In re Stoever

J. B. McPHERSON, District Judge. The following report of the referee will disclose the nature of tlie present controversy: “The original petition in this case was filed February 7, 1900, and adjudication thereon made March 28, 1900. “On August 18. 1901, a deposition for proof of claim of the United States, in the sum of 87,816.95, for actual damages sustained by reason of the failure ol' tlie bankrupt to perform a certain contract with the United States, was tiled. “This contract was made July 24. 1899, by the bankrupt as principal, and tlie United States Fidelity & Guaranty Company as surety; and, after reciting that certain proposals had been made for supplying the Post Office Department with certain supplies of wrapping paper, designated as items Nos. 112, 112a, and 114, in such quantities and at sueli times, and from time to time, as tlie same might he ordered, (luring the fiscal year beginning July 1, 1899, and ending June 30, 1900, stipulated that the bankrupt should furnish and deliver the same at certain prices per ream, and, in case of failure on his part, he and his surety should become, indebted to the United States in the sum of toil thousand dollars, as fixed and settled damages, and not as a penalty to be reduced or diminished, and also that, in case of failure to furnish any of said articles within thirty days after they have been ordered, the right was reserved to the Postmaster General to purchase such articles in open market, and, if a greater price than that specified in the contract be paid for such articles, tlie total difference between (lie purchase price and the contract price might be charged to the said bankrupt and his surety, and, further, that the contract might be annulled by the Postmaster General for any failure of performance, in his opinion, but that such termination of the contract should not affect or impair any right or claim of the United States to indebtedness or damages for the breach of any of the covenants. “On August 11, 1899, an order was given for five hundred reams of item No. 114, which was eventually filled. Subsequently thereto nine orders of various items, aggregating sixteen thousand reams, were given, from September 20 to December 5, 1899;, and on January 22, 1900, the Postmaster General, in an order reciting that the bankrupt had failed to furnish said articles, under various orders made upon him since July 1, 1899, he was declared a failing contractor, presumably in pursuance of the fast-recited stipulation of the contract. Prior to this time, and after repeated urgent reminders and [396] 'fJemarifls for the delivery of the articles referred to'under 'the orders stated, application was made to two paper companies, and purchases to supply the deficiency were made from one of them; these purchases continuing until -February 8; 1900, as to the sixteen thousand reams, and thereafter until - June 4th as to the seventy-one hundred reams, for paper needed by the department after the annulment of the contract. The excess paid over the contract price for the 16,000 reams amounted to $5,741.95, and ihis, together ; with $2,075, amount paid in excess of the contract price for the 7,100 reams, ; makes the amount of the claim of the United States, $7,S1G.95. “The trustee has filed exceptions to the allowance of the claim, first, be- , cau.se it was not filed within one year from the adjudication; second, because the trustee is informed and believes that the United States could have had the contract filled in the open market without loss to the United States; .third,.because the claim is for items .o/rdered subsequent to the filing of the petition on February 7, 1900. “Section 3466 of the Revised Statutes of the United States [U. S. Comp. St. .,1901, p. 2314] provides that, whenever any person indebted to the United States is insolvent, the debts due to the United States shall be first satisfied, and the priority thereby established shall extend as well to cases wherein a debtor not having sufficient property to pay all his debts makes a voluntary assignment, as to cases in which an act óf bankruptcy is committed; and i by section’ 3467 [U, S. Comp. St. 1901, p. 2314], every executor, administrator, * or assignee, or other person, who pays' any debt due by the person or estate from who.m or for which he acts before he satisfies and pays the debts due to the-United States from such person or estate, is made answerable in his own person and estate for the debts so due to the United States, or for so rhhch thereof as may remain due and unpaid. “Section 3468 [U. S. Comp. St. 1901, p. 2314] gives (upon payment) to any surety on the bond of the insolvent the same right of priority for the recovery and receipt of the moneys out of the estate of the insolvent as is secured to the United States. < >• “The bankruptcy act of ‘July 1, 1898 (chapter 541, § 64, el. ‘b,’ 30 Stat. 563 ; [U. S. Coinp. St. 1901, p. 3448]), provides that the debts to have priority, after 1 payment of costs of preserving the estate, filing fees, costs of administration, and wages, are ‘(5) debts owing to any person who by the laws of the states or the United' States is entitled to priority.’ The bankruptcy act of March 2,1867 (chapter 176, § 28, 14 Stat. 530), provided that after the payment of the •fees, costs, and expenses, etc., all debts due to the United States, and all ■taxes and assessments under the laws thereof, should be entitled to priority, or preference, and to be paid first in full. “The right of the United States under these sections of the Revised Statutes and the bankruptcy act of 1867 (14 Stat. 517, c. 176), was considered in Lewis v. United States, 92 U. S. 618 [23 L. Ed. 513], in which it was said by Mr. Justice Swayne (page 622 [92 U. S., 23 L. Ed. 513J): ‘The United States are in no wise bound by the bankrupt act. The clause above quoted [referring to the right of priority under the act of March 2, 1807] is in pari materia with the several acts giving priority of payment to the United States, and was doubtiess put in to recognize and reaffirm the rights which those statutes give, and to exclude the possibility of a different conclusion.’ “By section 57, cl. ‘n,’ of the bankruptcy act of July 1, 1898 (30 Stat. 561 [U. S. Oomp. St. 3901, p. 3444]), it was provided that ‘claims shall not be proved against the bankrupt estate subsequent to one year after the adjudication.’ While the general principle that statutes of limitation do not bind the sovereign would probably permit the proof of this claim of the United States after the expiration of the year, it is manifest that under the provisions of section 3467 the trustee’s liability would continue, and, as he would be entitled to indemnity from the funds in his hands, the first exception of the trustee cannot be sustained. “As to the second exception, the bankrupt act makes a statement under oath of a claimant, setting forth the claim, the consideration etc., prima •facie evidence of the debt. While some • of the testimony taken might be inadmissible in a suit against the bankrupt, the measure of damage sustained under the contract, in the absence of any countervailing evidence on the part [397] of the trustee, is sufficiently proved; and the second exception is therefore not sustained. , . “As to the third exception, it appears that the 3,000 reams mentioned therein as having been ordered on February 8, 1900, were in fact ordered December 5, 1899; February 8th being the date of the purchase to supply the said quantity ordered December 5, 3899. As to the other items, however, stated in this exception, aggregating 7,100 reams, as before mentioned, no order appears to have been made upon the bankrupt therefor; the contract having been, as already appears, annulled on .January 22, 3800. While the stipulation for such a termination of the contract provides that it shall not affect or impair any right or claim of the United States, this must be restricted, presumably, to claims arising out of failure of performance theretofore made. The contract by the bankrupt was to furnish paper at.a certain price, as ordered from time to time within a year. If orders were not given him, it is difficult to understand how he could be liable for failure to furnish that of which he could have no knowledge. Any claim of the United States must be for a breach of the contract, and such breach is not possible after the termination of the contract, and without compliance with the provision thereof requiring orders upon the bankrupt for the quantities and articles agreed to be supplied. “As to the provision liquidating the damages at ten thousand dollars, it is provided by clause 'j,’ § 57, of the act of July 1, 1898 (chapter 543, 30 ¡3tat. 561 [U. S. Comp.'St. 1903, p. 3444]), that ‘debts owing to the United States as a penalty or forfeiture shall not be allowed except for the amount of the pecuniary loss sustained by the act, transaction or proceeding, out of which the penalty or forfeiture arose, with reasonable and actual costs occasioned thereby and such interest as may have accrued thereon according to law.’ “The third exception, therefore, is in part sustained, and the claim of the United States is allowed in the sum of $5,743.95; and the trustee is ordered to make payment thereof.” Upon the foregoing facts the trustee contends that the government has lost its right to share in the fund for distribution by reason of its failure to prove its claim within the year, while the government contends that its whole claim should have been allowed. I do not think that the position taken by the trustee is sound. It is a long and firmly established rule that the sovereign is not bound by a statute of limitation in which he is not named, and the provision in the bankrupt act requiting a claim to be proved within a year is a plain limitation on the creditor’s remedy. Lindsey v. Miller, 6 Pet. 666, 8 L. Ed. 538; Gibson v. Chouteau, 13 Wall. 99, 20 L. Ed. 534; United States v. Herron, 20 Wall. 251, 22 L. Ed. 275; Redfield v. Parks, 132 U. S. 239, 10 Sup. Ct. 83, 33 L. Ed. 327; United States v. Dalles, etc., Co., 140 U. S. 632, 11 Sup. Ct. 988, 35 L. Ed. 560. Neither can there be any doubt that the priority of the United States exists either for part or for the whole of its claim. I understand this to be conceded, but, in any event, the authorities are decisive upon the point.- In Lewis v. United States, 92 U. S. 622, 23 L. Ed. 513, it was decided'by the Supreme Court that the United States was not bound by the bankrupt act of 1867, and that the clause in the act giving priority to “all debts due to the United States” was “in pari materia with the several acts giving priority of payment to the United States, and was doubtless put in to recognize and reaffirm the lights which. those statutes gave, and to exclude the possibility oí a different conclusion.” It was therefore held that the- United States was under np-obligation to prove a debt in bankruptcy proceedings, -but might pqrsue' whatever other- remedy should be at its- .command against the bankrupt [398] or against any other person. What was said in Lewis v. United States is, I think, equally true of the act of 1898. Section 64, cl. “b” (5), which gives priority to “debts owing to any person who by the laws of the states or the United States is entitled to priority,” is in pari materia with sections 3466 and 3467 of the Revised Statutes, and adds nothing to the rights given by those sections, nor takes anything away. See, also, Re Huddell (D. C.) 47 Fed. 206, and United States v. Barnes (C. C.) 31 Fed. 705. The case of U. S. v. Murphy (C. C.) 15 Fed. 589, seems to be somewhat in conflict with United States v. Barnes — both are decisions in the circuit court on appeal— and I incline to think that it may also be in conflict with the decisions of the Supreme Court; but, whatever its value may be as an authority, it is not now in point. Instead of standing by while the bankrupt's assets were being distributed, as was the case there, the government is here seeking to share in the fund; and there is no possible danger to the present trustee, from which a court might desire to protect him on the ground that he would otherwise be treated harshly and inequitably, for a part of the fund has been set apart to answer this very claim, if it shall appear to be valid. How much, then, iá the United States éntitled to recover? There can be no doubt, I think, concerning the validity of the claim for such damage as was caused by the bankrupt’s breach of contract before February 7th, when the bankruptcy proceeding began; and, in my opinion, the claim is equally valid for the damage suffered thereafter down to the 30th day of June. The bankruptcy proceeding could not affect the government’s right under the contract, and this right was to have the paper at the rates agreed upon, or (upon the bankrupts’ default) to buy the paper in the. market and charge the difference to the bankrupts. Neither did the annulment of the contract on January 22d by the Postmaster General affect the government’s right, for the contract expressly stipulated— “Tliat this contract may be annulled by the Postmaster General for any failure, in his opinion, of the said Charles M. Stoever to do and perform any of the covenants, agreements, or stipulations herein covenanted, agreed, and stipulated to be done or performed by the said parties of the second part, or in case of a willful attempt by him to impose upon the department articles inferior to those required by this contract; and the spid parties of the second part further expressly agree that the termination of said contract as aforesaid, or anything done by the Postmaster General in pursuance of the stipulation, shall not affect or impair any right or claim of the United States to indebtedness or damages for the breach of any of the covenants of the contract by the parties of the second part.” The learned referee was of opinion that this should be confined to damages for such breaches as might precede the annulment, but the language is broad enough to cover any right for the breach of any covenant, and it seems to me that this refers to 'the future as well as to the past. The referee denied the government’s right to damages for breaches after February 7th on the ground that its failure to give notice to the bankrupts after February 7th that certain installments of the paper were desired relieved the bankrupts from liability. But I think this conclusion overlooks two considerations; First, that the bankruptcy had totally disabled the contractors from performing their [399] agreement, and therefore made notice a useless formality, for it would have been a vain thing to notify them to do what it was notorious that they were wholly unable to do; and, second, that, as the contract had been annulled for cause, the bankrupts were no longer entitled to notice. Even if they had been able and had offered to perform, they would not have been permitted to perform after the contract had been put an end to on the ground of their failure to deliver iu due season. The United States is entitled to recover the whole amount of its claim, and to this extent the exceptions to the report of the referee must be sustained.