                   UNITED STATES COURT OF APPEALS
                        FOR THE FIFTH CIRCUIT

                          _______________________

                                No. 91-8144
                          _______________________


                         UNITED STATES OF AMERICA,

                                                     Plaintiff-Appellee,

                                   versus

                    HARTEC ENTERPRISES, INC. and
                           JOSE J. ACEVES,

                                                 Defendants-Appellants.


_________________________________________________________________

          Appeals from the United States District Court
                for the Western District of Texas
_________________________________________________________________

                              (July 21, 1992)

Before WISDOM, REYNALDO G. GARZA, and JONES, Circuit Judges.

EDITH H. JONES, Circuit Judge:

           Appellant Jose J. Aceves is the president and majority

stockholder of appellant Hartec Enterprises, Inc. Both appeal from

a conviction of theft of government property, and aiding and

abetting the theft of government property, in violation of 18

U.S.C. §§ 641 and 2(b).      We reverse.

                                   FACTS

           Hartec is a machine shop and metals-fabricating plant

located   in   Horizon    City,   Texas.    Aceves   is   a   self-educated

machinist who established and developed Hartec into a business with

a reputation for high quality operations.            Hartec garnered the

government's scrutiny through an FBI investigation of minority-
controlled    government        contractors       for    possible      kickbacks      to

officials of the Small Business Administration.                  After an initial

investigation, the FBI seized virtually all of Hartec's business

records and held them for further examination for three years. The

FBI found no evidence of any illegal kickbacks.

            Appellants were charged in a thirteen-count indictment

with making false claims related to certain contracts that Hartec

had with the government, and with theft of government property.                       At

the close of the prosecution's case, the trial court entered a

judgment of acquittal on all of the counts, except Count IX, the

subject of the instant appeal.                 Count IX charged the theft of

certain   wire   mesh    panels        that    were   fabricated     by    Hartec    in

fulfillment of a government contract.                   The government had paid

periodic progress payments to Hartec on the contract. The contract

called for the fabrication of 13,057 wire mesh panels, to be

completed    before     March     31,    1986.        Several    extensions      were

ultimately granted.

            In January 1987, Hartec declared 513 of the panels as

scrap and sold them to El Paso Machine and Steel Works.                              The

government    claims    that     the    sale    of    these   panels      amounted    to

conversion of government property, since progress payments had been

made pursuant to the production of these panels.                 The nature of the

government's interest forms the critical inquiry on appeal.                          The

government claims that a title vesting provision of the Federal

Acquisition      Regulations,          incorporated       into      the     contract,

effectively transferred ownership of the panels to the government


                                          2
because the panels were manufactured with materials paid for

through progress payments.

                     THE GOVERNMENT'S INTEREST

          The government argued successfully at trial that the

panels were the property of the United States.      The government

relied on a plain language interpretation of the title vesting

provision.1   Accordingly, the government argued that the wire mesh

panels which Hartec sold actually belonged to the United States.

Aceves concedes that the panels were fabricated with materials

purchased with government progress payments, but characterizes the




     1
          Federal Acquisition Regulation 52.232-16 provides, in
pertinent part:

          (d)   Title.

               (1) Title to the property described in
          this paragraph (d) shall vest in the
          Government. The vestiture shall be
          immediately upon the date of this contract,
          for property acquired or produced before that
          date. Otherwise, vestiture shall occur when
          the property is or should have been allocable
          or properly chargeable to this contract.

               (2) "Property" as used in this clause,
          includes all of the below-described items
          acquired or produced by the Contractor that
          are or should be allocable or properly
          chargeable to the contract under sound and
          generally accepted accounting principle and
          practice. [including] . . .

                    (i) Parts, materials, inventories,
          and works in progress. . . .

     This regulation took effect on April 1, 1984. Prior to that
date Defense Acquisition Regulation, 32 C.F.R. § 163.79-2, which
contained a similar title vesting provision, applied.

                                 3
panels as non-conforming goods which should properly be classified

as scrap.

            Appellants insist that the title vesting clause should

not be interpreted literally, primarily relying on Midland Marine

Bank v. United States, 231 Ct. Cl. 496, 687 F.2d 395 (1982), cert.

denied, 460 U.S. 1037 (1983).     In Midland Marine Bank, the court

considered the history and purpose of the Defense Acquisition

Regulations, concluding that the word "title" should not be read

literally   because   the   regulations     specifically   exempted   the

government from most incidents of ownership.       The court determined

that the title vesting provision was originally enacted as an

expedient to avoid the effects of an 1823 congressional prohibition

on advancing federal funds to government contractors.            Midland

Marine Bank, 687 F.2d at 400-01.       The title vesting provision was

based on the rationale that if the government took title to

materials at the time of purchase, there would technically be no

advance of funds to the contractor.          See C.S. McClelland, The

Illegality of Progress Payments As a Means of Financing Government

Contractors, 33 Notre Dame L. Rev. 380 (1958) (cited in Marine

Midland Bank, 687 F.2d at 401).         See also 31 U.S.C. § 529 ("No

advance of public money shall be made in any case unless authorized

by the appropriation concerned or other law.").       In 1958, Congress

abolished this prohibition and authorized progress payments to

federal government contractors.        Marine Midland Bank, 687 F.2d at

401.   In view of this amendment, the Marine Midland Bank court

reasoned that the title vesting provision should no longer be


                                   4
literally construed. Instead the provision should be understood as

a security interest in the underlying collateral.

           [T]he government's title vesting clause and
           regulations provide for the taking of an
           interest in the nature of a lien. Full title,
           in the plain sense, certainly is not meant, as
           an examination of the clause and regulations
           show. We recognize that the government's use
           of the word "title" has had an important
           history, both to avoid the ban on advances of
           public money and as a way to circumvent
           floating lien interests of general creditors,
           and that it has an important present use in
           insuring that the government may take actual
           possession of the inventory of a bankrupt
           contractor. There is no reason, however, in
           theory or in case law, to read the word for
           more than that.

Midland Marine Bank, 687 F.2d at 403-04.

           In construing the progress payments as a series of loans,

rather than a partial purchase, the court concluded that the title

vesting provision "makes clear that the government does not take

ownership to recover inventory in any normal sense of the word."

Midland Marine Bank, 687 F.2d at 399.          For example, the court noted

that   a   government   contractor       may    sell   scrap    without   the

government's approval; that upon completion of the contract, title

will revest in the contractor for covered material that was not

incorporated in the final product; that any inventory-related loss

associated with the covered inventory would fall on the contractor,

and not the government; and, that in the event of default, the

government may force the revesting of inventory in the contractor

by compelling a repayment of progress payments.           Id.    Thus, while

the government had certain possessory rights in the inventory



                                     5
funded by progress payments, that type of possessory interest is

inconsistent with the traditional notion of ownership.

              "Title" is meant to carry no risks for the
              government and is shifted back to the
              contractor when it would be unneeded or
              undesired. In short, the government takes an
              interest in the contractor's inventory but
              does not want, and does not take, any of the
              responsibilities that go with ownership.

Id.

              In contrast, the government relies on In re American

Pouch Foods, Inc., 769 F.2d 1190 (7th Cir. 1985), cert. denied, 475

U.S. 182 (1986).       The Seventh Circuit engaged in a review of the

history of the title vesting provision, following the same path as

the Marine Midland Bank court, but reaching a contrary conclusion.

The Seventh Circuit acknowledged the reasonableness of the Marine

Midland Bank holding but believed that the title vesting provision

was written with an intent toward literal interpretation. American

Pouch Foods, 769 F.2d at 1196.        American Pouch Foods is, however,

distinguishable on a number of fronts.

              Primarily, the court's conclusion that the Marine Midland

Bank decision stands in error is dicta.           The court conceded that

"application of the Marine Midland rule to the present case would

produce the same result we reach. . . ."         American Pouch Foods, 769

F.2d at 1196.     Second, American Pouch Foods was a bankruptcy case,

in which the government sought relief from the automatic stay to

regain the possession of foodstuffs prepared under a military

contract.      Third, unlike the instant case, no person's liberty

hinged   on     the   court's   interpretation    of   the   title   vesting


                                      6
provision.        In American Pouch Foods, the issue was whether the

government       was   entitled   to    possession   of    the    property   upon

termination of the government contract, not title to the property.

American Pouch Foods, 769 F.2d at 1196.              The Marine Midland Bank

court       acknowledged   that    its    holding    did    not    disturb   the

government's right of possession.            "[T]he government's right to

possess such property cannot be questioned, and it is entirely

accurate and appropriate for an opinion in a case that is solely on

possession to recite that 'title means title.'"                   Marine Midland

Bank, 687 F.2d at 400.2

               We find the reasoning of Marine Midland Bank v. United

States to be compelling in this criminal case.                    The government

neither demanded nor accepted any of the traditional incidents of

title with regard to Hartec.           See Marine Midland Bank, 687 F.2d at

399.        While the title vesting provision would assist the United

States to regain possession of inventory wrongfully sold to a third

party, just as a lien holder could properly recover such goods

wrongfully held by another, it was unjust to convict defendants in

the instant case of "stealing" property that the government did not

own.3       This is also a paradigmatic case for application of the rule

        2
          The government also cites United States v. Digital
Products Corp., 624 F.2d 690 (5th Cir. 1980), a similarly
distinguishable case which turned on title as possession, not
title as ownership. Moreover, Digital Products Corp. was a case
where the government was attempting to replevy goods for which it
had contracted after the contract had been terminated, and not a
criminal prosecution. Digital Products Corp., 624 F.2d at 692.
        3
          Even after criticism of the Marine Midland Bank
decision by the Seventh Circuit and a few bankruptcy courts, see
e.g., In re Coded Sales, Inc., 112 B.R. 560, 562 (Bankr. S.D.N.Y.

                                         7
of lenity.   The rule of lenity compels us to construe ambiguous

criminal statutes in favor of lenity.    Dowling v. United States,

473 U.S. 207, 229 (1985).      The rule promotes fair notice of

prohibited conduct and reduces the likelihood that unintentionally

criminal conduct will be penalized.     United States v. Kozminski,

487 U.S. 931, 952 (1988).   Although the rule does not require that

we give the statute its narrowest construction, United States v.

Chen, 913 F.2d 183, 189 (5th Cir. 1990), we find that under the

facts now before us, the coupling of the title vesting provision

with its inconsistent interpretations in the courts and § 641 did

not provide Aceves with notice that he could be criminally liable

for sale of the wire mesh panels.

          The government contends that even if its interest in the

property is characterized as a security interest, appellants'

convictions may still be upheld because the government retained

sufficient control over the property to support a theft action.

See United States v. Faust, 850 F.2d 575, 579 (9th Cir. 1988).

("Government must have 'title to, possession of, or control over'

the [property] involved" in order to convict under § 641) (quoting

United States v. Johnson, 596 F.2d 842, 846 (9th Cir. 1979)).   But

cf., United States v. Tana, 618 F.Supp. 1393, 1395 (S.D.N.Y. 1985)


1988); In re Reynolds Manufacturing Co., 68 B.R. 219, 224 (Bankr.
W.D.Pa. 1986), the United States Claims Court has recognized the
continuing authority of the Marine Midland Bank holding. First
National Bank of Geneva v. United States, 13 Cl. Ct. 385, 387
(1987); Welco Industries, Inc. v. United States, 8 Cl. Ct. 303,
305-06 (1985). Moreover, the drafters of the Federal
Acquisitions Regulations have proposed an amendment to conform
the FAR to the Marine Midland Bank decision. 54 Fed. Reg. 18,631
(May 1, 1989).

                                 8
(government's position that security interests can be subject of

prosecution under § 641 is "plainly wrong").

           There is substantial credible evidence in the record that

Aceves had reason to believe that the government retained control

over the wire mesh panels. One of Hartec's clerical employees, who

also assisted with government contracts, told Aceves that she

believed the wire mesh panels belonged to the government.              Another

employee advised Aceves to consult with the government contract

officer before selling the material declared as scrap.                However,

the   government's   expert    witness      on    the   Federal   Acquisition

Regulations    testified   that   a   contractor        is   vested   with   the

discretion to make the determination whether an item is scrap or

not, although there may be a review process.            However, we need not

determine whether a security interest is a thing of value of the

United States, the theft of which may impose criminal liability

under § 641.    Count IX of the indictment charged that defendants

"did knowingly and willfully embezzle, steal, purloin, and convert

. . . wire mesh panels."      The government did not indict appellants

on the theory that they deprived the government of property over

which the government exercised sufficient control to constitute

theft of government property.             The government also failed to

introduce proof supporting a control theory, and has thus waived

this possible theory of liability.               See also United States v.

Gordon, 638 F.2d 886, 889 (5th Cir. Unit B), cert. denied, 452 U.S.

909 (1981) (in construing "thing of value of the United States"

"[t]he word 'of' necessarily implies ownership.               Things 'of' the


                                      9
Government, in the sense of the statute, are property of the

Government").4

          The government also urges before the court evidence that

Hartec was in serious financial straits at the time Aceves sold the

scrap material to El Paso Machine & Steel Works and that Hartec's

books were in disarray.    Not only did Aceves benefit from the

opinion of at least two Hartec employees that the materials could

not be sold as scrap without at least contacting the government

contract administrator, Aceves was also required to credit the

proceeds from the sale to the government's account.    This he did

not do.   The circumstances surrounding the sale of the scrap

suggest that Aceves may have acted out of desperation and in hopes

of temporarily alleviating Hartec's business woes. However correct

the government may be in their assertion that the wire mesh panels

could not be unilaterally declared scrap, this argument has no

application. We have already held that the title vesting provision

gives rise to no more than a security interest in the goods for

which the government has contracted and advanced progress payments,

and that no criminal liability under § 641 may attach on the facts

of this case for "theft of a security interest."

                            CONCLUSION




     4
          Appellants also ask us to find § 641 as applied in this
case to be unconstitutional because of its vagueness, citing
Tana, 618 F.Supp. at 1397 (finding that § 641, as applied to
theft of security interests, may be void for vagueness). Because
we reverse appellants' convictions on other grounds we need not
reach this issue.

                                10
            We agree with the district court that "this is not the

kind of case that ought to have been tried.        What this case should

have been . . . is a suit by the . . . government contracting

agency against the defendant of a civil nature as opposed to a

criminal nature." The government indicted appellants on the theory

that the title vesting clause truly vested title, and gave full

ownership   rights   to   the   government   for   materials   upon   which

progress payments had been advanced.         The title vesting provision

of the Federal Acquisition Regulations creates no more than a

security interest in the government's favor, and cannot be, under

the facts of this case, a basis for prosecution under 18 U.S.C. §

641.   Appellants' convictions are REVERSED.




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