Cleveland Chair Co. v. United StatesCleveland Chair Co. v. United States
delivered the opinion of the court:
This contract case, before the court on the parties’ cross-motions for summary judgment, arose out of a tax dispute litigated in the Tax Court in the mid-1960’s, over alleged tax deficiencies said to be owing from the early 1940’s. After obtaining an adverse decision from the Tax Court in 1964, Jackson v. Commissioner,
The bills matured on April 21, 1966, while on deposit in the Treasury, where the clerk had placed them pursuant to 31 C.F.R. part 225 (1966). There they sat, accruing no further interest, until plaintiffs moved the Tax Court on May 2, 1967, to allow substitute collateral (new Treasury bills with later maturity dates) to secure their tax obligation. As provided in 6 U.S.C. § 15 (1970), which gave plaintiffs the right to ask for the collateral substitution upon offering equally acceptable security to the Government, the Tax Court allowed the request on Mаy 3, 1967. Plaintiffs then removed the matured bills from the Treasury and presented them for payment. However, the fact remained that the bills sat in the Treasury interest-free from April 21, 1966, to May 3, 1967.
Plaintiffs eventually lost their tax case in the Sixth Circuit, Jackson v. Commissioner,
In an unreported memorandum opinion, the district court dismissed the first two claims. Cleveland Chair Co. v. United States, Civ. No. 6870 (filed Nov. 19, 1974), It viewed the tax refund claim as inapt because no more than the deficiency was actually paid and because the contention that interest should have been paid was only a contract or fiduciary breach claim that arose incident to tax litigation. Further, it held the claim of injury under the Federal Tort Claims Act, 28 U.S.C. §§ 1346(b) and 2671 et seq. (1970), not сognizable because both out of time and covered by an exclusion in the Act for damages arising out of Treasury fiscal operations. Finally, it transferred the unjust enrichment and the breach claims to this court, pursuant to 28 U.S.C. § 1406(c) (1970), because they exceeded $10,000. See 28 U.S.C. § 1346(a)(2) (1970). The Sixth Circuit affirmed,
The issue is whether defendant is liable in damages for failure to reinvest plaintiffs’ Treasury bills after they matured, or alternatively, tо notify plaintiffs of their maturity, such duty of reinvestment or notice being grounded in a security agreement between the parties implied from the facts. Plaintiffs and defendant essentially quarrel over two points: whether they had an "agreement” necessary to form an implied contract in the nature of a "security аgreement” within the meaning of article 9 of the Uniform Commercial Code (UCC), and whether defendant breached any duty thereunder if such a contract existed. Plaintiffs do not claim that a judgment in their favor can be based on any theory other than implied contract. Their assertion that defendant’s "unjust enrichment,” by being the obligor on the Treasury bills and thus having the benefit of plaintiffs’ funds without paying interest thereon, gives rise to a claim cognizable in this court can only be read as suggesting that this potential enrichment (viewed from the time the bills were deposited in the Treasury) is just one other reason why the Government implicitly agreed to hold the bills as a "security interest.” Unjust enrichment cannot in itself be the basis for a recovery here, for it lacks the consensual element needed to find a contract implied in fact, and only provides support for the remedial device known as a contract implied in law, over which this court has no jurisdiction. Algonac Mfg. Co. v. United States,
Both parties agree that, under Groves v. United States,
For plaintiffs to prevail, they must establish both that a security agreement implicitly existed in fact between themselves and the Government, and that the Government breached some duty owed them under that agreement. An agreement to create a security interest in the Treasury bills is necessary to bring this case within article 9 according to UCC § 9-204(1) and Groves v. United States, supra, and yet determining whether a consensual agreement can properly be implied from the conduct of parties is always a difficult and delicate exercise. See Primary Metal & Mineral Corp. v. United States, ante at 90; Grismac Corp. v. United States, ante at 39; Collins v. United States,
Plaintiffs claim that defendant had the duty, upon the maturity of the bills, either to reinvest them or to notify plaintiffs that they had matured. Further, since neither reinvestment nor notification was undertaken by defendant’s agents, it is said that the parties’ security agreement was breached, requiring defendant to respond in dаmages under UCC § 9-207(3). Plaintiffs, however, in support of their assertion that a duty to reinvest or to give notice did indeed exist, can point only to statements in § 9-207(1) and (2)(c) requiring a security holder to "use reasonable care in the custody and preservation of collateral” in its possession, and to deliver up to the оwner or apply to his secured debt any income that the holder receives on the principal. They cite no case where it has been held that a duty to "preserve” principal includes an obligation to make the principal sum produce income. At oral argument, for example, рlaintiffs stressed the importance of Grace v. Sterling, Grace & Co.,
* * * [The security holder’s] responsibilities extend to the exercise of such care as a reasonably prudent pledgee would exercise under like circumstances to protect and preserve the validity and value of the securities. * * *.
The value of the Gardner-Denver debentures, owned by the plaintiff and held by [dеfendant] Cleveland [Trust Company] as pledgee, depended to a great extent upon their convertibility feature. * * *.
* * * * *
As a reasonably prudent bank keeping informed with respect to collateral held by it, Cleveland would know that, following a duly published redemption date, the Gardner-Denver debentures would drastically depreciate in value. * * *. Prudent banking or investment practices would suggest that, prior to redemption, the debentures be sold or converted to protect the value of the investment. * * *. [289 N.Y.S.2d at 637-38, 640-41 .] [Emphasis supplied.]
The cases on the security holder’s obligation to preserve the value of the principal invariably stop short of requiring that action be taken, when the security matures, to insure that it will continue to рroduce income. Defendant points out that UCC § 1-102(3) authorizes the parties to an agreement within the UCC, including an article 9 security agreement, to specify their respective rights and duties, even to the extent of varying the rules of the UCC. Defendant also notes that the only written terms of the parties’ security agrеement to be found anywhere— still assuming arguendo that there was an agreement— exist in the provisions of 6 U.S.C. § 15 and 31 C.F.R. part 225, dealing with the Government’s acceptance of its own fiscal obligations as security for indebtedness. The statute and regulation generally limit their discussion of the Government’s duties to acceptance of the security, permission of substitution of collateral, and delivery of the security intact upon satisfaction of the secured obligation. From all this defendant argues that the specification of the duties just mentioned, and the absence, of specification of any duty to reinvest or give notice of a security that had matured, must lead to the conclusion that the parties expressly agreed in this case not to obligate the Government to see that the bills on deposit continue to bear interest. We find this argument appealing, for while the statute and regulation may not relieve the Government from the broad duty to exercise reasonable care and perhaps do not list all the actions that the Government is obligated to undertake as a security holder by the ordinary dictates of prudence, certainly where a wholly new duty is sought to be imposed upon the holder, a duty not recognized in any of the decided cases, there is good reason to conclude that its conspicuous absence from among the written terms of the security agreement means that the parties did not contemplate its existence in the first place. Where the terms of a security agreement cover a great many aspects of the security holder’s duties but omit from mention any duty of the holder, not supported in the case law, to take care that a pledged security always continues to produce income, such a duty will not be implied.
We have been informed of no reason why the well-acknowledgеd obligation of a security holder to act prudently to preserve the principal sum of the pledged security should now be extended to include a duty to promote its increase by keeping it on interest. Rather, we can think of at least two reasons, in this case at least, for refusing such an extension. First, it wоuld create a considerable burden upon the Treasury to manage debtors’ portfolios, notifying them of maturing bills or changing the investments when the bills matured, which would probably require a great mass of activity in the Treasury on practically every working day. No pledgee, including the Government, is required to play the role of investment counselor or mutual fund. Further, if the Government were to undertake reinvestment
Plaintiffs’ petition also asks for intеrest on the sum alleged to have been wrongfully deprived them by defendant’s supposed breach of the security agreement. Even if plaintiffs were correct about the breach, which we have just concluded they are not, still they would not be entitled to the interest claimed for delay in payment. Interest is not recoverable from the sovereign on damages awarded for breach of contract or of a fiduciary duty. United States v. Thayer-West Point Hotel Co.,
For the foregoing reasons, we conclude that plaintiffs’ claim is without merit. Therefore, plaintiffs’ motion for summary judgment is denied, defendant’s cross-motion for summary judgment is granted, and the petition is dismissed.