary way, as are the courts

of bankruptcy.”

See also Pepper v. Litton, 308 U.S. 295, 84 L. Ed.

281; 1 Collier on Bankruptcy, 14th Ed. 147, 149.

These principles are well established and of long

duration. !

On the other hand, this Court, in Lichter v. United

States, 384 U.S. 742, 92 L.E. 1694, held the Renego-

tiation Act to be constitutional and the remedies pro-

vided therein to afford due process. The Act speci-

fically provides that the order of the War Contracts

assis.

Price Adjustment Board, if no petition to the Tax

Court therefrom is filed, ‘“‘shall be final and conclusive

and shall not be subject to review or redetermination

by any court or other agency.”

There is thus an apparent fundamental conflict in

jurisdiction in the case of a pending claim for exces-

sive profits under the Renegotiation Act against a

contractor against whom a petition im bankruptcy has

been filed prior to the time the renegotiation claim is

determined and liquidated. The unliquidated claim for

excessive profits under the Renegotiation Act has to be

disposed of. Which tribunal—the War Contracts Price

Adjustment Board or the Bankruptcy Court—has the

jurisdiction to do it? The Referee and the District

Court held that the exclusive jurisdiction in such case

resided in the Bankruptcy Court. The Court of Ap-

peals held it was in the War Contracts Price Adjust-

ment Board. There is thus presented an important

question of Federal law that has not been, but should

be, settled by this Honorable Court.

Eighth; Was it necessary, under Section 57d, that

the Government apply to the Bankruptcy Court and

obtain its consent to have the amount of excessive

profits, if any, determined by the War Contracts Price

Adjustment Board?

Section 57 of the Bankruptcy Act provides for the

allowance of claims in bankruptcy. Its requirements

are mandatory. Part “d” of said section provides the

method under which unliquidated claims may be li-

quidated and allowed. In this connection, Section 11b

(11 USCA, Sec. 29(b)) authorizes the Bankruptcy

—63—

Court: to permit its Trustee to defend pending “non-

bankruptcy suits and proceedings. ;

The objective of Section 57d is to give to the Referee

a control over the administration of the estate in bank-

ruptey. (3 Collier on Bankruptcy, 14th Ed., 184, 195,

202-209). Whether renegotiation proceedings can be

conducted and determined, without the Bankruptcy

Court’s being informed thereof and without its giving

consent thereto, is an important question which should

be authoritatively determined.

Ninth; Where an unliquidated claim is, after the

filing of bankruptcy proceedings, reduced to judgment

in another court, without the consent of the Bankrupt-

cy Court, is the judgment conclusive and allowable?

The answer to this question involves a reconciliation

of tow apparently conflicting sections of the Bankrupt-

cy Act itself. Bankruptcy procedure is of fundamental

public importance. The framers of the Constitution

specifically authorized Congress to establish a uniform

system of bankruptcy throughout the United States.

Article I, Sec. 8, Clause 4 of the Constitution. The lat-

est comprehensive bankruptcy act so passed by Con-

gress was the Chandler Act enacted in 1938. The ques-

tion raised by the decision of the Court of Appeals is

whether a creditor who has brought an action in an-

other tribunal to reduce an unliquidated claim to judg-

ment, which suit is pending at the time of the petition

in bankruptcy, may proceed with such action without

the consent or direction of the Bankruptcy Court, re-

duce the unliquidated claim to judgment, and thereby

conclusively establish a provable and allowable debt

» vides:

celine

against the bankrupt estate. The Court of Appeals

held that that could be done under the terms of Section

63(a) (5) (11 U.S.C.A., Sec. 103 (a) (5),) reading as

follows: ;

“Sec. 103. Debts provable against

“(a) Debts of the bankrupt may be proved and

allowed against his estate which are founded upon

ce k *

“(5) Provable debts reduced to judgments af-

ter the filing of the petition and before the consoli-

dation of the bankrupt’s application for a discharge,

less costs incurred and interest accrued after the

filing of the petition and up to the time of the en-

try of such judgments; * * * .”

Section 63(b) (11 U.S.C.A., Section 103(b) ) pro-

vides :

“Where any contingent or unliquidated claim has

been proved, but, as provided in subdivision d of

Section 93 of this title, has not beer allowed, such

claim shall not be deemed provable under this title.”

Section 57(d) (11 U.S.C.A., Section 93(d) ) pro-

“(d) Claims which have been duly proved shall

be allowed upon receipt by or upon presentation to

the court, unless objection to their allowance shall

be made by parties in interest or unless their con-

sideration be continued for cause by the court upon

its own motion: Provided, however, That an unli-

—65—

iquidated or contingent claim ‘shall not ‘be -allowed

quidation or of reasonable estimation or that such

liquidation or estimation would unduly delay the

administration of the estate or any proceeding un-

der this title.” a

The Court of Appeals, without even mentioning or

considering Sections 63(d) or 57 (d) above, held that

Section 63(a)(5) required the allowance of an unli-

quidated claim reduced to judgment in another tribun-

al pending bankruptcy, even though it was so reduced

to judgment without the consent or direction ofthe

Bankruptcy Court. In so doing, it allegedly distin-

guished, but in fact overruled, its own earlier decision

on this subject. In re Barrett & Co., 27 F. 2d 159, aff’d

29 F. 2d 737. This holding is further directly contrary,

not only to the statutory provisions above, but to the

holding of the Second:Circuit Court of-Appeals in:[n re

Paramount Publix Corporation, 85 F. 2d 42, wherein

the Court stated, at page 43:

«“ * * * we take it as law that a judgment ob-

tained after bankruptcy petition filed does not li-

quidate a claim for purposes of distribution. (Cas-

es cited.) The fact that section 63b, Bankr. Act (11

U.S.C.A. Sec. 103(b) ), allows unliquidated claims

to be liquidated ‘in such manner as it (the court)

may direct,’ would seem to give it control over li-

quidation. See, also, Section 11 and Section 57(d)

(U.S.C.A., Sees. 29, 93(d) 1 dd

elles

See also 1 Collier on Bankruptcy, 14th Ed. 1170, —

1171 and 3 Collier ab. cit., 1871-1872, 1874 and cases —

cited therein.

The importance of an authoritative disposition of

this question cannot be overemphasized. Uniform, or- —

derly and speedy disposition of bankruptcy cases is of

national concern. The decision below introduces into

bankruptcy procedure a method for creditors to obtain

binding judgments in other tribunals against the bank-

rupt estate not contemplated or authorized by Con-

gress. Unless clarified by the final say of this Honor-

able Court, chaos in the administration of the Bank-

ruptcy Act will result in such cases. This is no isolated

case. This question arises every day in the administra-

tion of bankruptcy law, and the uncertainty created by

the decision below requires the attention of this Court

to the end that final, authoritative disposition is made

of this vital question.

It is respectfully submitted that the writ of certior-

ari should be granted.

JACOB I. WEINSTEIN

2200 Girard Trust Building

Philadephia 2, Pennsylvania

FRANK B. APPLEMAN

Sinclair Building

Fort Worth 2, Texas

RICHARD U. SIMON

302 Life of America Building

Fort Worth 2, Texas

Attorneys for Petitioner

Page

Ne I i eo oo aa cain en aeline vinnie een amie 1

SEERA RBG A MRP RSRe ga ROARED” PRINTERS Diagn Peo ne Nap A NO A eae a: 1

ELLOS EA DV EPOCH A POE Re ERIN £ Kumi thaw 2

wand contract peovision involved... sc edeacinchakis aie ai 2

PRGA EA Hy Ck ce: pts «eae So atta RL Ie. wt 3

L ontinmene Fee Claim_......-... ORE ENDS 2 ee 3

"Sis fe OR oe ESL EAE ETE PIERO pn OR 7

3. Proocedings With Respect to the Foot of Gaim 8

Be ade Si a es cee ie aie BR Crees 10

1. a Wee: Chale oom etnies SRE ato ll

@. Renegotiation Claim.-.........---- +. .-45-24.-..+-- 19

RE iE SNES OSA ls aerate Anes Coe Oa NEE CeO aa 22 -

CERES ARE SIE RTS, OR RAT ARE pes AS RNR 23

CITATIONS

Arkansas Comm’n v. Thompson, 313 U. 8. 132. ...----.-_- 22

Callaway v. Benton, 336 U. 8. 132._.-..-.-.-.---------- 20

Crocker v. United States, 240 U. 8. 74...----.-..----.--- 11,19

Ebeling v. Fred J. Swaine Mfg. Co., 357 Mo. 549___--.--- 15

Granzow v. Village of Lyons, Ill., 89 F. 2d 83_......------ 19

Hazelton v. Sheckells, 202 U. 8. 71....-.---------------- 11

Heidt v. United States, 56 F. 2d 559, certiorari denied, 287

i Pi MOR cu tiboss econ aea akan es Wnsanie ees cabbie 18

Lichter v. United States, 334 U. 8. 742. ...-._----------- 21

Muschany v. United States, 324 U. 8. 49__..-....-------- il

Order of Railway Conductors v. Pitney, 326 U. 8. 561_._.-- 20

Oscanyan v. Arms Company, 103 U. 8. 261. _.-.-..-----. 11

Priebe & Sons v. United States, 332 U. 8. 407__...--..--- 19

Reynolds v. Goodwin-Hill Corporation, 154 F. 2d 553... -- 14

Riehle vy. Margolies, 279 U. 8. 218. _.....--------------- 22

Rumsey Manufacturing Co., Bankruptcy No. 36448 (W. D.

1 TBS pi BOR ASR TEEN ER 0 aR PSN eR CoD Uap gece PANE ele DSTI 10

pen ¥. ew, 968 A). B; BIS... 0s ee ee ce bce 19

Thompson v. Magnolia Petroleum Co., 309 U. 8. 478. .---- 19

Tool Company v. Norris, 2 Wall. 45........------------ 11,19

Tviet v. Child, 21 Wall. 441._............----.--------- 11

United States v. Burchard, 125 U. 8. 176....-.-------.-- 18

United States v. Great Northern Ry. Co., 287 U. 8. 144..... 19

United States v. Wurts, 303 U. 8. 414_._..--..-..----.-- 18

Wisconsin Central R’D v. United States, 164 U. 8. 190._.-- 18

Statutes:

Armed Services Procurement Act, Act of February 19, 1948,

en tbat Ot: Bee::4 fe) os oo oes os ea 12

892402—50——1 (1)

MIR Cer S38

Shite Serene Gato he ied ies

Ocroser TERM, -1950

No. 79

Burrow B. Pappock, TRUSTEE IN BANKRUPTCY OF

THE Estate oF GLope Arrcrarr CoRPORATION,

BANKRUPT, PETITIONER

Vv.

Untrep States of AMERICA

ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED

STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT

BRIEF FOR THE UNITED STATES IN OPPOSITION

OPINIONS BELOW

The order of the referee in bankruptcy and

the opinion of the District Court for the North-

ern District of Texas (R. 467-473; 506-508) are

not reported. The opinion of the Court of Ap-

peals for the Fifth Circuit (R. 527-536) is re-

ported at 178 F. 2d 394. Its opinion on rehear-

ing (R. 575-578) is reported at 180 F. 2d 121.

JURISDICTION

The judgment of the Court of Appeals for the

Fifth Circuit was entered on December 22, 1949

(1)

2 Bu

(R. 536-537). A petition for rehearing was

denied on February 18, 1950 (R. 578). The peti-

tion for a writ of certiorari was filed on May 18,

1950. The jurisdiction of this Court is invoked

under 28 U.S. C. 1254 (1). ;

Whether the United States, in a bankruptcy

proceeding, may assert claims for 5;

(1) the amount of contingent commis-

sions paid by the bankrupt for Government

contracts in violation of the contracts’

standard Covenant Against Contingent

Fees, and

(2) the amount of excessive profits de-

termined in an order of the War Contrééts

Price Adjustment Board under the Re-

negotiation Act, where renegotiation pro-

ceedings had been instituted prior to the

date of filing of the petition in bankruptcy,

but the order was issued subsequent to

that date.

STATUTES AND CONTRACT PROVISIONS INVOLVED

1. The pertinent provisions of Sections 57 and

63 of the Bankruptcy Act (11 U. S. C. 93, 103)

are set forth in the Appendix, infra, pp. 23-24.

2. The pertinent provisions of the Second

Renegotiation Act (Act of February 25, 1944,

Title VII, 58 Stat. 21, 78-92, 50 U. S. C. App.

1191) are set forth in the Appendix, infra, pp.

24-27.

8

Fees is set forth in the Statement, infra, p. 4.

This action arises from the filing by the United

States of a proof of claim in the bankruptey pro-

ceedings of Globe Aircraft Corporation (Globe)

(RB, 3). Included in that proof of claim was a

claim for $383,527.47, designated as the ‘‘Con-

tingent Fee Claim,’’ and one for $200,000, desig-

nated as the ‘‘Renegotiation Claim” (R. 3, 9, 13).

4. Contingent Fee Claim.—Prior to World

War II, Globe’s airplane sales were made

through 45 regular distributors and 350 author-

ized dealers (R. 201, 389). Instead of using these

regularly-established channels of distribution in

selling to the Government during the war, Globe, in

late 1941 and early 1942, hired Production Engi-

neering Company (Production) for the purpose of

assisting it in making ‘‘approaches * * * to

the representatives of the Government in order

to get contracts” (R. 88-95, 212, 213). Through

Production, Globe obtained various Army air-

plane contracts and subcontracts, amounting to

more than twenty-five million dollars." Each of

1 Contract No. W535 AC-24980, for 600 AT-10 training

planes and spare parts, amounted to $21,979,525.04 (R. 166,

198, 207, 353, 365) ; Contract No. W33-038 AC-603 was for

$2,620,195.19 (R. 367-369) ; Contract No. W33-038 AC-2915,

for $469,098.29 (R. 371) ; and subcontract under prime con-

tract W535 AC-24581, for $658,946.90 (R. 373). Several

smaller war contracts were also made with Globe (R. 9).

4

ments of Executive Order 9001 (6 F. R. 6787,

6788), contained the following ‘‘Covenant Against

Contingent Fees”’ (R. 8, 229, 528) :

er Covenant Against Contingent Fees.—

‘The Contractor warrants that he has not

employed any person to solicit or secure

this contract upon any agreement for a

commission, percentage, brokerage, or con-

tingent fee. Breach of this warrarty shall

give the Government the right to annul

the contract, or, in its discretion, to deduct

from the contract price or consideration the

amount of such commission, percentage,

brokerage, or contingent fees. This war-

ranty shall not apply to commissions pay-

able by contractors upon contracts or sales

secured or made through bona fide estab-

lished commercial or selling agencies

maintained by the Contractor for the

purpose of securing business.

Despite the express terms of this warranty, Globe

agreed to pay Production a 144% contingent

commission on all such business secured by Pro-

duction for Globe from the United States “‘until

the conclusion of’? World War IT (R. 92, 93,

96, 206).

Production had been originally incorporated in

1939 as the American Equities Corporation and

its business was ‘‘buying assets of defunct banks’’

(R. 321, 322). It assumed its present name in

1941, and still later started to describe its business

5

as ‘‘Production Engineers and Sales Represent-

atives’’ (R. 323-324). No evidence was introduced

to show how Production’s experience in bank-

asset buying equipped it to represent airplane

manufacturers in procuring contracts. It was

shown, however, that Production maintained

Washington offices (R. 207), that all of its com-

missions from Globe were “‘exclusive[ly] for serv-

ices rendered in the procuring of contracts” (R.

191),? and that Globe recognized that its payments

to Production on this government business were

“payments * * * not in the ordinary course

of [Globe’s] business” (R. 262, 389).

Globe, before entering the first Government

contract* secured for it by Production, apprised

the Army procurement officers of its contingent

fee arrangement with Production (R. 176, 178).

In investigating this arrangement to determine

whether it violated the covenant against contin-

gent fees, Army Procurement and the Air Tech-

nical Service Command, at various times in 1943

to 1945, requested and obtained detailed informa-

tion from Globe concerning its operations under

* This statement was made by Globe’s president in answer-

ing a question of the lawyer for the trustee in bankruptcy as to

whether the payments to Production “were in part for serv-

ices rendered.” The answer, quoted in the text, was objected

to by the Government attorney on the ground that the con-

tract between Globe and Production constituted the best

evidence. The referee sustained the objection. (R. 191.)

‘This was Contract No. W585 AC-24980, amounting to

over 21 million dollars. See footnote 1, supra, p. 3.

7a

wie

6

the arrangement (R. 85; 55; 50-54; 47; 43; 33). —

On September 4, 1945, upon termination of the

investigation, the Acting Judge Advocate. of the

Air Technical Service Command ruled that the

contingent commission paid by Globe to Produc-

tion violated the covenant (R. 22). On October

9, 1945, formal demand was made upon Globe for

$380,000,‘ representing the amount of the com-

mission payments to Production (R, 82). Globe

did not dispute the amount claimed (R. 101, 190,

230-231), but refused payment on the ground that

Production was a bona fide established commer-

cial or selling agency within the express excep-

tion to the covenant (R. 74).

In the meantime, and while the Army investi-

gation undertaken by the procurement and serv-

ice comraand officers was in progress, the Army

disbursing officers made full payment of over

twenty-five million dollars to Globe on its various

eontracts. See footnote 1, supra, p. 3. This

sum was paid to Globe by various Government

ehecks issued between 1942 and 1945, the last

check to Globe being dated May, 1945 (R. 369),

four months before the investigation had been

completed. During that same month, Globe and

* This figure failed to take into account the sum of $3,-

527.47, which represented commissions paid to Production

in 1942 and 1943 (R. 230-231). This additional sum makes

up the difference between the $380,000 claim asserted by the

Army and the $383,527.47 figure listed by the Government in

its proof of claim (R. 9).

4

~

7

Production agreed to cancel their contingent

commission arrangement (R. 215).

2, Renegotiation Claim.—On December 12, 1945,

Globe’s 1945 sales to the Government were as-

- signed to the Wichita Price Adjustment Section

of the Army Air Forces for renegotiation (R.

287, 399). Preliminary negotiations were held

with Globe, which furnished the information nec-

essary under the Renegotiation Act (R. 289-291,

298, 417, 484), and on October 24, 1946, Globe’s

representatives met with those of the War Con-

tracts Price Adjustment Board (R. 421). The

Board proposed that Globe refund $200,000 to

the Government and an agreement to refund that

amount was mailed to Globe but not executed by

it (R. 399, 415). Notice constituting statutory

commencement of renegotiation proceedings was

then sent to Globe by registered mail on Novem-

ber 18, 1946 (R. 399, 463).

About 5 weeks later, on December 27, 1946, an

involuntary petition in bankruptey was filed

against Globe in the District Court of the United

States for the Northern District of Texas (R.

470; Pet. 3). A few days later Globe filed in

the same court a petition for reorganization under

Chapter X of the Bankruptcy Act, and trustees

in reorganization were appointed (R. 399; Pet. 3).

On February 28, 1947, attorneys for the trustees

in reorganization informed the War Contracts

Price Adjustment Board that while the President

892402—50——2

8

of Globe and the trustees had ‘‘no objection to

the amount of the proposed renegotiation refund”’

they could not then sign a renegotiation agree-

ment (R. 400).

The Board, realizing that an agreement could

not be reached, entered an order determining that

Globe, during 1945, had derived excessive profits

of $200,000, the amount of the previously pro-

posed refund (R. 392-395). Notice of this order

was mailed to Globe on April 4, 1947 by regis-

tered mail (R. 394-397), and formal demand for

the repayment of ‘‘excessive profits in the amount

of $200,000’’ less appropriate tax credits,’ was

made on Globe on the same date (R. 397). On

April 21, 1947, the petition for reorganization was

dismissed and subsequently, in the reinstated

bankruptey proceedings, Globe was adjudicated

bankrupt and petitioner here was appointed trus-

tee in bankruptcy (Pet. 3).

3. Proceedings With Respect to the Proof of

Claim.—Both the Contingent Fee and Renego-

tiation Claims were included by the Government

in a proof of claim it filed in the reinstated bank-

ruptey proceedings. Petitioner (the trustee in

bankruptcy) objected to the claims (R. 125),

> Petitioner claims that the appropriate tax credit is $171,-

000, leaving a balance of $29,000 (R. 189, 141). ‘The court

below left“open * * * such other claims, counterclaims,

and set-offs, as either party may have against the other”

(R. 578).

* No petition for redetermination of those excessive profits

was ever filed in the Tax Court (R. 535).

9

and, after a hearing, the referee ordered both

claims disallowed (R. 467-473). His order was

affirmed by the district court, which held the Con-

tingent Fee Claim jnvalid on the ground that

Production was a ‘‘bona fide established commer-

cial or selling agenc[y] maintained by the Con-

tractor’? within the exception to the Covenant

Against Contingent Fees (R. 507). It also ruled

the Renegotiation Claim was invalid because the

War Contracts Price Adjustment Board order,

setting forth the amount of excessive profits, was

issued on April 4, 1947, more than 3 months after

the involuntary petition in bankruptcy was filed

against Globe * (R. 507).

On appeal, the court below reversed the district

court judgment and allowed both claims (R. 536;

578). It ruled that Production was not a bona

fide established commerciak or selling agency

maintained by the contractor, that the covenant

was therefore violated, and that the United

States could, in Globe’s bankruptey proceeding,

assert a claim for the amount of the commissions

paid by Globe in violation of the covenant (R.

527-534). It also allowed the Government to

assert the Renegotiation Claim, holding that the

War Contracts Price Adjustment Board’s au-

thority to determine excessive profits under the

Renegotiation Act was exclusive (subject only to

‘The district court also found that the referee’s inde-

pendent finding that Globe earned no excessive profits under

the Renegotiation Act was “well supported” (R. 507 ).

10

redetermination by the Tax Court), and that the

failure to petition the Tax Court for redetermi-

nation of the Board’s order ‘‘precluded [the

assertion of] any defense’’ in the bankruptcy pro-

ceeding to the claim based on that order (R.

)- ARGUMENT

The trustee in bankruptcy here, as well as in

the proceedings below, challenges only the right of

the Government to assert the Contingent Fee and

Renegotiation claims against the bankrupt’s

estate, That is the single right which the Gov-

ernment asserted, which the court below accorded,

and which arose as a result of the peculiar set of

facts here involved. No similar set of claims has

ever been asserted by the Government in any other

bankruptcy proceeding.®

The issue here is thus narrow and of no gen-

eral importance in the bankruptcy field. More-

over, the decision of the court below, according

the United States the right to assert its two

claims in the bankruptcy proceeding, was plainly

correct, is supported by previous holdings of this

Court, and involves no conflict of rulings among

* Petitioner recognizes that this bankruptcy case is “the

only case” involving a contingent fee claim by the Govern-

ment (Pet.25). Similarly, the Government, in but one other

case, has had occasion to assert a renegotiation claim against

a contractor as to whom a petition in bankruptcy was filed

prior to the date of the order formally determining his exces-

sive profits. See Rumsey Manufacturing Co., Bankruptcy

No. 36448 (W. D. N. Y.).

11

the lower courts. Accordingly, further review by

this Court does not appear to be warranted.

1. Contingent Fee Claim

(a) It has long been recognized that contingent

fees for the procurement of Government contracts

are invalid because of their tendency to induce

improper solicitation of public officers and the

exercise of political pressure, with a consequent

inerease in costs to the public. Tool Company v.

Norris, 2 Wall. 45, 54-56; Trist v. Child, 21 Wall.

441, 446-452; Oscanyan Vv. Arms Company, 103

U. S. 261, 271-273; Hazelton v. Sheckells, 202

U. 8. 71, 79; Crocker v. United States, 240 U. 8.

74, 78-19; Muschany v. United States, 324 U. 8.

49, 64-65.

During World War I, these same considera-

tions, coupled with the wartime increase in the

number of “influence peddlers” who represented

to businessmen that they could obtain Government

contracts through pressure or influence, resulted

in a Presidential ban on the payment of any com-

missions at all for procuring such contrac. .

Hearings, Investigations Subcommittee of the

Senate Committee on Expenditures in the Execu-

tive Departments (Influence in Government Pro-

curement), 81st Cong., Ist Sess., pursuant to S. Res.

52 (1949) 12.

This prohibition, required to be inserted as a

standard covenant in all Government contracts

awarded after June 18, 1918, forbade all com-

missions 41 contingent fees to agents for contracts

12

with the Government irrespective of whether the

sales agency was bona-fide and had been in busi-

ness for a considerable period of time. Hearings,

House Committee on Naval Affairs, 78th Cong.,

ist Sess., on H. Res. 30 (1943) 382. While this

ban effectively eliminated the employment of

those who traded upon purported influence or

other improper methods, its all-inclusive nature

also precluded the employment of accredited and

established sales representatives or manufacturers

agents who represented their principals in selling

to commercial customers and had been hired be-

cause of their familiarity with the products sold.

To allow these bona-fide agents to continue the

proper representation of their clients, the cov-

enant was amended in 1924 by exempting ‘‘bona

fide established commercial or selling organizations

maintained by the contractor for the purpose of

securing business.’”’ Hearings, House Committee

on Naval Affairs, 78th Cong., Ist Sess., on H. Res.

30 (1943) 384.° And, in order to effectuate this

objective, the exception, with respect to World

War IT contracts, has been administratively in-

terpreted to exempt ‘‘only those agents who (1)

® The identical covenant, along with this exception, was

written into the contracts here involved pursuant to Execu-

tive Order 9001, 6 F. R. 6787, 6788; R. 8. See also Section

4 (a), Armed Services Procurement Act, Act of February

19, 1948, 62 Stat, 21; Section 304 (a), Federal Property and

Administrative Services Act, Public Law 152, 81st Cong., 1st

Sess.; S. 2369 and S. 2371, 8ist Cong., 1st Sess.; S. Report

No. 1232, 8ist Cong., 2d Sess. pursuant to S. Res. 52 (1950)

34,

13

have had a certain continuity of service, going

back well before the war; (2) have represented

their principals in selling to commercial custo-

mers as well as to the Government; and (3) have

been employed because of their familiarity with

the products sold, not because of their knowledge

of Government procedure or acquaintance with

Government officials.” HH. Rep. No. 353, 78th

Cong., Ist Sess., on H. R. 1900 (1943) 5.

(b) It is this exception upon which petitioner

relies in urging that the Government’s claim for

recovery of the contingent fees in this proceeding

may not succeed. The argument is that Globe’s

retention of Production to solicit Government

business and its payment of contingent commis-

sions to Production on that business did not

violate the covenant against contingent fees be-

eause Production was ‘‘a bona fide established

commercial or selling agenc[y] maintained by”’

Globe. But Production, as pointed out by the

court below, meets none of the express require-

ments of the exceptive language (R. 528).

It cannot be seriously questioned that Produc-

tion was not a ‘“‘bona-fide, established commer-

cial or selling agency.’”’ Incorporated in 1939,

its business was originally that of “‘buying assets

of defunct banks” (R. 321, 322). It assumed its

present name in 1941, but not until 1943, when

wartime procurement was exceptionally high, did

it describe its business as ‘‘Production Engineers

14

and Sales Representatives’ (R. 323-324).

Globe’s president admitted he hired Production

to assist in making ‘‘approaches * * * to the

representatives of the Government in order to get

contracts”? (R. 212-213). These circumstances,

when considered along with the above-outlined

history, purpose, and administrative construction

of the exception proviso, fully demonstrate the cor-

rectness of the ruling of the court below that Pro-

duction ‘‘was not such [a bona-fide] established

agency’’ as was contemplated by that exception

(R. 529).

In any event, the fact that Production was not

‘*maintained’’ by Globe for the purpose of secur-

ing business and, for that reason, is not within

the exception, is indisputable. The purpose of

that condition is plain. It allowed contractors,

who had regularly been employing agents in sell-

ing their products generally, to continue to use

those agents and thus continue “‘to do business

in their accustomed way”’ even though the Gov-

ernment was the purchaser. Reynolds v. Good-

win-Hill Corporation, 154 F. 2d 553, 555 (C. A. 2).

As reiterated by the court below on rehearing,

the purpose of the exception and its “‘use of the

word ‘maintained,’ was to allow contractors to

continue the existence of something already in

use, not to introduce a special method of securing

15

government con ” (R. 515). Here, Globe

fully recognized that the payments to Production

were not customary and routine but, on the con-

trary, ‘“‘payments made by [Globe] not in the

ordinary course of business’’ (R. 262, 389). Fur-

thermore, since Globe’s sales, prior to its con-

~“¢mgent fee agreement with Production, were

never made through Production but were han-

dled by various established distributors on an

entirely different basis (R. 201, 388-389), it is

obvious that Globe was not ‘‘maintaining”’ Pro-

duction within the meaning of that word as used

in the exception, but was actually introducing a

new technique to obtain Government contracts

when it hired Production.”

(c) It is further argued that even if Produc-

tion does not come within the exception, the

Government has waived its right to claim the

2 It is significant that Ebeling v. Fred J. Swaine Mfg. Co.,

357 Mo. 549, relied cn by petitioner (Pet. 49), completely

overlooks the presence of the word “maintained” in the

exception.

1 That this was the reasoning employed by the Court below

in interpreting the word “maintained” as it affected the

Globe-Production relationship is apparent from its opinion

on rehearing (R. 575-576). Petitioner nevertheless suggests

that the court below construed the word “maintained” to

exclude any independent agent (Pet. 16). While its origi-

nal opinion may be susceptible of such a reading, the opinion

on rehearing gives the word the much more restricted mean-

ing, which is not challenged nor even mentioned by petitioner,

and under which Production could not qualify, as noted

above, p. 14, even if its independent status were assumed not

to preclude it from coming within the exception.

89240250 —3

16

contingent commissions because it affirmatively

exercised its discretion so as not to deduct the

commissions when paying the full contract price

to Globe (Pet. 56).

The short answer to this contention is that there

is nothing in the record to show any such exercise

of discretion on the part of the Government.

Petitioner infers from the Government’s payment

of the full contract price to Glohe, after it had

been apprised of Globe’s arrangement with Pro-

duction, that the Government exercised its dis-

cretion ‘“‘not to deduct”? (Pet. 56). However,

petitioner ignores the more likely inference that

the procurement officers, while aware of the con-

tingent fee arrangement, may not have notified

the disbursement officers in time for them to

deduct the commissions from the contract price.

The Technical Service Command and Procure-

ment Division’s investigation of the Globe-

Production arrangement was first completed on

September 4, 1945, when the Acting Judge Advo-

eate of the Service Command concluded that the

covenant had been violated by Globe (R, 22). A

month later the contracting officer made demand

upon Globe for the amount of contingent com-

missions paid to Production in violation of the

covenant (R. 82).* But prior thereto and at

various times between 1942 and 1945, while the

# That Globe early recognized the claim so asserted by the

Army in 1945 is evident from the prospectus which it filed

with the Securities Exchange Commission and in which it

17

investigation had still been pending, the disburs-

ing officers paid over to Globe almost twenty-two

million dollars on one contract (R. 237, 365), and

several additional millions on others (R. 369, 371,

373)." These payments in full to Globe, even

before the investigation was completed, show that

they probably resulted from an inadvertent error

on the part of the disbursing officers in not dis-

covering that the investigation was pending in

other offices. In these circumstances, those pay-

ments in no way imply an affirmative exercise by

any officer of his discretion not to deduct the

commissions.

But, even assuming that those full payments

could be so interpreted, that interpretation would

not help petitioner. For, if the officer acted under

the belief that he had discretion to waive the

Government’s rights to the contingent commis-

sions, he was acting under a mistake of law.

Contrary to petitioner’s assumption, the covenant

against contingent fees created no such thing as a

discretion on the part of the officer not to deduct

the commissions. The express terms of the cove-

nant grant him discretion only to deduct rather

than annul the contract. Those terms make it

obvious that the only discretion vested in him

described its potential liability on the claim (R. 389-392).

Globe, moreover, set up contingent reserves to provide for

the amount of this claim (FP. 433, 445).

* It was out of these payments that the $383,527.47 was

paid by Globe to Production as contingent commissions

(R. 101).

18

was to exercise his judgment so as not to annul

the contract. Once the decision not to annul was

made, there was no discretion left for him to

exercise. Deduction of the contingent commis-

sions then became an absolute requirement. It is

obvious that the need of avoiding delays in com-

pletion of war contracts would make it advisable

for the contracting authorities to have the dis-

cretion to allow the completion of even those

contracts which had been negotiated by ‘‘influence

peddlers.’’ However, there was no similar reason

to justify any failure to deduct after the contract

was completed.

Whether payment of the full contract price in

this ease to Globe, without deduction, resulted

from a factual mistake in making payment with-

out awareness of the pending investigation, or

from a mistake of law on the part of the officer as

to the extent of the discretion he was authorized

to exercise, is immaterial“ in view of the long-

settled principle that the Government is entitled

to recover any money paid out by a public officer

by mistake either of fact or of law. United

States v. Wurts, 303 U. 8. 414; Wisconsin Central

R’D v. United States, 164 U. S. 190, 212; United

States v. Burchard, 125 U. 8. 176; Heidt v. United

States, 56 F. 2d 559 (C. A. 5), certiorari denied,

44 Whatever the cause, it is obvious that the magnitude and

complexities of the Government’s fiscal operations, especially

in wartime, will inevitably result in such mistaken overpay-

ments.

19

287 U. 8. 601; Granzow v. Village of Lyons, Ill., 89

F. 2d 83 (C. A. 7). The fact that no such mistake

was made in United States v. Great Northern Ry.

Co., 287 U. 8. 144, relied on by petitioner (Pet.

56), is sufficient to show the complete inapplica-

bility of that case here.”

2. Renegotiation Claim

In contesting the right of the Government to

assert this claim, the trustee’s main argument is

that the filing of the involuntary bankruptcy peti-

tion against the debtor stripped the War Con-

tracts Price Adjustment Board of its power to

continue the statutory renegotiation proceedings

and shifted that power to the bankruptcy court.

A bankruptcy court, generally, has exclusive

control over the administration of an estate in its

possession. Thompson v. Magnolia Petroleum

Co., 309 U. S. 478, 483; Straton v. New, 283 U. 8.

%* Petitioner also argues that the deduction of the con-

tingent commissions constitutes a penalty and is therefore

unenforceable under Priebe & Sons v. United States, 332

U. S. 407. That case, however, fully recognizes the right of

the Government, as a contractor, to provide for liquidated

damages in the event of a breach, wherever the damages are

“fair and reasonable attempts to fix just compensation for

anticipated loss,” 332 U. S. 407, 411. As early as the Civil

War, this Court observed that the contingent commissions

arrangement caused “unnecessary expenditures of the public

funds” Zool Co. v. Norris, 2 Wall. 45, 54; see, Crocker v.

United States, 240 U.S. 74. Obviously, the*air and reason-

able basis for computation of the damage so caused the Gov-

ernment is the amount of the contingent commissions consti-

tuting the “unnecessary expenditure.”

20

318. But, as this Court has observed, it does not

follow that Congress gave ‘‘the bankruptcy court

exclusive jurisdiction over all controversies that

in some way affect the debtor’s estate.” Calla-

way V. Benton, 336 U. S. 132, 142. Thus, where

Congress has created an administrative agency

and given it exclusive authority to deal with cer-

tain disputes, the district court in charge of a

Bankruptcy Act proceeding must allow those dis-

putes to be adjudicated by that agency. Order of

Railway Conductors v. Pitney, 326 U. 8. 561.

Here the disputed claim concerned the deter-

mination of excessive profits under the Renegotia-

tion Act. Congress, by that Act, created a War

Price Contracts Adjustment Board and expressly

empowered it to determine ‘‘the amount, if any,

of such excessive profits.’”’ Section 403 (d) (1),

and 403 (ec) (1), infra, pp. 26, 24. That Act also

allows any contractor, aggrieved by a Board de-

termination, to petition the Tax Court for a de

novo redetermination of excessive profits. Sec-

tion 403 (e): (1), infra, p. 26. In the absence of

the filing of such a petition, the Act makes the

Board order ‘‘final and conclusive’’ and further

provides that the order ‘‘shall not be subject to

review or redetermination by any court or other

agency.”’ Section 403 (c) (1), infra, p. 24.

Both Globe and the trustee, in the instant case,

had notice of the renegotiation proceedings which

were instituted by the Board before the filing of

21

the bankruptey petition (R. 535; R. 399, 461-

463; R. 400). After termination of those pro-

@eedings, notification of the Board’s order deter-

_ mining the amount of excessive profits was also

made (R. 396-397). However, no petition was

filed with the Tax Court. This failure to invoke

the ‘‘one and only procedure [provided by the

Act] to secure a redetermination of the excessive

profits’? made the Board’s order final and con-

elusive and immune from attack or reexamina-

tion by any other court. Lichter v. United States,

334 U. S. 742, 790, 792. In holding that the

bankruptcy court, therefore, was precluded from

redetermining the excessive profits,* the court

below did no more, we submit, than apply the

clear requirements of the Renegotiation Act (R.

535).

Formal issuance of the Board order after the

filing of the bankruptcy petition justifies no dif-

* It is true that a bankruptcy court is empowered to deter-

mine certain tax cases involving deficiency assessments

against a bankrupt. But that power is specifically con-

ferred on the court by Section 274 (a) of the Internal Revenue

Code and Section 64 (a) (4) of the Bankruptcy Act. No

similar power, with respect to renegotiation proceedings, has

ever been conferred on the bankruptcy court by Renegotia-

tion, Bankruptcy, or any other Act.

* This reasoning, petitioner intimates, was abandoned by

the court below, on petition for rehearing (Pet. 58). The

opinion on rehearing, however, merely sets forth additional

grounds requiring a reversal of the district court’s ruling on

the Renegotiation Claim. Those additional reasons are fully

consistent with those in the earlier opinion.