United States v. Hougham/Opinion of the Court

Section 16 of the Surplus Property Act of 1944 gave priority preferences to veterans in the purchase of surplus war materials. 58 Stat. 765. Section 26 authorized the United States to recover damages against any person who obtains such property from the Government by 'fraudulent trick, scheme, or device * *  * .' The complaint in this case charged that respondent Hougham, a nonveteran, combined with the other respondents, who are veterans, and obtained for his own business purposes hundreds of items of surplus property, including trucks, trailers and other equipment, by fraudulent use of the veteran respondents' priority certificates. After hearings, the District Court found respondents guilty of fraud as charged and awarded damages in the amount of $8,000. Both sides appealed. The Court of Appeals affirmed, rejecting both the Government's contention that the damages awarded were inadequate and the respondents' contentions that the finding of fraud was clearly erroneous and that the claims were barred by the statute of limitations. 9 Cir., 270 F.2d 290. Because the case raises important questions concerning the interpretation and application of the Surplus Property Act, we granted the Government's petition for certiorari. 361 U.S. 958, 80 S.Ct. 590, 4 L.Ed.2d 541.

The respondents first contend that the entire controversy here has been settled, is therefore moot, and that the Government is estopped from further pressing claims against them. This contention rests upon the fact-set out in respondents' brief and not disputed by the Government-that after the trial court judgment was entered and before it was affirmed by the Court of Appeals, the Government accepted from respondents promissory notes totalling $8,000, the amount of the trial court judgment. The contention is that this fact alone renders the case moot or at least creates some sort of estoppel against the Government. We disagree. It is a generally accepted rule of law that where a judgment is appealed on the ground that the damages awarded are inadequate, acceptance of payment of the amount of the unsatisfactory judgment does not, standing alone, amount to an accord and satisfaction of the entire claim. See, for example, Embry v. Palmer, 107 U.S. 3, 2 S.Ct. 25, 27 L.Ed. 346; Erwin v. Lowry, 7 How. 172, 183-184, 12 L.Ed. 655. This case provides a perfect example of the good sense underlying that rule. For here it was the respondents themselves who proposed payment of the $8,000, asserting expressly as their purpose in so doing the obtaining of a 'Full Release of Judgment Liens' filed in the Counties of Los Angeles and Kern. The Government did nothing more in the entire transaction than accept the notes and execute the requested release. Since that release was expressly denominated only as a 'Full Release of Judgment Liens' for the Counties of Los Angeles and Kern, it simply is not and cannot properly be interpreted to constitute a full release of all the Government's claims against respondents. Moreover, since the transfer of the notes occurred prior to the decision of the Court of Appeals, it is clear that neither of the parties regarded that transfer as an accord and satisfaction of the entire controversy for both pursued their appeals in that court. Thus respondents' contention here is totally inconsistent with their position in the Court of Appeals where they sought to avoid all liability to the Government, including liability for the $8,000 they had already paid. For that position must necessarily have been predicated upon the view that the payment was without prejudice to the rights of either party as those rights might come to be established by subsequent judicial decree. Under such circumstances, the contention that the Government has lost its right to press its claim for the full amount of damages it believes due is wholly untenable.

We find it unnecessary to discuss at length respondents' second contention-that the claims asserted by the Government are barred by the statute of limitations. It is sufficient to say that the courts below were entirely correct in rejecting that contention for, resting as it does upon the assumption that recoveries under § 26(b) are penalties, it is inconsistent with our holding in Rex Trailer Co. v. United States, 350 U.S. 148, 76 S.Ct. 219, 100 L.Ed. 149.

We therefore proceed to the principal controversy-the question of the adequacy of the damages awarded to the Government. Section 26(b) provides in relevant part that those who obtain property by the kind of fraud established here:

'(1) shall pay to the United States the sum of $2,000 for     each such act, and double the amount of any damage which the      United States may have sustained by reason thereof, together      with the costs of suit; or

'(2) shall, if the United States shall so elect, pay to the     United States, as liquidated damages, a sum equal to twice      the consideration agreed to be given by such person to the      United States or any Government agency; or '(3) shall, if the United States shall so elect, restore   to the United States the property thus secured and   obtained and the United States shall retain as   liquidated damages any consideration given to the United   States or any Government agency for such property.'

In its complaint as originally filed, the Government claimed recovery as authorized by § 26(b)(1)-$2,000 for each fraudulent act plus double the amount of any actual damages. Subsequently, the Government attempted to file a First Amended Complaint claiming liquidated damages under § 26(b)(2). Upon indication of the trial judge that the claim in the original complaint under § 26(b)(1) amounted to an irrevocable election of remedies, but without any formal ruling to that effect, the Government withdrew the First Amended Complaint and filed a Second Amended Complaint in which it reverted to its original claim under 26(b)(1). Still later, however, following pretrial proceedings under Rule 16 of the Federal Rules of Civil Procedure, 28 U.S.C.A., the district judge, with the approval of counsel for both parties, entered a pretrial conference order which provided, '(T)his order shall supplement the pleadings and govern the course of the trial of this cause, unless modified to prevent manifest injustice.' And the order expressly enumerated the 'issues of law' that remained 'to be litigated upon the trial.' One of the issues so reserved was the legal correctness of the Government's argument that it was entitled to recover 'double the amount of the sales price of the vehicles described in the Second Amended Complaint,' that it was 'entitled to make its election (as between § 26(b)(1) and § 26(b)(2)) at any time prior to judgment' and that it did then elect 'in the event of judgment in its favor, to receive as liquidated damages a sum equal to twice the consideration agreed to be given to the United States.' The District Court ultimately decided this legal issue against the Government, holding that the original complaint constituted an irrevocable election, and proceeded to award damages of $8,000 under § 26(b) (1). The Court of Appeals affirmed this judgment on a different ground. It held that the refusal of the District Court to permit recovery under § 26(b)(2) was within its power to determine the appropriate remedy under § 26(b), asserting that no issue as to election of remedies was even involved in the case. 270 F.2d at page 293.

The Government contends that denial of recovery under § 26(b)(2) cannot be justified on either of the theories adopted below. Respondents contend that the Government waived its right to urge this contention by voluntarily proceeding to judgment on the Second Amended Complaint. This contention is predicated upon the failure of the Government to get a formal ruling on its First Amended Complaint before withdrawing it and filing the Second Amended Complaint. But, as shown above, the pretrial order and the conclusions of law of the District Court both show that the Government urged its right to change its election up to the time judgment was rendered. That pretrial order, as authorized by Rule 16, conclusively established the issues of fact and law in the case and declared that the issues so established should 'supplement the pleadings and govern the course of the trial * *  * .' One of these supplementary issues was the Government's contention that it was entitled to recover under § 26(b)(2), rather than under § 26(b)(1) as claimed in the Second Amended Complaint. Thus the pretrial order changed the claim in that complaint from § 26(b)(1) to § 26(b)(2) insofar as the Government had the power to change its election, and posed an issue which required adjudication by the District Court. That such was the effect of the order is clear from the language of Rule 16 which provides that the court, after pretrial conference, 'shall make an order which recites * *  * the amendments allowed to the pleadings *  *  * and such order when entered controls the subsequent course of the action, unless modified at the trial to prevent manifest injustice.' Since the pretrial order here reserved the legal question as to the Government's right to change its election and since the court expressly decided that question against the Government, the question most certainly was not waived and must here be determined.

Thus, we come to the question whether the courts below were correct in holding that the Government was not entitled to damages under § 26(b)(2). With respect to the theory adopted by the District Court that the Government's original complaint constituted an irrevocable election of remedies, we can find nothing either in the language of § 26(b) or in its legislative history which lends the slightest support to such a construction. This fact leads naturally to the conclusion that the ordinary liberal rules governing the amendment of pleadings are applicable. The applicable rule is Rule 15 of the Federal Rules of Civil Procedure, which was designed to facilitate the amendment of pleadings except where prejudice to the opposing party would result. Despite respondents' argument to the contrary, we see this case as one where there plainly was no such prejudice. In such a situation, acceptance of respondents' contention on this point would subvert the basic purpose of the Rule. 'The Federal Rules reject the approach that pleading is a game of skill in which one misstep by counsel may be decisive to the outcome and accept the principle that the purpose of pleading is to facilitate a proper decision on the merits.' Conley v. Gibson, 355 U.S. 41, 48, 78 S.Ct. 99, 103, 2 L.Ed.2d 80. We therefore conclude that under the circumstances of this case the Government had a right to amend its pleadings and that the District Court erred in refusing to permit such amendment.

The alternative theory of the Court of Appeals appears, upon examination, to be equally untenable. The Court of Appeals interpreted § 26(b) as placing power in the District Court to determine, according to the evidence presented in any particular case, which of the three subsections would be most appropriate and to require the Government to accept judgment under that subsection. That interpretation collides with the express language of § 26(b) which provides for recovery under any one of the three subsections 'if the United States shall so elect.' (Emphasis supplied.) Since the language of the section is conclusive on this point, the theory adopted by the Court of Appeals must also be rejected.

The respondents' final contention is that in any event they are entitled to a new trial. Obviously, there need be no new trial on the fraud issue. But respondents also urge that there is no support in the record for a judgment fixing the Government's recovery under § 26(b)(2) and 'twice the consideration agreed to be given' for the vehicles. There was no consideration 'agreed to be given,' the argument proceeds, because all the transactions involved cash sales at a price fixed by the Government. This argument, while ingenious, is not sound. Cash sales, like others, must follow an agreement of the parties with regard to consideration 'to be given.' Respondents' contention to the contrary would, if accepted, allow any purchaser from the Government to effectively avoid liability under § 26(b)(2) simply by being careful to make all of its fraudulent dealings in cash. Plainly, however, the Government suffers just as much from a fraudulent cash sale as from a fraudulent credit sale. An interpretation of § 26(b)(2) which allows recovery for the one but not for the other cannot be accepted. The respondents' contention for a new trial must be rejected.

The judgment is therefore reversed and the cause remanded to the District Court with directions to enter judgment for the United States under § 26(b)(2).

It is so ordered.

Judgment reversed and cause remanded to the District Court with directions.

Mr. Justice WHITTAKER, with whom Mr. Justice DOUGLAS joins, dissenting.