Court Opinion

ID: 9611200
Source: CourtListenerOpinion
Date Created: 2023-08-22 03:53:18.724383+00
Date Added: 2024-06-11T18:03:10.896801
License: Public Domain

REED, Justice (Retired),
sitting by designation (dissenting).
The court finds in Muschany v. United States, 324 U.S. 49, 66-67, 65 S.Ct. 442, 89 L.Ed. 744, a precedent for upholding the validity of the present contract. Corruption as a basis for the invalidation of a government contract is considered neither in the Muschany case nor in this case. Both cases turn on whether the conduct was in violation of public policy and therefore void.
. The court cites, in support of its position, the conclusion reached in the Muschany case .that a contract to be invalid as a violation of public policy must be “so menacing as to prohibit such contracts regardless of the effect in a partic-' ular case.” The Muschany case calls for maintenance of contractual obligations of the United States unless a dominant public policy or a statutory enactment declares its invalidity.3
In the Muschany case, the Government purchased land through its own agent by a contract that allowed the agent cost plus a fixed fee, a method specifically approved by a statute, The National Defense Act of 1940.4 In this present case now under consideration, there is a dominant public -policy .against a negotiator with a conflict of interest which is embodied in a statutory enactment punishing such conduct as criminal.5
In such situations a contract made in violation of the criminal statute is unenforceable. Accepting- the argument of the majority that no improper .motive influenced any action of Mr. Wenzell does not in our opinion make the Mississippi Valley contract valid. If contracts are made in violation of positive law, they are unenforceable.6
The Supreme Court of the United States approved - that rule many years ago in the Bank of United States v. Owens, 2 Pet. 527, 7 L.Ed. 508. There the charter of the bank provided a limitation of six percent upon its loans or discounts. It was held that more was taken. The charter, however, did not provide that a contract for a greater sum was void. The court declared the answer was obvious; an unlawful contract could not be-enforced, and decreed no recovery.
Again in Miller v. Ammon, 145 U.S. 421, 12 S.Ct. 884, 36 L.Ed. 759, recovery on a bill for a sale of liquor without a valid license was denied, the Supreme Court holding:
“The general rule of law is, that a contract made in violation of a statute is void; and that when a plain-, tiff cannot establish his cause of action without relying upon an illegal contract, he cannot recover. * * * And in Harris v. Runnels, 12 How. 79, 13 L.Ed. 901, this court, after noticing some fluctuations in the course of decision, and observ*526ing ‘that we have concluded, before the rule can be applied in any case of a statute prohibiting or enjoining things to be done, with a prohibition and a penalty, or a penalty only for doing a thing which it forbids, that the statute must be examined as a whole, to find out whether or not the makers of it meant that a contract in contravention of it should be void, or that it was not to be so,’ added: ‘It is true that a statute, containing a prohibition and a penalty, makes the act which it punishes unlawful, and the same may be implied from a penalty without a prohibition ; but it does not follow that the unlawfulness of the act was meant by the legislature to avoid a contract made in contravention of it. When the statute is silent, and contains nothing from which the contrary can be properly inferred, a contract in contravention of it is void.’ ” 145 U.S. at pages 426-427, 12 S.Ct. at page 886.7
This court has strongly supported the application of the rule against the validity of contracts where an officer or agent of the United States participates in their adoption. In Curved Electrotype Plate Co. of New York v. United States, 50 Ct.Cl. 258, a suit on an implied contract to pay for the Government’s use of a patent was dismissed on the ground of an interest in the contract by the Public Printer responsible for its use. This court said, at page 271, referring to section 1783, Revised Statutes, the forerunner of 18 U.S.C. § 434, the section the Government relies on here:
“ * * * section 1783, Revised Statutes, forbids any person directly or indirectly interested in thfe pecuniary profits or contracts of a commercial corporation acting as an officer or agent of the United States for the transaction of business with such corporation. It is not clear that by the alleged transfer to his sister-in-law of his stocks in this and other concerns Mr. Benedict intended to deprive himself of all ownership therein. Certainly the statement that his purpose was to give the full benefit of the stock in plaintiff corporation to his brother in case the latter was able to repay him the advances he had made is inconsistent with an absolute transfer of his stock to his sister-in-law, because, if it was hers, he could not give his brother the benefit of it, even if the advances were repaid. Certain it is that Mr. Benedict regarded himself as equitably entitled to compensation out of the corporation’s receipts, and he says as much.”
See Rankin v. United States, 98 Ct.Cl. 357, which is in accord. Compare Architects Building Corp. v. United States, 98 Ct.Cl. 368, 380, where a ministerial act, signing a contract, was held permissible under Revised Statutes 1783. This court said, at page 380:
“We believe this is one of the exceptions to the general rule. It was not the intention of the statute to cover a case of the nature of the instant case where the action of the President of the Corporation, who happened to be an agent of' the Government, was solely for the purpose of officially signing the lease or voting on its acceptance, and where he took no part in the negotiations and derived no benefit, his actions being purely ministerial and in no way detrimental to the interests of the United States and transcended no public policy.”
It appears that the English courts apply the same rules' as to contracts' in violation of statutes. In Barton v. Piggott, L.R.. 10 Q.B. (1874) 86, a surveyor of highways, forbidden by. statute to have an interest in a contract for work or materials, unless a license in writing was *527first obtained, had his accounts for such work subsequently approved by the appropriate justices who were authorized to approve beforehand. It was held unlawful to allow accounts declared illegal by another provision of the statute.
Pollock on Contracts (13th ed.), 275, phrases the present English rule in these words :
“(b) The imposition of a penalty by the legislature on any specific act or omission is prima, facie equivalent to an express prohibition.
“These rules are established by the case of Bensley v. Bignold, which decided that a printer could not recover for his work or materials when he had omitted to print his name on the work printed, as then required by statute. It was argued that his right under the contract was untouched by the Act, which contained no specific prohibition, but only a direction sanctioned by a penalty. But the Court held unanimously that this was untenable, and a party could not be permitted to sue on a contract where the whole subject-matter was ‘in direct violation of the provisions of an Act of Parliament.’ And Best, J. said that the distinction between mala prohibita and mala in se was long since exploded. The same doctrine has repeatedly been enounced in later cases.
“Thus, for example, by the Court of Exchequer:
“ ‘Where the contract which the plaintiff seeks to enforce, be it express or implied, is expressly or by implication forbidden by • the common or statute law, no- Court will lend its assistance to give it effect. It is equally clear that a contract is void if prohibited by a statute, though the statute inflicts a penalty only, because such a penalty implies a prohibition.’
“It is needless to discuss the ‘policy of the law’ when it is distinctly enunciated by a statutory prohibition.” 8
Such unanimity of view as to the invalidity of contracts that violate specific statutory prohibitions brings us to an examination of the statute here in question. It appears below.9 It was enacted to meet a specific menace to the fair negotiation of federal contracts and is akin to other statutory requirements to insure against corrupt influences, such as the requirement for statutory authority in the contracting officer or prior advertisement, or those that bar fiduciaries from •profiting from dealings with their cestui que trust.10 This section of the Code originated as Sec. 8 of An Act to prevent and punish Frauds upon the Government of the United States. It was enacted March 2, 1863, 12 Stat. 696, as a result of prolonged investigation and reports to Congress on the war contract frauds of that era.11
Government contracts are not only large in number and value but are negotiated by numerous contracting officers of varying ability and experience. The statutes for the protection of the Government are not because of frequent fraud- ' ulent influences but are to guard against the situations that may arise. They *528should' be fairly interpreted so as to carry out their purpose to protect against a tendency to overreach the Government but are not to be extended to situations “not clearly within its terms.” 12 In such cases as we have before us, it must be plain not only that, as we have shown above, the law makes illegal contracts that the statutes forbid, but that the questioned actions violate the statute.
Mr. Wenzell acted as an agent of the United States for the transaction of business with the business entity, which transactions immediately resulted in a contract with the Atomic Energy Commission for the construction of generating facilities. The entity became the Mississippi Valley Generating Company. The words, “such business entity,” were inserted in § 434 to insure that all types of business arrangements were included.13 The fact that Mr. Wenzell received no salary from the Government but only reimbursement of expenses does not affect our conclusion that he was employed and acted as an agent of the United States in analyzing the cost of TVA’s production of electricity for the Budget Bureau. This was to be compared with the cost of generation by private operators. To accomplish this analysis, Mr. Wenzell was furnished detailed information as to TVA operations, including costs.14 The knowledge thus acquired was passed on to First Boston, his employer and a prospective agent for the sale of the private securities of the sponsoring company, in the fall of 1953, by Mr. Wenzell, although the Bureau had forbidden such disclosure as it was a confidential Bureau document. Finding 35. With First Boston’s previous experience in a similar transaction with Ohio Valley Electric Corporation, Mr. Wenzell’s company was well equipped to handle the financial affairs for any builders of the needed generating plant. Mr. Wenzell submitted his report to the Bureau of the Budget September 20, 1953. Finding 29.
Shortly thereafter steps were taken by the responsible officials of AEC and the Budget to negotiate with private power companies for furnishing the needed electricity. The Government considered it desirable to recall Mr. Wenzell for assistance in the negotiation. He was recalled and came in the middle of January 1954, as a Budget Bureau consultant, and worked for it in and out of Washington until April 3, 1954. Finding 106. His expenses for this period were paid sometimes by the Government, sometimes by First Boston. Finding 99. Mr. Wenzell consulted frequently in this period with the private sponsors of the construction plan as a representative of the Budget Bureau to work out a plan for private construction of the facilities. He was the only representative of the Budget Bureau at an important meeting on January 20, 1954. Finding 50. Various meetings followed concerning the sponsors’ proposals in which Messrs. Wenzell and Dixon, an active sponsor of Mississippi Valley, participated. Findings 50-67. The negotiators submitted a proposal to the AEC on February 25, 1954. This proposal was analyzed by the Budget Bureau, and Mr. Wenzell participated in the work. The conclusion was reached that the sponsors’ proposed cost was too high.15 The sponsors revised their cost estimates after various contacts with Mr. Wenzell. The Budget asked him to see Seal, a sponsor’s representative, about new figures. He did so. Finding 84. 'He discussed the sponsors’ offer with the sponsors’ representatives, Messrs. Dixon and Yates, at a meeting with a senior officer of First Boston on March 10, 1954. Finding 86. During the period between the first and second proposals, there were several telephone calls and meetings between Wenzell and the sponsors’ representatives concern*529ing these proposals.16 Later, at a general discussion at which Mr. Wenzell was present, the sponsors were told they were close “to submitting acceptable figures.” Findings 97-98. Their formal proposal dated April 10, 1954, was made to the AEC on April 12 at Washington. This was done after a conference that morning with First Boston over the cost of the necessary construction money, some one hundred million dollars, at which Mr. Wenzell and other First Boston officials, including the Chairman of the Executive Committee, were present. Finding 107. On that date “Wenzell expected that First Boston would handle the financial arrangements for the sponsors if a contract resulted from the April 10 proposal.” Finding 108. The April 10th proposal was accepted by AEC as a “Satisfactory basis” for the negotiation of the contract finally concluded on November 11, 1954. Findings 129-131.
These facts establish, we think, that Mr. Wenzell was an employee of the United States participating in the transactions that culminated in the contract in question within the terms of § 434 of Title 18 U.S.Code. But before the contract should be declared unenforceable under the section in question, it must also be established that the agent was “an officer, agent or member of, or directly or indirectly interested in the pecuniary profits or contracts” of the business entity with which he transacts business for the Government, that is, the sponsors who became the Mississippi Valley Generating Company. We think he was directly interested, within the meaning of the statute, in the contract of Mississippi Valley with AEC. His negotiations were with the sponsors of the business entity that made that contract.
The majority opinion, we think, misjudges the thrust of the statute. It argues that it is not shown that First Boston had an interest in the contract as financial agent or otherwise until, after Wenzell’s governmental employment had terminated. Assume that fact as true. The defense to this suit is not that First Boston violated § 434, but that Wenzell did.
The statute covers a person, not an officer, agent, or member of the Mississippi Valley business entity who is indirectly interested in the contracts of that business entity and acts as an agent of the United States for the transaction of business with such business entity. This covers Mr. Wenzell’s situation.
Mr. Wenzell was a Vice President of First Boston receiving a salary and a bonus based upon the amount of business he brought the firm. Finding 125. If solely or partially through his contacts with the officials of Mississippi that business entity was induced, persuaded, or found it convenient to employ First Boston as its agent to “place the debt” of Mississippi with bond buyers, Mr. Wenzell could confidently expect recognition from First Boston.
The exact date of the contract between the Mississippi Valley business entity and First Boston on financing does not appear in the record. It was apparently at the meeting in Boston on April 12, 1954, to consider the submission of the sponsors’ new proposal that arrangements were made. Findings 116 and 124. The retainer facts appear in detail in Findings 107-128.
The action of First Boston in refusing a fee for its services in the loan was predicated on the advice of counsel as to the questionable legality of Mr. Wenzell’s dual role as government negotiator and official of the financial agent of Mississippi Valley. First Boston, at an executive committee meeting, October 21,1954, decided not to accept compensation for its services, except out-of-pocket expenses, because the company thought the financing had flowed directly from the offer of Mr. Wenzell’s services to the Budget by First Boston’s President, Mr. Woods. Finding 117. It had been determined in May preceding that the fees, would be split 60% to First Boston and 40% to Lehman Brothers. Finding 115. *530First Boston’s fee for the OVEC financing, a transaction akin to this one was $150,000, plus $20,000 expenses. Finding 27. Apparently the question of waiving a fee came up in First Boston’s Executive Committee meeting of July 1, 1954. No action was then taken. Until November 17, 1954, after the contract between Mississippi Valley and AEC was signed, neither Lehman Brothers nor any representatives of the sponsors “had notice of First Boston’s attitude regarding the charging of a fee.” Finding 117. But whether the financing was to be without compensation or not, First Boston considered it a valuable feather in its cap to be in the “senior position” of such a large financial transaction. Finding 113.
The problem raised by Mr. Wenzell’s activities in connection with his representation of the United States in its negotiations with Mississippi was not new on July 1, 1954. Both the First Boston and Mississippi Valley sponsors had had the matter brought to their attention. Prior to the time the first proposal of the sponsors was submitted to the Budget and AEC, February 25, 1954, the sponsors’ counsel advised Mr. Dixon of the possible conflict of interest because of Mr. Wenzell’s representation of the Government, if First Boston was asked to handle the financing. Mr. Dixon immediately spoke to Mr. Wenzell about the matter. Finding 68. A similar warning also came to Mr. Wenzell from members of the Budget Bureau staff during Wenzell’s participation in the negotiations concerning the second offer of the sponsors. Finding 76. Mr. Wenzell spoke to Mr. Hughes of the Budget about the possible conflict question raised by the sponsors of Mississippi Valley. He advised him to talk to counsel and then to the Director of the Budget. Mr. Wenzell then talked with Mr. Coggeshall, the President of First Boston who told Wenzell to take it up with First Boston’s counsel, Sullivan & Cromwell of New York. On February 26, 1954, the day after the sponsor’s first proposal to the AEC, Mr. Wenzell was advised by Sullivan & Cromwell to resign “forthwith and in writing” from the Budget Bureau. He was “also advised that if the proposal was later accepted and First Boston was requested to handle the financing the board of directors of First Boston should consider whether they wanted to accept the business and, if so, whether they should charge a fee.” Finding 72. Mr. Wenzell did not resign immediately, nor ever in writing, but continued to negotiate for the Government on the new contract with the sponsors and First Boston, as shown above. No explanation has been offered of the failure of Wenzell to resign promptly after his attorney advised him to do so on February 26, 1954, nor as to why, after being advised of the possible charge of conflict of interest, as set out in unchallenged findings 78 and 79, he continued to attend meetings in the Budget Bureau where the sponsors’ offers to the Government were discussed and analyzed. For us these facts show a complete indifference to an obvious conflict of interest in violation of 18 U.S.C. § 434.
The steps taken by Mr. Wenzell between the first unsatisfactory proposal of the sponsors of the Mississippi Valley contract and the proposal that ripened into the contract, February 25 to April 12, 1954, appear to us to have been taken when his interest in securing the financial representation of the sponsors by First Boston was direct, positive, and looked useful to his financial advantage as helpful to his employer, First Boston. The acts were carried out with full advice as to their questionable character. They violated the words of the statute. Cf. Waskey v. Hammer, 223 U.S. 85, 32 S.Ct. 187, 56 L.Ed. 359.
That statute was intended to protect the public against participation in negotiations by civil servants with interests conflicting with those of the Government, to prevent abuses, and inspire confidence. The record shows that Mr. Wenzell’s study of TVA operating costs and practices, and his subsequent association with and advice to the sponsors of the Mississippi Valley contract negotiations were with the knowledge and approval of the *531Budget Bureau. This, we think, does not validate the contract. The Government has been fortunate in securing the services of many able Americans who serve without compensation but so long as they retain an interest in their respective companies, they cannot, under the statute, negotiate contracts with them for the Government. He may advise the Government as to business matters but he cannot act as an agent of the Government for the transaction of business with any business entity in which he has an interest. This is the public policy the criminal statute lays down.
We have here no problem of unjust enrichment of the Government without payment for the benefits furnished it by the Mississippi Valley Generating Company. To now say that the contract is invalid may seem harsh since the evidence does not disclose a payment or an express promise of direct financial benefit to Mr. Wenzell or the First Boston, but if the statute in question is to perform its intended function in the protection of the Government against prohibited actions that might influence contracts by public agents with private connections, courts must carry out the legislative purpose. The Government has vigorously defended this suit to recover damages for breach of contract on the ground of the invalidity of the agreement. We think the Government’s position on that ground of public policy is well taken and the petition should be dismissed.

. Muschany v. United States, supra.

. 54 Stat. 712; Muschany v. United States, supra, 324 U.S. at pages 66-67, 65 S.Ct. at page 451.

. See note 9, infra.

. 6 Williston on Contracts (Rev.Ed., 1938), § 1763:
“For the protection of the public, or for purposes of taxation, or for both reasons, many statutes are enacted forbidding certain bargains and sales either ah together or unless certain statutory reg,ulations are complied with. There can be no doubt that if a statute directly prohibits a contract or sale it cannot be enforced by the parties to it, and the same is true if the formation or performance of the bargain is declared to be a crime. .The imposition of a penalty is at least prima facie an implied prohibition of the transaction to which the penalty attaches. On the other hand, even though no penalty is imposed, the transaction may nevertheless be invalidated.” The text is supported by numerous cases. See Berka v. Woodward, 125 Cal. 119, 57 P. 777, 45 L.R.A.. 420; Marshall v. Baltimore & Ohio R. Co., 16 How. 314, 334, 14 L.Ed. 953.

. The Restatement of the Law. 'of the American Law Institute is in accord. It recognizes, too, that where refusal to enforce or rescind a bargain would pro’duce a harmful effect on parties for whose protection a statute was passed, the illegal contracts may be enforced. 'A.L.I.' Contracts, §§ 580 and 601.

. Bensley v. Bignold (1882), 5 B. & Ald. 335; 24 R.R. 401.

. 18 U.S.C. § 434:
“Whoever, being an officer, agent or member of, or directly or indirectly interested in the pecuniary profits or contracts of any corporation, joint-stock company, or association, or of any firm or partnership, or other business entity, is employed or acts as an officer or agent of the United States for the transaction of business with such business entity, shall be fined not more than $2,000 or imprisoned not more than two years, or both.”

. In re Floyd Acceptances, 7 Wall. 666, 19 L.Ed. 449; United States v. Ellicott, 223 U.S. 524, 543, 32 S.Ct. 334, 56 L. Ed. 535; Securities & Exchange Comm. v. Chenery Corp., 318 U.S. 80, 63 S.Ct. 454, 87 L.Ed. 626; 332 U.S. 194, 67 S.Ct. 1575, 91 L.Ed. 1995. See Federal Conflict of Interest Statutes, 65 Harv.L.Rev. 955, 957.

. H.R.Rep. No. 2, 37th Cong., 2d Sess., Government Contracts, and Supplement.

. United States v. Chemical Foundation, 272 U.S. 1, 18, 47 S.Ct. 1, 71 L.Ed. 131.

. H.R.Rep. No. 364, 80th Cong., 1st Sess., Sec. 434, A32.

. Findings of Fact 24 through 35, particularly 30.

. Findings 60-100, particularly 89-90.

. Findings 87, 89, 90, 92, 94.