Virginia Shipbuilding Corporation v. United States , 22 F.2d 38 ( 1927 )

22 F.2d 38 (1927)

VIRGINIA SHIPBUILDING CORPORATION et al.
v.
UNITED STATES.

No. 2598.

Circuit Court of Appeals, Fourth Circuit.

October 18, 1927.

Wm. A. Barber, of New York City, Wm. L. Day, of Cleveland, Ohio, J. K. M. Norton, of Alexandria, Va., and H. Starr Giddings, of New York City (James R. Caton, of Alexandria, Va., Wolcott, Wolcott & Lankford, of Norfolk, Va., and Carlin, Carlin & Hall, of Alexandria, Va., on the brief), for appellants.

Chauncey G. Parker, of Newark, N. J., and W. W. Nottingham, of Washington, D. C. (Paul W. Kear, U. S. Atty., and H. H. Rumble, both of Norfolk, Va., on the brief), for the United States.

Before PARKER and NORTHCOTT, Circuit Judges, and SOPER, District Judge.

PARKER, Circuit Judge (after stating the facts as above).

The questions presented by this appeal relate solely to the credits to which the shipbuilding corporation is entitled in connection with the ships constructed by it under its various contracts with the Fleet Corporation and the Shipping Board representing the government; for there is no dispute as to the amount of the loans and advancements made to the shipbuilding corporation or as to its liability therefor. The first position of the shipbuilding corporation is that it is entitled to credit for the amount which was to be paid under the contract of December 7, 1917, for the construction of the vessels in controversy, and that this credit will extinguish its indebtedness to the government and will moreover entitle it to recover a considerable balance. Its second position is that, even though it be not entitled to recover for the construction of the vessels under the contract of December 7, 1917, it is entitled to credit for their value at the time they were seized by the government; that their value at that time was as much as $185 per dead weight ton; and that to charge the government with this value would entirely extinguish its claim and entitle the shipbuilding corporation to a decree for a balance amounting to $2,572,955.12.

With respect to its first position, the shipbuilding corporation contends that it did not purchase from the government the ten ships which were sold under foreclosure; that only two of these ships were ever conveyed to it, and that these were conveyed back to the government pursuant to the contract of July 19, 1920; that at the time the ships were seized by the Shipping Board there existed merely an executory contract to sell them to the shipbuilding corporation or its nominee; and that the seizure of the ships by the government constituted an abandonment or rescission of the executory contract to sell, and relegated the parties to their rights under the original construction contract. The contention of the government is that its obligation to pay for the construction of the vessels was modified and superseded by the contract of September 25, 1919; that the purpose and effect of that contract was to release the government from its obligation to take and pay for the vessels under the construction contract and to provide for the reimbursement of the government for the moneys which it had advanced; that this reimbursement was to be accomplished by having the shipbuilding corporation complete and take over the vessels and execute mortgages upon them as security for the moneys which the government had advanced and which the shipbuilding corporation was bound to repay; that pending the completion of the vessels and the execution of these mortgages legal title was retained in the government as security for the amount due it with beneficial ownership of the vessels in the shipbuilding corporation; that the government, because it held the legal title to the vessels as security, was justified in seizing them for the protection of its interest, such seizure being also expressly authorized by the contract of July 19, 1920; and that in this suit it was proper to decree foreclosure of the equity of the shipbuilding corporation and, after applying the proceeds of the sale of the vessels in partial satisfaction of the debt due the government, to enter decree in favor of the government for the balance due it.

Intricate legal arguments have been advanced with great ingenuity of reasoning and wealth of learning in support of these conflicting contentions; but the answer to the questions involved is to be found, not in technical reasoning from legal definitions applied to the forms in which the parties have clothed their transactions, but in a careful study of the facts conducted with a view of ascertaining the real relationship which existed between the parties and the substance, not the form, of the agreements into which they entered. Such a study has convinced us that the position of the government is essentially correct.

There can be no dispute, of course, as to the meaning of the first contract, that of December 7, 1917. Under it the government was the absolute owner of ships constructed as well as ships in process of construction and ship material on the yards of the shipbuilding corporation. It made loans and advancements for which the shipbuilding corporation became indebted to it, and upon the completion of the ships it was to pay the price provided in the contract.

The meaning of the contract of September 25, 1919, is, we think, equally clear, although "in clothing the reimbursement in the language of a sale" (to quote the letter of September 10, 1919), some ground was given for technical argument. The war was over and the government did not need the vessels which it had contracted with the shipbuilding corporation to construct. There was a large demand for such vessels, however, and the shipbuilding corporation itself, or those who controlled it, thought it could use to advantage the vessels embraced in the contract. The government, however, had advanced for the construction of these vessels over $12,000,000 for which it would have to be reimbursed if the vessels were to be taken over by the shipbuilding corporation. To meet this situation, the contract of September 25, 1919, was executed. Its purpose, as appears from the contract itself as well as from the letter of the shipbuilding corporation, was to let that corporation take over the ships and reimburse the government by giving it notes secured by mortgages on the ships taken over. Initial payments were to be made, but these were to be returned to the shipbuilding corporation to enable it to complete the ships under construction. A price was fixed for the ships, which the shipbuilding corporation says was merely to determine the amount of the initial payments; and it is clear that under the plan adopted the higher the price fixed the fewer ships would be subject to mortgage. As soon as the notes and mortgages given together with the initial payments provided for should equal the amount due the government, all parties were to be absolved from further liability under the contracts, and all ships and ship material were to be conveyed to the shipbuilding corporation. Until the initial payments were made and the mortgages given, the title to ships completed and under construction and to shipbuilding material on the ground remained in the government under the provisions of the contract of December 7, 1917; but this title of the government was subject to the right of the shipbuilding corporation to proceed with the completion of the ships, all of which remained in its possession, and to have title thereto placed in its name upon making the payments, which were to be loaned back to it, and executing the mortgages provided for.

When we come to the dealings of the parties under the contract, we find that from the time of its execution the shipbuilding corporation conducted itself and was treated by the government as the beneficial owner of the vessels. Of course, the shipbuilding corporation had possession of the uncompleted ships and the ship material at the time of the execution of the contract, but, as soon as the contract was executed, the three completed ships were delivered back to it, although initial payments and mortgages were delivered as to only two of them. It was at once credited with the earnings of the two ships which had been under commitments. And six other ships were delivered as fast as they were completed, although the initial payments required by the contract were not made, nor were mortgages delivered as to any of them. All of these vessels were thereupon operated and continued to be operated by the transferee of the shipbuilding corporation until they were seized by the government.

Construing the contract of September 25, 1919, therefore, in the light of the purpose for which it was executed and the practical interpretation placed upon it by the parties themselves, we think there can be no doubt that it was intended to be and was a contract under which the ships completed and under construction were taken over by the shipbuilding corporation, with provision for completion of ships and execution of mortgages in reimbursement of the government for moneys advanced, and with title remaining in the government as security until the contract should be carried out. We think it is clear, and this is the vital point in the case, that, after the execution of this contract the government was no longer under obligation to take and pay for ships constructed under the contract of December 7, 1917, but became, in effect, a mere creditor, holding title to ships and ship materials as security for the money which it had advanced to the shipbuilding corporation, and bound to surrender its rights in the ships and ship material when the indebtedness due it should be repaid or funded in accordance with the provisions of the contract. See Heryford v. Davis, 102 U.S. 235, 26 L. Ed. 160; U. S. v. Shelby Iron Co., 273 U.S. 571, 47 S. Ct. 515, 71 L. Ed. 781.

And we do not think that the essential relationship created between the parties by the contract of September 25, 1919, was changed in any vital particular by the contract of July 19, 1920. Considering the situation which existed when that contract was executed, it appears that legal title to two of the vessels had been conveyed to the shipbuilding corporation. The initial payments on these had been made, but the amounts so paid had been advanced back to the shipbuilding corporation. The government thus held mortgages on them, in an amount less by about $1,000,000 than their supposed value. The shipbuilding corporation was seeking release of the mortgages on its plant, and the government was seeking a guaranty of performance of the Groton Iron Works contract. In addition to this, the shipbuilding corporation was seeking to be relieved from making initial payments on the ships delivered and to obtain a longer term for the purchase-money mortgages to run, in accordance with terms granted other purchasers of ships. All of these matters were covered by the contract of July 19, 1920. Provision was made for the release of the mortgage on the plant and for the guarantee of the Groton Iron Works contract. Evidently to secure the indebtedness from which the security of the plant mortgage was withdrawn and which might be increased by the guaranty of the Groton Iron Works contract, title to all of the vessels constructed and under construction was conveyed to the government, and provision was made for their revenues being handled under a controlled account for the completion of construction. Initial payments were dispensed with, although the corporation was to be allowed to operate the completed vessels. And upon completion of all of the vessels the equity in them owned by the shipbuilding corporation was to be transferred to a corporation to be named by it, under a contract to be drawn in accordance with the standard policy and terms adopted by the Shipping Board.

It will thus be seen that there is nothing whatever in the contract of July 19, 1920, which obligates the government to take and pay for the vessels in accordance with the contract of December 7, 1917, or which releases the shipbuilding corporation from its obligation to take and pay for them under the contract of September 25, 1919. On the contrary, the rights and obligations of the shipbuilding corporation under that contract are expressly recognized. In providing for the transfer of the vessels to the nominee of the shipbuilding corporation upon their completion, it is that corporation's "equity" in them which is to be transferred. The proceeds of the $2,000,000 bond issue are to be applied by the shipbuilding corporation in "liquidating its obligations under the contract of September 25, 1919." And in event of default by the shipbuilding corporation, the Fleet Corporation is to retain title only "to so many of the said vessels and to so much of the surplus material in the yard of the company as may be necessary to offset the total indebtedness of the company to the Fleet Corporation, including all the obligations of the company to the Fleet Corporation under said contract of September 25, 1919, and under this contract." It is true that the revenues of the vessels are to be accounted for in the manner provided under the agency agreement in use by the Fleet Corporation, but these revenues are to be used for financing the construction of the uncompleted vessels, and, upon the transfer of the vessels to the nominee of the shipbuilding corporation, title is to be deemed effective "as of the original dates of delivery thereof to the company." In other words, under the contract of July 19, 1920, the shipbuilding corporation still had an equity in the vessels and was still under obligation to take and pay for them with notes and mortgages in reimbursement of the amount which had been advanced by the government; and the government remained a mere creditor, holding the legal title to the vessels and material as security for the amount which it had advanced. By the contract of September 25, 1919, the shipbuilding corporation assumed the obligation of taking over the vessels and reimbursing the government for the moneys which it had advanced. Certainly the contract of July 19, 1920, expressly stated to be supplemental to the contract of 1919, cannot and does not relieve the shipbuilding corporation of this obligation.

And we do not think that the seizure of the vessels by the government can be considered in any sense an abandonment or rescission of the contracts of September 25, 1919, and July 19, 1920. It is true that the former of these contracts, provided in article 9 thereof that, upon failure of the shipbuilding corporation to fulfill its obligations, the Fleet Corporation might declare the contract forfeited and the original contracts reinstated in full force and effect, upon giving fifteen days' notice. But there is no evidence whatever that the Fleet Corporation or the Shipping Board or any one representing the government ever gave any notice of forfeiture or that it attempted to declare the contract of September 26, 1919, forfeited or to reinstate the original contract. The seizure of the ships and ship materials was made under section 9 of the contract of July 19, 1920, which authorized the Fleet Corporation, upon default by the shipbuilding corporation, to enter its yard and complete construction and to retain title to so many of the vessels and so much of the material as might be necessary to offset its indebtedness. And not only do we think that the seizure of the vessels did not of itself operate as an abandonment or rescission of the contracts of September 25, 1919, and July 19, 1920, but we think, also, that the evidence conclusively shows that no abandonment or rescission was intended or understood by either party to have been effected. When the Betsy Bell was seized and the seizure of three of the other vessels was authorized, the Shipping Board directed that they remain in the custody of the Fleet Corporation and be allocated or assigned by it, only upon the condition that the shipbuilding corporation or the transport company should fail to reimburse the Fleet Corporation for the amount expended in releasing liens and bringing the vessels into port. More than a month after this, the ninth vessel was delivered to and accepted by the transport company and more than three months later the shipbuilding corporation applied for and obtained a temporary injunction restraining the Fleet Corporation from interfering with the transport company in operating the vessels in its possession in the coastwise trade. In applying for this injunction, the shipbuilding corporation relied upon its rights in the vessels under the contracts of September 25, 1919, and July 19, 1920, although seizure of two of the vessels had been made at that time. On February 7, 1921, after the seizure of the Guntson Hall, the transport company wrote a letter protesting against the seizure, and stating that that vessel was delivered "pursuant to a contract of purchase," and that the action of the Shipping Board constituted a conversion of the vessel for which it would be held for damages. On March 21, 1921, after three of the vessels had been seized, the assistant manager of the transport company wrote the letter from which we have quoted in the statement of facts, in which he relied upon these contracts for the position that the vessels in the possession of the transport company were not subject to the management and control of the Shipping Board but only an accounting of their revenues was required. And on June 15, 1921, after all the vessels had been seized, counsel for the transport company wrote the Fleet Corporation, refusing to sign delivery certificates for the vessels seized and protesting that they were seized improperly. In view of these and other circumstances, the narration of which would unduly lengthen this opinion, we are satisfied that the government did not intend to rescind or abandon the contracts of September 25, 1919, and July 19, 1920, and go back to the original construction contract, and we are satisfied also that the shipbuilding corporation and the transport company thoroughly understood this, and that, while they protested against the seizure of the ships, they did not themselves attempt to rescind the contracts of purchase because of their seizure, but, on the contrary, manifested an unequivocal intention to hold under the contracts.

Since, therefore, the effect of the contract of September 25, 1919, was to relieve the government of its obligation to take and pay for the vessels embraced in the construction contract, substituting therefor an agreement under which the government was to be reimbursed for loans and advancements and hold legal title to the ships and ship materials as security until the agreement was carried out, and since the essential nature of this agreement was not changed by the contract of July 19, 1920, and has not since been abandoned or rescinded, it follows that there was no basis for going back to the construction contract of December 7, 1917, or for charging the government with the price of the ships in accordance with its terms.

It is said, however, that the contract under which the shipbuilding corporation was to take over the vessels was an executory contract of sale, and that, as the government never delivered bills of sale conveying the title to the ships to that corporation or its nominee, it cannot rely upon that contract as absolving it from liability to take and pay for the ships. But, as we have seen, the contract was not a mere executory contract of sale. It was a contract for reimbursement under which the ships were to be taken over by the shipbuilding corporation and mortgages executed thereon in liquidation of the debt due the government. This vested in the corporation a substantial equity in the ships, subject to the legal title which was retained in the government as security for the debt due it. This being the situation, it is clear that the shipbuilding corporation is not to be relieved of its obligation and the parties thrown back upon the original construction contract merely because legal title has not been conveyed to the shipbuilding corporation, when it appears that legal title has not been conveyed because the shipbuilding corporation has not complied with the conditions entitling it to a conveyance. Williston on Contracts, vol. 2, § 677; U. S. v. Peck, 102 U.S. 64, 6 L. Ed. 46; U. S. v. United Engineering Co., 234 U.S. 236, 34 S. Ct. 843, 58 L. Ed. 1294. On the contrary, equity, at the instance of the party aggrieved, will regard that as done which should have been done, will treat the ships as the property of the shipbuilding corporation with legal title in the government to secure the indebtedness due it, and will decree foreclosure in order that the proceeds of the ships may be applied upon the debt.

We do not find in the books any case exactly similar to the case at bar; but we find many cases which apply the equitable principles which are controlling here. Thus it is well settled that an express executory contract in writing, whereby a party promises to convey, assign, or transfer property as security for a debt or other obligation, creates an equitable lien upon the property, under the maximum that equity regards as done that which ought to be done. Pomeroy's Equity Jurisprudence, vol. 3, § 1235; Ingersoll v. Coram, 211 U.S. 335, 368, 29 S. Ct. 92, 53 L. Ed. 208; Walker v. Brown, 165 U.S. 654, 664, 17 S. Ct. 453, 41 L. Ed. 865; Ketchum v. St. Louis, 101 U.S. 306, 316, 25 L. Ed. 999. In this case, therefore, the agreement to execute mortgages upon the ships delivered to the shipbuilding corporation would have given rise to a lien which a court of equity would have enforced even had the title not been retained as security. Certainly the government is not to be held to be in a worse position because the legal title has been retained pending the completion of construction and the execution of bills of sale and mortgages in accordance with the contract.

It is also well settled that, in the application of the equitable maxim above stated, a court of equity will deal with even an executory contract for the sale of land or chattels in a very different manner from a court of law, and, in a proper case, will regard the purchaser as the real owner of the property subject to liability for the unpaid price, and the vendor or seller as holding the legal title merely as security. Pomeroy's Equity Jurisprudence, vol. 1, § 368; Rexford v. Southern Woodland Co. (C. C. A. 4th) 225 F. 1022; s. c. (D. C.) 208 F. 295; Lewis v. Hawkins, 23 Wall. 119, 23 L. Ed. 113. This will be done, of course, only in those cases where equity will decree specific performance of a contract, and is, in reality, an exercise of the power to compel specific performance in order that more perfect and complete justice may be done. See opinion of Judge Connor in Rexford v. Southern Woodland Co., supra (D. C.) 208 F. at 306. And, although ordinarily specific performance will not be decreed of a contract for the sale of chattels, relief is denied in such cases solely because the remedy at law is deemed adequate. Where the remedy at law is inadequate, specific performance will be decreed, and such relief has been granted with respect to a contract for the sale of vessels. Clark v. Flint, 22 Pick. (Mass.) 231, 33 Am. Dec. 733; 25 Rawle C. L. 295. The peculiar circumstances of this case — the fact that the ships to be conveyed were being constructed by the shipbuilding corporation and were left in its possession; that the conveyance was to be in satisfaction of existing controversies; that the price agreed was merely a basis for determining the first payments and the amount of the mortgages to be given for funding the existing indebtedness; and that the mortgages were to be executed, not in reality for the purchase price at all, but as a means of funding the indebtedness — all of these make the case one where the remedy at law would not meet the situation and where the remedies which only equity can administer are peculiarly appropriate. We think, therefore, that the learned Judge in the court below was correct in holding that the equitable ownership of the vessels was in the shipbuilding corporation, or its transferee, the transport company, with legal title in the United States as security for the amount due, even though the bills of sale for the vessels and the mortgages back had not been executed; and that he properly entered the decree of foreclosure under which the vessels were sold, as there can be no controversy as to the fact that the shipbuilding corporation and the transport company were in default at the time.

And we do not think that this decision conflicts with what was decided by the Circuit Court of Appeals of the Third Circuit in U. S. v. Henderson, 286 F. 794. That was a suit against the United States under the Suits in Admiralty Act (46 USCA §§ 741-752 [Comp. St. §§ 1251¼-1251¼l]) to recover for supplies furnished to some of the vessels involved in this suit while they were being operated by the transport company. The United States appeared as the registered owner of the vessels, but the defense was made that the transport company was operating them, not for the United States, but for the shipbuilding corporation. In holding the government liable, the court was careful to state that the case before it was not an action between the United States and the shipbuilding corporation or the transport company arising out of the contracts between them, but that it had been instituted by strangers who were wholly uninformed at the time of furnishing the supplies as to the situation existing between the parties. The court pointed out that the statute (Act of June 23, 1910, 36 Stat. 604 [Comp. St. §§ 7783-7787], as re-enacted in the Merchant Marine Act of June 5, 1920, 41 Stat. 988 [46 USCA §§ 971-975; Comp. St. §§ 8146¼ooo-8146¼q]), upon which libelants relied, presumes the owner's authority in one intrusted with a ship to procure supplies on the pledge of the ship, unless the owner has withheld his authority and the furnisher knows this or by due diligence could have ascertained it; that there was nothing in the agency agreement under which the transport company was operating the vessel which restricted its authority to secure supplies on the credit of the vessel; and that the restriction in the standard form of purchase agreement which was to be executed when the vessel was transferred pursuant to the contract of July 19, 1920, was not applicable because the vessel had not been transferred nor the purchase agreement executed. The decision, in short, was based on the fact that there was nothing in the completed transactions between the government and the shipbuilding corporation or the transport company which withheld from the transport company the right to purchase supplies on the credit of the vessels. While the contract of July 19, 1920, was referred to as an executory contract to sell, this expression must be construed in the light of the question before the court. The court in that case did not have occasion to consider the effect of the contracts of September 25, 1919, and July 19, 1920, on the obligation of the United States to take and pay for vessels under the original construction contract, nor the nature of the equity in the vessels acquired by the shipbuilding corporation under the later contracts, nor the rights of the parties under the later contracts on default by the shipbuilding corporation, which are the vital matters in the case at bar. In short, the court did not decide that the provisions of the contracts of September 25, 1919, and July 19, 1920, had been nullified by the acts of the parties, and that therefore their rights and liabilities should be determined by the original contract of 1917 for the construction of ships.

This brings us to the second question in the case. The shipbuilding corporation contends that there was unreasonable delay in making sale of the ships under foreclosure, and that it is entitled to credit for their value at the time of seizure, which it contends is $185 per dead weight ton, as found by the master to whom the case was referred. As heretofore stated, the vessels were seized in 1921 and were sold in 1923 for the sum of $622,291.71. Judge Waddill held that the shipbuilding corporation was entitled to credit for their value at the time of seizure, but found this value to be $5,235,000. The government has not appealed from this finding, but has consented that the shipbuilding corporation be credited with this amount. That corporation, however, contends for the credit of $185 per dead weight ton, which was allowed it by the master, and this would amount, with interest, to a sum exceeding $20,000,000.

We have carefully considered the evidence bearing upon the value of the ships at the time of seizure, and we think that the finding of Judge Waddill with respect to this matter is correct and gives to the shipbuilding corporation all of the credit to which it is entitled under any aspect of the case. The finding of the master seems to have been based upon the asking price demanded by the Shipping Board for its vessels; but this asking price was far above their market value and seems not to have been reduced merely because the members of the Shipping Board thought they were without authority to act, due to the fact that the terms of a number of the members had expired and the Senate had failed to confirm the appointment of their successors. The finding of Judge Waddill, on the other hand, was based upon testimony as to market value which was practically uncontradicted. It is settled that we will not reverse a finding of the District Court having support in the evidence unless we think that the Judge has misapprehended the evidence or gone against the clear weight thereof, or, in other words, unless we think that his finding was clearly wrong. Wolf Mineral Process Corporation v. Minerals Separation North American Corporation (C. C. A.) 18 F.(2d) 483; International Organization, United Mine Workers of America, v. Red Jacket Coal & Coke Co. et al. (C. C. A.) 18 F.(2d) 839. But, without regard to this rule, we are satisfied that upon the evidence the finding made by Judge Waddill was correct.

Because of the decline in the value of vessels between September, 1919, and May, 1921, a great loss was sustained in connection with the ships which are the subject-matter of the contracts under consideration. It is unfortunate that this loss must fall upon any one, but there would seem to be no question that in equity and good conscience, as well as in law, it should be borne by the shipbuilding corporation, who when times were prosperous and the contract seemed advantageous took over the government's interest in the vessels upon an agreement to repay merely the amount which had been advanced for their construction. The fact that prices have since declined furnishes no excuse for releasing that corporation from its contract. As was well said by Judge Waddill in the court below ([D. C.] 292 F. 453):

"The fact that the Virginia Company and those acting with it were anxious to acquire the ships at the time they were purchased by them, and sold and transferred to C. W. Morse & Co., Inc., who in turn assigned them to the Transport Company, and now wish to be relieved from such ownership at a time when the ships have become almost worthless, and fall back to the former position of construction contractor under the first contract of December 7, 1917, instead of that of purchaser under the adjustment agreement, is only too apparent. To have the government make good to the Virginia company, and those claiming under it, the profits that would have been earned under the construction contract, and relieve them from their liability as purchasers, and return to them the advances made by the Virginia company on the purchase of ships, would be a most desirable position to occupy, but in its result would be very unfair to the government. If the Virginia company, C. W. Morse & Co., Inc., and the Transport Company, as to the purchase of the ships in question one from the other, are not estopped from now asserting that they are neither purchasers nor owners of the property, they should at least not be allowed to visit their losses upon the government, arising from what has developed to be an undesirable contract of purchase on their part."

A motion to dismiss the appeal was made and argued at the same time as the case on the merits; but, as we have reached the conclusion that the decree should be affirmed on the merits, and as the result is the same so far as the parties are concerned, we deem it unnecessary to discuss the procedural questions raised by this motion.

The decree of the District Court is affirmed.

Affirmed.