INTRODUCTION

Of the many subjects dealt with in the Navy Contract Law Course, only one is dignified by having its roots in the Constitution itself. Article IV, Section 3 of the Constitution provides:

"The Congress shall have power to dispose of and make all needful rules and regulations respecting the Territory or other property [emphasis supplied] belonging to the United States; and nothing in this Constitution shall be so construed as to prejudice any claims of the United States or of any particular State."

This provision of the Constitution is the foundation upon which the authority to dispose of Government property rests. It is only appropriate, therefore, that this chapter commence with a consideration of the meaning and significance of Article IV, Section 3.

The cases construing the above quoted language hold that Congress has absolute power concerning the disposal of real and personal property owned by the Government. In one of the early cases, United States v. Nicoll, 1 Paine 646 (C.C.N.Y. 1826), an Army captain sold certain lead belonging to the Government. The Treasury Department brought an action against the purchaser for the price of the lead, and the court held that the Army captain was merely an agent for safekeeping and had no authority to sell the lead. The court stated that lead "being property of the United States, nothing short of the authority of an Act of Congress would justify its sale originally." More recently, in the case of Ashwander v. Tennessee Valley Authority, 297 U.S. 288 (1935), the Supreme Court held that electric. energy generated by a Government-owned power plant is "property belonging to the United States" within Article IV, Section 3 of

* Prepared by Ernest L. Rushmer, Assistant to the General Counsel, Department of the Navy.

the Constitution. Similarly, in the case of Alabama v. King & Boozer, 314 U. S. 1 (1941), the Supreme Court considered personal property of the United States to be within Article IV, Section 3 of the Constitution.

It would, therefore, appear to be clear that the disposal of both real and personal property is subject to the authority of Congress. However, specific statutory authority is not under all circumstances required for all disposals of Government property. Thus, when the Secretary of the Navy was unable to obtain bids on a vessel offered for sale pursuant to statutory authority, the Attorney General, in 28 Op. Atty. Gen. 470 (1910), held that it was within the inherent authority of the Secretary, as executive custodian of Government property, to salvage the engines and other equipment and to destroy the hull. Hence, the Attorney General did not feel that specific action by Congress was essential to authorize the Secretary to abandon property of the Government, clearly a definite form of disposition. It is arguable that such inherent authority stems from the statutory organization of the executive departments of the Government and thus satisfies Article IV, Section 3. For instance, the Comptroller General, in 28 Comp. Gen. 38 (1948), held that the inherent authority of an executive department includes the authority to sell excess power generated at a power plant of a Government department notwithstanding the absence of a specific statute authorizing such sale. (Compare with the Ashwander case, supra.) Although the Court of Claims, in Flores v. United States, 18 Ct. Cl. 352 (1883), held that no department of the Government, in the absence of statutory authority therefor, may lease private lands under the terms of which improvements made by the Government shall revert to the owner, the Attorney General, in 23 Op.

Atty. Gen. 163 (1900), approved the sale of personal property of the Government in the absence of statutory authority therefor where the Government would have otherwise suffered a total loss of the value of the property. In 32 Op. Atty. Gen. 114 (1920), the Attorney General held that a Government contractor obtained valid title to buildings erected upon his land pursuant to a contract with the War Department calling for the erection of a chemical plant and providing, as part of the consideration moving to the contractor, that the buildings would become property of the contractor at the "termination of the present war." The latter case may be distinguished from the usual Government property situation since the plant was not in esse at the time the contract contemplating its ultimate disposal was entered into.

In general, disposal of Government-owned property within the Navy is currently related (a) to the winding up of war contracts, disposal of vessels, and the disposal of the personal and real property no longer required in the naval establishment; (b) to the disposal of Government-owned property in connection with current procurement; and (c) to the leasing under Public Law 364, 80th Congress (61 Stat. 774, 34 U. S. Code 522a), of property not for the time being required for use by the Navy. With respect to (a), until the enactment of Public Law 862, 80th Congress, all such disposals, with certain exceptions noted below, were governed by the Surplus Property Act of 1944 (58 Stat. 765, 50 U. S. Code App. 1611-1646) and its companion legislation, the Contract Settlement Act of 1944 (58 Stat. 649, 41 U. S. Code 101-125). Since June 30, 1948, as provided in Public Law 862, the Surplus Property Act has not been applicable to property "which has not been declared surplus" on or before such date, and the legal basis for disposal of Navy property not so declared must be found under "other existing law." Primary consideration will be given, therefore, to legislation other than the Surplus Property Act. It is to be noted, however, that Public Law 862 did not repeal the Surplus Property Act.

The disposal of "facilities," which term connotes all forms of productive property from

machine tools to complete industrial plants, raises some of the more important and interesting questions to be considered in this chapter. Such facilities were furnished to contractors under several wartime statutes including Public Law 671, 76th Congress (54 Stat. 676, 50 U. S. Code App. 1151-1162), which authorized the Navy to furnish facilities to contractors whether located on privately-owned land or on land under the ownership or control of the Government; and Public Law 703, 76th Congress (54 Stat. 712, 50 U. S. Code App. 1171), which was made applicable to the Navy by Executive Order No. 9262 (dated November 5, 1942, 7 F.R. 10179) and which authorized the sale or other disposition of facilities furnished thereunder if such sale or other disposition was in the interest of the national defense. The enactment of Public Law 862, supra, the difficulty of determining at this late date that a sale of a "war-built" plant is in the interest of national defense, and the limited application of Public Law 703 to Navy facilities, raises a number of disposal problems which will be discussed under headings entitled "Sales to the Public" and "The Relation of Property Disposal to Procurement."

Statutes relating to the disposal of property excess to the needs of one Government agency generally require that, prior to disposition outside of the Government, other agencies of the Government shall have an opportunity to acquire such property by transfer from the owning agency. Thus, the Act of July 11, 1919 (41 Stat. 67, 40 U. S. Code 311) requires the several executive departments and agencies to purchase, insofar as possible, material, supplies, and equipment from other Government. departments possessing such property "no longer required because of the cessation of war activities." Section 12 of the Surplus Property Act also reflects the general policy that Government agencies should utilize property of other Government agencies before such property is made available for disposition outside the Government.

The Act of July 11, 1919, and the Surplus Property Act, in line with long-established Congressional policy, provide, with certain exceptions, that the proceeds of sales of Government property, including those between departments

of the Government, shall be covered into the Treasury as miscellaneous receipts. While the rule as to the handling of proceeds has no bearing upon the authority of an agency to dispose of property, it has a substantial bearing on the manner in which surplus property disposals between Government agencies are administered. The application of this rule with respect to personal property has been considered in a number of administrative decisions, including directives of the Bureau of Federal Supply, and in published opinions and rulings of the Attorney General and the Comptroller General. A discussion of these matters will be found under the heading entitled "Inter-Governmental Transfers."

Because of their general application, two statutes of special interest should be mentioned before discussing the several methods of disposal. The first of these is the Act of June 28, 1940, as amended, (54 Stat. 681, 60 Stat. 868, 871, 34 U. S. Code 546e), which applies to personal property and provides in Section 14 thereof:

"(a) Notwithstanding the provision of any other law, no naval weapon, ship, boat, aircraft, munitions, supplies, or equipment, to which the United States has title, in whole or in part, or which have been contracted for, shall hereafter be transferred, exchanged, sold, or otherwise disposed of in any manner whatsoever unless the Chief of Naval Operations shall first certify that such material is not essential to the defense of the United States."

The required certification has been accomplished by appropriate provisions in the Navy Property Redistribution and Disposal Regulations which state that the Chief of Naval Operations "has found and certified that property of the Navy Department, disposed of in accordance with the provisions of this Regulation, is not essential to the defense of the United States."

The second statute of general interest is the Act of April 4, 1944 (Public Law 289, 78th Congress; 58 Stat. 189, 23 U. S. Code 106) which applies only to real property and, in substance, provides that all proposed disposals of land by the Navy shall first be reported to the Naval Affairs Committees of Congress (now Armed Services Committees) and approved by such Committees.

SALES TO THE PUBLIC

Although Public Law 862, 80th Congress, provides that the Surplus Property Act shall not be applicable on and after June 30, 1948 to property not theretofore declared surplus, and requires that Government property not so declared surplus be disposed of under other existing law, a brief review of the Surplus Property Act as it related to sales by owning agencies may be helpful.

Under Section 14 (a) of the Surplus Property Act, owning agencies were authorized (a) to dispose of property for war production purposes, and (b) to authorize any contractor or subcontractor to retain or dispose of contractor inventories for the purpose of war production or for any other purpose which in the opinion of the Surplus Property Board (subsequently The War Assets Administration) would not be contrary to the objectives of the Surplus Property Act. Since the Surplus Property Act is no longer applicable, the question of disposal of property in connection with contracts to be terminated in the future will be discussed under the heading "The Relation of Property Disposal to Procurement."

Sales by the Navy to the public of personal property (other than vessels, the disposal of which is subject to separate authority mentioned below), as distinguished from sales to or by contractors incident to the settlement of a terminated contract, was limited by Section 14(b) of the Surplus Property Act and by War Assets Administration Regulation No. 9 to small lots, scrap, and salvage. Such sales were required to be made on a competitive bid basis except in exceptional cases where a negotiated sale at the "best price obtainable" might be permitted. Where property was sold as scrap a warranty was required that the property would be used or resold only as scrap. Usable personal property, not falling within the category of small lots, scrap or salvage, was not sold by the Navy but was declared surplus to and sold or otherwise disposed of by a disposal agency designated under the Surplus Property Act.

The enactment of Public Law 862 required, after June 30, 1948, certain radical changes in the disposal of property surplus to the needs

of the Navy. All such surplus personal property became, after that date, subject to disposition under "other existing law." So far as concerns sales of personal property to the public, such "other law" comprises principally the Acts of August 5, 1882 and June 30, 1890 (22 Stat. 296, 26 Stat. 194, 34 U. S. Code 543, 544) which, in substance, require that all sales of old or condemned naval supplies, stores, and material be by public auction or by advertisement.

Although much of the personal property becoming surplus to the needs of the Navy after June 30, 1948 falls clearly within the categories set forth in the above mentioned statutes, some liberality of construction is required to bring within the purview of "supplies, stores and material" all the myriad varieties of property, from airplanes to radio tubes, which as an aftermath of the war are surplus to the requirements of the service. However, administrative necessity has required a construction of these statutes that will permit their application to war created surpluses, and the word "condemned" has been deemed to mean the equivalent of "no longer useful for the purpose for which acquired."

In furtherance of the policy of preferring governmental use of property excess to the needs of any Department or agency, to the disposition and sale of such property to the public, the Bureau of Federal Supply, following the enactment of Public Law 862, issued its Circular Letter C-1 on July 1, 1948, which letter was revised on July 29, 1948. This Circular Letter, as revised, requires the Navy to make its surplus personal property available for redistribution within the Government prior to offering such property for sale to the general public. The Letter also provides that such transfers shall be made without reimbursement. The legal basis for such transfers will be considered under the heading "Inter-Governmental Transfers."

The Surplus Property Act required that surplus real property, not acquired by contractors pursuant to contract option provisions, be declared to War Assets Administration for dis

1 Surplus military reservations are subject to disposal by the Department of the Interior under the Act of July 5, 1884 (23 Stat. 103, 43 U. S. Code 1071).

posal, which agency was responsible for all sales of real property to the public. Since June 30, 1948, real property becoming excess to the needs of the Navy must be disposed of under the Act of August 27, 1935, as amended (49 Stat. 885, 40 U. S. Code 304a et seq.) rather than under the Surplus Property Act. The Act of August 27, 1935, provides that the Commissioner of Public Buildings, in the Federal Works Agency, shall administer and sell real property, except military reservations,1 surplus to the needs of the Government.

Accordingly, by a letter dated August 18, 1948, the Commissioner advised the heads of all Federal agencies to declare excess real estate to the Commissioner for sale by the Federal Works Agency to the general public or for other disposal.

An interesting post-war development in the disposal of industrial real property was the adoption of a concept of restricted disposal, a sale under terms and conditions that would be adequate to assure the continued availability of the productive capacity of an industrial plant or shipyard should need therefor arise, and that would permit of limited recapture of the property by the Government for national defense purposes without the necessity of resorting to condemnation. Such provisions have been given the somewhat euphemistic title of "the National Security Clause," the development and purposes of which has been described in chapter 1 as a means of creating a reserve of strategic industrial potential out of the tremendous investment made by the Government during World War II in industrial and shipbuilding facilities. Congress has given legislative sanction to this program in its National Industrial Reserve Act of 1948, Public Law 883, 80th Congress, which authorizes the Secretary of Defense to determine what surplus industrial or marine property is of sufficient strategic importance to justify the Government retaining some hold upon it and to direct that such property be disposed of only subject to the provisions of the National Security Clause. The Act provides that such property, which for one reason or another cannot be sold, shall be administered and maintained by the Federal Works Agency.

The disposal of vessels to the public by the

Navy is governed primarily by the Acts of August 5, 1882 and March 3, 1883 (22 Stat. 296, 599, 34 U. S. Code 491, 492). Executive Order 9641, dated October 15, 1945, limited sales of vessels under the authority of these laws to combatant vessels defined as (a) battleships, (b) cruisers, (c) aircraft carriers, (d) destroyers, and (e) submarines; and authorized sale of these classes of vessels to be made, regardless of the appraised value, to the highest acceptable bidder after advertising the sale for not less than 30 days. Surplus vessels of the Navy, other than combatant ships, which are determined "to be merchant vessels or capable of conversion to merchant use" were required by Section 10 (b) of the Surplus Property Act to be sold by the United States Maritime Commission under the Merchant Marine Act of 1936 (49 Stat. 1985, 46 U. S. Code 11011246). In addition, some vessels of the Navy were and continue to be subject to disposal uder other laws, such as Public Law 305, 78th Congress (58 Stat. 223, 50 U. S. Code App. 1301-1304) which requires that surplus vessels acquired from private owners and suitable for the fishing industry, of 1000 gross tons or less, or employed in the Great Lakes during the year preceding acquisition by the Government, are to be turned over to the Maritime Commission for resale to former owners or for other disposition, and Public Law 204, 78th Congress. (57 Stat. 604, 34 U. S. Code 498c-12) which requires that surplus vessels acquired from the Maritime Commission are to be returned to it.

Current disposal of vessels by the Navy is made under the authority of the 1882 and 1883 statutes and of Executive Order 9986, dated August 16, 1948, which superseded Executive Order No. 9641, and applies to non-combatant as well as combatant vessels which are not otherwise subject to disposal by the Maritime Commission. Thus, the Navy sells vessels to the public, including foreign governments (see 40 Op. Atty. Gen. No. 107 (1946)), on a competitive basis after a minimum of 30 days' public advertising and after such vessels have been stricken from the Navy Register (List of Naval Vessels) in accordance with the Act of August 5, 1882.

This statutory condition precedent to the sale

of naval vessels-that they first be surveyed and stricken from the Navy Register-has presented a difficult problem. The 1882 Act (34 U. S. Code 491) requires the appointment of Survey Boards to examine all vessels of the Navy at least every three years and to report to the Secretary of the Navy those vessels which, in the opinion of the board, are determined to be unfit for further service. If the Secretary, with respect to any vessel, agrees with the report, the name of the vessel is stricken from the Navy Register and is then available for sale under the 1883 statute (34 U. S. Code 492). Boards surveying vessels, which have become excess to the needs of the Navy and which are to be sold if unnecessary maintenance expenses are not to be incurred, have had some difficulty in finding, merely because a vessel is excess and is not needed, that it is unfit for further service. However, it seems reasonable to construe the language of the statute as meaning unfit for further naval service not only because of material condition but because unsuitable and no longer required for the tactical needs of the Navy. Such a construction should enable all excess vessels to be stricken under the 1882 statute and sold under the 1883 statute, or, if authorized or required by law, to be transferred to the Maritime Commission.

It has been the practice in the Navy to dispose of naval vessels usually only for scrapping purposes and to require a commitment by the purchaser that the vessel will be scrapped. Where sales are made for purposes of use it is customary to require that the vessels remain in United States ownership and be documented under the laws of the United States. Such conditions are relaxed and approval of "sales foreign' are made only after reference to and securing the approval of the State Department and the Maritime Commission.

DISPOSAL OF NAVAL PROPERTY IN
CONNECTION WITH PROCUREMENT

The disposal of Navy property in connection with procurement requires at the outset a determination of what constitutes a "disposal," within the meaning of Article IV, Section 3 of the Constitution. In construing the provision that "The Congress shall have the power to