# Petition for Writ of Certiorari — Paddock v. United States

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition for Writ of Certiorari
- **Published:** January 1, 1950
- **Citation:** 340 U.S. 813

## Text

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, ?

—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.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386417_0185%3A1. Public record. Not legal advice.