U.S. v. Hartec Enterprises, Inc.

UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_______________________
No. 91-8144
_______________________
UNITED STATES OF AMERICA,
Plaintiff-Appellee,
versus
HARTEC ENTERPRISES, INC. and
JOSE J. ACEVES,
Defendants-Appellants.
_________________________________________________________________
Appeals from the United States District Court
for the Western District of Texas
_________________________________________________________________
(July 21, 1992)
Before WISDOM, REYNALDO G. GARZA, and JONES, Circuit Judges.
EDITH H. JONES, Circuit Judge:
Appellant Jose J. Aceves is the president and majority
stockholder of appellant Hartec Enterprises, Inc. Both appeal from
a conviction of theft of government property, and aiding and
abetting the theft of government property, in violation of 18
U.S.C. §§ 641 and 2(b). We reverse.
FACTS
Hartec is a machine shop and metals-fabricating plant
located in Horizon City, Texas. Aceves is a self-educated
machinist who established and developed Hartec into a business with
a reputation for high quality operations. Hartec garnered the
government's scrutiny through an FBI investigation of minority-
controlled government contractors for possible kickbacks to
officials of the Small Business Administration. After an initial
investigation, the FBI seized virtually all of Hartec's business
records and held them for further examination for three years. The
FBI found no evidence of any illegal kickbacks.
Appellants were charged in a thirteen-count indictment
with making false claims related to certain contracts that Hartec
had with the government, and with theft of government property. At
the close of the prosecution's case, the trial court entered a
judgment of acquittal on all of the counts, except Count IX, the
subject of the instant appeal. Count IX charged the theft of
certain wire mesh panels that were fabricated by Hartec in
fulfillment of a government contract. The government had paid
periodic progress payments to Hartec on the contract. The contract
called for the fabrication of 13,057 wire mesh panels, to be
completed before March 31, 1986. Several extensions were
ultimately granted.
In January 1987, Hartec declared 513 of the panels as
scrap and sold them to El Paso Machine and Steel Works. The
government claims that the sale of these panels amounted to
conversion of government property, since progress payments had been
made pursuant to the production of these panels. The nature of the
government's interest forms the critical inquiry on appeal. The
government claims that a title vesting provision of the Federal
Acquisition Regulations, incorporated into the contract,
effectively transferred ownership of the panels to the government
2
because the panels were manufactured with materials paid for
through progress payments.
THE GOVERNMENT'S INTEREST
The government argued successfully at trial that the
panels were the property of the United States. The government
relied on a plain language interpretation of the title vesting
provision.1 Accordingly, the government argued that the wire mesh
panels which Hartec sold actually belonged to the United States.
Aceves concedes that the panels were fabricated with materials
purchased with government progress payments, but characterizes the
1
Federal Acquisition Regulation 52.232-16 provides, in
pertinent part:
(d) Title.
(1) Title to the property described in
this paragraph (d) shall vest in the
Government. The vestiture shall be
immediately upon the date of this contract,
for property acquired or produced before that
date. Otherwise, vestiture shall occur when
the property is or should have been allocable
or properly chargeable to this contract.
(2) "Property" as used in this clause,
includes all of the below-described items
acquired or produced by the Contractor that
are or should be allocable or properly
chargeable to the contract under sound and
generally accepted accounting principle and
practice. [including] . . .
(i) Parts, materials, inventories,
and works in progress. . . .
This regulation took effect on April 1, 1984. Prior to that
date Defense Acquisition Regulation, 32 C.F.R. § 163.79-2, which
contained a similar title vesting provision, applied.
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panels as non-conforming goods which should properly be classified
as scrap.
Appellants insist that the title vesting clause should
not be interpreted literally, primarily relying on Midland Marine
Bank v. United States, 231 Ct. Cl. 496, 687 F.2d 395 (1982), cert.
denied, 460 U.S. 1037 (1983). In Midland Marine Bank, the court
considered the history and purpose of the Defense Acquisition
Regulations, concluding that the word "title" should not be read
literally because the regulations specifically exempted the
government from most incidents of ownership. The court determined
that the title vesting provision was originally enacted as an
expedient to avoid the effects of an 1823 congressional prohibition
on advancing federal funds to government contractors. Midland
Marine Bank, 687 F.2d at 400-01. The title vesting provision was
based on the rationale that if the government took title to
materials at the time of purchase, there would technically be no
advance of funds to the contractor. See C.S. McClelland, The
Illegality of Progress Payments As a Means of Financing Government
Contractors, 33 Notre Dame L. Rev. 380 (1958) (cited in Marine
Midland Bank, 687 F.2d at 401). See also 31 U.S.C. § 529 ("No
advance of public money shall be made in any case unless authorized
by the appropriation concerned or other law."). In 1958, Congress
abolished this prohibition and authorized progress payments to
federal government contractors. Marine Midland Bank, 687 F.2d at
401. In view of this amendment, the Marine Midland Bank court
reasoned that the title vesting provision should no longer be
4
literally construed. Instead the provision should be understood as
a security interest in the underlying collateral.
[T]he government's title vesting clause and
regulations provide for the taking of an
interest in the nature of a lien. Full title,
in the plain sense, certainly is not meant, as
an examination of the clause and regulations
show. We recognize that the government's use
of the word "title" has had an important
history, both to avoid the ban on advances of
public money and as a way to circumvent
floating lien interests of general creditors,
and that it has an important present use in
insuring that the government may take actual
possession of the inventory of a bankrupt
contractor. There is no reason, however, in
theory or in case law, to read the word for
more than that.
Midland Marine Bank, 687 F.2d at 403-04.
In construing the progress payments as a series of loans,
rather than a partial purchase, the court concluded that the title
vesting provision "makes clear that the government does not take
ownership to recover inventory in any normal sense of the word."
Midland Marine Bank, 687 F.2d at 399. For example, the court noted
that a government contractor may sell scrap without the
government's approval; that upon completion of the contract, title
will revest in the contractor for covered material that was not
incorporated in the final product; that any inventory-related loss
associated with the covered inventory would fall on the contractor,
and not the government; and, that in the event of default, the
government may force the revesting of inventory in the contractor
by compelling a repayment of progress payments. Id. Thus, while
the government had certain possessory rights in the inventory
5
funded by progress payments, that type of possessory interest is
inconsistent with the traditional notion of ownership.
"Title" is meant to carry no risks for the
government and is shifted back to the
contractor when it would be unneeded or
undesired. In short, the government takes an
interest in the contractor's inventory but
does not want, and does not take, any of the
responsibilities that go with ownership.
Id.
In contrast, the government relies on In re American
Pouch Foods, Inc., 769 F.2d 1190 (7th Cir. 1985), cert. denied, 475
U.S. 182 (1986). The Seventh Circuit engaged in a review of the
history of the title vesting provision, following the same path as
the Marine Midland Bank court, but reaching a contrary conclusion.
The Seventh Circuit acknowledged the reasonableness of the Marine
Midland Bank holding but believed that the title vesting provision
was written with an intent toward literal interpretation. American
Pouch Foods, 769 F.2d at 1196. American Pouch Foods is, however,
distinguishable on a number of fronts.
Primarily, the court's conclusion that the Marine Midland
Bank decision stands in error is dicta. The court conceded that
"application of the Marine Midland rule to the present case would
produce the same result we reach. . . ." American Pouch Foods, 769
F.2d at 1196. Second, American Pouch Foods was a bankruptcy case,
in which the government sought relief from the automatic stay to
regain the possession of foodstuffs prepared under a military
contract. Third, unlike the instant case, no person's liberty
hinged on the court's interpretation of the title vesting
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provision. In American Pouch Foods, the issue was whether the
government was entitled to possession of the property upon
termination of the government contract, not title to the property.
American Pouch Foods, 769 F.2d at 1196. The Marine Midland Bank
court acknowledged that its holding did not disturb the
government's right of possession. "[T]he government's right to
possess such property cannot be questioned, and it is entirely
accurate and appropriate for an opinion in a case that is solely on
possession to recite that 'title means title.'" Marine Midland
Bank, 687 F.2d at 400.2
We find the reasoning of Marine Midland Bank v. United
States to be compelling in this criminal case. The government
neither demanded nor accepted any of the traditional incidents of
title with regard to Hartec. See Marine Midland Bank, 687 F.2d at
399. While the title vesting provision would assist the United
States to regain possession of inventory wrongfully sold to a third
party, just as a lien holder could properly recover such goods
wrongfully held by another, it was unjust to convict defendants in
the instant case of "stealing" property that the government did not
own.3 This is also a paradigmatic case for application of the rule
2
The government also cites United States v. Digital
Products Corp., 624 F.2d 690 (5th Cir. 1980), a similarly
distinguishable case which turned on title as possession, not
title as ownership. Moreover, Digital Products Corp. was a case
where the government was attempting to replevy goods for which it
had contracted after the contract had been terminated, and not a
criminal prosecution. Digital Products Corp., 624 F.2d at 692.
3
Even after criticism of the Marine Midland Bank
decision by the Seventh Circuit and a few bankruptcy courts, see
e.g., In re Coded Sales, Inc., 112 B.R. 560, 562 (Bankr. S.D.N.Y.
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of lenity. The rule of lenity compels us to construe ambiguous
criminal statutes in favor of lenity. Dowling v. United States,
473 U.S. 207, 229 (1985). The rule promotes fair notice of
prohibited conduct and reduces the likelihood that unintentionally
criminal conduct will be penalized. United States v. Kozminski,
487 U.S. 931, 952 (1988). Although the rule does not require that
we give the statute its narrowest construction, United States v.
Chen, 913 F.2d 183, 189 (5th Cir. 1990), we find that under the
facts now before us, the coupling of the title vesting provision
with its inconsistent interpretations in the courts and § 641 did
not provide Aceves with notice that he could be criminally liable
for sale of the wire mesh panels.
The government contends that even if its interest in the
property is characterized as a security interest, appellants'
convictions may still be upheld because the government retained
sufficient control over the property to support a theft action.
See United States v. Faust, 850 F.2d 575, 579 (9th Cir. 1988).
("Government must have 'title to, possession of, or control over'
the [property] involved" in order to convict under § 641) (quoting
United States v. Johnson, 596 F.2d 842, 846 (9th Cir. 1979)). But
cf., United States v. Tana, 618 F. Supp. 1393, 1395 (S.D.N.Y. 1985)
1988); In re Reynolds Manufacturing Co., 68 B.R. 219, 224 (Bankr.
W.D.Pa. 1986), the United States Claims Court has recognized the
continuing authority of the Marine Midland Bank holding. First
National Bank of Geneva v. United States, 13 Cl. Ct. 385, 387
(1987); Welco Industries, Inc. v. United States, 8 Cl. Ct. 303,
305-06 (1985). Moreover, the drafters of the Federal
Acquisitions Regulations have proposed an amendment to conform
the FAR to the Marine Midland Bank decision. 54 Fed. Reg. 18,631
(May 1, 1989).
8
(government's position that security interests can be subject of
prosecution under § 641 is "plainly wrong").
There is substantial credible evidence in the record that
Aceves had reason to believe that the government retained control
over the wire mesh panels. One of Hartec's clerical employees, who
also assisted with government contracts, told Aceves that she
believed the wire mesh panels belonged to the government. Another
employee advised Aceves to consult with the government contract
officer before selling the material declared as scrap. However,
the government's expert witness on the Federal Acquisition
Regulations testified that a contractor is vested with the
discretion to make the determination whether an item is scrap or
not, although there may be a review process. However, we need not
determine whether a security interest is a thing of value of the
United States, the theft of which may impose criminal liability
under § 641. Count IX of the indictment charged that defendants
"did knowingly and willfully embezzle, steal, purloin, and convert
. . . wire mesh panels." The government did not indict appellants
on the theory that they deprived the government of property over
which the government exercised sufficient control to constitute
theft of government property. The government also failed to
introduce proof supporting a control theory, and has thus waived
this possible theory of liability. See also United States v.
Gordon, 638 F.2d 886, 889 (5th Cir. Unit B), cert. denied, 452 U.S.
909 (1981) (in construing "thing of value of the United States"
"[t]he word 'of' necessarily implies ownership. Things 'of' the
9
Government, in the sense of the statute, are property of the
Government").4
The government also urges before the court evidence that
Hartec was in serious financial straits at the time Aceves sold the
scrap material to El Paso Machine & Steel Works and that Hartec's
books were in disarray. Not only did Aceves benefit from the
opinion of at least two Hartec employees that the materials could
not be sold as scrap without at least contacting the government
contract administrator, Aceves was also required to credit the
proceeds from the sale to the government's account. This he did
not do. The circumstances surrounding the sale of the scrap
suggest that Aceves may have acted out of desperation and in hopes
of temporarily alleviating Hartec's business woes. However correct
the government may be in their assertion that the wire mesh panels
could not be unilaterally declared scrap, this argument has no
application. We have already held that the title vesting provision
gives rise to no more than a security interest in the goods for
which the government has contracted and advanced progress payments,
and that no criminal liability under § 641 may attach on the facts
of this case for "theft of a security interest."
CONCLUSION
4
Appellants also ask us to find § 641 as applied in this
case to be unconstitutional because of its vagueness, citing
Tana, 618 F. Supp. at 1397 (finding that § 641, as applied to
theft of security interests, may be void for vagueness). Because
we reverse appellants' convictions on other grounds we need not
reach this issue.
10
We agree with the district court that "this is not the
kind of case that ought to have been tried. What this case should
have been . . . is a suit by the . . . government contracting
agency against the defendant of a civil nature as opposed to a
criminal nature." The government indicted appellants on the theory
that the title vesting clause truly vested title, and gave full
ownership rights to the government for materials upon which
progress payments had been advanced. The title vesting provision
of the Federal Acquisition Regulations creates no more than a
security interest in the government's favor, and cannot be, under
the facts of this case, a basis for prosecution under 18 U.S.C. §
641. Appellants' convictions are REVERSED.
11