Source: https://supreme.justia.com/cases/federal/us/273/571/
Timestamp: 2019-04-23 10:55:24+00:00

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Justia › US Law › US Case Law › US Supreme Court › Volume 273 › United States v. Shelby Iron Co.
1. A contract by which land on which improvements have been erected with money advanced by one party to the other is to be deeded to the lender absolutely, and the borrower, as his lessee, in consideration of "rentals" amounting to the aggregate debt is to have possession and, upon full payment, is to receive a reconveyance of the land and improvements, but, in case of default, may have his rights forfeited by reentry of the lender, is an equitable mortgage for security of the money unpaid. P. 273 U. S. 578.
2. In such case, where the lender, having taken over the premises on the borrower's default, finds that the deed he received is defective, his proper remedy is not to reform it, but to seek a sale under the mortgage and distribution of the proceeds to those entitled. P. 273 U. S. 578.
3. A contract made by the United States for erection and operation of an acetic acid and wood alcohol plant on land to be deeded to it recited that the wood required in the operation of the plant would be obtained by the other party under another contract between that party and a stranger to the first mentioned contract. Held that this did not constructively notify the United States of the stranger's rights in the land, as revealed by the contract so referred to, since the matter mentioned in the recital was not such as to arouse any inquiry concerning that title. P. 273 U. S. 580.
4. Where a landowner, as part of a contract, agrees to convey land to the other party for use in performance of the contract, but to be reconveyed thereafter free and clear of liens, and the contract permits the grantee to mortgage and relies only on his responsibility to clear the title before reconveyance, an equitable mortgage made by the grantee in pursuance of the purposes for which the contract was made, and remaining unpaid because of his insolvency, takes priority over the equity of the grantor in the land. So held where the attempted conveyance of the land was inoperative because of a mistake, so that the legal title remained in the grantor. P. 273 U. S. 581.
the United States is a suit in which it sought to quiet title to a piece of land in Alabama as against the corporation above named, of New Jersey, and another called the Shelby Iron Company of Alabama. The decree denied the relief and declared the title and right of possession, as between and the Shelby Iron Company of New Jersey, to be in the latter, but it gave the plaintiff six months in which to remove from the land buildings and equipment constituting a plant erected thereon by the Shelby Chemical Company under a contract with the plaintiff.
convey to the Chemical Company the needed land, which was near the works of the Iron Company, and to furnish hardwood, water, workmen's houses, and power necessary in the operation of the plant. The benefit which the Iron Company was to derive from the arrangement was the cheapness of cost in the charcoal to be made by the Chemical Company as a byproduct of the process of distillation, and to be sold at a fixed price to the Iron Company for use in its blast furnaces situated in a large tract of timber land, of which the Iron Company was the owner, and of which the 15 acres here in question was a part.
right of the United States for reformation of the deed is conceded but for this claim.
"Inasmuch as the United States government will be financially interested in the construction of the Chemical Company's plant, it is expressly agreed that such real estate may be deeded to and vested in the United States government during the period of a contract made between the Chemical Company and the United States government; said contract to extend for the duration of the war."
"It is understood that the Chemical Company is about to construct its plant under a contract with the United States government, by the terms of which the Chemical Company is to take the ownership of the land, buildings, equipment, and improvements, if an enabling statute to that effect shall be passed by the Congress of the United States. Therefore, it is distinctly agreed that the foregoing provision as to reconveyance of the lands is subject to the obtaining of the title to said lands by the Chemical Company from the United States government."
thereunder, with any accrued interest thereon, and should, if the Iron Company so elected, sell to it all the improvements, equipment, and other personal property placed on the lands of the Chemical Company.
Thereafter, on April 28, 1918, the government contract with the Chemical Company was made. It was estimated that the plant would cost over $400,000, which the United States agreed to advance, and reimburse itself by deductions from payment to be made from the sale by the Chemical Company to the government of the acetate of lime and the methyl alcohol.
"Whereas, the contractor has a contract with the Shelby Iron Company, of Shelby County, Alabama, according to the terms of which the Shelby Chemical Company shall receive all the lumber it may require from timber land owned and leased by the Shelby Iron Company in return for all charcoal derived therefrom."
The government contract, in its first article, provided that the Chemical Company, the contractor, was to convey to the United States a tract of land at Shelby, Alabama, of adequate size and suitable location for the erection of the plant thereafter described. The conveyance was to be made subject to and upon the completion of an opinion by the Attorney General that, by the conveyance, the government would derive an absolute title to the premises in fee simple, free and clear of all incumbrances, and that the United States should have the right to expend money for the erection of improvements thereon.
at cost, the particulars of construction to be embodied in a separate contract.
The third article provided for the retention of 40 percent of the price of all sales to the government for the products of the manufacture to yield 6 percent interest on the government investment in the plant and to constitute a depreciation and amortization fund for the benefit of the government.
By the fourth article, the contractor agreed to sell and deliver to the government the entire output of the acetate of lime and the methyl alcohol, and the government agreed to buy it, during a period of 18 months, and then for the duration of the war at certain agreed prices and on certain conditions.
By the sixth article, it was provided that, when the depreciation and amortization fund and the purchase fund provided should together equal the cost to the government, with interest at 6 percent, of the government's investment, or at any earlier date at the option of the contractor, the government should sell to the contractor, and the contractor should purchase, the plant, machinery, and equipment at the then fair market value to be fixed by appraisement. The obligation of the government to sell the plant was conditioned upon its having legal authority to make such sale and conveyance.
were erected, and should without further consideration reconvey such ground to the contractor.
Article 17 provides that, in the event of an armistice, the government, at its option, might terminate the agreement, but, in such event, the contractor should receive from the government the unpaid purchase price of the product then actually manufactured, and the contractor should receive further from the government a sum sufficient to protect him against his actual net expenditures and actual net outstanding obligations incurred in the manufacture. Then the value of the plant, machinery, and equipment should be determined by appraisal, as already provided, and the government should sell and the contractor should purchase the plant and equipment at the appraised value, and, in making the settlement, the contractor should be given credit on account of the purchase price for the 35 percent of the purchase price of the products theretofore sold to the government and by it retained for security.
any unpaid payments required to be paid by it under the terms of the contract, desire at any time to purchase the property, the government would sell it for a sum equal to the difference between $260,000 and the total sum of rents then paid. It was agreed in the contract that, should the contractor at any time default in any of the payments required to be made to the government in the lease, the government might waive such default, or treat and regard the lease and obligation and privilege to purchase as forfeited, or treat and regard the lease as a continuing legal and binding obligation, but the obligation and privilege to purchase was to be forfeited.
The president of the Iron Company denies that it had knowledge of this second contract. The plant was completed under the second contract, and charcoal was made and delivered to the Iron Company till 1922, in March. The government took over the plant in December, 1922, and the Chemical Company became a bankrupt in 1923.
It is clear that the effect of the purported contract of lease of January, 1919, was that of an equitable mortgage. The rentals to be paid were the installments of the amount due under the original contract from the Chemical Company for the amount of money which the government had advanced, less that which it had already received, and, upon payment of the rental stipulated, the title was to revert to the Chemical Company, while the government reserved the power to take over the property in case of default or bankruptcy of the Chemical Company. Its default gave to the government the right to enforce against the land and the plant the debt due under this equitable mortgage. Peugh v. Davis, 96 U. S. 332, 96 U. S. 336; Robinson v. Farrelly, 16 Ala. 472; Lowery v. Peterson, 75 Ala. 109, 111; Moses v. Johnson, 88 Ala. 517, 520; Love v. Butler, 129 Ala. 531, 537, 538.
examined, is not the reforming of a deed and a decree compelling the Shelby Iron Company of New Jersey to substitute its own deed to the Chemical Company for the useless and void deed of the Shelby Iron Company of Alabama. It is rather to give to the government leave to reframe its pleadings so as to set up therein its ownership of an equitable mortgage upon the land and the plant, to be enforced by a sale thereof and the proper distribution of the proceeds. Of course, we might affirm the action of the circuit court of appeals, with a provision in the affirmance that it should be without prejudice to the beginning of an original suit by a new bill in equity setting forth the equitable mortgage as against the Iron Company, and asking its enforcement, and, if need be, its foreclosure against the land and the plant. We think, however, that it is wiser and better and shorter to end the litigation in this one proceeding.
changes due to the installation of the plant by the government, and has suffered loss by failure of the Chemical Company to comply with its contract. It further says that the 15 acres of land is so related to the larger tract of which it was a part that its use and control is essential to its operation of its blast furnace, and that it offered to pay the balance of $210,000 for the transfer of the government's whole interest in the land and plant to it. It urges that, as between it and the Chemical Company, it became entitled to a reconveyance, and to take possession of the land because of the breach and bankruptcy of the Chemical Company, as a termination of the contract as if it had expired by limitation. This presents an issue as to the notice which the government had of the Iron Company's claim under its contract.
to the land and the plant upon it. The recital does not refer either to the land or the title to it, but to the furnishing of wood by the Iron Company. To charge one with notice, the facts must be such as ordinarily to excite inquiry as to the particular fact to be elicited. Rogers v. Rawlings, 54 App.D.C. 361, 298 F. 683; Mueller v. Engeln, 75 Ky. 441; Hyde Park Supply Co. v. Peck-Williamson Heating Company, 176 Ky. 513; 2 Pomeroy's Eq. § 629, pp. 1208, 1209.
We think, therefore, that the question of notice must be reexamined, and that the issue must be not of implied notice, but of actual notice. It was contended that one of the officers acting for the government was in such a position that he probably knew what the contents and the effect of the contract between the Iron Company and the Chemical Company was in reference to the tenure of the government in the land, and that the fact that he was not called to testify on the subject was a circumstance tending to sustain the claim that the government had actual notice. The Iron Company will have the opportunity to present this and other evidence to the trial court upon the issue of such actual notice when the pleadings are reframed.
obligation of the Chemical Company in reconveying to the Iron Company to clear off mortgage liens or bonds which the Iron Company evidently thought the Chemical Company might create. If this is the correct view, an equitable mortgage of the government of the land and the plant, in which it had an interest to the extent of $260,000, must be clearly superior to the equity of the Iron Company growing out of the obligation of the Chemical Company to reconvey the land to the Iron Company. Neither the district court nor the circuit court of appeals considered this phase of the case. It may not have been presented to them. Their consideration was chiefly given to the issue of misdescription and to the meaning of the clauses providing for reconveyance of the land and improvements by the government in the contract between the government and the Chemical Company. We do not now consider and pass upon the contention of the government in these regards. We only refer to it to have it clearly understood that, when the cause goes back, nothing in what we have said shall prevent a showing of actual notice to the government of the claim of the equity of the Iron Company in the land by virtue of its contract with the Chemical Company, on the one hand, or the construction of the eighth paragraph of that contract as a reason for maintaining the priority of the government's equitable mortgage, whether it had notice of the Iron Company's contract or not, on the other.

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