ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY (NEWARK) C.A. No. 676-71.
Adams, Rosenn and Weis, Circuit Judges.
The present case involves two principal questions: first, whether the expungement by a bankruptcy court of a claim by a seller of parts against a buyer acts as an estoppel in a subsequent attempt by the seller to recover damages from a third party to whom the parts were shipped; and second, whether the delivery of parts to the third party renders that party a bailee subject to liability under the Uniform Commercial Code, 12A N.J.S.A. § 2-705, for failure to honor a stoppage-in-transit order issued by the seller.
On June 29, 1967, Guenther Systems, Inc., a New York corporation, entered into a contract with the United States Army to supply support assemblies for howitzers. On November 14, 1968, Guenther subcontracted to Accurate Products Co., a New Jersey corporation, the job of manufacturing and shipping 98 support assemblies for $95,234.44. On March 26, 1969, Guenther subcontracted an additional portion of its contract to Donegal Steel Foundry Co., a Pennsylvania corporation, which was to produce 500 steel castings for $29,280.50. In order to save labor and shipping charges, Guenther directed Donegal to ship the castings directly to Accurate. Accurate was to incorporate the castings into the support assemblies and ship the end product to various Army depots.
The Government agreed to supply Guenther with certain government-owned tools on a "loan basis," title remaining with the Government. Donegal was not a party to the agreement regarding the tools, although it was the intended and actual user of the tools.
By November 1969 all the castings had been delivered by Donegal to Accurate, and Donegal had billed Guenther for them. No payment on the contract was made by Guenther to Donegal.
The Bankruptcy Proceeding
On September 8, 1970, Guenther filed a petition for bankruptcy pursuant to Chapter XI of the Bankruptcy Act in the Southern District of New York. On October 13, 1970, Donegal filed a proof of claim, as an unsecured creditor, in the amount of $28,717.42,*fn1 the balance due on Guenther's subcontracting account with Donegal.
The referee in bankruptcy, on January 13, 1971, authorized an arrangement whereby the prime contract between Guenther and the Army would be completed by Accurate, but remain in the name of Guenther. The terms were, inter alia, that (1) Accurate would receive "the remaining balance ($88,713.54) of the total money allocated by the Government for this contract as parts are delivered;" (2) Guenther would "turn over clear title and physical possession of any and all tooling . . . [and] castings . . . procured or generated under subject contract and in the possession of [Guenther] to [Accurate];" and (3) Accurate would release Guenther from all secured claims.
On December 16, 1971, Guenther filed a motion to adjust claims in the bankruptcy court, objecting to Donegal's claim as "excessive." By telegram dated December 23, addressed to the bankruptcy referee, Donegal objected to any reduction of its claim and reserved its right to prove such amount due. On March 6, 1972, however, after a hearing at which Donegal did not appear, the referee reduced the claim from $28,717.42 to $7,815.33, to be allowed as a general unsecured claim.
Meanwhile, Guenther had filed another motion in the bankruptcy court seeking an order directing Donegal to turn over to the Government all the tools Donegal had received as a result of the agreement between Guenther and the Government. Donegal filed an answer asserting a right in the tools as a set-off to its claim against Guenther and denying the bankruptcy court's jurisdiction to decide the matter. On June 29, 1972, after a hearing at which Donegal again chose not to be present, the referee ordered Donegal's claim expunged unless the tools were ...