B-153228, MAY 21, 1964

B-153228, MAY 21, 1964

TO THE BANK OF NOVA SCOTIA:

THIS IS IN FURTHER REPLY TO YOUR LETTER OF JULY 15, 1963. THE LETTER RELATES TO YOUR CLAIM AGAINST THE MILITARY SEA TRANSPORTATION SERVICE FOR OCEAN FREIGHT IN THE SUM OF $112,259.74, INDICATED AS HAVING BEEN ASSIGNED TO THE BANK OF NOVA SCOTIA BY KULUKUNDIS MARITIME INDUSTRIES, INC.

IN JANUARY 1963, YOU PRESENTED YOUR CLAIM FOR PAYMENT, SUPPORTED BY THE THREE ORIGINAL BILLS OF LADING, TO THE MILITARY SEE TRANSPORTATION SERVICE, WHICH HAS REFUSED PAYMENT BECAUSE OF THE GOVERNMENT'S CLAIMS AGAINST THE ASSIGNOR AND ITS AFFILIATES, CURRENTLY ATTEMPTING REORGANIZATION UNDER CHAPTER X OF THE BANKRUPTCY ACT, 11 U.S.C. 501 ET. SEQ. THE MILITARY SEA TRANSPORTATION SERVICE HAS RETAINED THE ORIGINAL BILLS OF LADING. YOU FURNISHED US PHOTOSTATS OF (1) THE MEMORANDUM COPIES OF TWO BILLS OF LADING, NOX. B-3440582 AND B 3440570, (2) THE INSTRUMENT OF ASSIGNMENT, AND (3) A LETTER DATED JANUARY 2, 1963, FROM THE STAR LINE AGENCY, INC., TO COMMANDER J. A. MERCADANTE, COMPTROLLER, MILITARY SEA TRANSPORTATION SERVICE, ATLANTIC AREA; AND A CARBON COPY OF A LETTER DATED MARCH 5, 1963, FROM THE BANK OF NOVA SCOTIA TO COMMANDER MERCADANTE.

THE SALIENT FACTS, AS INDICATED IN THIS RECORD, ARE THAT THE GOVERNMENT ARRANGED WITH THE KULUKUNDIS LINES FOR THE SHIPMENT OF THREE LOTS OF MOTOR VEHICLES AND MISCELLANEOUS MATERIAL FROM DETROIT, MICHIGAN, AND TOLEDO, OHIO, ON THE S.S. MOUNT MCKINLEY, SAILING IN NOVEMBER 1962 FOR BANDAR SHAHPUR, IRAN, AND KARACHI, PAKISTAN. PRESUMABLY THE GOODS WERE SATISFACTORILY DELIVERED EARLY IN JANUARY 1963 (THE MEMO COPY OF BILL OF LADING B-3440582 SHOWS JANUARY 7, 1963, AS THE ESTIMATED TIME OF ARRIVAL IN BANDAR SHAHPUR); THE RECORD CONTAINS NO SUGGESTION THAT THEY WERE NOT.

BY LETTER DATED JANUARY 2, 1963, THE STAR LINE AGENCY, INC., AUTHORIZED THE MILITARY SEA TRANSPORTATION SERVICE TO PAY THE OCEAN FREIGHT DUE, FOR ITS ACCOUNT, TO THE BANK OF NOVA SCOTIA; AS REQUESTED, COMMANDER MERCADANTE SIGNED A COPY OF THE LETTER AS "ACCEPTED," AND RETURNED IT TO THE SENDER. A PHOTOSTATIC COPY OF AN ASSIGNMENT DATED JANUARY 3, 1963, SHOWS THAT THE "KULUKUNDIS MARITIME INDUSTRIES" PURPORTED TO ASSIGN THE FREIGHT DUE FOR THESE SHIPMENTS TO THE BANK OF NOVA SCOTIA, AND THE BANK, WITH ITS LETTER OF MARCH 5, 1963, FURNISHED A PHOTOSTATIC COPY OF THE ASSIGNMENT TO THE MILITARY SEA TRANSPORTATION SERVICE, ATLANTIC AREA. THE MILITARY SEA TRANSPORTATION SERVICE, HOWEVER, DID NOT PAY THE FREIGHT CHARGES AND CONTINUES TO WITHHOLD PAYMENT.

THE ASSIGNMENT SHOWS THE ACCOUNTS ASSIGNED TO BE BILLS OF LADING B 3440582--- $94,802.35, B-3440591--- $2,381.73, AND B-3440570--- $14,774.69 (TOTAL $111,958.77), AS DO THE LETTERS OF JANUARY 2 AND MARCH 5, 1963. THE TOTAL OF $112,259.74 SHOWN IN YOUR LETTER OF JULY 15, 1963, APPARENTLY IS IN ERROR, RESULTING FROM THE SUBSTITUTION OF BILL OF LADING B-3440588, $2,682.70, FOR BILL OF LADING B-3440591.

YOU URGE UPON US THE IMPROPRIETY OF THIS WITHHOLDING FOR POSSIBLE SETOFF ON THE GROUND THAT THE CLAIM, IF PRESENTED BY THE CARRIER ASSIGNOR, WOULD BE IMMUNE FROM SETOFF, SINCE ADMIRALTY LAW COUNTENANCES SETOFF ONLY BY WAY OF RECOUPMENT, I.E., WHERE THE RESPECTIVE CLAIMS ARISE OUT OF THE SAME TRANSACTION, AND APPARENTLY THE GOVERNMENT HAS NO CLAIMS ARISING OUT OF THE SUBJECT MATTER OF THE ASSIGNMENT. IN ESSENCE, YOUR POSITION SEEMS TO BE THAT THE BANK TOOK AN ASSIGNMENT VALID UNDER THE ASSIGNMENT OF CLAIMS ACT, 31 U.S.C. 203; THAT THE BANK, AS ASSIGNEE, STANDS IN THE SHOES OF THE ASSIGNOR, KULUKUNDIS MARITIME INDUSTRIES; AND THAT THE BANK'S CLAIM FOR OCEAN FREIGHT UNDER THE ASSIGNMENT IS THEREFORE IMMUNE FROM SETOFF IN PARTIAL LIQUIDATION OF THE GOVERNMENT'S CLAIM AGAINST THE ASSIGNOR ARISING OUT OF INDEPENDENT TRANSACTIONS.

IN OUR VIEW, THE THRESHOLD QUESTION HERE IS, IF THE ASSIGNMENT IS VALID, WHETHER IT CONSTITUTES A VOIDABLE PREFERENCE UNDER SECTION 60 OF THE BANKRUPTCY ACT, 11 U.S.C. 96. IF THE ASSIGNMENT IS NOT GOOD, OR IF IT MAY BE CONSIDERED A VOIDABLE PREFERENCE, THEN, AS TO THE BANK OF NOVA SCOTIA, THE QUESTION AS TO THE PROPRIETY OF THE WITHHOLDING DOES NOT ARISE.

THE ASSIGNMENT OF CLAIMS ACT PERMITS THE PROCEEDS OF A GOVERNMENT CONTRACT, IF AT LEAST $1,000, TO BE ASSIGNED TO A FINANCIAL INSTITUTION, SUBJECT TO CERTAIN CONDITIONS. AMONG THESE IS THE REQUIREMENT THAT THE ASSIGNEE "FILE WRITTEN NOTICE OF THE ASSIGNMENT TOGETHER WITH A TRUE COPY OF THE INSTRUMENT OF ASSIGNMENT WITH (A) THE CONTRACTING OFFICER OR THE HEAD OF HIS DEPARTMENT OR AGENCY; * * * AND (C) THE DISBURSING OFFICER, IF ANY, DESIGNATED IN SUCH CONTRACT TO MAKE YMENT.' 31 U.S.C. 203, FOURTH PROVISO. GENERALLY A BILL OF LADING MAY BE TAKEN TO REPRESENT A CONTRACT OF CARRIAGE, AND THE MEMORANDUM COPIES OF BILLS OF LADING B-3440582 AND B- 3440570, INDICATE THAT THE CHARGES WERE TO BE BILLED TO THE COMPTROLLER, MILITARY SEA TRANSPORTATION SERVICE, ATLANTIC AREA.

THERE IS SOME QUESTION AS TO WHETHER THE REQUIREMENTS OF PROVISO 4 OF 31 U.S.C. 203 TECHNICALLY HAVE BEEN SATISFIED INSOFAR AS THE FILING OF A "WRITTEN NOTICE" AND A "TRUE COPY" OF THE INSTRUMENT OF ASSIGNMENT WITH THE CONTRACTING OFFICER OR THE HEAD OF HIS DEPARTMENT OR AGENCY AND THE DISBURSING OFFICER ARE CONCERNED. AND IT IS NOT CLEAR THAT THE INSTRUMENT OF ASSIGNMENT WAS PROPERLY EXECUTED IN ACCORDANCE WITH THE BY-LAWS OR OTHER GOVERNING RULES OF THE COMPANY INVOLVED; ALSO, THERE IS NO INDICATION AS TO THE FUNCTIONS OR AUTHORITY OF THE PERSONS SHOWN AS HAVING SIGNED THE INSTRUMENT. NOR IS THERE ANY AUTHENTICATION OF THE TWO SIGNATURES--- APPARENTLY ON BEHALF OF KULUKUNDIS MARITIME INDUSTRIES, WHICH IS NOT SHOWN ON THE BILL OF LADING CONTRACTS--- APPEARING ON THE ASSIGNMENT FORM. FOR PRESENT PURPOSES, IT MAY BE ASSUMED, BUT NOT ADMITTED, THAT THE STATUTORY REQUIREMENTS AS TO FORM MIGHT HAVE BEEN SATISFIED.

THE RECORD SHOWS THAT THE STAR LINE AGENCY, INC., WROTE TO COMMANDER MERCADANTE, ON JANUARY 2, 1963, AUTHORIZING PAYMENT OF THE FREIGHT DUE ON THESE THREE BILLS OF LADING, FOR ITS ACCOUNT, TO THE BANK OF NOVA SCOTIA, AND REQUESTING THAT THE ADDRESSEE NOTE HIS ACCEPTANCE ON A COPY OF THE LETTER AND RETURN IT TO THE SENDER. COMMANDER MERCADANTE DID SO. THERE IS NO MENTION OF THE ASSIGNMENT IN THIS LETTER; NEITHER IS THERE ANY INDICATION WHY THE STAR LINE AGENCY, INC., SHOULD DISPOSE, FOR ITS OWN ACCOUNT, OF FREIGHT BECOMING DUE THE CARRIER (KULUKUNDIS LINES) WHICH PERFORMED THE TRANSPORTATION. WE REALIZE THAT THE STAR LINE AGENCY IS ONE OF SEVERAL KULUKUNDIS ENTERPRISES INVOLVED IN REORGANIZATION PROCEEDINGS AND MAY HAVE BEEN AUTHORIZED TO ACT FOR THE CARRIER. THERE IS NO SHOWING THAT IT WAS AUTHORIZED TO ACT FOR THE BANK, HOWEVER, AND THE BANK, AS ASSIGNEE, IS THE PARTY CHARGED BY THE STATUTE WITH THE OBLIGATION TO FURNISH THE REQUIRED WRITTEN NOTICE. ADDITIONALLY, THE STAR LINE AGENCY LETTER DATED JANUARY 2, 1963, COULD NOT (EVEN IF EXPRESSED IN LANGUAGE APPROPRIATE FOR THE PURPOSE) SERVE AS PROPER NOTICE OF THE ASSIGNMENT DATED JANUARY 3, 1963. THE FIRST FORM OF NOTICE OF ASSIGNMENT RECEIVED BY ANY GOVERNMENT AGENCY APPARENTLY WAS THE BANK'S LETTER OF MARCH 5, 1963, FURNISHING A COPY OF THE INSTRUMENT OF ASSIGNMENT TO THE MILITARY SEA TRANSPORTATION SERVICE.

ALTHOUGH IT IS DOUBTFUL THAT THE FORM OF THE INSTRUMENT AND THE TIMELINESS OF THE NOTICE WERE ADEQUATE, WE FEEL THAT EVEN IF THE ASSIGNMENT WAS DULY PERFECTED, SERIOUS QUESTION WOULD REMAIN AS TO WHETHER, IN VIEW OF THE REORGANIZATION PROCEEDINGS, THE ASSIGNMENT MIGHT BE HELD TO CONSTITUTE A VOIDABLE PREFERENCE.

SECTION 60 OF THE BANKRUPTCY ACT, 11 U.S.C. 96 (A) (1), DEFINES A PREFERENCE AS (1) A TRANSFER OF ANY OF A DEBTOR'S PROPERTY; (2) TO OR FOR THE BENEFIT OF A CREDITOR (3) FOR OR ON ACCOUNT OF AN ANTECEDENT DEBT; (4) MADE BY THE DEBTOR WHILE INSOLVENT; (5) WITHIN FOUR MONTHS BEFORE THE FILING OF THE ORIGINAL PETITION UNDER CHAPTER X, AMONG OTHER CHAPTERS; AND (6) OF WHICH THE EFFECT WILL BE TO GIVE THE CREDITOR A GREATER PERCENTAGE OF HIS DEBT THAN OTHER CREDITORS OF THE SAME CLASS. THE TRUSTEE MAY AVOID SUCH PREFERENCE IF THE CREDITOR RECEIVING IT OR BENEFITING FROM IT, OR HIS AGENT, HAD REASONABLE CAUSE AT THE TIME OF MAKING THE TRANSFER TO BELIEVE THAT THE DEBTOR WAS INSOLVENT. 11 U.S.C. 96 (B). SEE MORAN BROTHERS V. YINGER, 323 F.2D 699 (1963).

THE DEPARTMENT OF JUSTICE HAS INFORMALLY ADVISED US THAT ITS FILES CONTAIN A COPY OF THE PETITION FOR REORGANIZATION UNDER CHAPTER X OF THE BANKRUPTCY ACT FILED BY KULUKUNDIS MARITIME INDUSTRIES WHICH BEARS THE COURT'S STAMP "FILED MARCH 15, 1963," AND THAT THE PETITIONS OF THE STAR LINE AGENCY AND THE OTHER KULUKUNDIS ENTERPRISES WERE FILED WITHIN TEN DAYS OF MARCH 15. THE INSTRUMENT OF ASSIGNMENT SIGNED FOR KULUKUNDIS MARITIME INDUSTRIES IS DATED JANUARY 3, 1963. IF WE RESERVE QUESTION AS TO OTHER POSSIBLE TECHNICAL DEFECTS IN THE INSTRUMENT AND CONCERN OURSELVES ONLY WITH THE NOTICE FORMALITY, IT WOULD NOT HAVE BEEN PERFECTED BEFORE MARCH 5, THE DATE OF THE LETTER GIVING NOTICE OF THE ASSIGNMENT TO THE MILITARY SEA TRANSPORTATION SERVICE AND TRANSMITTING A COPY OF THE INSTRUMENT. SECTION 60 OF THE BANKRUPTCY ACT ALSO PROVIDES THAT IF A TRANSFER IS NOT PERFECTED IN ACCORDANCE WITH THE APPLICABLE LAW--- HERE THE ASSIGNMENT OF CLAIMS ACT--- THE TRANSFER "SHALL BE DEEMED TO BE MADE OR SUFFERED AT THE TIME OF COMPLIANCE THEREWITH * * *.' 11 U.S.C. 96/A) (7) I AND II. UNDER THESE PROVISIONS, WHERE THE ASSIGNMENT WAS EXECUTED JANUARY 3, 1963, BUT THE APPLICABLE STATUTE, WHICH DOES NOT SPECIFY A STATED PERIOD OF TIME WITHIN WHICH TO GIVE WRITTEN NOTICE, WAS NOT COMPLIED WITH BEFORE MARCH 5 THE DATE OF THE NOTICE AND MORE THAN 21 DAYS AFTER THE TRANSFER, THE TRANSFER IS DEEMED MADE AT THE TIME OF COMPLIANCE AND CONSTITUTES PAYMENT FOR AN ANTECEDENT DEBT. SEE THE DISCUSSION ON THE 1950 AMENDMENT TO SECTION 60 OF THE ACT IN MAYO V. PIONEER BANK AND TRUST COMPANY, 270 F.2D 823, 835 (1959), REHEARING DENIED 274 F.2D 320, CERTIORARI DENIED 362 U.S. 962.

IF THE ASSIGNMENT BE CONSIDERED AS OTHERWISE SATISFYING THE REQUIREMENTS OF THE ASSIGNMENT OF CLAIMS ACT, PROOF OF THE SIXTH ELEMENT--- WHETHER THE TRANSFER WAS MADE WHILE THE DEBTOR WAS INSOLVENT--- SEEMS TO BE THE ONLY PROOF NOT DEFINITELY ESTABLISHED BY OUR LIMITED RECORD; SINCE, UNDER THE LAW, THE TRANSFER WAS MADE AT THE TIME OF WRITTEN NOTICE, TEN DAYS PRIOR TO THE FILING OF THE PETITION FOR REORGANIZATION, EVIDENCE PROBABLY COULD BE ADDUCED TO SHOW INSOLVENCY AT THAT TIME.

A PREFERENCE HAVING ALL THE ABOVE SIX ELEMENTS IS VOIDABLE BY THE TRUSTEE IF THE CREDITOR BENEFITING FROM IT HAD REASONABLE CAUSE AT THE TIME THE TRANSFER WAS MADE (HERE, TEN DAYS BEFORE THE FILING OF THE PETITION UNDER CHAPTER X), TO BELIEVE THE DEBTOR WAS INSOLVENT. THIS BEING SO, IN ADDITION TO THE OTHER DOUBTFUL ASPECTS OF THE TRANSACTION, AND BECAUSE THE KULUKUNDIS ENTERPRISES REPORTEDLY OWE THE UNITED STATES CONSIDERABLE AMOUNTS OF MONEY, WE MUST CONCUR IN THE ACTION OF THE MILITARY SEA TRANSPORTATION SERVICE IN WITHHOLDING PAYMENT. WE THINK IT PROPER TO LEAVE TO THE APPROPRIATE JUDICIAL AUTHORITY THE DETERMINATION OF THIS MATTER. CHARLES V. UNITED STATES, 19 CT.CL. 316; LONGWILL V. UNITED STATES, 17 CT.CL. 288.