
    CHELSEA FACTORS, INC. v. THE UNITED STATES
    [No. 372-55.
    Decided March 2, 1960.
    Defendant’s motion for reconsideration overruled June 8, 1960]
    
      
      Mr. Richard T. Gormay for the plaintiff. Messrs. Louis Zaslofl, Minot <& Zasloff, and Lawrence J. Lotto were on the briefs.
    
      Mr. Gerson B. Kramer, with whom was Mr. Assistant Attorney General George Cochran Doub, for the defendant. Mr. Acting Assistant Attorney General George 8. Leonard was on the brief.
   Maddest, Judge,

delivered the opinion of the court:

The plaintiff sues, claiming that it is the assignee of the proceeds of a contract between the Government and Suburban Frosted Foods, Inc. The Government asserts numerous defenses. The plaintiff is a corporation that engages only in the business of lending money on the security of specific merchandise. Its customers are wholesalers who need funds with which to purchase merchandise for resale, and who can pledge with the plaintiff as collateral their warehouse receipts or other evidence of title to the merchandise. When the borrower resells the merchandise, he has to obtain the release of the collateral by the plaintiff, by paying off the loan or substituting other equivalent collateral.

The plaintiff, at the time here involved, had an arrangement with the National City Bank of New York whereby the plaintiff could borrow from the bank up to 80 percent of the amounts loaned by the plaintiff to its customers, by placing with the bank as collateral the customers’ notes and the documents of title pledged by the customers to the plaintiff. In that situation the bank, of course, had to release the documents of title before the plaintiff’s customer could resell the merchandise. The bank would give such a release only upon the payment of the plaintiff’s note to it, or the substitution of other collateral.

One of the plaintiff’s customers was a corporation, Suburban Frosted Foods, Inc., which was engaged in wholesaling frosted foods to the Government and to private purchasers. Between November 28,1951, and February 7,1952, the plaintiff loaned Suburban $27,132.10 to be used by Suburban to purchase three separate lots of frozen foods and to pay the freight charges on one of the lots. Suburban gave the plaintiff four notes totaling the $27,132.10, and pledged as collateral the warehouse receipts for the frozen foods. The plaintiff pledged Suburban’s notes and the warehouse receipts to National City Bank for four separate loans totaling $20,200, evidenced by four separate notes.

On February 26, 1952, Suburban entered into two contracts with the Department of the Army, Quartermaster Market Center, New York City, to supply the Army with 100,000 pounds of frozen corn and 70,000 pounds of frozen peas, at specified prices per pound, the total contract price being $36,631. The contracts contained express provisions consenting to the assignment by Suburban of the money, to which it might become entitled under the contract, to a bank or other financing institution, pursuant to the Assignment of Claims Act of 1940, as amended, 31 TJ.S.C. § 203, 41 TJ.S.C. §15.

Suburban intended to use the frozen foods, the warehouse receipts for which it had pledged with the plaintiff, to fulfill its contracts with the Government. It obtained the consent of the plaintiff and the bant to the release of the frozen foods from the warehouse, and their delivery to the Army, upon substituting, as collateral, an assignment of its rights to receive payments from the Army for its delivery of these frozen foods in performance of its contracts. Suburban prepared two assignments, on standard government forms, naming the bank as assignee. It also prepared a letter, addressed by it to the bank, a copy of which letter accompanied each of its two assignments to the bank. The letter instructed the bank as follows:

All funds collected or to be collected by the National City Bank of New York through the assignment dated Feb. 28, 1952 between you and ourselves with reference to funds due on [the particular contract] are to be given to Chelsea Factors Inc. * * * after application of the indebtedness due National City Bank of New York.
Chelsea Factors Inc. are to have full title to these remaining funds.

These assignments and letters were accepted by the bank and the plaintiff as substitute collateral for the frozen foods, the warehouse receipts for which were held by the bank, and the warehoused goods were thereupon released from the pledges, and were available for delivery to the Army.

The bank sent notices of the two assignments, on standard government forms, and copies of the assignments, to the contracting officer and the disbursing officer, as required by the statute.

On March 13, 1952, Suburban borrowed an additional $2,600 from the plaintiff to pay Suburban’s shipping costs on the frozen foods shipped under Suburban’s contracts with the Army, giving the plaintiff four notes secured by the money which Suburban was to receive under its contracts with the Army. The plaintiff, in turn, borrowed an additional $4,000 from the bank, giving its note for that amount secured by Suburban’s assignment to it of the money to become due under the contracts.

Suburban, in March of 1952, made four shipments to the Army. One shipment of 30,000 pounds of frozen peas was rejected by the Army because of improper packaging. The Army secured these frozen peas from another supplier at a cost exceeding by $825 the amount it would have had to pay Suburban at Suburban’s contract prices. Suburban made a second shipment stated in Suburban’s invoice to contain 39,900 pounds of frozen peas and 35,000 pounds of frozen corn. Suburban’s invoice called for $15,936.27 for this shipment, and that sum was paid by the Army to the bank pursuant to Suburban’s assignments to the bank. In fact there were shortages in the shipment, and the invoiced price was excessive by $576.56 for the peas and $561.75 for the corn.

Suburban made two further shipments, stated in its invoices to contain 65,000 pounds of frozen corn. In fact only 59,500 pounds of corn was shipped. It was received and used by the Army. At Suburban’s contract prices it was worth $13,369.65. The Government has not paid any part of this sum to anyone. The Government discovered the shortages in the shipments, and withheld payment. The plaintiff inquired of Suburban and learned of the shortages, urged Suburban to make up the shortages, which Suburban promised to try to do. The Government’s investigation disclosed that the shortages were due to fraud on the part of Suburban. Suburban and its principal officers were, in 1953, convicted of violations of section 1001 of Title 18, U.S.C. Theretofore, on May 29,1952, Suburban had filed a petition in bankruptcy and had been adjudicated a bankrupt.

As appears above, the Army paid the bank $15,936.27 on one of Suburban’s invoices. The bank used the money to pay off, so far as it went, the plaintiff’s notes to the bank secured by the Suburban assignments. The balance due on those notes was paid by the plaintiff to the bank.

The above recital shows that the plaintiff financed Suburban’s contracts with the Army; that the Army received from Suburban and used $13,369.65 worth of frozen foods for which it has not paid anyone; that against this $13,369.65 the Army had offsets against Suburban in the amount of $825 of excess costs of replacing a defectively packed shipment, and $576.56 and $561.75 of overpayments included in the payment of $15,936.27 shown above. Suburban, before its discharge in bankruptcy, was indebted to the plaintiff in an amount greater than the $13,369.65, the value of the frozen foods which the Government received and has not paid for, less the three offsets referred to above, amounting to $1,963.31.

If the plaintiff’s loans to Suburban to finance its performance of Suburban’s contracts with the Government were secured by Suburban’s assignment of the proceeds of those contracts, the plaintiff is entitled to the money still in the hands of the Government. The Government says that the plaintiff’s loans to Suburban were not so secured because there was no assignment by Suburban to the plaintiff, the only assignment being to the National City Bank.

The Assignment of Claims Act, supra, in its third proviso says:

* * * any such assignment may be made to one party as agent or trustee for two or more parties participating in such financing;

The arrangement between the bank, the plaintiff, and Suburban in the instant case, made the bank a trustee for the plaintiff of Suburban’s assignment to the bank. The bank had loaned no money to Suburban to finance its contracts with the Government. It loaned money to the plaintiff, which the plaintiff became absolutely bound to pay to the bank, regardless of the outcome of Suburban’s transactions with the Government. The bank knew that the plaintiff borrowed the money from it in order, in turn, to lend it to Suburban to finance Suburban’s Government contracts. It agreed with Suburban and with the plaintiff that, when it received money from the Government under the assignments, it would use the money, so far as necessary, to pay itself the amount which the plaintiff owed it on the loans which the plaintiff had obtained from it to reloan to Suburban, and would turn over the excess, if any, to the plaintiff. If it had failed to do so; if, for example, it had attempted to use such an excess to pay itself for other debts which the plaintiff might have owed it, it would have been guilty of a breach of trust to Suburban, which had a right that the money paid under its contracts should be used to pay its debts, and not those of someone else. If it were necessary, which of course it is not, that a “trustee” within the meaning of the third proviso of the Assignment of Claims Act must be so constituted by a written document spelling out his duties, the writing made by Suburban and assented to by the bank and the plaintiff did spell out for the bank the duties of a trustee, i.e., the duty to receive and use money for the benefit of another person.

The Government says that even if the assignment, plus the trust relation which the bank assumed as the assignee, gave putative rights to the plaintiff under the statute, the plaintiff never perfected those rights by giving to the Government the notices which the statute requires. The fourth proviso of the statute says:

4. * * * in the event of any such assignment, the assignee thereof shall 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; (b) the surety or sureties upon the bond or bonds, if any, in connection with such contract; and (c) the disbursing officer, if any, designated in such contract to make payment.

As we have seen, the bank gave the notices required by the statute. The statutory purpose of the notice is, of course, to prevent the payment of the contract money to the contractor, or to some subsequent assignee, or to prevent its being retained by the Government to satisfy some obligation of the contractor to the Government unconnected with the contract, if the contract permits an assignment “not subject to reduction or set-off.”

As we have seen, the statute permits an assignment to one (and only one) finance institution, but provides that that one may be a trustee “for two or more parties participating in such financing.” The Government is urging that the notice given by the one assignee to the Government must advise the Government of the arrangements which the bank has with any number of persons who may have signed notes and put up collateral with the bank to induce it to participate in the financing, or to permit its name to be used as assignee to satisfy the statute. When the Government has received this information, which it says is a sine qua non to an effective assignment, what does it propose to do with it? Is it willing, at its peril, to undertake to pay out the proceeds of the contract to the persons named as beneficiaries of the trust, and in accordance with their various, and variable from time to time, equities ? The statute does not, of course, load the Government with any such burden. But if, as the Government argues, the statute requires that notice be given of the equities, a court would be hard put to justify the Government in disregarding the equities and paying the money to the one assignee of which it had notice.

The 1940 Amendment to the Assignment of Claims Act was intended to facilitate the financing of Government contracts by private capital in the way in which private capital normally operates in financing the country’s economy. It was not an act for the encouragement and multiplication of suits at law and bills of interpleader in equity.

We hold that the notices given by the bank were valid, and preserved the rights of the plaintiff as the beneficiary of the bank’s ownership, as a trustee, of the assignment.

We have referred above to the shortages in Suburban’s shipments, and the conviction of Suburban and its officers of the offense of filing false claims against the Government. The consequence of this fraud was that any right of Suburban to be paid for the frozen foods which it delivered and which were accepted and used, was forfeited. 28 U.S.C. § 2514. The Government urges that the security of the as-signee was thereby forfeited. We held to the contrary in Arlington Trust Company v. United States, 121 C. Cls. 82. The Government urges us to repudiate that precedent. We can think of no more effective way to destroy the purpose and usefulness of the Assignment of Claims Act of 1940 than to do that. We see no reason why a banker, or those for whom he acts in financing a Government contract, should forfeit their security because of fraudulent acts of another person in which they did not participate. We cannot see why any prudent person would lend a dollar to finance a Government contract, if such a risk were added to those normally inherent in the lending of money.

The Government says that the plaintiff was, itself, guilty of fraud in attempting to collect money on Suburban’s contracts after it knew of the shortages in the shipments.

When the defendant withheld payment of Suburban’s vouchers A 418 and A 430, Chelsea, having learned that the Suburban contracts were being investigated by defendant, called in Suburban’s officers, and they confessed the shortages. Chelsea urged them to make up the shortages and they promised to try to do so. On May 5, 1952, about six weeks after the last invoice had been submitted, Chelsea wrote the bank, the named assignee, the following letter:

He: Assignment of Government Contracts #23424, & #23426
The above contracts were entered into by Suburban Frosted Foods Inc., 807 Washington Street, N.Y.C., the proceeds of which have been assigned to you, and discounted by you with our firm.
To date only one invoice has been paid, leaving three invoices outstanding. The payment of these invoices have [sic] been overdue for some time now, and inquiries I have made to the disposition of these funds have given me no satisfaction.
Since the government recognizes only you as the assignee of the above mentioned contracts, I hereby request of you to write the parties involved to determine the cause for delay in payment.
The invoices involved are as follows:
Contract #23424: Invoice #A418 Dated March 12, 1952, $6,741.00; Invoice #A429 Dated March 26, 1952, $6,069.00.
Contract #23426: Invoice #A430 Dated March 26, 1952, $7,864.50; Invoice #A417 Dated March 12, 1952 was paid on March 26,1952 in the amount of $15,936.27.
Copies of the above invoices are in your files for future reference, [sic] I would appreciate your acting on this as soon as possible.

Defendant argues that as a result of this letter, the plaintiff’s claim against the United States was forfeited pursuant to 28 U.S.C. § 2514.

The plaintiff’s letter to the bank was, obviously, not straightforward and frank. It then knew that there had been shortages in Suburban’s deliveries and that the Government was aware of the shortages and was investigating Suburban’s conduct. If it had been completely frank, it would have so advised the bank. But its omission to do so could not possibly have been with the hope or intent of misleading the Government into paying for goods which it knew that the Government knew that it had not received.

There were many questions which had to be taken up with the Government by the bank. As we have seen, the Government, in Arlington Trust Co. v. United States, supra, took the position that the fraud of a contractor, in no way participated in by his assignee, was imputable to the assignee, and resulted in a forfeiture of the assignee’s rights under his assignment. Was the Government taking that same position in this case, and therefore refusing to pay the assignee for the goods which it had actually received and used ? All of the questions which have been so vigorously litigated in this case were to be answered, and the answers had to come, in the first instance, from the Government. It was not for the plaintiff to determine whether Suburban’s shortages had been fraudulent or only inadvertent. It was entirely proper for the plaintiff to ask the bank to ask the Government what position it was taking with regard to the rights of the assignee. The bank made the inquiry, and the Government answered it. No one was misled, and, it seems plain to us, no one was ever intended to be misled.

To deny recovery to the plaintiff would be to impose a fine of some $12,000 upon it, not for fraud, but for lack of frankness. This seems to us to stretch the language and the purpose of section 2514 far beyond the breaking point, and to violate all the precedents to the effect that fraud, resulting in forfeiture, can be found only on the basis of clear and convincing evidence.

When the Government refused to pay for the frozen foods which it accepted and used, and the bank had collected all the money which it had put into the transaction, and Suburban and its officers had been convicted of fraud, and the Government was charging fraud against the plaintiff, the National City Bank refused to take any further steps to enforce the rights created by the assignment. We think it took a very lighthearted attitude toward its duties as trustee under its agreement with the plaintiff. It even refused to allow the plaintiff to use its name as trustee in a suit to ascertain the plaintiff’s rights under the assignment.

The plaintiff brought this suit in its own name. On September 26, 1957, while this suit was pending, the bank gave the plaintiff two documents, each entitled “Reassignment”, which documents by their terms “reassigned” the bank’s rights, under Suburban’s two contracts, to the plaintiff.

The third proviso of the Assignment of Claims Act says that:

Unless otherwise expressly permitted by such contract any such assignment * * * shall not be subject to further assignment.

Suburban’s contracts with the Government expressly stated that the contracts “may thereafter be assigned and reassigned to any such institution.” The context shows that “such institution” meant a bank, trust company or other financing institution. The Government concedes that the plaintiff is a financing institution within the meaning of the contracts.

It would seem, then, that after these “reassignments” the legal rights and the equitable rights under the assignment had come to rest in the same person, and that even the formal procedural requirements had been placed beyond argument. But the Government says that the merger of rights occurred too late. It says that by 1957 when the “reassignments” took place, the plaintiff was fully aware of all of Suburban’s wrongdoings, and of all of the Government’s defenses and counterclaims. This is perfectly true, and we must determine whether it is material.

In the interpretation and application of the Assignment of Claims Act of 1940 it becomes necessary, in order to make the act workable and fair, to call upon analogies in the fields of equity and negotiable instruments. When the bank in the instant case took the assignments as trustee, both it and its beneficiary, the plaintiff, were bona fide purchasers. They continued in that moral position during the time that their money was advanced to Suburban, and during Suburban’s performance of the contracts. The bank, then, got its legal right as assignee, and the plaintiff got its equitable right as the beneficiary of the trust, the res being Suburban’s assignment, as purchasers in good faith. The Government says that a transfer of the legal title by the trustee to the owner of the equitable title of a chose in action, makes the chose in action subject to the infirmities and defenses which the equitable owner, the transferee, had become aware of by the time the transfer took place.

That cannot be sound doctrine. It would mean that if a trustee of an estate, for example, in good faith purchased bonds, payable to bearer, and it was later discovered and published that the bonds had been stolen, the beneficiaries of the trust who knew that the bonds had been stolen could never receive the bonds or their proceeds without being liable to restore them to the one from whom they were stolen. It is conceivable that if the beneficiaries of the trust knew, although the trustee did not, at the time of the purchase, that the bonds had been stolen, the bonds would have to be restored to the true owner. But we cannot accept the reverse of that proposition, as the Government urges. In the instant case both the trustee bank and the beneficiary, the plaintiff, were good faith purchasers when they invested their money and took Suburban’s assignments as security. The later merger of the two rights into one did not destroy or impair the equity which the assignment had created long before this merger.

The plaintiff’s standing to sue in this court is founded upon the reassignments to it by the bank, which reassignments were expressly permitted by its contracts with the Government, and by the statute. What standing it might have had in the absence of the reassignments it is not necessary for us to decide, and we do not decide.

The amounts which Suburban owed the plaintiff on the loans secured by the assignments here in question were reduced by the payment of the Government to the bank of the one invoice referred to above, and by a number of payments of interest by Suburban to Chelsea. The notes bore interest at the rate of 1*4% per month, and provided that legal fees incurred in attempting to collect on the notes should be added to the face of the notes. There was an item of $340 for such fees, and an item of $15.36 for warehouse storage. The rate of interest was shockingly high but it was, apparently, not illegal nor even unusual.

The Government urges that the plaintiff should recover only the principal of its loans; that for it to recover interest would be a violation of the doctrine that the Government is not obliged to pay interest in the absence of a statute or a contract providing for interest. The Government misapprehends the situation. It will not be paying interest. It will be paying for frozen corn and frozen peas which it received and used and has not paid for. The Government, by the Assignment of Claims Act of 1940 has consented that its obligations to contractors may be used as collateral by contractors in borrowing money to finance performance. Naturally, it has not said that such loans must be without interest. The collateral, as in all other situations, secures the payment of interest, attorney’s fees, and other agreed-upon charges, as well as the principal of the loans.

Suburban’s contracts with the Army contained the provision that:

Notwithstanding any other provision of this contract, payments to an assignee of any monies due or to become due under this contract shall not, to the extent provided in said Act (The Assignment of Claims Act of 1940) as amended, be subject to reduction or setoff.

The Act authorized the insertion in Government contracts of “no set-off” provisions and said that when such a provision was inserted in the contract payments to the assignee should not be subject to reduction or setoff for any liability of the contractor-assignor to the Government arising independently of the contract, nor for any liability for renegotiation repayments or for

(2) fines, (3) penalties (which term does not include amounts which may be collected or withheld from the assignor in accordance with or for failure to comply with the terms of the contract), or (4) taxes, social security contributions, or the withholding or nonwith-holding of taxes or social security contributions, whether arising from or independently of such contract.

As we have seen, Suburban filed a petition in bankruptcy in 1952 and was adjudicated a bankrupt. The United States filed a priority claim for $22,775.07 which was allowed. The proof of the claim consisted of a sworn statement by the Assistant Comptroller General listing several small items of claim, and a claim of $20,111.84 alleged to be due the Government because of Suburban’s substitution of ungraded and inferior merchandise in shipments under five of its contracts, none of which were the contracts whose assignment is involved in this case.

The plaintiff was not a party to the bankruptcy proceedings. It chose to rely, as it had a right to do, upon its notes secured by collateral. There apparently were no assets for the creditors in the bankrupt estate. In the circumstances, there would have been no objection to, and not much judicial consideration of, the Government’s claim. The allowance of it is of course not binding on the plaintiff. In the instant suit the Government has not been able to reconstruct or support the claim, except to the extent of the three items of $825, $576.56, and $561.75, a total of $1,968.81, which we have recited above. It counterclaims for and seeks to set off double damages and forfeitures under the False Claims Act, 31 U.S.C. § 231 ff., in the amount of $8,276.62. A discussion of this question would be a repetition of what we have said in this opinion and elsewhere about the right of the Government to invoke a forfeiture for fraud, under 28 U.S.C. § 2514, against an innocent assignee of a Government contract.

Our conclusion is that Suburban had earned $11,406.34 in the performance of its contracts, ($13,369.65 less $1,963.31) above what has been paid; that Suburban was indebted to the plaintiff on its notes to the plaintiff secured by the assignment of its contracts, in an amount greater than $11,406.34, and that the plaintiff is therefore entitled to a judgment for $11,406.34. The counterclaim is dismissed.

It is so ordered.

LittletoN, Judge {Bet.); Laeamore, Judge, and Jones, Chief Judge, concur .

Whitakek, Judge,

dissenting in part and concurring in part:

I cannot agree that Chelsea Factors acquired any rights against the defendant by virtue of Suburban’s assignment to the bank and its letter to the bank instructing it to pay to Chelsea the excess received by it over the amount necessary to discharge Chelsea’s note. As between the bank, Suburban and Chelsea, the bank did become a trustee for Chelsea, but not as to the defendant. This is so, because a copy of Suburban’s letter to the bank was not given the defendant, nor was the defendant otherwise notified of Chelsea’s interest in the assignment. While the amendment to the antiassignment statute permitted an assignment to a financial institution as a trustee for others participating in the financing of a Government contract, still, it provided that notice of the assignment be given the defendant. This necessarily implies, in view of the purpose of the antiassignment statute, that the defendant be put on notice of those having an interest in the funds assigned. Defendant did not want unknown claimants making demands on it. When it paid out money it wanted to be sure it was paying the right party and would not have to pay it again. This was the purpose of the original antiassignment statute, Hobbs v. McLean, 117 U.S. 567, 576; United States v. Aetna Cas. & Surety Co., 838 U.S. 366; Pittman v. United States, 127 C. Cls. 173; cert. denied 348 U.S. 815, and it is the purpose of the requirement of filing a true copy of the assignment.

If a true copy is filed it would show whether the named assignee was acting as agent or trustee for anyone else participating in the financing. If it does not show that the named assignee is an agent or trustee, no one can acquire any rights under it as against the United States other than the person named.

It is true the majority opinion does not rest plaintiff’s right to recover on the assignment to the bank and Suburban’s letter to the bank, but it clearly implies plaintiff might recover on this basis in the absence of the bank’s later reassignment. I disagree as to this, but I do agree that it might recover under the reassignment, except for the fraud which I think it attempted to practice on the defendant.

I agree Suburban’s fraud is not imputable to plaintiff, but I think plaintiff itself attempted to practice a fraud.

When the defendant withheld payment of Suburban’s vouchers A 418 and A 430, Chelsea, having learned that the Suburban contracts were being investigated by defendant, called in Suburban’s officers, and they confessed the shortages. Chelsea urged them to make up the shortages and they promised to try to do so, but plaintiff does not claim they actually did so. At this point Chelsea’s own gown definitely begins to trail in the mud. It withheld knowledge of this fraud from the bank, and withheld it also from the defendant, at the same time inquiring of defendant what had become of the money. On May 5,1952, about six weeks after the last invoice had been submitted, Chelsea wrote the bank, the named assignee, the following letter:

He: Assignment of Government Contracts #23424, & #23426
The above contracts were entered into by Suburban Frosted Foods Inc., 807 Washington Street, N.Y.C., the proceeds of which have been assigned to you, and discounted by you with our firm.
To date only one invoice has been paid, leaving three invoices outstanding. The payment of these invoices have been overdue for some time now, and inquiries I have made to the disposition of these funds have given me no satisfaction.
Since the government recognizes only you as the as-signee of the above mentioned contracts, I hereby request of you to write the parties involved to determine the cause for delay in payment.
The invoices involved are as follows:
Contract #23424: Invoice #A418 Dated March 12, 1952, $6,741.00; Invoice #A429 Dated March 26, 1952, $6,069.00.
Contract #23426: Invoice #A430 Dated March 26, 1952, $7,864.50; Invoice #A417 Dated March 12, 1952 was paid on March 26,1952 in the amount of $15,936.27.
Copies of the above invoices are in your files for future reference, I would appreciate your acting on this as soon as possible.

Without saying a word about the shortages, of which they were fully aware when this letter was written, they asked the bank why the invoices had not been paid — “to determine the cause for the delay in payment,” are the exact words of their letter. In this letter they set out the amount of the invoices — not the amount Suburban, or it as assignee, was entitled to claim, but the amount Chelsea knew Suburban had fraudulently claimed. Chelsea wanted the bank to find out why these fraudulent invoices had not been paid.

Had Chelsea been honest and aboveboard and had told the defendant of the shortages, they would have been entitled to collect for the goods actually shipped and accepted by the defendant. But they were not honest and aboveboard. They did not disclose what they knew to be a fact, that the defendant was being overcharged; they withheld this knowledge, and tried to collect the full amount fraudulently claimed, or, at least, to find out why it had not been paid, which I think is tantamount to a request for payment. They did not need to request information as to the cause for the delay in payment; they knew the cause. They were not asking information; they were asking for payment; they were asking for payment for invoices they knew to be fraudulent.

I think this was a deliberate attempt to secure payment of vouchers it knew to be fraudulent.

My reluctance to find anyone guilty of an attempt to practice a fraud is largely overcome in this instance by plaintiff’s apparent knowledge of prior fraudulent conduct on the part of Suburban in its dealings with defendant.

Between September 17,1951, and December 18,1951, Suburban and defendant entered into six contracts for frozen foods. All of them called for Grade B or better, except one, which called for Grade A. Chelsea financed these contracts. Chelsea had also financed the purchase by Suburban of various lots of ungraded frozen foods, which were caused to be released from public warehouses by Chelsea at the request of Suburban for the specific purpose of performing the contracts, which called for frozen foods, not ungraded, but of Grade B or better. On these contracts, Suburban deliberately shipped ungraded merchandise in lieu of the graded merchandise specified. Suburban then submitted to Chelsea, to be forwarded to the defendant, a false and fraudulent invoice under each of these contracts, requesting payment for the graded merchandise specified in each contract. Since it had financed Suburban’s contracts with defendant, Chelsea must have known that they called for graded merchandise, and it knew that ungraded merchandise was being shipped instead. Chelsea forwarded the invoices with this knowledge, actual or presumptive.

Section 2514 of Title 28 U.S.C. reads:

Sec. 2514. Forfeiture of fraudulent claims.
A claim against the United States shall be forfeited to the United States by any person who corruptly practices or attempts to practice any fraud against the United States in the proof, statement, establishment, or allowance thereof.
In such cases the Court of Claims shall specifically find such fraud or attempt and render judgment of forfeiture. ,[62 Stat. 978.]

In my opinion Chelsea attempted to secure payment of vouchers which they knew to be false and' fraudulent, and thereby attempted to practice a fraud against the United States in the “establishment or allowance” of the claim on which it now sues. Under the statute its claim should, therefore, be forfeited to the United States.

For the foregoing reasons I respectfully dissent.

FINDINGS OF FACT

The court, having considered the evidence, the briefs and argument of counsel, and the report of Trial Commissioner No aid A. Hogenson, makes the following findings of fact:

1. Plaintiff, Chelsea Factors, Inc., hereinafter referred to as Chelsea, is a New York corporation, organized in early 1951, with its office at New York City. At all relevant times, Chelsea engaged only in the business of lending money on the security of specific merchandise. Chelsea’s customers were food wholesalers or other business concerns that desired to borrow money for use in purchasing specified merchandise to be stored at a public warehouse for future sale. Chelsea customarily loaned an amount up to 80 percent of the cost of the merchandise, and received the customer’s note for the amount of the loan with warehouse receipts or other evidence of title to the merchandise as collateral security for the loan. Chelsea loaned money to concerns dealing in different kinds of merchandise, and the officers of Chelsea ordinarily were not familiar with the details of the business of its customers.

2. Chelsea in part financed its loan operations by an arrangement with the National City Bank of New York, hereinafter referred to as the Bank, whereby Chelsea could borrow from the Bank up to 80 percent of the amount that Chelsea loaned to its customers. The Bank received Chelsea’s note for the amount of the loan and, as collateral, the customer’s note to Chelsea endorsed over to the Bank by Chelsea and the warehouse receipts or other evidence of title to the merchandise securing the customer’s note. Because the merchandise stored at the warehouse was pledged by the wholesaler to Chelsea and by Chelsea to the Bank, it was necessary for the wholesaler to request Chelsea’s consent to the release of the merchandise and in turn for Chelsea to request the Bank’s release of the merchandise, whenever the wholesaler desired to accomplish a sale or transfer of the pledged merchandise. In order to obtain consent for the release of the merchandise, the wholesaler had to repay his loan to Chelsea or substitute other collateral, such as an assignment of the sales contract. The Bank authorized release of the merchandise only upon Chelsea’s request, and upon payment by Chelsea of that part of the Bank’s loan secured by the merchandise released or upon substitution of other collateral, such as an assignment of the wholesaler’s contract for sale of the merchandise. The Bank required that it be named as the assignee in any such assignment, and further, that collateral such as warehouse receipts and other evidence of title be held by it in its name.

3. Suburban Frosted Foods, Inc., hereinafter referred to as Suburban, was a New York corporation, organized in late 1950. It engaged in the wholesaling of frozen foods until bankruptcy proceedings were instituted against it on May 29, 1952. It was adjudicated a bankrupt on June 2, 1952. Suburban at times borrowed from Chelsea part of the money necessary for its purchases of frozen foods. For the most part, these goods were resold by Suburban to the United States. During its operations, Suburban had over 100 different Government contracts, but also made sales to private concerns. On a number of occasions, Suburban executed an assignment of payments or claims to payments due or to become due under one of these Government contracts in order to obtain release of the merchandise used to perform the contract, either in whole or in part, without immediately repaying the loan secured by the merchandise.

4. On November 28,1951, Chelsea loaned Suburban $8,400 for use by Suburban in purchasing 1,800 cases or 54,000 pounds of frozen corn, receiving Suburban’s note for $8,400 secured by the 1,800 cases of corn. This loan was recorded in Chelsea’s books as Loan No. 168, and is hereinafter referred to by that designation. Also on November 28, 1951, Chelsea was loaned $6,700 of this money by the Bank, giving the Bank its note for that amount secured by the 1,800 cases of corn and Suburban’s note which was endorsed over to the Bank. At the request of Chelsea, Suburban by letter instructed the warehouse to store the 1,800 cases of corn in the name of the Bank, and Chelsea delivered the warehouse receipt for the corn to the Bank. The corn was stored in the name of the Bank.

5. On J anuary 4,1952, Chelsea loaned Suburban $8,400 for use by Suburban in purchasing 1,800 cases or 54,000 pounds of frozen corn, receiving Suburban’s note for $8,400 secured by the 1,800 cases of corn. This loan was recorded in Chelsea’s books as Loan No. 178, and is hereinafter referred to by that designation. Also on January 4, 1952, Chelsea was loaned $6,700 of this money by the Bank, giving the Bank its note for that amount secured by the 1,800 cases of corn and Suburban’s note which was endorsed over to the Bank. At the request of Chelsea, Suburban by letter instructed the warehouse to store the 1,800 cases of corn in the name of the Bank, and Chelsea delivered the warehouse receipt for the corn to the Bank. The corn was stored in the name of the Bank.

6. On January 30,1952, Chelsea loaned Suburban $9,160.50 for use by Suburban in purchasing 1,970 cases or 59,100 pounds of frozen peas, and on February 7, 1952, Chelsea loaned Suburban $1,171.60 for use by Suburban in paying the freight bill on the 1,970 cases of peas. Chelsea received Suburban’s notes for $9,160.50 and $1,171.60, secured by the 1,970 cases of peas. These loans were reduced to a total of $8,500 shortly thereafter. They were recorded on Chelsea’s books as Loan No. 183, and are hereinafter referred to by that designation. On January 31, 1952, Chelsea was loaned $5,900 of this money by the Bank and, on February 13,1952, Chelsea was loaned $900 of this money. Chelsea gave the Bank its notes for $5,900 and $900, secured by the 1,970 cases of peas and Suburban’s notes which were endorsed over to the Bank. At the request of Chelsea, Suburban by letter instructed the warehouse to store the 1,970 cases of peas in the name of the Bank, and Chelsea delivered the warehouse receipt for the peas to the Bank. The peas were stored in the name of the Bank.

7. Each of the notes given by Suburban to Chelsea in connection with Loans Nos. 168, 178, and 183 were payable on demand, each in the amount above-stated, and provided for the payment of interest at the rate of 1% percent. Although not expressly provided in the notes, Suburban and Chelsea both understood and intended that the stated interest rate was a monthly rate and that interest would be compounded monthly. Each of the notes also contained the following provisions, the word “Company” meaning Chelsea:

I. As collateral security for the payment of (i) the indebtedness evidenced hereby or by any note(s) which may be given in renewal or extension of all or any part of that indebtedness, and (ii) any and all other obligations and/or liabilities, direct or contingent, of the undersigned to the. Company, due or to become due, whether now existing or hereafter arising — (the indebtedness evidenced hereby and any and all such other obligations and liabilities being hereinafter referred to as the “Obligations”) — the undersigned has deposited, or agrees forthwith to deposit, with the Company and/or with * * * as agent or pledgeholder for the Company, the following property, viz: * * * and the undersigned agrees: (a) to deliver to the Company additional collateral or to make payments on account, to the satisfaction of the Company, should the aggregate market value of all property held as security hereunder at any time suffer any decline or should any such property be deemed by the Company to be unsatisfactory or inadequate, or should any such property fail to conform to legal requirements; (b) that the Company shall be under no duty with respect to any collateral held relative hereto at any time(s) except to account therefor in due course pursuant to the terms and provisions hereof, and (c) that the Company may, in its discretion and in the absence of other express instruction in wi’iting, apply any amount(s), which may be paid to and/or received or held by it relative hereto at any time(s), to the payment or reduction, either in whole or in part, of the principal and/or interest (as the Company may elect) then owing on any of the Obligations.
II. The undersigned hereby gives to the Company a lien, for the amount(s) owing at any time(s) on the Obligations, upon any and all property now or at any time(s) hereafter given unto or left in the possession or control of the Company by or for account of the undersigned, or in transit to or from the Company from or to the undersigned, and also upon any and all property of the undersigned held at any time by any third party as agent, pledgeholder or otherwise for the Company, whether so possessed, controlled or held by the Company or any such third party for the express purpose of being used by the Company as collateral security, or for safekeeping, or for any other or different purpose, and also upon any and all cash balance (s) of the undersigned with the Company, and the Company may, at its option and at any time (s) with or without notice to the undersigned, appropriate and apply to the payment or reduction, either in whole or in part, of the amount owing on all or any of the Obligations (whether or not then due) any and all moneys now or hereafter with the Company, on deposit or otherwise, to the credit of or belonging to the undersigned, it being understood and agreed that the Company shall not be obligated to assert or enforce any rights or liens hereunder or to take any action in reference thereto and that the Company may in its discretion at any time(s) relinquish its rights as to particular property hereunder without thereby affecting or invalidating its rights hereunder as to all or any other property hereinbefore referred to.
III. In event of the happening of any one or more of the following, to-wit: (a) the non-payment of any of the Obligations; (b) the failure of the undersigned forthwith, with or without notice, to furnish satisfactory additional collateral, or to make payments on account, as hereinbefore agreed; (c) the death, failure in business, dissolution or termination of existence of the undersigned; (d) any petition in bankruptcy being filed by or against the undersigned or any endorser or guarantor of this note, or any proceedings in bankruptcy, or under any Acts of Congress relating to the relief of debtors, being commenced for the relief or readjustment of any indebtedness of the undersigned or any endorser or guarantor of this note, either through reorganization, composition, extension or otherwise; (e) the making by-the undersigned or any endorser or guarantor of this note of an assignment for the benefit of creditors or the taking advantage by any of the sanie of any insolvency law; (f) the appointment of a receiver of any property of tbe undersigned or any endorser or guarantor of this note; (g) the attachment or distraint of any funds or other property of the undersigned which may be in, or come mto, the possession or control of the Company, or of any third party acting for the Company as aforesaid, or of the same becoming subject at any time to any mandatory order of court or other legal process — then, or at any time after the happening of any such event, this note and/or any note(s) or other obligation(s) which may be taken in renewal or extension of all or any part of' the indebtedness evidenced thereby, shall immediately become due and payable, without demand or notice, and likewise upon the happening of any such event, or at any time thereafter, any or all of the other Obligations then existing, shall, at the option of the Company, become due and payable forthwith, without demand upon or notice to the undersigned. Furthermore, in any such event, full power and authority are hereby given the Company to sell, assign, and deliver the whole of the said collateral, or any part(s) thereof, or any substitutes therefor, or any additions thereto, or any other property upon which the Company has hereinbefore been given a lien, at any broker’s board, or at public or private sale, at the option of the Company, either for cash or on credit or for future delivery, without assumption of any credit risk, and without either demand, advertisement or notice of any kind, all of which are hereby expressly waived, and no delay on the part of the Company in exercising any power of sale or any other rights or options hereunder, and no notice or demand, which may be given to or made upon the undersigned by the Company with respect to any power or sale or other right or option hereunder, shall constitute a waiver thereof, or limit or impair the right of the Company to take any action or to exercise any power of sale or any other rights hereunder, without notice or demand, or prejudice the rights of the Company as against the undersigned in any respect. At any sale hereunder, the Company may itself purchase the whole or any part of the property sold, free from any right of redemption on the part of the undersigned, all such rights being also hereby waived and released. In event of any sale or other disposition of any of the property aforesaid, after deducting all costs or expenses of every kind for care, safekeeping, collection, sale, delivery or otherwise, the Company shall, after applying the residue of the proceeds of the sale, or other disposition thereof, as hereinabove authorized and after making proper allowance for interest on Obligations not then due, return any overplus to the undersigned, all without prejudice to the rights of the Company as against the undersigned with respect to any and all amounts which may then be or remain unpaid on any Obligations.
IV. The word “property” as used herein includes goods and merchandise, as well as any and all documents relative thereto; also, funds, securities, choses in action and any and all other forms of property, whether real, personal or mixed, and any right, title or interest of the undersigned therein or thereto.
V. The Company is hereby authorized, at its option and without any obligation to do so, to transfer to or register in the name of its nominee (s) all or any part of the property referred to hereinabove, and to do so before or after the maturity of any of the Obligations, and with or without notice to the undersigned.
VI. The Company may transfer this note and deliver to the transferee (s) all or any of the property then held by it as security hereunder, and the transferee(s) shall thereupon become vested with all the powers and rights herein given to the Company with respect thereto; and the Company shall thereafter be forever relieved and fully discharged from any liability or responsibility in the matter but the Company shall retain all rights and powers hereby given with respect to property not so transferred.
VII. This note shall be deemed to have been made under and shall be governed by the laws of the State of New York in all respects, including matters of construction, validity and performance, and it is understood and further agreed that none of its terms or provisions may be waived, altered, modified or amended except as the Company may consent thereto in writing duly signed and on its behalf.

8. On February 21,1952, Suburban borrowed $10,000 from Mr. Harry Friedman, doing business under the name of Consumers Products Company, hereinafter referred to as Consumers. As security for this loan, Suburban assigned to Consumers its equity in the merchandise pledged with Chelsea as security for Chelsea’s loans Nos. 168,178, and 183, and also in 1, 796 cases of corn pledged with Chelsea as security for another loan to Suburban. In a letter dated February 21,1952, addressed to Chelsea, signed by Mr. Friedman for Consumers, and endorsed as approved by both Chelsea and Suburban, Mr. Friedman advised Chelsea of his $10,000 loan to Suburban and of the assignment by Suburban of its equity in the particular merchandise to Consumers. It was further stated in the letter as follows:

We hereby acknowledge and agree that this merchandise is to remain in your name. Upon sale of all or any portion of the above merchandise, you will retain from the proceeds up to that portion of money due you in repayment of the loan or loans made by you to Suburban Frosted Foods Inc., and all charges thereof.
Of the amount or amounts remaining after deductions due you, you will remit the remaining proceeds to me up to the amount of $10,000.00.
Those proceeds over and above monies due you, and monies due me, will then be remitted to Suburban Frosted Foods, Inc.

Chelsea thereby agreed that after it had been paid all monies due on its loans secured by the particular merchandise, it would remit any other proceeds from the sale of that particular merchandise to Consumers up to the sum of $10,-000, with any balance thereafter to be remitted to Suburban. Partial payment of this obligation was made as hereinafter stated in finding 16, and the unpaid balance was the subject matter of a claim filed by Mr. Friedman against Suburban in the bankruptcy proceedings.

9. Suburban entered into two contracts, each dated February 26, 1952, with the Department of the Army, Quartermaster Market Center, New York, N. Y. These contracts were designated as Purchase Orders Nos. NY 23421 and NY 23426. Contract NY 23424 provided for sale and delivery to defendant of 30,000 pounds of frozen corn at $0.2247 per pound, and 30,000 pounds of frozen peas at $0.2023 per pound. Contract NY 23426 provided for sale and delivery to defendant of 40,000 pounds of frozen peas at $0.2023 per pound and 70,000 pounds of frozen corn at $0.2247 per pound. The total contract price was $12,810 for delivery of the produce specified in contract NY 23424 and $23,821 for delivery of the produce specified in contract NY 23426. Deliveries under both contracts were to be accomplished at Penniman and Norfolk, Virginia, on specified dates between March 14 and 28,1952.

10. Clause 8 (a), as amended by clause 38, of the General Provisions of both of the contracts referred to in finding 9 above, provides that:

Pursuant to the provisions of the Assignment of Claims Act of 1940, as amended (31 U. S. Code 203, 41 U. S. Code 15), if this contract provides for payments aggregating $1,000 or more, claims for monies due or to become due the Contractor from the Government under this contract may be assigned to a bank, trust company, or other financing institution, including any Federal lending agency, and may thereafter be further assigned and reassigned to any such institution. Any such assignment or reassignment shall cover all amounts payable under this contract and not already paid, and shall not be made to more than one party, except that such assignment or reassignment may be made to one party as agent or trustee for the two or more parties participating in such financing. Notwithstanding any other provision of this contract, payments to an assignee of any monies due or to become due under this contract shall not, to the extent provided in said Act, as amended, be subject to reduction or setoff. * * *

11. Suburban intended to fulfill its commitments under contracts NY 23424 and NY 23426 by utilizing the frozen corn and frozen peas which had been pledged to Chelsea as security under Loans Nos. 168,178 and 183. In order to obtain release of this merchandise, Suburban did not pay these loan obligations to Chelsea, but instead proposed to Chelsea that the release be made on the basis of assignments of the two contracts. Suburban knew that the particular merchandise had been repledged by Chelsea to the Bank and that the assignments would have to be executed in the name of the Bank as assignee in order to obtain release of the merchandise. Accordingly, Suburban prepared and executed an assignment of each contract, on standard Government forms, and inserted the name of the Bank as assignee. These assignments, dated February 28, 1952, were delivered by Suburban to Chelsea and by Chelsea to the Bank, and accompanying each assignment was a letter under the same date executed by Suburban at the request of Chelsea and addressed to the Bank in the following terms:

All funds collected or to be collected by the National City Bank of New York through the assignment dated Feb. 28,1952 between you and ourselves with reference to funds due on contract #NY 23426 dated Feb. 27,1952 between the Quartermaster Market Center of New York and Suburban Frosted Foods Inc. are to be given to Chelsea Factors Inc. 99 Hudson Street, New York City after application of the indebtedness due National City Bank of New York.
Chelsea Factors Inc. are to have full title to these re-remaining funds.

The letter covering contract NY 23424 was identical except for the contract number.

In accordance with the Bank’s standard practice, there was no direct dealing between Suburban and the Bank, but Chelsea and Suburban understood and agreed that Chelsea would request the Bank to release the pledged merchandise upon the delivery to the Bank of the contract assignments. The Bank accepted the assignments as security in lieu of the warehouse receipts and existing pledge arrangements on the particular merchandise. At the request of Chelsea, the Bank released the particular merchandise at the warehouse, without payment by Chelsea of the loan obligations for which the Bank had held the merchandise as security. The Bank released a portion of the merchandise when the time arrived for each of the four shipments under the two contracts.

12. The assignments referred to in finding 11 were executed by Suburban on February 28, 1952. The assignment relating to contract NY 23426 contained the following pertinent provisions:

_ Know all MEN bt these pkesents, that the undersigned (hereinafter called the “Assignor”) for good and valuable consideration, the receipt whereof is hereby acknowledged, hereby assigns, transfers and sets over unto National City Bank of New York (hereinafter called the “Financing Institution”), all of the right, title and interest of the Assignor in and to all moneys and claims for moneys due or to become due to the Assignor from the United States or from any agency or department thereof under or arising out of Contract No. NY 23426, or any amendment thereof or addition thereto, between the Assignor and the United States of America, or an agency or department thereof (hereinafter called the “Contract”).
The Assignor hereby irrevocably authorizes and empowers the Financing Institution, in the name of the Assignor or otherwise, to demand, receive and collect, and to give acquittance for the payment of any and all moneys assigned, or the claims for which are assigned hereby, to file any claims and to commence, maintain or discontinue any actions, suits or other proceedings, which the Financing Institution deems advisable, in order to collect or enforce payment of any such moneys, to settle, adjust and compromise any and all disputes or claims in respect of such moneys, and to endorse any and all checks, drafts or other orders or instruments for the payment of moneys payable to the Assignor which shall be issued in respect of such moneys; but the Financing Institution is not obligated in any manner to make any demand, to present or file any claim, or to take any other action here-inabove authorized.
The Assignor hereby authorizes and directs the United States and the agencies and departments of the United States and the appropriate officers and agents thereof to pay to the Financing Institution all moneys as and when due the Assignor under or in connection with the Contract, and to draw and deliver to the order of the Financing Institution any and all warrants and other instruments for the payment of the moneys and claims assigned hereby, and to accept the receipts of the Financing Institution therefor, and the Assignor agrees that such receipt for any such payment shall be a full and complete discharge of the United States and of any such agency or department with respect to the payment so made.
The Assignor represents and warrants unto the Financing Institution that the Contract is valid and enforceable, that the Assignor is not in default thereunder, that no payments have been made on account thereof, except as otherwise may be noted at the end hereof, that the Assignor has not heretofore alienated or assigned the Contract or any rights or interests therein or thereto, that nothing in the Contract forbids this assignment, and that the Contract expressly permits this assignment of claims thereunder and further assignment or reassignment thereof to a bank, trust company or other financing institution including any Federal lending agency.
The Assignor further represents and warrants unto the Financing Institution that the rights of the Assignor under the Contract are not subject to any set-off for obligations of the Assignor arising otherwise than under the Contract or incidental to the Assignor’s performance thereof.
The Assignor covenants and agrees with the Financing Institution that the Assignor will duly perform and observe all of the terms and provisions of the Contract on the part of the Assignor to be performed or observed.
This instrument shall be binding upon the Assignor and upon the Assignor’s heirs, executors, administrators, successors and assigns, as the case may be, and shall inure to the benefit of the Financing Institution, its successors and assigns.

The assignment relating to contract NY 23424 was identical, except for the contract number.

13. On February 28, 1952, notices of the two assignments, prepared by Chelsea on standard Government forms, were signed by an officer of the Bant and sent to the Contracting Officer, Quartermaster Market Center, New York City, and to the Disbursing Officer, Navy Market Office, Bichmond, Virginia, together with copies of each assignment. The defendant’s contracting officer received the notice of each assignment and a copy of each assignment on March 4, 1952. The appropriate disbursing officer received a set of the same papers on March 10,1952.

14. On March 13, 1952, Chelsea loaned Suburban $2,600 to be used in payment of the cost of freight in shipping merchandise to the defendant in performance of contracts NY 23424 and NY 23426. Of this amount, $1,400 was added to Loan No. 168, and $1,200 was added to Loan No. 183. Chelsea received from Suburban on the same day four separate notes in the amounts of $400, $400, $800, and $1,000, respectively secured by the assignments of the two contracts. Each of the four notes contained the provisions described in finding 7. Chelsea borrowed an additional $4,000 from the Bank, on March 28, 1952, giving its note for that amount secured by the assignments of the two contracts.

15. Suburban made four shipments of merchandise to the defendant pursuant to contracts NY 23424 and NY 23426, and submitted to the defendant its invoices numbered A 417, A 418, A 429, and A 430 with respect to these shipments. The merchandise shipped by Suburban was among that given as security for Loans Nos. 168,178, and 183.

16. Suburban’s invoices A 417 and A 430 concerned the shipments under contract NY 23426.

Invoice A 417, dated March 12,1952, was for the shipment of 39,900 pounds of frozen peas and 35,000 pounds of frozen corn, at a total price of $15,936.27, pursuant to contract NY 23426. This invoice was paid in full by the defendant to the Bank, on March 25,1952, pursuant to the assignment of contract NY 23426. The entire $15,936.27 was credited by the Bank to Chelsea’s account with the Bank, and at the same time a proportionate amount was debited to Chelsea’s account and used to reduce the amount of the Bank’s loans to Chelsea. By agreement with Suburban and Consumers, Chelsea paid $3,000 of the $15,936.27 to Consumers pursuant to the assignment of equity (see finding 8 above) and $1,000 to Suburban. The only payment that has ever been made on Consumers’ $10,000 loan to Suburban was this $3,000 payment. The remainder of the $15,936.27 was applied by Chelsea in reduction of Loans Nos. 168,178, and 183. Suburban in fact had shipped only 37,050 pounds of frozen peas and 32,500 pounds of frozen corn. At the contract unit price of $0.2023 for the peas and $0.2247 for the corn, the defendant thus paid $576.56 for 2,850 pounds of undelivered peas and $561.75 for 2,500 pounds of undelivered corn.

Invoice A 430, dated March 26,1952, was for the shipment of 35,000 pounds of frozen corn, at a total price of $7,864.50, pursuant to contract NY 23426. Suburban in fact shipped only 32,500 pounds of corn. The defendant accepted delivery of the shipment, but has not paid the invoice or otherwise made any payment for the 32,500 pounds of corn actually delivered. At the contract price of $0.2247 per pound, the 32,500 pounds of com had a total value of $7,302.75.

17. Suburban’s invoices A 418 and A 429 concerned the shipments under contract NY 23424.

Invoice A 418, dated March 12,1952, was for the shipment of 30,000 pounds of frozen corn, at a total price of $6,741, pursuant to contract NY 23424. Suburban in fact shipped only 27,000 pounds of corn. The defendant accepted delivery of the shipment, but has not paid the invoice or otherwise made any payment for the 27,000 pounds of corn actually delivered. Valued at the contract price of $0.2247 per pound, the 27,000 pounds of com had a total value of $6,066.90.

Invoice A 429, dated March 26,1952, was for the shipment of 30,000 pounds of frozen peas, at a total price of $6,069, pursuant to contract NY 23424. The shipment was twice rejected by the defendant for improper packaging in violation of the contract terms, and the contract was duly terminated for this default. The 30,000 pounds of frozen peas were purchased by the defendant from another source at a reasonable cost of $825 in excess of the amount that would have been paid under contract NY 23424. Contract NY 23424 provided that Suburban would be liable to the defendant for such excess costs.

18. On September 9, 1953, Suburban and its principal officers, Warren Freedgood and Nat Donay, were all convicted, upon pleas of guilty, by the United States District Court, Southern District of New York, of violating Title 18, Section 1001, U. S. C., in that they unlawfully, willfully and knowingly made a false and fraudulent statement in Suburban’s invoice A 418 to the effect that Suburban had sold 30,000 pounds of frozen corn to the Navy under contract NY 23424, whereas in truth and in fact, as they then well knew, they sold 27,000 pounds of frozen corn to the Navy; and in that they unlawfully, wilfully and fraudulently made a false and fraudulent statement in Suburban’s invoice A 430 to the effect that Suburban had sold 35,000 pounds of frozen corn to the Navy under contract NY 23426, whereas in truth and in fact, as they then well knew, they sold 32,500 pounds of frozen corn to the Navy.

19. The short shipments made by Suburban, as indicated in findings 16 and 17, were accomplished by Suburban’s deliberately including a lesser number of five-pound cartons in each case of frozen goods than the number of cartons represented by their labeling on each case, and then invoicing the defendant for the total quantity of frozen goods as represented by the labeling on all of the cases. Neither Chelsea nor the Bank had anything to do with the packaging, labeling or shipment of the cases.

In accordance with the usual practice in dealings between Chelsea and Suburban, Suburban submitted its invoices A 417 and A 430 under contract NY 23426 and its invoices A 418 and A 429 under contract NY 23424 to Chelsea which forwarded tbe same to tbe defendant for payment. From its own records, Cbelsea knew wben it received tbe invoices from Suburban that tbe Bank at Chelsea’s request bad released pledged merchandise specifically for tbe performance of tbe two contracts, which merchandise was insufficient to meet tbe quantities set forth in the invoices. With respect to invoice A 417 under contract NY 23426, 37,050 pounds of frozen peas and 32,490 pounds of frozen corn had been released for the performance of this contract, whereas the invoice called for 39,900 pounds of frozen peas and 35,000 pounds of frozen corn. With respect to invoice A 418 under contract NY 23424-, 27,000 pounds of frozen corn had been released for the performance of this contract, whereas the invoice called for 30,000 pounds of frozen corn. With respect to invoice A 429 under contract NY 23424,22,050 pounds of frozen peas had been released for the performance of this contract, whereas the invoice called for 30,000 pounds of frozen peas. With respect to invoice A 430 under contract NY 23426, 32,490 additional pounds of frozen corn had been released for the performance of this contract, whereas the invoice called for 35,000 pounds of frozen corn. However, Suburban was not required under any existing agreements with Chelsea, or anyone else, to make shipments under any contract entirely from merchandise financed by Chelsea and released by Chelsea or the Bank, and Suburban had on previous occasions used its own unpledged merchandise, together with pledged merchandise released by Chelsea or the Bank, to perform contracts, which fact was known to Chelsea at the time Suburban submitted the invoices covering contracts NY 23424 and NY 23426 to Chelsea to be forwarded to the defendant. The testimony of the principal officers of Suburban, convicted of making fraudulent statements as set forth in finding 18, to the effect that they informed Chelsea’s executive officer of their fraudulent intentions or activities prior to their submission to Chelsea of their invoices under the two contracts, is rejected in favor of the testimony of Chelsea’s executive officer to the contrary.

20. Neither Chelsea nor the Bank knew of the shortages in the shipments at the time they were made, at the time the invoices were submitted to the Government, or at the time that invoice A 417 was paid. Chelsea’s first knowledge of the shortages was obtained after invoice A 417 had been paid and the payments under the other invoices were past dne. At that time, Chelsea obtained information that Suburban’s activities pursuant to contracts NY 23424 and NY 23426 were being investigated by the Government. Upon inquiry by Chelsea, Suburban admitted the shortages in the shipments pursuant to these two contracts. Chelsea urged Suburban to rectify the shortage, which Suburban promised to try to do. At no time thereafter did Chelsea notify either the Bank or the defendant that Suburban had shortshipped on the two contracts.

By letter dated May 5, 1952, by which time Chelsea had been informed by Suburban of the short shipments, Chelsea wrote to the Bank as follows:

Be: Assignment of Government Contracts #23424, & #23426
The above contracts were entered into by Suburban Frosted Foods Inc., 807 Washington Street, N. Y. C., the proceeds of which have been assigned to you, and discounted by you with our firm.
To date only one invoice has been paid, leaving three invoices outstanding. The payment of these invoices have been overdue for some time now, and inquiries I have made to the disposition of these funds have given me no satisfaction.
Since the government recognizes only you as the as-signee of the above mentioned contracts, I hereby request of you to write the parties involved to determine the cause for delay in payment.
The invoices involved are as follows:
Contract #23424: Invoice #A418 Dated March 12, 1952, $6,741.00; Invoice #A429 Dated March 26, 1952, $6,069.00.
Contract #23426: Invoice #A430 Dated March 26, 1952, $7,864.50; Invoice #A417 Dated March 12, 1952 was paid on March 26,1952 in the amount of $15,936.27.
Copies of the above invoices are in your files for future reference, I would appreciate your acting on this as soon as possible.

The Bank, pursuant to Chelsea’s request, inquired of the Quartermaster Market Center at New York City, and was advised that the two contracts were under consideration by the Office of the Under Secretary of the Army, Assistant Judge Advocate General. The Bank on May 9, 1952, wrote to the Office of the Under Secretary of the Army, and received a reply dated May 20, 1952, in which it was stated that the contract relationship between Suburban and the Army was under consideration by the Department of Justice, and that further inquiries could appropriately be made to the Department of Justice.

21. A petition in bankruptcy, filed by Suburban with the United States District Court, Southern District of New York, on May 29,1952, was granted and Suburban was adjudicated a bankrupt on June 2,1952. The defendant filed a priority claim for $22,775.07 in the bankruptcy proceedings, which claim was allowed. The proof of claim consisted of a sworn statement by the Assistant Comptroller General that the defendant had: (1) overpaid Suburban $370 for food supplies furnished under contract NY 8669; (2) incurred excess costs of at least $852.50 in purchasing elsewhere food supplies not delivered by Suburban as a result of its default under contract NY 23424; (3) incurred excess costs of at least $812.41 in purchasing elsewhere food supplies not delivered by Suburban as a result of its default under contract NY 25851; (4) incurred excess costs of at least $628.32 in purchasing elsewhere food supplies not delivered by Suburban as a result of its default under contract NY 25918; and (5) that $20,111.84 was due the defendant as a result of substitutions by Suburban of ungraded and inferior merchandise in shipments of graded merchandise under contracts NY 7811, NY 7820, NY 13561, NY 15530, NY 15541, and NY 8669. The proof of claim did not indicate the basis for the statement that Suburban had substituted ungraded and inferior merchandise in its shipments under the specified contracts, and did not indicate the manner in which the amount allegedly due the defendant as a result thereof was calculated or the portion of the total amount attributable to each contract.

22. Other than the payment received by the Bank pursuant to Suburban’s invoice A 417 as stated in finding 16, the Bank’s loans to Chelsea secured by the assignments of contracts NY 23424 and NY 23426 remained unpaid until 1954 when the Bank demanded payment in full by Chelsea. Chelsea then paid the Bank. The Bank never attempted to collect any money either from Suburban directly or in the bankruptcy proceedings. Discussions were thereafter had between Chelsea and the Bank relating to the institution of this suit, but the Bank declined to participate.

23. The original petition in this case was filed in this Court on October 3, 1955. On March 11, 1957, again at Chelsea’s request, the Bank wrote the following letter to the Department of Justice:

Contracts Nos. NY 23428 and NY 23424 were assigned to us under dates of February 28 and March 28, 1952. Notices of such assignments were given to the Disbursing Officer, Na.vy Market Office, North Blvd. & Kelly Bd., Richmond, Va., and acknowledged under date of March 10,1952. Under date of May 6,1952, we inquired of the Commander in Charge of Quartermaster Market Center, 111 East 16 Street, New York City, as to why we had not received payment of the following invoices:
Contract No. 23424: Invoice No. A418 dated March 12, 1952, Amount $6,741.00; Invoice No. A429 dated March 26,1952, Amount $6,069.00.
Contract No. 23426: Invoice No. A430 dated March 26, 1952, Amount $7,864.50.
The reply received under date of May 8,1952 contained the following paragraph:
“Please be advised that consideration is being given the above contracts by the Office of the Under Secretary of the Army, (Assistant Judge Advocate General), Washington 25, D. C. Inquiries with respect to subject contracts should be addressed in writing direct to that office.”
A considerable time had elapsed since that reply. Hence, we are hereby requesting that payment of such amount as is owing be made to us on or before March 15, 1957. We are informed that the complete file on this case is in the Attorney General’s Office.

The Department of Justice acknowledged receipt of the Bank’s letter, but no action was ever taken by the defendant with respect to payment.

At Chelsea’s request, on September 26, 1957, the Bank executed and gave to Chelsea two documents, each entitled “Reassignment”, which by their terms reassigned the Bank’s rights under contracts NY 23424 and NY 23426 to Chelsea. Notices of these “reassignments” were addressed and mailed to the original contracting officer and disbursing officer, but on October 4, 1957, these notices were returned to Chelsea accompanied by a letter from the defendant’s Richmond Military Subsistence Market Center, Richmond, Virginia, as follows:

The “Navy Market Office” previously located at this address has been deactivated.
Inasmuch as the contracts involved, purchase order numbers N.Y. 23424 and N.Y. 23426 were issued by the New York Military Subsistence Market Center, 29th Street and 3rd Avenue, Brooklyn, N. Y., it is suggested that the New York Market Center be contacted regarding the attached reassignments of the contracts.

Chelsea then mailed the notices and reassignments to the New York Military Market Subsistence Center. The contracting officer of the Center acknowledged that the notices had been received on October 8,1957, and returned a copy of each notice with the following statement:

Although receipt is acknowledged, the Government hereby disclaims the validity and legal effectiveness of the above mentioned instrument of reassignment and contends that no right, title or interest to moneys due or to become due under the above described contract has accrued or been transferred to Chelsea Factors, Inc. as a result of such purported reassignment.

24. The amounts owed by Suburban to Chelsea on Loans Nos. 168, 178 and 183 have been reduced by payment of invoice A 417, by a number of payments of interest by Suburban, by the transfer of credit balances from other loans to Suburban, and by the proceeds from the sale of merchandise given as security for the loans. Loan No. 183 has been entirely repaid from these sources. As of January 22, 1958, Loan No. 168 showed a balance of $3,522.52 due and owing to Chelsea. This sum includes principal, legal fees of $340 paid in an effort to collect on the loan, storage charges totaling $15.36 paid to warehouses for storing the pledged merchandise prior to sale, and accumulated interest compounded at the rate of 1% percent per month up to January 22,1954, and thereafter compounded at the rate of 15 percent per year. As of January 1, 1958, Loan No. 178 showed a balance of $12,274.62 due and owing to Chelsea by Suburban. This sum includes principal, a storage charge of $7.59, and accumulated interest compounded at the rate of 1% percent per month up to December 31,1954, and thereafter compounded at the rate of 15 percent per year.

Defendant contends that if it be established that Chelsea is entitled to recover, the amount of recovery should include only the principal amount owed by Suburban to Chelsea on Loans 168 and 178, that is, that the computation of the balance owed on each loan should eliminate the application of any part of any credit or payment to interest due but should apply all credits and payments to the reduction of principal only, and that only the balance of principal thus computed without interest charges should be included in the amout of recovery as to each loan. On this theory, the unpaid balance on Loan 168 is $957.02 and on Loan 178, $5,243.42.

Defendant’s alternate theory of damages would allow application of each credit or payment first to interest due and thereafter in reduction of principal, but only permit recovery of amounts representing the balance of each loan as of June 2,1952, the date when Suburban was adjudicated a bankrupt. With respect to Loan 168, the balance thus computed to be due Chelsea by Suburban on that date was the sum of $4,172.12. However, the defendant reduces this sum to the amount of $1,277.93 by deducting $2,894.19 which last-mentioned sum was a credit balance in favor of Suburban on Loan 163 between Chelsea and Suburban. This credit balance was transferred by Chelsea and applied in reduction of Loan 168 by accounting entries made on June 20,1952. It is reasonable to conclude that the credit balance in favor of Suburban on Loan 163 in the sum of $2,894.19 existed as of June 2, 1952. With respect to Loan 178, the amount of recovery on this same theory would be $5,596.52, which sum was the balance owed by Suburban to Chelsea on June 2, 1952.

25. In addition to contracts NY 23424 and NY 23426, Suburban between May 1951 and April 1952 was awarded a large number of contracts by the defendant for delivery of frozen foods. Among these contracts were the following, each designated by the number and date of its War Department Purchase Order:

NT 26200, May 22,1951
NY 7811, September 17,1951
NY 7820, September 17,1951
NY 8669, September 25,1951
NY 13561, November 13,1951
NY 15530, December 7,1951
NY 15541, December 18,1951
NY 25851, March 24,1952
NY 25918, March 24,1952

Chelsea participated in financing the operations of Suburban in connection with each of these contracts.

Chelsea’s loans to Suburban began about March 1951 when initial discussions were had by Chelsea and Suburban regarding Chelsea’s financing of purchases of frozen goods by Suburban. At that time Suburban informed Chelsea that its principal business was supplying frozen goods to the defendant under Government contracts. Thereafter, and until early May 1952, Chelsea made a number of loans to Suburban for the purchase of specific lots of merchandise pledged by Suburban to Chelsea and ultimately released by Chelsea to Suburban for performance of specific Government contracts, including among others, the above-enumerated contracts.

Suburban’s principal officers testified to the effect that sometime in 1951 in connection with a loan proposal, they advised Chelsea’s officers that Suburban intended to acquire and ship a certain lot of ungraded frozen vegetables to perform a Government contract, unidentified in the record, which contract specified Grade B produce. They further testified that Chelsea agreed to and did finance the purchase of the ungraded produce, but required and received an extra payment from Suburban in the sum of $250 because of the extra risk to be incurred by Chelsea in the fraudulent performance of a Government contract by Suburban. This testimony of Suburban’s principal officers is rejected in favor of the testimony of Chelsea’s officers that no such discussion or agreement or transaction ever occurred.

26. There is no evidence in the record of this case that the defendant overpaid Suburban in the sum of $370 for food supplies furnished under contract NY 8669, as that claim was made by defendant and allowed in the bankruptcy proceedings as stated in finding 21. In addition to the excess payment made by defendant to Suburban under invoice A 417 of contract NY 23426 and the excess costs incurred by defendant as a result of Suburban’s default under contract NY 23424, as related in findings 16 and 17, the defendant incurred excess costs in purchasing elsewhere merchandise not delivered by Suburban, in the respective sums of $628.31 and $812.41 on contracts NY 25918 and NY 25851, both defaulted by Suburban.

27. With respect to contract NY 26200, defendant contends that Chelsea knowingly participated in the submission by Suburban of a false and fraudulent invoice to the defendant, requesting payment for shipment of 33,000 pounds of frozen broccoli stalks, Grade B or better, when in truth and in fact, 24,000 pounds of frozen broccoli cuts and 9,000 pounds of frozen broccoli stalks were delivered to the defendant. Neither the contract nor any copy thereof is in evidence, and the evidence is insufficient to establish that the merchandise delivered to the defendant was inferior to or different from that specified in the contract.

28. Under date of September 17, 1951, Suburban was awarded contract NY 7811 calling for the delivery of 50,000 pounds of frozen asparagus spears, Grade B or better. Under date of September 17,1951, Suburban was awarded contract NY 7820 calling for the delivery of 40,000 pounds of frozen asparagus spears, Grade B or better. Under date of September 25,1951, Suburban was awarded contract NY 8669 calling for the delivery of 18,520 pounds of frozen peas, Grade A. Under date of November 13, 1951, Suburban was awarded, contract NY 13561 which contained an item calling for the delivery of 50,000 pounds of frozen peas, Grade B or better. Under date of December 7, 1951, Suburban was awarded contract NY 15530 which contained an item calling for the delivery of 50,000 pounds of frozen peas, Grade B or better. Under date of December 18, 1951, Suburban was awarded contract NY 15541 calling for the delivery of 50,000 pounds of frozen broccoli stalks, Grade B or better.

Chelsea had financed the purchase by Suburban of various lots of ungraded frozen foods which were caused to be released from public warehouses by Chelsea at the request of Suburban for tbe specific purpose of performing the contracts set forth in the preceding paragraph of this finding. On these contracts, Suburban deliberately shipped ungraded merchandise in lieu of the graded merchandise specified. Suburban then submitted to Chelsea to be forwarded to the defendant, a false and fraudulent invoice under each of these contracts, requesting payment for the graded merchandise specified in each contract. While Chelsea had noted on its record as to each lot of merchandise financed by it, the grade, type, and quantity of merchandise held by it under pledge and released by it to Suburban for performance of a specific contract, and while Chelsea was in a position to know that graded merchandise was specified under each of these contracts whereas ungraded merchandise was released for the performance of each of them, it is found from all the evidence in this case that Chelsea did not knowingly participate in the fraudulent activities of Suburban and did not knowingly submit false and fraudulent invoices to the defendant.

CONCLUSION OP LAW

Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that the plaintiff is entitled to recover and it is therefore ordered and adjudged that the plaintiff recover of and from theUnited States the sum of eleven thousand four hundred six dollars and thirty-four cents ($11,406.34). It is further concluded that the defendant is not entitled to recover on its counterclaim and the counterclaim is dismissed.  