B-146437, AUG. 2, 1961

B-146437, AUG. 2, 1961

TO THE SECRETARY OF THE ARMY:

REFERENCE IS MADE TO LETTER OF JULY 14, 1961, FROM THE ASSISTANT SECRETARY OF THE ARMY (INSTALLATIONS AND LOGISTICS) REQUESTING A DECISION AS TO THE VALIDITY OF PROPOSED SUPPLEMENTAL AGREEMENT NO. 3 TO LEASE NO. DA-11-032-ENG-7064, WITH THE WABASH CHEMICAL CORPORATION ENTERED INTO BY AUTHORITY OF THE SECRETARY OF THE ARMY AND UNDER THE DIRECTION OF THE CHIEF OF ENGINEERS.

UNDER THE LEASE THE OLEUM (SULPHURIC ACID) FACILITIES LOCATED AT THE KANKAKEE UNIT OF THE JOLIET ARSENAL MILITARY RESERVATION, ILLINOIS--- THE MINIMUM FAIR VALUE OF WHICH PREMISES HAD BEEN APPRAISED AT $180,000 PER ANNUM--- WERE LEASED TO THE WABASH CHEMICAL CORPORATION FOR A TWENTY-YEAR TERM AT AN ANNUAL RENTAL OF $200,000 FOR THE FIRST YEAR OF THE LEASE AND $350,000 FOR EACH LEASE YEAR THEREAFTER PAYABLE IN ADVANCE IN EQUAL MONTHLY INSTALLMENTS. IT IS EXPLAINED THAT THE FIRST YEAR'S RENTAL WAS FIXED AT A REDUCED RATE IN RECOGNITION OF THE COST TO THE LESSEE IN REHABILITATING AND CONVERTING THE LEASED FACILITIES TO AN OPERATING CONDITION, WHICH WAS ESTIMATED BY THE GOVERNMENT TO BE $150,000.

UNDER THE PROVISIONS OF SUPPLEMENTAL AGREEMENT NO. 2, DATED FEBRUARY 2, 1961, THE STIPULATED RENTALS IN CONDITION NO. 1 OF THE LEASE WERE SUBJECTED TO A REDUCTION OF NOT TO EXCEED $25,000 TO REIMBURSE THE LESSEE FOR THE CONSTRUCTION OF A GUARD RADIO DISPATCHERS' BUILDING AND THE RELOCATION OF EXISTING UTILITIES, FIRE AND INTRUSION ALARM SYSTEMS.

UNDER CONDITION 13B OF THE ORIGINAL LEASE THE LESSEE WAS AUTHORIZED TO INSTALL A WATER COOLING TOWER AND SLUDGE DECOMPOSITION EQUIPMENT AT ITS EXPENSE, TITLE TO SUCH IMPROVEMENT TO VEST IN THE GOVERNMENT UPON TERMINATION OF THE FULL LEASE TERM. THIS PROVISION, HOWEVER, WAS SUBJECT TO THE CONDITION THAT IN THE EVENT THE GOVERNMENT SHOULD TERMINATE THE LEASE PRIOR TO THE EXPIRATION OF THE TWENTY-YEAR TERM THE GOVERNMENT, IN THE EVENT IT SHOULD ELECT TO KEEP THE WATER COOLING TOWER AND SLUDGE DECOMPOSITION EQUIPMENT, WOULD PAY TO THE LESSEE THE DEPRECIATED VALUE OF SUCH EQUIPMENT. A FURTHER CONDITION STIPULATED THAT IN THE EVENT THE GOVERNMENT FAILED TO EXERCISE SUCH ELECTION THEN THE LESSEE WOULD BE PERMITTED TO DISMANTLE THIS EQUIPMENT AND REMOVE SAME AT ITS OWN EXPENSE.

UNDER CONDITION 19 OF THE LEASE THE GOVERNMENT WAS AUTHORIZED TO TERMINATE THE LEASE AT ANY TIME UPON TIMELY NOTICE UNDER THE CONDITIONS THEREIN PROVIDED.

IT IS STATED THAT THE EQUIPMENT AUTHORIZED TO BE INSTALLED BY THE LESSEE UNDER CONDITION 13 OF THE LEASE WAS ERECTED UPON THE LEASED PREMISES AT AN ACTUAL COST OF $416,639, THAT WHILE THE LOSSES HAS ESTIMATED THE VALUE OF SUCH FACILITIES AT APPROXIMATELY $1,000,000 THE DEPARTMENT IS OF THE OPINION THAT THE IN-PLACE VALUE IS BETWEEN $700,000 AND $800,000; AND THAT THE RETENTION OF THESE IMPROVEMENTS UPON THE TERMINATION OR EXPIRATION OF THE LEASE IS DESIRED AND WOULD BE IN THE PUBLIC INTEREST.

BY LETTERS DATED MARCH 8, 1961, APRIL 12, 1961, AND APRIL 17, 1961, THE LESSEE THROUGH ITS ATTORNEY ADVISED THE REAL ESTATE SECTION OF THE DISTRICT ENGINEER'S OFFICE AT CHICAGO THAT ITS OPERATIONS HAVE NOT BEEN SUCCESSFUL; THAT IT HAD A DEFICIT OF $1,437,077 AS OF DECEMBER 31, 1961; AND THAT IT WAS IMPOSSIBLE TO CONTINUE OPERATIONS ON THE PRESENT BASIS. THE LESSEE ATTRIBUTED ITS OPERATING LOSSES PRIMARILY TO THE PRICING ACTIONS OF ITS COMPETITORS, IN AN ENDEAVOR TO SQUEEZE THE LESSEE OUT OF THE CHICAGO AREA. THE LESSEE INDICATED HOWEVER, THAT IT IS DETERMINED TO CONTINUE OPERATIONS AND IT EXPRESSED THE VIEW THAT BASED UPON RECENT CONCERTED SALES EFFORTS WHICH RESULTED IN NEW CONTRACTS IT WAS CONFIDENT THAT IT COULD OPERATE THE LEASED FACILITIES PROFITABLY ON A LONG-TERM BASIS. TO DO SO, HOWEVER, THE LESSEE MAINTAINS THAT IT MUST HAVE IMMEDIATE TEMPORARY RELIEF AND IT HAS REQUESTED AN ADJUSTMENT IN THE FUTURE RENTALS TO BE PAID UNDER THE LEASE.

IT IS PROPOSED TO EFFECT THE REQUESTED ADJUSTMENT BY SUPPLEMENTAL AGREEMENT NO. 3 UNDER THE PROVISIONS OF WHICH CONDITION 1 OF THE LEASE WOULD BE FURTHER AMENDED, BY ADDING AFTER THE FIGURE ($350,000) IN LINE7 THEREOF, THE FOLLOWING:

"PROVIDED, THAT FOR THE THIRD THROUGH THE SEVENTH LEASE YEARS, THE LESSEE MAY DEFER PAYMENTS OF RENTALS TO THE GOVERNMENT IN THE AMOUNT OF ONE HUNDRED SEVENTY FIVE THOUSAND DOLLARS ($175,000) ANNUALLY. THEREAFTER, THE LESSEE SHALL PAY THE ANNUAL RENTAL OF THREE HUNDRED FIFTY THOUSAND DOLLARS ($350,000) AND ONE-THIRTEENTH ( 1/13TH) OF THE TOTAL DEFERRED RENTAL. THE LESSEE ALSO AGREES TO PAY TO THE GOVERNMENT MONTHLY, IN ADDITION TO THE RENTAL PROVIDED IN THIS CONDITION 1, INTEREST ON THE AMOUNT OF THE THEN OUTSTANDING DEFERRED RENTAL AT THE RATE OF FIVE PERCENT (5 PERCENT) PER ANNUM. THE LESSEE SHALL HAVE THE OPTION TO PAY AT ANY TIME ALL OR ANY PART OF THE OUTSTANDING DEFERRED RENTAL. IN THE EVENT THE LEASE IS TERMINATED BY THE GOVERNMENT, THE TOTAL DEFERRED RENTAL AND INTEREST THEN OUTSTANDING SHALL BE IMMEDIATELY DUE AND PAYABLE TO THE GOVERNMENT.'

IN ADDITION, CONDITION 13B OF THE LEASE WOULD BE DELETED AND THERE WOULD BE SUBSTITUTED THEREFOR A NEW CONDITION 13B, AS FOLLOWS:

"THE LESSEE HAS ERECTED AND INSTALLED ON THE LEASED PROPERTY (1) A WATER COOLING TOWER, AND (2) SLUDGE DECOMPOSITION EQUIPMENT, WHICH PROPERTY SHALL, IN THE EVENT OF TERMINATION OF THE LEASE BY THE GOVERNMENT PURSUANT TO CONDITION 19 OF THE LEASE, BECOME THE PROPERTY OF THE GOVERNMENT WITHOUT ANY PAYMENT THEREFOR TO THE LESSEE.'

IT IS STATED THAT AN ATTEMPT WAS MADE BY THE CORPS OF ENGINEERS TO HAVE THE LESSEE SECURE A GUARANTOR FOR THE OBLIGATIONS OF THE PROPOSED SUPPLEMENTAL AGREEMENT NO. 3 BUT THAT THE ATTORNEY REPRESENTING THE LESSEE VERBALLY ADVISED THE DEPARTMENT OF THE ARMY THAT THE LESSEE CORPORATION IS 80 PERCENT OWNED BY CHATHAM READING CORPORATION AND THAT THE PARENT CORPORATION IS PROHIBITED FROM FURNISHING SUCH GUARANTEE.

IN URGING APPROVAL OF THE PROPOSED SUPPLEMENTAL AGREEMENT NO. 3 IT IS STATED THAT IF THE LESSEE DOES NOT OBTAIN IMMEDIATE RELIEF IN THE FORM OF TEMPORARILY REDUCED ANNUAL RENTAL PAYMENTS THERE IS A STRONG PROBABILITY THAT THE LESSEE WILL DEFAULT IN SUCH PAYMENTS AND THAT THE GOVERNMENT WILL BE FACED WITH THE PROSPECT OF READVERTISING THE PROPERTY. IT IS STATED FURTHER THAT NOTWITHSTANDING THE FACT THAT THE LESSEE IS OBLIGATED UNDER THE TERMS OF THE LEASE FOR THE STIPULATED RENTAL PAYMENTS FOR THE FULL TWENTY-YEAR TERM AND, IN THE EVENT OF DEFAULT, IT WOULD BE LIABLE FOR WHATEVER COSTS AND LOSSES MIGHT BE INCURRED BY THE GOVERNMENT IN RE- LEASING THE PROPERTY, THE ACTUAL RECOVERY OF SUCH COSTS AND LOSSES WOULD BE SPECULATIVE. AS TO THE ADVANTAGES ACCRUING TO THE GOVERNMENT UNDER THE LEASE IT IS STATED THAT THE OLEUM FACILITIES AT THE DATE OF THE LEASE WERE 15 YEARS OLD; THAT IT WAS ESTIMATED THAT PRIVATE ENTERPRISE COULD CONSTRUCT A PLANT OF SIMILAR CAPACITY (500 TONS PER DAY) FOR A CAPITAL INVESTMENT OF $1,930,000; THAT THE LESSEE UNDER THE TERMS OF THE LEASE IS ALSO REQUIRED TO MAINTAIN THE PROPERTY, THUS RESULTING IN AN ADDITIONAL ANNUAL SAVING OF APPROXIMATELY $13,200 TO THE GOVERNMENT; AND THAT BY HAVING THE FACILITIES IN OPERATION THE GOVERNMENT IS ASSURED THAT THEY WILL BE IN A READY CONDITION TO MEET MOBILIZATION REQUIREMENTS. THE VIEW IS EXPRESSED THAT IN THE LIGHT OF THE PAST ACTIONS OF THE LESSEE'S COMPETITORS, AND ON THE BASIS OF THE PRESENT MARKET CONDITIONS FOR SULPHURIC ACID IN THE CHICAGO AREA, AS DESCRIBED IN THE LESSEE'S LETTER OF APRIL 12, 1961, THERE IS SERIOUS DOUBT THAT THE FACILITIES, IF READVERTISED TODAY, COULD BE LEASED AND, IF SO THAT THE ANNUAL RENTAL WOULD EXCEED $175,000, THE ANNUAL AMOUNT THE LESSEE IS WILLING TO PAY DURING THE NEXT FIVE YEARS. IT IS STATED THAT IN VIEW OF THE FOREGOING FACTORS IT HAS BEEN DETERMINED BY THE DEPARTMENT OF THE ARMY THAT THE GRANTING OF THE RELIEF REQUESTED BY THE LESSEE WOULD BE IN THE PUBLIC INTEREST AND IN THE INTEREST OF NATIONAL DEFENSE.

IT IS A WELL ESTABLISHED RULE THAT WITHOUT A COMPENSATING BENEFIT TO THE UNITED STATES, AGENTS AND OFFICERS OF THE UNITED STATES HAVE NO AUTHORITY TO DISPOSE OF THE MONEY OR PROPERTY OF THE UNITED STATES, TO MODIFY EXISTING CONTRACTS OR TO SURRENDER OR WAIVE CONTRACT RIGHTS THAT HAVE VESTED IN THE GOVERNMENT. SIMPSON V. UNITED STATES, 172, U.S. 372; UNITED STATES V. AMERICAN SALES CORP., 27 F.2D 389, AFFIRMED 32 F.2D 141, CERTIORARI DENIED, 280 U.S. 574; PACIFIC HARDWARE CO. V. UNITED STATES, 49 CT.CL. 327; BAUSCH AND LOMB OPTICAL CO. V. UNITED STATES, 78 CT.CL. 584.

WHILE UNDER THE AMENDMENT OF CONDITION 1 OF THE LEASE AS PROVIDED FOR IN THE PROPOSED SUPPLEMENTAL AGREEMENT NO. 3 THE LESSEE WOULD BE AUTHORIZED TO DEFER PAYMENT OF RENTALS TO THE GOVERNMENT IN THE AMOUNT OF $175,000 ANNUALLY FOR THE THIRD THROUGH THE SEVENTH LEASE YEARS THE LESSEE WOULD STILL BE OBLIGATED TO PAY THE AGGREGATE RENTAL STIPULATED IN CONDITION 1 OF THE LEASE AS AMENDED BY CONDITION 26B OF SUPPLEMENTAL AGREEMENT NO. 2, PLUS INTEREST AT THE RATE OF 5 PERCENT PER ANNUM ON THE OUTSTANDING DEFERRED RENTAL. IN ADDITION, UNDER THE PROVISIONS OF PARAGRAPH 2 OF THE PROPOSED SUPPLEMENTAL AGREEMENT NO. 3 IF THE GOVERNMENT--- IN THE EVENT OF PREMATURE TERMINATION OF THE LEASE PURSUANT TO CONDITION 19 OF THE LEASE-- - SHOULD ELECT TO KEEP THE WATER COOLING TOWER AND THE SLUDGE DECOMPOSITION EQUIPMENT IT WOULD BE RELIEVED FROM PAYMENT OF THE DEPRECIATED VALUE OF SUCH EQUIPMENT, PRESENTLY ADMINISTRATIVELY ESTIMATED BETWEEN $700,000 AND $800,000.

IN VIEW OF THE ABOVE AND SINCE IT IS STATED THAT THE RETENTION OF THE WATER COOLING TOWER AND THE SLUDGE DECOMPOSITION EQUIPMENT UPON EXPIRATION OR TERMINATION OF THE LEASE WOULD BE IN THE PUBLIC INTEREST WE WOULD NOT BE REQUIRED TO OBJECT TO THE EXECUTION OF THE PROPOSED SUPPLEMENTAL AGREEMENT NO. 3.