author: JACOBS, District Judge.

text:
    EL PASO & S. W. R. CO. v. ARIZONA CORPORATION COMMISSION et al.
    No. E-132.
    District Court, D. Arizona.
    July 20, 1931.

      Knapp & Boyle, of Tucson, Ariz., H. H. McElroy, of San Francisco, Cal., W. A. Hawkins, of Fort Worth, Tex., and J. L. Stewart, of Houston, Tex., for complainant.
    The Attorney General of Arizona, for Arizona Corporation Commission and members.
    Samuel White, of Phoenix, Ariz., and Elmer Westlake and James E. Lyons, both of San Francisco, Cal., for Arizona Eastern Ry. Co.
    Chalmers, Fennemore & Nairn, of Phoenix, Ariz., and E. W. Camp, of Los An-geles, Cal., for.Atchison, T. & S. F. Ry. Co.
    Baker & Whitney, of Phoenix, Ariz., Elmer Westlake and James E. Lyons, both of San Francisco, Cal., for Southern Pac. Co.
    Rice & Mathews, of Globe, Ariz., for Apache Powder Co.
    Chalmers, Fennemore & Naim, of Phoenix, Ariz., for Ray & Gila Valley Ry. Co.
    Leroy Anderson, of Prescott, Ariz., and George W. Nilsson, of Los Angeles, Cal., for Verde Tunnel & Smelter R. R. Co.
    Before SAWTELLE, Circuit Judge, and JAMES and JACOBS, District Judges.
   JACOBS, District Judge.

This ease comes before the court on motion'to dismiss and agreed statement of facts. The motion to dismiss the bill of complaint is on the following grounds: First, that it appears upon the face of said bill that the facts therein stated are not sufficient to constitute a valid cause of action in equity; second, that this court has no jurisdiction of the subject-matter thereof. The ease comes within the provisions of section 266 of the Judicial Code (28 USCA § 380). At a hearing heretofore had before three judges, a preliminary injunction was issued and is still in full force and effect.

It appears from the agreed statement of facts that prior to May 3,1921, all of the intrastate rates on powder and explosives in effeet in Arizona were those prescribed by the Arizona Corporation Commission. That on July 29, 1920, the Interstate Commerce Commission made and entered its general order increasing interstate rates 25 per cent., Ex parte 74, 58 I. C. C. 220. The carriers then applied to the Arizona Corporation Commission for authority to increase intrastate rates to the level of the interstate rates as increased under said Ex parte 74. This authority, however, was .denied by the Arizona Commission by its order of October 18, 1920, Docket No. 1092-R-36. The Arizona carriers then applied to the Interstate Commerce Commission for an order authorizing a 25 per cent, increase in intrastate rates within Arizona and, after a hearing, the Commission having found that the intrastate rates were unjustly discriminating against interstate commerce and that the discrimination should be removed by increasing the intrastate rates to correspond with the increase made by the carriers under Ex parte 74, the Commission granted this petition on May 3, 1921, 61 I. C. C. 572, and authorized a 25 per cent, increase in intrastate rates within Arizona. Thereafter, on May 3, 1922, a joint conference was held between representatives of the state commissions and the Interstate Commerce Commission concerning a plan of co-operation between the state commissions and the Interstate Commerce Commission for maintaining the proper relationship between the state and interstate rates and a plan of co-operation was reported and approved.

Shortly after this conference on May 24, 1922, the Arizona Corporation Commission set aside its order of October 18, 1920, and approved and authorized increases in intrastate rates to conform to the increases made in interstate rates under the order in Ex parte 74. In authorizing said increases in intrastate rates to conform to the increases in interstate rates, the Arizona Corporation Commission said:

“The intrastate rates, fares and charges applicable to the transportation of persons and property within the State of Arizona authorized, and ordered by the Interstate Commerce Commission were published and made effective. No attempt was made by this Commission to interfere with or prevent said order from becoming effective and said rates, fares and charges have been recognized as legally established, and we are of the opinion that they should be ratified and confirmed by this Commission, to be continued in effect until changed by lawful authority.
“It is, therefore, ordered: that our order herein issued on October 18, 1920, be and it is hereby vacated and
“It is further ordered: that the rates, fares and charges prescribed by the Interstate Commerce Commission in its order in Docket No. 11971 of May 3, 1921, be and they are hereby ratified and confirmed until changed by lawful authority. By order of the Arizona Corporation Commission.”

The order of the Interstate Commerce Commission authorizing the 25 per cent, increase remained in effect without change or modification until June 1, 1922. Shortly after the Arizona Corporation Commission had approved the 25 per cent, increase in Arizona intrastate rates, the Interstate Commerce Commission, on June 1, 1922, made its further order, wherein it recited the facts relating to the increase in Arizona intrastate rates, and said:

“It further appearing * * * that said increased intrastate rates, fares and charges prescribed by and established pursuant to the order heretofore entered by this Commission will, if «aid order of said Commission be vacated, continue in effect as the lawfully established and applicable intrastate rates unless and until changed by further affirmative order of the competent authority of said state;
“It is ordered that the aforesaid order heretofore entered in the above entitled proceeding No. 11971 be and it is hereby vacated and set aside, effective from and after this date, and that said proceeding be discontinued.”

This order, in effect, restored to the Arizona Corporation Commission power to deal with individual rates in Arizona for the future, and the Arizona Corporation Commission did from time to time thereafter authorize and approve special rate authorities on powder and other explosives. These special rate authorities were issued by the Arizona Corporation Commission without a hearing and in response to and solely upon representations contained in letters and telegrams from agents of the carriers, representing that the requested rates were reductions over the present rates.

On June 2, 1922, the Interstate Commerce Commission, having ordered a certain 10 per cent, reduction in rates and charges applicable to transportation of interstate traffic effective July 1, 1922, and it appearing to the Arizona Corporation Commission that similar reductions should be made on intrastate traffic, the Arizona Corporation Commission entered the following order: “That all railroads within the State of Arizona and all traffic bureaus issuing traffic publications for said railroads be and they are hereby authorized to publish and make effective similar reductions in rates and charges applicable to the transportation of intrastate traffic as will be made effective on interstate traffic, said charges to be made effective on not less than five days notice.”

On the 6th day of August, 1923, in a proceeding by defendant Apache Powder Company and others before the Arizona Corporation Commission, Docket No. 1601-R-150, in which the Apache Powder Company sought a reparation as an award of damages for excessive charges theretofore collected under ' rates prescribed by the Arizona Corporation Commission and the intrastate rates fixed by the Interstate Commerce Commission and approved by the Arizona Corporation Commission, as above stated, the Arizona Corporation Commission entered an order reducing said rates and prescribing a reasonable rate for the future and ordered: “That the defendant herein shall pay to the complainant, the Apache Powder Company, as reparation and for damages sustained all charges in excess of the rates herein found to be reasonable which have been collected within two years from the date of the filing of the complaint in this ease.”

On the 9th day of May, 1924, at a hearing before the Arizona Corporation Commission for the purpose of determining the amount of reparation to be ordered, it appearing from the proof that all of the payments of freight rates were made to the El Paso & Southwestern Railroad Company (complainant herein), the Commission modified its order previously made ordering reparation to be made by all of the defendants and entered its order directing the El Paso & Southwestern Railroad Company, complainant herein, to pay to the Apache Powder Company the sum of $80,814.43 principal and interest and further interest at the rate of 6 per cent, per annum from February 4, 1924, until paid, thus eliminating all railroad defendants from the ease.

Before the filing of the bill of complaint herein and after the order of the Arizona Corporation Commission made on the 6th day of August, 1923, in which the Commission fixed intrastate rates for the future and ordered reparation to the defendant Apache Powder Company, the carriers filed their complaint with the Interstate Commerce Commission, attacking the validity of the railroad freight rates on powder and high explosives from Curtis, Ariz., to points of destination within the state of Arizona in intrastate commerce, alleging the rates to be unlawful and causing undue and unreasonable advantage, preference, and prejudice in favor of the Apache Powder Company and as unjust discrimination against interstate commerce. This proceeding was designated upon the records of said Interstate Commerce Commission as Docket No. 16412. .

That prior to the filing of said petition in said Docket No. 16412, this defendant Apache Powder Company filed with said Interstate Commerce Commission its petition against complainant El Paso & Southwestern Railroad Company and other carriers, attacking the rates established and maintained by complainant and other carriers for the transportation of powder from Curtis, Ariz., to points in California and elsewhere outside of the state of Arizona in interstate commerce; that said petition was designated upon the records as Docket No. 14687. This petition %vas consolidated with Docket No. 16412. They were heard together and decision rendered January 7, 1929, in which relief was denied in Docket No. 16412 and the proceeding discontinued. In Docket No. 14687, the Commission found that the rates attacked were unreasonable and prejudicial to the defendant and ordered the carriers to cease and desist from practicing such prejudice.

In the agreed statement of facts, the following stipulation appears: “The complainant and connecting lines or other carriers which handled the shipments involved in this proceeding complied with the orders, decisions and rate authorities heretofore set forth by the publication of the rates applicable to powder and other explosives authorized or required to be published thereby.”

The authority of the Interstate Commerce Commission to raise or lower intrastate rates to the level of interstate rates to avoid unjust discrimination against interstate commerce is not questioned..

It appears from the foregoing facts and the stipulation that every rate charged and collected by the carriers herein was fixed and prescribed by the Interstate Commerce Commission, the Arizona Corporation Commission, or the Interstate Commerce Commission, and approved by the Arizona Corporation Commission, and that no rates or charges were made or collected by the carriers in excess of those that had. been theretofore fixed and prescribed by lawful authority.

Under the Federal Plan of Common Carrier Regulation, the carrier is required to initiate rates and is commanded to initiate only those rates that are “just and reasonable.”

The Commission may, upon complaint of a shipper or upon its own motion, review the rate fixed by the carrier. If it finds the rate to be excessive, unjust, or unreasonable, it may then fix a just and reasonable rate to be charged in the future and order the carrier to pay the shipper as damages all moneys collected by the shipper under the unreasonable rate in excess of the rate the Commission finds would have been a reasonable rate during that period. This is a penalty on the carrier for disregarding its duty under the law and initiating an unreasonable rate.

A different rule is provided in Arizona. The Constitution, section 3, article 15, provides: “The Corporation Commission shall have full power to, and shall, prescribe just and reasonable classifications to be used, and just and reasonable rates and charges to be made and collected. * * * ”

The carrier is precluded from initiating rates as under the federal plan, and may only charge and collect those rates that have been approved and prescribed by the Commission.

The authority of the Arizona Corporation Commission to order reparation is expressed in paragraph 2347, Revised Statutes of Arizona 1913 (Civ. Code), as follows: “When complaint has been made to the commission concerning any rate, fare, toll, rental or charge for any product or commodity furnished or service performed by any public service corporation, and the commission has found, after investigation, that the public service corporation has charged an excessive or discriminatory amount for such product, commodity or service, the commission may order that the public service corporation make due reparation to the complainant therefor, with interest at the legal rate from the date of collection; provided, no discrimination will result from such reparation.”

This provision of the act must necessarily refer to rates and charges made and collected in excess of those fixed and prescribed by the Commission, as the carrier is not permitted to charge or collect any sum whatever until after the Commission has prescribed “just and reasonable rates and charges to be made and collected.”

The state of Louisiana has a law quite similar to that of Arizona, in construing which the Supreme Court of Louisiana, in the ease of Texas & P. Ry. Co. v. Railroad Commission of Louisiana, 137 La. 1059, 69 So. 837, held: “Neither the Constitution, nor any statute, whether directly or by fair implication, confers upon the Railroad Commission of Louisiana jurisdiction to assess, or award, against a railway company, damages,’ alleged to have been sustained by a shipper or consignee by reason of its observance of a freight rate authorized by the Commission.”

This in the face of an act of the Legislature authorizing the Commission to “hear complaints as to damages arising from violations of rates adopted by the Commission.”

The state of Alabama has a law very similar to that of Arizona, and in construing this law and the constitutional provisions of the state affecting the question the Supreme Court of Alabama, in the ease of T. R. Miller Mill Co. v. Louisville & Nashville R. Co., 207 Ala. 253, 92 So. 797, in an action to recover alleged excessive freight charges with statutory penalties, held:

“There can be but one ‘lawful rate’ in force at a given time, and that rate, by the terms of Code 1907 * * * is a rate which has been filed and approved by the Railroad Commission and published by the carrier and behind that rate, so long as it remains unchanged, and so far as its application to specific shipments is concerned, neither shipper nor carrier can go, and courts cannot inquire.
“A freight rate which has been filed, approved, and published by the Railroad Commission is the lawful rate, even though unreasonable, and is the only rate which the carrier can charge without violating the statutes and penal laws; and, where a carrier has charged such rates, the shipper is not entitled to recover as for any excess charges, nor for penalties accruing under Code 1907. * * *
“It seems to us that this proposition is self-evident and fundamental, and that it is the foundation of our regulatory system, without which it would fail in its primary purposes, which are to stabilize rates and charges, and to insure equality to shippers in their application.”

See, also, Atchison, T. & S. F. R. Co. v. State, 85 Okl. 223, 206 P. 236; Producers’ Refining Co. v. Missouri K. & T. Ry. Co. (Tex. Com. App.) 13 S.W.(2d) 680.

This court has passed upon the question involved, in the ease of El Paso & Southwestern Railway Company et al. v. Arizona Corporation Commission et al., in which a similar order of the Arizona Corporation Commission was attacked. It was there held no written opinion having been filed, that the order of the Commission was null, void, and of no effect, and a permanent injunction issued against the enforcement of the order.

We find no reason to depart from the ruling made in that ease.

We are convinced that when the Arizona Corporation Commission has approved and authorized a rate to be collected, and the carrier has collected that rate and nothing in excess thereof .while the rate was in force, the Commission has no authority to order a reparation, even though it should thereafter find, as it did in this case, that the rate so prescribed was excessive. The same rule applies to rates fixed by the Interstate Commerce Commission, Atchison, T. & S. F. Ry. Co. v. Arizona Grocery Co. (C. C. A.) 49 F.(2d) 563.

There remains to be considered .the second ground of the motion, “That the court has no jurisdiction of the subject-matter of this suit.”

The jurisdiction of this court is invoked upon the constitutional grounds that the laws of Arizona in question deny to complainant equal protection of the laws, and their enforcement will deprive it of its property without due process of law. It is not necessary to prolong this opinion by setting forth at length all of the constitutional and statutory provisions of Arizona bearing upon the subject, as the résumé thereof contained in complainant’s brief is quite sufficient to disclose the effeet of their enforcement against a carrier situated like complainant in this suit.

It appears therefrom and from the bill of complaint herein that under subdivision (b) of paragraph 2347 of the Revised Statutes of Arizona 1913 (Civ. Code), the defendant Apache Powder Company has the right at any time to bring suit to recover the reparations and award; that in such suit and in accordance with paragraph 2341 of said Code, the validity of the order awarding repara tions would be conclusive; that under section 17 of article 15 of the State Constitution and paragraphs 2343 and 2344 of said Code, the order would remain in force pending the court’s decision, and the court could not enter a decree enjoining, restraining, suspending, or delaying the order; that under section 16 of article 15 of the State Constitution and paragraph 2352 of said Code, a penalty of not less than $100 nor more than $5,-000 could be imposed upon complainant for disobeying the order of reparation, and that each day’s continuance of such disobedience would constitute a separate and distinct of-, fense; that under paragraphs 2353 and 2355 of said Code every officer, agent, or employee of said complainant who takes part, aids, or abets in the violation of such order would be guilty of a misdemeanor and could be prosecuted therefor on the complaint of any citizen and upon conviction fined in' ah amount not exceeding $1,000' or imprisoned for a term not exceeding one year, or both; that under paragraph 2357 of said Code, complainant or any of its officers, agents, or employees disobeying said order would be in contempt of the State Corporation Commission and could be fined therefor in a sum not less than $100 nor more than $5,000 ; that the enforcement of any of said remedies or penalties would not be a bar against the enforcement of any other remedy, but would be cumulative and in addition to all other remedies ; and that under paragraph 2349' of said Code punitive damages could be awarded defendant Apache Powder Company - for complainant’s refusal or failure to pay the reparations awarded.

This question has been decided by this court at least three times adversely to defendants’ contention. In the ease of Bonbright v. Geary (D. C.) 210 F. 44, 46, the complainant, as in this ease, rested his claim of jurisdiction upon the allegations that in no other way could his rights be adjudicated in a court of law; that the pains and penalties of the Arizona statute are so severe and cumulative in effect that he could not test the validity of the order of the Corporation Commission without the danger of being subjected to irreparable damage and excessive fines and penalties, and the court, speaking through Judge Morrow, said: “These allegations of the complaint and the provisions of the Arizona statute to which reference is made appear to bring this ease within the decision of. the Supreme Court of the United States in Ex parte Young, 209 U. S. 123-144, 148, 28 S. Ct. 441, 52 L. Ed. 714, 13 L. R. A. (N. S.) 933, 14 Ann. Cas. 764.”

In the cáse of Van Dyke v. Geary, 218 F. 111, 116, in which the jurisdiction of this court was invoked on the same grounds as in the Bonbright Case, the court, speaking through Judge Sawtelle, after quoting from Judge Morrow’s decision in the Bonbright Case, said: “We think it unnecessary to go into a lengthy discussion of this question. We hold that this court has jurisdiction of this cause, because it involves the decision of a federal question arising under the Constitution of the United States.”

The same ruling was made in the ease of El Paso & S. W. Ry. Co. v. Arizona Corporation Commission, supra.

The defendant contends that this court is without jurisdiction, for the reason that this is not a suit between citizens of different states, and that there is no substantial federal question involved; that the question of whether or not the Arizona Corporation Commission had power under the state law to make the reparation order is purely a local or state question.

In this case, the plaintiff alleges that the act in question was in violation of the Federal Constitution (Amendment 14) because of the enormous fines and penalties provided as punishment for a violation of any of its provisions, and, as Judge Sawtelle said, in the case of Van Dyke v. Geary, supra, this involves the decision of a federal question arising under the Constitution of the United States and the federal court has jurisdiction.

As stated by Mr. Justice Peckham, in the ease of Siler v. Louisville & Nashville R. Co., 213 U. S. 191, 29 S. Ct. 451, 454, 53 L. Ed. 753, “The Federal questions as to the invalidity of the state statute because, as alleged, it was in violation of the Federal Constitution, gave the circuit eourt jurisdiction, and, having properly obtained it, that court had-the right to decide all the questions in the case, even though it decided the Federal questions ' adversely to the party raising them, or even if it omitted to decide them at all, but decided the case on local or state questions only.”

There are other questions raised by both parties, but we deem them of no importance, in face of the foregoing. There is no merit in the motion to dismiss and the same is denied. "

As the whole ease is submitted to the eourt for final decision upon the agreed statement of facts, and from the facts and the law it appears that the eourt has jurisdiction and that a good cause in equity is stated, it follows that the complainant is entitled to the decree of this eourt permanently enjoining the enforcement of the order of the Corporation Commission, as prayed in the bill, with costs. It is so ordered.


source: Caselaw Access Project

author: CHESNUT, District Judge.

license: Public Domain

text:
    UNITED STATES v. RUFFNER.
    No. 14918.
    District Court, D. Maryland.
    July 17, 1931.
    Risley Ensor, Asst. U. S. Atty., of Baltimore, Md., for the United States.
    Wendell D. Allen, of Baltimore, Md., for defendant.
   CHESNUT, District Judge.

In this case a criminal information has been filed charging the defendant with the unlawful possession of 65 gallons of intoxicating liquor and certain property designed for the manufacture of liquor; that is, in common parlance, a still. The defendant has filed a motion to suppress and exclude certain physical evidence found and seized upon the property of the defendant by prohibition agents (without search warrant or warrant for arrest) on the ground that the search and seizure was in violation of the Fourth Amendment to the Constitution which declares that “the right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.”

In accordance with the practice under such motions, oral testimony of witnesses as to the facts and circumstances surrounding the search and seizure has been taken, and counsel for the respective parties have aided me in the consideration of the matter by the submission of oral and written arguments.

The principal witnesses at the hearing were one Switzer, a brother-in-law and employee of the defendant, and Prohibition Agent Danforth, both called by the defendant. From the evidence it appears that the defendant owns a farm of about 100 acres at or near Grimes Station, Washington county, Md. On the farm is situated a dwelling house and near by, a gristmill with adjoining garage. In consequence of numerous, but anonymous, complaints that the property was being used for the illegal manufacture of whisky, Mr. Danforth and two other prohibition agents visited the place on December 12, 1930, without a search warrant and without a warrant for arrest. As their information was purely anonymous, it is obvious that they could not validly have obtained a search warrant. At the time, the defendant, Peter Ruffner, was not in the building, but was on the farm building a fence. The agents first .approached the defendant’s wife to ascertain who was in charge of the premises. They were apparently referred. by the wife to Switzer who was in the gristmill. Mr. Dan-forth then had a ten-minute conversation with Switzer who stated that he was in charge of the mill. There is a contradiction between the testimony of these two witnesses as to the substance and effect of the conversation. Switzer stated that in substance Agent Dan-forth said he was going to make a search and that Switzer said, “All right, go ahead.” On the other hand, Agent Danforth testified that he did not say he was going to search, but on the contrary engaged Switzer in conversation in the hope of getting permission to search and that, after having told Switzer about the reports concerning the mill, Swit zer, without solicitation on Danforth’s part, told the latter he could look around and see for himself. Thereupon the agents did make search as a result of which they found the whisky and still (which was not in operation) concealed in a blind cellar which extended under the garage and gristmill. The entrance to the cellar was found to be through a concealed trapdoor in the floor of the garage.

Before actually finding the still and the liquor the agents had no knowledge of its existence through sense of sight, smell or otherwise. The search was, therefore, purely an exploratory one without a warrant. The government contends that on the facts the court should find from Danforth’s testimony that Switzer freely and voluntarily gave the agents an invitation or permission to search; and that the consent of the agent so given was legally binding on Ruffner, the employer, and constituted an effective waiver of the latter’s constitutional rights. It is, however, admitted by'the government that if Switzer’s account of the substance of the conversation with Agent Danforth is to be accepted as the fact, then the search was illegal because the effect of the conversation indicated merely acquiescence as distinguished from consent. United States v. Slusser, 270 F. 818 (D. C., S. D. Ohio, 1921) ; United States v. Marra, 40 F.(2d) 271 (D. C. W. D. N. Y.1930).

Under the view that I take of this case I do not find it necessary to make a sharp' decision on the facts between the two versions of the circumstances as given by the respective witnesses. I am satisfied that the agents acted in good faith and with the belief on their part that Switzer was freely consenting to the search but I have some doubt as to whether Switzer really did consent to the search as freely as the agents seem to have understood. It is probable that the effect made on Switzer’s mind by this prolonged conversation on the one topic was that opposition, to the search which the agents obviously wished to make, even if they did not state that they intended to make it, would be useless on his part. In form, I am inclined to believe that what took place is substantially related by Agent Danforth but it is quite probable, it seems to me, that the substantial effect the conversation made on Switzer’s mind was as testified to by him. Bearing in mind the important nature of the constitutional right and immunity given by the Fourth Amendment, it seems to me that a trier of the facts should be slow in finding an intentional and voluntary relinquishment of this right by an individual when the effect of the testimony is uncertain. But assuming that Switzer did freely consent to the search, in my opinion Ruffner was not bound thereby. The agents apparently knew that Ruffner was the owner and Switzer only an employee; and they also knew or could readily have learned, that the owner was near by. There was no such required haste in making the search as to preclude consulting the owner in person for permission. The government did not undertake to prove that Switzer had in fact authority from Ruffner to permit the search. And, in the absence of such proof, the circumstances did not justify the application of the doctrine of apparent authority seemingly relied upon by the government.

The federal decisions, or at least the weight of them, is in accord with this view. In Amos v. United States, 255 U. S. 313, 317, 41 S. Ct. 266, 65 L. Ed. 654, the Supreme Court found it unnecessary to consider whether it is possible for a wife, in the absence of her husband, to waive his constitutional rights under the Fourth Amendment, because the court found implied coercion on the part of the agents affecting the wife. But in Cofer v. United States, 37 F.(2d) 677, 679, the Circuit Court of Appeals for the Fifth Circuit, in a case quite similar on the facts, stated that the wife was without authority to bind her absent husband by waiving a legal warrant or consenting to an unauthorized search, citing the Amos Case, thus at least indicating that the implication from the Amos Case is against the apparent authority of the wife in such a situation. And a similar ruling was made by the District Court for the Southern District of Ohio in United States v. Rykowski, 267 F. 866, 871. The same principle under somewhat different circumstances is affirmed by In re Tri-State Coal & Coke Co., 253 F. 605 (D. C. W. D. Pa.).

The only case referred to by counsel where, in the absence of the owner, the consent of his agent on the premises has been held effective is Raine v. United States, 299 F. 407 (C. C. A. 9th Cir.). And this ease is cited by the government as authority for the general proposition that a present agent may waive the rights of an absent owner. I think, however, the particular* case does not support the principle thus broadly contended for. In the Raine Case the defendant prior to the search which was questioned, had been, arrested for violation of the liquor law and was presumably in custody and away from the premises indefinitely. He had left an agent in charge of the property. The agent gave the officer full permission to enter and search for evidence. In the opinion of the court by Circuit Judge Gilbert, page 411 of 299 F., the authority of the agent under the circumstances to consent for the owner was upheld without discussion; but it is also to be noted that Circuit Judge Rudkin, while concurring in the result, dissented on the particular point, and Circuit Judge Ross dissented on an underlying point in the case, the effect of which seemingly rendered unnecessary the discussion by him of the particular question.

The views herein expressed as to the effect of consent by an agent are intended to be limited to the facts of the particular ease under consideration. The question involved is fundamentally only a question of agency. There may well arise situations in which the agent of an absent principal, by virtue of the nature of the premises and the use to which they are put and the extent of his powers, would be held to have legal authority to consent to a search without a warrant. It is not intended herein to announce a general principle of law to the effect that under no circumstances or conditions would a search be authorized unless consented to personally by the defendant owner.

I conclude that the search and seizure made in this case was not reasonable, and therefore was unlawful and in violation of the defendant’s constitutional rights. Consequently, in my opinion, the motion to suppress the evidence must be granted and it is so ordered. The motion does not ask for a return of the whisky so seized which, it appears, was unlawfully possessed.


author: BINDBEY, District Judge.

text:
    BURK v. MUSK et al.
    District Court, E. D. Illinois.
    July 28, 1931.
    Gunn, Penwell & Bindley, of Danville, Ill., for plaintiff.
    Jones, Mclntire & Jones, of Danville, Ill., for defendants.
   BINDBEY, District Judge.

The trustee in bankruptcy of John Musk seeks to recover certain property, consisting of all the estate, real and personal, of the bankrupt, conveyed by him to his brothers May 6,1930, in consideration of the satisfaction of his indebtedness to them and payments in cash, by them to him aggregating $1,485.

From the findings of fact, it appears that John was on May 6, 1930, known by Perry Musk, agent for all defendants, to have insufficient property to pay even the debts due his brothers; that he conveyed all his assets to defendants; that they knew of no other creditors and made no inquiry concerning same.

Under section 60, Bankr. Act (11 USCA § 96), a bankrupt is deemed to have given a preference if within four months preceding his bankruptcy, while insolvent, he has made a payment or transfer of property to a creditor, and the effect thereof will be to enable the transferee or payee to receive a greater percentage of his claim than other creditors of the same class. Such preference is voidable at the suit of the trustee, under section 60b (11 USCA § 96(b), provided the transferee had reasonable cause to believe that a preference would be effected as a result of the transaction.

In the present case, all the elements of a voidable preference appear, unless it be proof of reasonable cause upon the part of the transferees to believe that' a preference would result. The ’.issue is limited to that narrow question of fact.

The bankrupt had other debts of substantial amount of some years’ standing. He had borrowed money at three different banks. He had no visible means of support, no settled vocation, and no known source of income. He had been a tenant farmer and a man of casual employment. He had borrowed money in substantial amounts from the transferees and had repaid no part of the principal and only a small portion of the accrued interest thereon. His indebtedness had over a period of years, without reduction, constantly grown, until the brothers demanded payment in full. He replied that he could pay them only by transferring to them his assets. They agreed to take and received a conveyance of all the same, including real estate, grain, ehoses in action, money in bank, and amount due for labor. The conveyances stripped him of all tangible property and left him without means or vocation, except $1,485 advanced to him in cash. At the time of the recording of the conveyances, according to the testimony of defendants, the assets conveyed were worth little more than one-half of his debt to his brothers, but the transaction was completed upon the basis of the parol agreement made some months before when the property transferred was agreed as being worth $1,485 more than the indebtedness.

Of all these facts, the transferees had notice, unless it be of other creditors. At the time of the recording, they knew him to be insolvent, but they insist they knew of no other creditors, and therefore could not have reasonable ground to believe that they were obtaining a preference. They made no in•quiry as to other debts, but rely upon their lack of knowledge as their defense.

A transfer of all assets of an insolvent person to one creditor is not an ordinary or normal transaction. It is so unusual that the eourts quite generally hold it puts the transferee upon inquiry and charges him with such knowledge as a reasonably prudent man would acquire upon such inquiry.

Thus in McElvain v. Hardesty, 169 F. 31, 36 (C. C. A. 8) the court said: “Moreover, if MeElvain did not have actual knowledge of the insolvent condition of his debtors, we think in the circumstances of this ease he is constructively chargeable with that knowledge. He took a transfer of all his debtors’ property — of a going concern — in satisfaction of a debt. This in itself was an unusual thing, and the reasons which actuated it must have sprung from a fear or suspicion of danger. Solvent and prosperous business houses do not commonly pay debts that way. He knew of his own dishonored notes. He knew that his debtors could not have carried on active business for seven months and thereby make enough to pay over $2,600 upon his own indebtedness assumed by them without purchasing supplies. These facts and many others disclosed by the record were sufficient to put him as an ordinarily prudent man upon inquiry as to his debtor’s solvency and to charge him with all the knowledge he could have acquired by the exercise of reasonable diligence.”

In re Miller (D. C.) 221 F. 471, 473, the court announced: “When the circumstances are of such a character as to put an ordinarily prudent man on inquiry, the beneficiary of such a one-sided transaction as this is held to the duty of making a real inquiry to ascertain if the facts justify the favor to him, and, making no real inquiry, he is charged with just such knowledge as an inquiry of the character indicated would have produced, had it been truthfully answered. What the court means by the term a ‘real inquiry’ is that investigation which a reasonably prudent and honest man would make after the circumstances known to him suggested that an inquiry ought to be made.

The facts known to defendants and their counsel before their claims were paid unquestionably put defendants upon inquiry. It is beyond question that a ‘real inquiry,’ entered into by business men owning claims against bankrupt, would very soon have disclosed the hopeless insolvency of bankrupt, and that to pay any defendant in full would be to unlawfully prefer it.”

In Bentley v. Young et al., 223 F. 536 (C. C. A. 2) the court remarked: “The offer of Kruger’s entire stock at a lump sum was a circumstance to put Henry Young upon inquiry.”

. The Supreme Court defines the test as follows : “When the condition of a debtor’s affairs are known to be such that prudent business men would conclude that he could not meet his obligations as they matured in the .ordinary course of business, there' is reasonable cause to believe him to be insolvent. Knowledge is not necessary, nor, even a belief, but simply reasonable cause to believe.” Merchants’ National Bank v. Cook, 95 U. S. 346, 24 L. Ed. 412. “The transfer, in any ease, by a debtor, of a large portion of his property, while he is insolvent, to one creditor, without making provision for an equal distribution of its proceeds to all his creditors, necessarily operates as a preference to him, and must be taken as conclusive evidence that a preference was intended, unless the debtor can show that he was at the time ignorant of his insolvency, and that his affairs were such that he could reasonably expect to pay all his debts. The burden of proof is upon him in such ease, and not upon the assignee or contestant in bankruptcy.” Toof v. Martin, 13 Wall. 48, 20 L. Ed. 481.

Though the two eases last cited arose under the former act, the test of what constitutes reasonable cause to believe remains the same. So when the bankrupt conveyed his entire estate, the court, in the case of In re McDonald & Sons (D. C.) 178 F. 487, 492, said: “The unusual nature of the transaction, •in connection with all the circumstances, raises such a presumption that it can only be overcome by proof on the part of the preferred creditor that he took the proper steps to find out the pecuniary condition of the debtor.”

In Pollock v. Jones, 124 F. 163, 168 (C. C. A. 4) the court went so far as to say: “When Pollock received this chattel mortgage covering all the property of the mortgagee, and when Duff gave the mortgage practically clothing Pollock with a legal title to all the property of the firm, it is impossible to say that the one did not know that he got a preference and that the other was unaware that he gave a preference.”

A cause very similar to that at bar is Jones v. Flatters, 54 N. D. 459, 209 N. W. 969, 971, 8 A. B. R. (N. S.) 669; where a son, creditor of his mother, residing some distance from her and said to be unfamiliar with her financial affairs, accepted a conveyance of all her property in satisfaction of his debt. There the court said: “It is conceded that the grantor wás in fact insolvent; but it is denied that the defendant had ‘reasonable cause’ to believe that such was the fact. While he asserts he did not know that she owed any debts, defendant admits that he knew the conveyance to him by his mother devested her of all her property. * * * Surely, by getting all her property he had ‘reasonable cause to believe’ that a preference would be effected if there were a single creditor besides himself. He knew that he was being preferred in faet and in law if she was indebted to any extent; and he actually knew that the enforcement of the transfer would effect a preference, if the grantor owed a single debt. * * * A single question respecting the existence of outstanding indebtedness would have disclosed that he would receive a greater proportion of his debt than any other creditor of the same class. He refrained from making inquiry when the circumstances and every consideration of prudence suggested that inquiry should be made.” The conveyance was held voidable.

Black on Bankruptcy (4th Ed.) § 1034 states the general rule as follows: “Where a creditor, about to receive a payment or security from his debtor, has knowledge or notice of facts which would incite a man of ordinary prudence and business intelligence to inquire as to the debtor’s solvency and the probable effect of the transaction as a preference, he is bound to prosecute a reasonably diligent inquiry to ascertain the truth; and if he fails to do so, he is chargeable with knowledge of the facts which such an inquiry would have disclosed; and if such ultimate knowledge would give him reasonable cause to believe that the transaction would result in giving him a preference, within the meaning of the bankruptcy law, then he cannot safely accept the payment, transfer, or security, for if the debtor’s bankruptcy follows within four months, the transaction will be voidable at the suit of the trustee.”

See, also, Martin v. McDonald, etc., Co., 159 Minn. 447, 199 N. W. 176, 4 A. B. R. (N. S.) 553.

Though the question is a close one, I am of the opinion that the proof is such that Perry Musk, acting for himself and his brothers in the transaction, had reasonable ground to believe that the effect of the conveyances would- effect a preference. On May 6, he knew the assets were insufficient to meet the debt due him and his brothers. He knew they were receiving all of John’s assets. The unusual character of the transaction put him upon inquiry. A simple question propounded to the nearest banks would have disclosed other indebtedness. As a reasonably prudent man he was charged with such knowledge as he would thus have obtained.

If we consider John Musk as a man of any vocation, the conveyance of all his personal property must be held void also because not in compliance with the Bulk Sales Law of Illinois. Main v. Hall, 41 F.(2d) 715 (C. C. A. 7).

Inasmuch as defendants advanced $1,485 to John in addition to canceling his indebtedness, they must be given credit for that amount. There will be a decree, therefore, directing defendants to pay to the trustee the value of the property as found in the findings of fact on May 6, 1930, less $1,485, within 30 days, and, in case of failure so to pay, directing them to reconvey to the trustee the property less the aforesaid credit.


author: PER CURIAM.

text:
    NEW YORK TITLE & MORTGAGE CO. v. TARVER et al.
    No. 380.
    District Court, W. D. Texas, Austin Division.
    June 3, 1931.
    Goggans & Ritchie, of Dallas, Tex., A. N. Moursund, of San Antonio, Tex., Lyle Saxon, of Dallas, Tex., and George S. Parsons, of New York City, for complainant.
    The Attorney General of Texas; Charles L. Black and Ireland Graves, both of Austin, Tex., for defendants.
    Before FOSTER, Circuit Judge, and WILSON and BOYNTON, District Judges.
   Findings of Fact.

PER CURIAM.

1. That on the 27th day of February, 1929, there became effective within the state of Texas a statute, known and designated as the Title Insurance Act, duly enacted by the Forty-First Legislature of the State of Texas at the regular session thereof, known as chapter 40 of the laws of such session (Vernon’s Ann. Civ. St. Art. 1302a); section 3 of said act providing as follows:

“See. 3. Corporations so formed as well as foreign corporations and those created under Subdivision 57, Article 1302 of the Revised Statutes of 1926, or under Chapter 18, Title 78, Revised Statutes of 1925, or any other law insofar as the business of either may be a title insurance business, shall operate in Texas under the control and supervision and under such uniform rules and regulations as to forms of policies and underwriting contracts and premiums therefor, as may be from time to time prescribed by the Board of Insurance Commissioners of Texas; and no Texas or foreign corporation whether incorporated under this Act or any other law of the State of Texas shall be permitted to issue any title policy or mortgage certificate or underwriting contract on Texas property other than under this Act and under such rules and regulations. No policy of title insurance or guarantee of any character on Texas titles shall be issued or valid unless written by a corporation complying with all pro-visions of and authorized or qualified under this Act. Before any rate provided for herein shall be fixed or changed, reasonable notice shall issue, and a hearing afforded to the companies affected by this Act. Every company doing business under this Act shall file with the Board of Insurance Commissioners the form of guarantee certificate, mortgage policy or any policy of title insurance before the same shall be issued, and the form must be approved by the Board, and be uniform as to all companies. Under no circumstances may any company use any form until after the same shall have been approved by the Board.
“The Board of Insurance Commissioners shall have the right and it shall be its duty to fix and promulgate the rates to be charged by corporations created or operating hereunder for premiums on policies or certificates and underwriting contracts. The rate fixed by the Board shall be reasonable to the public and nqneonfiseatory as to the company. Eor the purpose of collecting data on which to determine the proper rates to be fixed, the Board shall have the right to require the companies operating in Texas to submit such information in such form as it may deem proper, all information as to loss experience, expense of operation, and other material matter for its consideration.
“Bates when once fixed shall not be changed until after a public hearing shall be had by the Board, after proper notice sent direct to all companies interested in writing this business, and after public notice in such manner as to give fair publicity thereto for two weeks in advance. The Board must call such hearing to consider rate changes at the request of a company writing title insurance, or if the Board thinks that a change in rates may be proper. Any company or other person interested, feeling injured by any action of the Board with regard to rates, shall have the right to file a suit in the District Court of Travis County, within thirty days after the Board has made such order, to review the action, in which suit the Court may enter a judgment correcting the Board’s order and fixing such rates as may be proper, or affirming the action of the Board. Under no circumstances shall any rate of premium be charged for policies or underwriting contracts different from those fixed and promulgated by the Board, or those fixed in a final judgment of the Court as herein provided.”

And section 4 of said act provides as follows:

“See. 4. Corporations organized under the laws of any other State shall be permitted to do business in this State on exactly the same basis and subject to the same rules, regulations and prices and supervision as fixed for Texas corporations.”

2. From the evidence and record in the ease at bar it is found, and held, that title insurance, and uniform rules and regulations as to forms of policies and premiums therefor, is a business of public interest, affected by a public use.

3. That the uniform form of policy, premium rates, fees, rules, and regulations complained of in complainant’s bill, herein, were not determined on, fixed, and promulgated by said Board of Insurance Commissioners until after public hearings were held and conducted by said board, of which all companies and interested parties to be affected had reasonable notice, at which discussion was had of proposed uniform form of policy, premium rates, fees, rules, and regulations to be adopted and promulgated by said board; and were attended and participated in by a representative or representatives of complainant company.

4. The court further finds that the form of policy, uniform form of policy, premium rates, schedules of rates and fees, rules and regulations, so adopted, prescribed, and promulgated by the Board of Insurance Commissioners of Texas, under and by virtue of provisions contained in section 3 of .said Title Insurance Act aforesaid, in complainant’s bill alleged, are not shown to be arbitrary or unreasonable, but on the other hand to be reasonable, and nonconfiscatory as to the company.

Conclusions of Law.

I. A state government, under powers inherent in every sovereignty, may enact laws to regulate a business, otherwise private in nature, that has become affected with a public interest; under its police power, so long as such regulation is not arbitrary and unreasonable. Munn v. Illinois, 94 U. S. 113, 24 L. Ed. 77; German Alliance Ins. Co. v. Lewis, Sup’t of Ins. of Kansas, 233 U. S. 389, 34 S. Ct. 612, 58 L. Ed. 1011, L. R. A. 1915C, 1189; La Tourette v. McMaster, 248 U. S. 465, 39 S. Ct. 160, 63 L. Ed. 362; Stipcich v. Metropolitan Life Insurance Co., 277 U. S. 311, 320, 48 S. Ct. 512, 72 L. Ed. 895; O’Gorman & Young v. Hartford Fire Insurance Co. (O’Gorman & Young v. Phoenix Assurance Co., Ltd.), 282 U. S. 251, 51 S. Ct. 130, 75 L. Ed. 324, January 5, 1931.

II. Whether rate regulation is necessary-in regard to a particular business affected by a publie use, such as insurance, is a matter for legislative determination. The court can only determine whether the Legislature has the power to enact it. German Alliance Ins. Co. v. Lewis, Sup’t of Ins. of Kansas, 233 U. S. 389, 34 S. Ct. 612, 58 L. Ed. 1911, L. R. A. 1915C, 1189.

III. That by reason of the fact that title insurance is here found and held, by the court, to be a business of publie interest affected by a publie use, the Legislature of the State of Texas had power to enact said Title Insurance Aet of February 27, 1929, and, as in section 3 thereof (Vernon’s Ann. Civ. St. art. 1302a, § 3) provided, vest the Board of Insurance Commissioners with legal authority and power to adopt and prescribe uniform rules and regulations as to forms of policies of such insurance and rate of premiums therefor, and further provide, as in said section of said aet set forth, that “under no circumstances may any company use any form until after the same shall have been approved by the Board.”

IV. It is further held by the court that the form of policies so prescribed and rates of premiums so .fixed and prescribed by the Board of Insurance Commissioners of the State of Texas, here in question, as shown by the record herein, are not shown to be arbitrary or unreasonable.

V. That under and by virtue of said Title Insurance Aet said Board of Insurance Commissioners held as vested with implied power.to fix maximum amounts to be charged for services and fees in connection with the writing of policies, so long as same be found reasonable. O’Gorman & Young v. Hartford Fire Insurance Co. (O’Gorman & Young v. Phoenix Assurance Co., Ltd.), 282 U. S. 251, 51 S. Ct. 130, 75 L. Ed. 324, January 5, 1931.

VI. That said Title Insurance Act is held to only relate to and affect form of policies and premium rates of such insurance, etc., within the state of Texas, the doing of business within the state of Texas; not to be extraterritorial in its effect, and same cannot affect the form of policies in use by complainants in other states than the state of Texas or rates of premium charged on policies written outside the state of Texas not to he performed within this state. The state of Texas has the power to say what kind of title -insurance business shall be performed in the state of Texas. Bothwell et al. v. Buck-bee, Mears Co., 275 U. S. 274, 48 S. Ct. 124, 72 L. Ed. 277.

VII. That section 3 of said Title Insurance Aet of the State of Texas is held not to be unconstitutional, repugnant to the Fourteenth Amendment, or any other portion, of -the Constitution of the United States. “Every statute is presumed to be constitutional. The courts ought not to declare one to be unconstitutional, unless it is clearly so. If there is doubt, the expressed will of the legislature should be sustained.” Munn v. Illinois, 94 U. S. 113, 123, 24 L. Ed. 77.

Therefore, based upon the findings of fact and conclusions of law, complainant’s motion and prayer for interlocutory injunction herein is denied.


author: DAWSON, District Judge.

text:
    KENTUCKY RIVER COAL CORPORATION v. LUCAS.
    No. 1278.
    District Court, W. D. Kentucky, at Louisville.
    July 9, 1931.

      Woodward, Hamilton & Hobson, of Louisville, Ky., for plaintiff.
    T. J. Sparks, U. S. Atty., and Frank Ropke, Asst. U. S. Atty., both of Louisville, Ky., and C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, and Kelly Kash, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., for defendant.
   DAWSON, District Judge.

This is a suit for a refund of income taxes for the year 1923. The whole case hinges on whether or not the so-called debenture stock issued and sold by the plaintiff was,, in fact, capital stock, or represented borrowed money. These securities were sold at 50 per cent, discount. The plaintiff contends that the so-called 6 per cent, dividends on this stock should be treated as interest paid on borrowed money and allowed as a deduction, under section 234 of the Revenue Act of 1921 (42 Stat. 254), and that it was likewise entitled to amortize, over a period of ten years, the discount at whieh this stock was sold, and to deduct the proper amount of this discount for this purpose for the year 1923.

I am unable to agree with the plaintiff’s contention that the amount represented by this debenture stock must be treated as borrowed money. The plaintiff is a Virginia corporation. Under the law of that state, every corporation organized thereunder is given the power to create two or more kinds of stock, of such classes, with such designations, preferences, and voting power’s, or restrictions or qualifications, as shall be expressed in the charter or articles of incorporation. Its articles of incorporation were drawn in conformity to the statutes of Virginia, and, as therein required, the articles of incorporation set out the authorized amount of capital stock and the character thereof. The so-called debenture stock is specifically listed in the articles of incorporation as a part of the capital stock structure. The articles of incorporation further provide that the $500,000 of debenture stock and $500,000 of the common stock were to remain in the treasury and to be disposed of as treasury stock, for the benefit of the corporation as its necessities might require, with the specific requirement that the proceeds of the $500,000 debenture stock was to be used exclusively in the discharge of indebtedness owing by the five corporations whose property was to be acquired by the plaintiff, the payment of which indebtedness was to be assumed by the plaintiff, or for betterments, prospecting, or acquiring. additional property.

It is quite clear from the record that the consideration paid to the five corporations whose property was acquired was $2,000,000 of preferred stock, $2,000,000 of the common stock of the plaintiff corporation, and the assumption and the discharge by the plaintiff of not exceeding $300,000 of indebtedness owing by the selling corporations, and for this latter purpose the $500,000 of debenture stock was tó be first used.

The entire capital of the plaintiff corporation was represented by the property transferred to it by the five selling corporations, and the debenture stock is just as much reflected in this property as is the common and preferred stock.

The debenture stock, when issued, was styled “debenture stock,” and provided that the stipulated dividend of 6 per cent, should only be paid out of the surplus profits, earnings, or assets of the corporation, a typical provision as to preferred stock, as distinguished from ordinary indebtedness.

When the corporation came to comply with the Virginia law, which required to be filed with the corporation commission of that state a statement of its financial organization plan, the debenture stock was listed as a part of the capital stock structure. The debenture stock was placed upon the market by selling one share of it and one share of the common stock as a single unit, whieh is a common corporate practice in the disposition of preferred stock. In its income tax reports for the year’s 1918 to 1921, both inclusive, the plaintiff reported the amount received from the sale of its debenture stock as invested capital, and this amount was treated as invested capital in determining the war profits credit, under the Revenue Aet of 1918, and the excess profits credit, under the Revenue Acts of 1918 and 1921 (40 Stat. 1057; 42 Stat. 227), to whieh plaintiff was entitled for each of the years mentioned. In its capital stock returns to the United States government for the years 1916 to 1922, both inclusive, the plaintiff reported as a part of its capital stock the amount of the debenture stock whieh was outstanding for each of the respective years.

On the facts so far related, it may well be doubted if plaintiff would undertake to claim that these debenture shares were evidences of indebtedness instead of part of the capital stock structure. Plaintiff insists, however, that the unconditional undertaking on the part of the corporation to redeem these securities at par at the expiration of ten years from the date of their issual, and the further undertaking on the part of the corporation to incur no indebtedness in excess of $25,000 while any of the debenture stock was outstanding, give to these debenture shares the characteristics of a debt, and take from them the true characteristics of capital stock. I do not think that the obligation not to incur any indebtedness in excess of $25,-000 while this stock was outstanding is inconsistent with the government’s theory that these debenture shares were really capital stock. A very common practice in the issual of the ordinary form of preferred stock is to provide that the corporation’s indebtedness shall not exceed a specified amount, so long as any of the stock is outstanding. Nor do 1 think the unconditional undertaking to redeem the stock at par at the end of ten years destroys its nature as capital stock. The stockholders among themselves undoubtedly had the right to make such an agreement. If its enforcement rendered the corporation incapable of meeting its obligations to those general creditors whose claims were within the $25,000 debt limitation, I have no doubt the courts would hold that the rights of the holders of these debenture shares were subordinate to the rights of these general creditors.

I am constrained therefore to agree with the Board of Tax Appeals in its decision involving exactly this same question with the same taxpayer, and reported in 3 B. T. A. 644.

The stipulation of facts filed in this ease will be treated as my finding of facts, for the purpose of appeal.


author: JOHNSON, District Judge.

text:
    CONSOLIDATED CAR HEATING CO., Inc., v. LEHIGH TRACTION CO. (RAILWAY UTILITY CO., Intervener).
    No. 618.
    District Court, M. D. Pennsylvania.
    July 28, 1931.
    William S. Hodges, of Washington, D. C., and Joseph F. Gunster, of Scranton, Pa., for plaintiff.
    J. B. Macauley, of Chicago, Ill., and John H. Bigelow, of Hazleton, Pa., for defendant.
   JOHNSON, District Judge.

The bill of complaint charges the defendants with the infringement of letters patent No. 1,293,786, issued February 11,1919; letters patent No. 1,500,566, issued July 8,1924; and letters patent No. 1,664,778, issued April 3, 1928, issued to Lee P. Hynes and by him assigned to the Consolidated Car Heating Company, Inc., of Albany, N. Y., and prays for an injunction and an accounting.

In their answer the defendants deny the validity of the patents in suit and also deny infringement. On the pleadings and evidence, two main questions arise for disposition: First, the validity of the plaintiff’s patents; and, secondly, the infringement by the defendants.

The patents cover improvements in thermostats. The thermostatic device which .is claimed to infringe the plaintiff’s patents was manufactured and sold to the Lehigh Traction Company by the Railway Utility Company of Chicago, Ill. This later company upon petition was allowed to intervene and defend in this suit.

It is charged that claims 6 and 7 of patent No. 1,293,786, all the claims of patent No. I, 500,566, and claims 1, 3, 4, and 5 of patent No. 1,664,778 are infringed.

Patent No. 1,293,786 covers a thermostat having novel means for supporting a thermometer bulb within the easing, but claims 6 and 7 of said patent, which are the only ones involved here, are directed to a means for securing the base to the cover and attaching the device to a car wall or other support. This means is a screw extended through a tubular bolt to engage the car wall or other supporting member. This hollow bolt is fitted with a nut concealed under the base so that when the screw is engaged with the wall it is impossible for any one to remove the cover without first removing the device from the wall.

In an earlier device patented by the defendant, the cover and base were secured together by a hollow rivet, through which a screw was passed to fasten the thermostat to the wall of the car. Tubular bólts and tubular rivets are not uncommon, and it does not require a high order of inventive skill to substitute one for the other. Claims 6 and 7 of this patent cannot be read upon the defendant’s device which is alleged to infringe.

In defendant’s device, hollow bolts are used to secure the cover to the back plate, and screws passing through these hollow bolts secure the thermometer inelosure to the base. The base is screwed to the support by other screws, differently positioned, and passing only through the base.

The patent in respeet to the use of the tubular bolt and screw shows so little invention that it should be construed to cover only the actual structure shown. When so restricted it is not infringed by defendant’s device.

Patent No. 1,500,566 discloses a thermostat comprising a metal cover and a base of molded material, a thermometer bulb provided with electric contacts and a heat-sensitive element for conducting the temperature of the car to the thermometer bulb. This heat-sensitive element, as shown, is a thin strip of copper, or other composition that is sensitive to changes of temperature, which is passed through slots in the front wall of the metal cover or easing. The mercury bulb at its lower end is surrounded by this thin strip of copper, which then passes through a slot on one side of the metal easing, around the outside of the easing, being returned by a second slot on the opposite side or breast of the easing and secured.to its opposite end. Between this strip and the outer wall of the casing is interposed a strip of heat-insulating material.

Infringement of all the claims of this patent is alleged. Claim 1, which is representative, reads as follows: “A thermostatic control device comprising a base, a cover cooperating with said base to provide an enclosure, a thermostat and an element of temperature-sensitive material applied to said thermostat within said enclosure, a portion of said temperature-sensitive material being exposed to the atmosphere outside of the enclosure and acting on the thermostat independently of the enclosure and an electric contact controlled by the thermostat.”

One of the defenses advanced by defendant is that this thermostat invented by Hynes and assigned to the plaintiff is anticipated by patent No. 1,386,618, issued on August 9, 1901, to W. G. Hartwig and assigned by him to the defendant the Railway Utility Company. The structure disclosed by the prior patent to Hartwig covers a thermostat comprising a base, a metal cover, a thermometer bulb provided with electric contacts, and a heat-conducting element in contact with the cover and with the thermometer bulb.

The heat-conducting element as shown in the patent, and in defendant’s earlier commercial device, took the form of a thin flat plate or panel of copper, which formed a part of the metal cover or inelosure, and was soldered or otherwise secured to a thin metal clip or clamp adapted to bear upon the thermometer tube on opposite sides of the mercury bulb.

There is nothing in the prior art which shows the use of a heat-conducting element to carry the changes of temperature from the atmosphere to the thermostatic element, before the invention of Hartwig. In his structure the heat-conducting element is not insulated from the cover, but the specification points out that it may be so insulated if greater accuracy is desired.

It is clear that Hartwig was the pioneer in the invention of a thermostat with a heat conducting element, and that the thermostat invented by Hynes was an improvement on the Hartwig patent. What Hynes did was to reduce the extent of the heat-conducting element, changing it from a panel forming part of the inelosure to a comparatively small strip of heat-conducting material passed around the metal cover by means of slots positioned on opposite sides of the cover. It is described in his specification, page 1, line M, as follows: “My invention resides in the use of a comparatively small heat-responsive element which is effectively heat-insulated from the cover or casing but applied directly to the thermometer bulb. This heat-responsive element is exposed to the atmosphere on the outside of the cover or casing but is heat-insulated therefrom and passes through narrow slots into the inside of the easing where it is wrapped around the bulb of the thermometer.”

It is claimed by the defendant, in respect to claim 1 of the Hynes patent, that “the Hartwig construction when the sensitive element is insulated, as the patent states it should be when greater sensitiveness is desired, completely anticipates this claim.”

It is true that the insulation of the heat conducting element was old, in view of the Hartwig disclosure, but it appears to be true also that the reduction in extent of the heat-conducting element resulted in a more effective thermostat. The disadvantages of the Hartwig thermostat were pointed out by Hynes in his specification, page 1, line 24, where he says: “Heretofore it has been proposed to connect the thermometer bulb in a thermostat of this type with a cover-plate of a special heat responsive metal, through which the temperature changes in the outer atmosphere are communicated to the bulb. In this device, the large surface of heat-responsive-metal, together with the other metal parts associated therewith tend to make the action of the device sluggish, its response to temperature changes being so gradual as to impair the electric contacts, particularly on the opening of the circuit.”

“Moreover, such instruments are ordinarily mounted on the wall of a ear or apartment wherein .heat is inevitably stored, and soon come to partake of such stdred heat and acquire a temperature that is not quickly changed by changes in the atmospheric temperature.”

It has'been shown by defendant that the earlier device made under the Hartwig patent was successful and is still in commercial use, but it is true that after the improvement was made by Hynes the defendant developed a thermostat specifically different from its earlier device embodying certain changes which appear to have been inspired by the teaching of Hynes. Defendant’s later device has a smaller heat-conducting element, the back-plate is insulated from the base, which is constructed of nonmetal substance of low heat-conductivity, and which is also supplied with openings to admit the air and allow it to circulate under the back-plate, thus further insulating it from the thermometer inclosure.

The step taken by Hynes was small, but his claim to have produced a more effective thermostat is upheld by the conduct of the defendant. It is of narrow scope, however, and should be limited in scope to the specific construction set forth in the patent. Unless the claims are limited to Hynes specific features of mounting his heat-sensitive element “outside of the enclosure,” they are invalid in view of the Hartwig patent. Hunt, Helm, Ferris & Co. v. Milwaukee Hay Tool Co., 148 F. 220, 78 C. C. A. 116; Brown Hoisting & Conveying Mach. Co. v. King Bridge Co., 107 F. 498, 46 C. C. A. 432; Walker on Patents (6th Ed.) pages 314, etc.

The defendant’s device alleged to infringe is specifically different from that shown in the Hynes patent. Defendant’s device comprises two main members, a base and a separable in-elosure comprising a cover and a back plate. The base is provided with a screw-hole to attach it to the wall of the car, and the front of the base is made hollow and provided with apertures designed to permit the circulation of air underneath the back-plate of the inclosure so as to miminize the transfer of the heat from the wall through the base to the inelosure containing the thermometer.

The separable inclosure comprises a back-plate and a cover composed of a glass bay-windowed portion and a struck up metal sheet frame in which the bay-window is supported. The cover is connected to the back plate and the two together to the base by the hollow bolt construction heretofore discussed. Within this inclosure is mounted a thermometer provided with electric contacts. The bulb of the thermometer is surrounded by a metal sleeve to which is joined a sheet metal conducting strip which extends through a notch in the edge of the glass bay-window and in the marginal portion of the frame. The lower end of the strip is enlarged to form a ring provided with small prongs. The ring surrounds and is supported by but insulated from the hollow bolt, and the prongs or lugs on the edge of the ring are passed through corresponding slots in the projecting lower end of the metal frame.

If the Hynes patent is limited to cover its specific disclosure, it is clear that the defendant’s device does not infringe. Even if it be true that defendant’s later device was developed in response to the teaching of the Hynes invention, defendant has produced a device within the scope of the Hartwig patent and specifically different from the structure of the Hynes patent. Walker on Patents (6th Ed.) page 509.

Moreover, the elements of the claims of the patent in suit cannot be read upon the defendant’s device. Claim 1 specifies “a base, a cover co-operating with said base to provide an enclosure.” This is not to be found in defendant’s device, where the cover co-operates not with the base but with the back-plate to form an inelosure. The base is beneath the back-plate and is open at the sides. Claim 1 further specifies “a portion of said temperature sensitive material being exposed to the atmosphere outside of the enclosure and acting on the thermostat independently of the enclosure.” In defendant’s device there is a portion of the temperature-sensitive material exposed to the atmosphere, but it does not act on the thermostat independently of the inclosure. The copper ring which forms the extension of defendant’s heat conducting element is insulated by a fibre washer from the hollow bolt and the screw which passes through it, but it is not insulated from the metal frame which forms a part of the cover. It seems clear, therefore, that claim 1 is not infringed.

Claim 2 differs from claim 1 in specifying that the temperature sensitive element pass'¡es through the coyer. This element can be read verbally upon the defendant’s device but in spirit the construction is not similar. In the Hynes construction the heat sensitive element is secured in slots in the breast of the cover, while in the defendant’s device ■the heat conducting element passes through a notch in the glass element of the cover and through the metal frame constituting a part ■of the cover.

As to claims 3 and 4, the so-called temperature-sensitive element is not insulated from the easing in the defendant’s construction, and as to claims 5 and 6, the temperature-sensitive element is mot constructed independently of the inclosure-forming means. Claims 7 and 8 fall into the same class as ■claim 2.

It appears, therefore, that Patent No. 1,500,566 is valid but limited in scope, and ■that it is not infringed by defendant’s device.

Patent No. 1,664,778 describes a thermostatic device having a easing consisting merely of. an open back shell of glass, to the inside wall of which a thermostatic element is screwed. It is constructed of glass, which is of low heat conductivity, and differs from the prior art in its simplicity of construction. In practice it is used with the heat-sensitive element disclosed under patent Ño. 1,500,566.

The file wrapper of the patent shows that the application was rejected by the Examiner, who'held that there was no invention in the substitution of one material for'another. After a hearing before the Board of Examiners the patent was allowed because of the simplicity of the construction and because the use of glass in place of metal lowered the heat conductivity of the easing. But Hartwig in his patent disclosed this feature of using for the easing a material of. low heat conductivity, for he suggested in his specification that if a less conductive material than copper be used for the heat-interchange plate, that-it would be desirable to employ a less heat conductive material for the easing and that preferably some nonmetal substance should be substituted.

The use of glass in place of metal, because, of its low heat conductivity was old, in view of the Hartwig disclosure, and the novelty of the Hynes patent resides not in its use of glass but in its simplified construction which eliminated the binding-post and connection board heretofore required and made it possible to mount the casing directly upon the wall of the ear, so that the back closure was formed by the wall of the car or other support.

The claims of this patent in suit are claims 1, 3, 4, and 5. Claims 1 and 5 specify that the hollow casing is open at the back. This cannot be read upon defendant’s device alleged to infringe which has a casing closed at the back-plate.

When his appeal was taken before the Board of Examiners Hynes filed an affidavit, on page 2 of which he said: “My open-back easing of the present application is a one-piece casing at half the-costs — no bolts, no rivets are required. The moulded glass is not merely a cover, it is also the supporting element that secures, it to the Wall.” .

Defendant’s device does not have the hollow casing open at the back called for in claims 1 and 5. Therefore it does not infringe either of these claims.

Claims 3 and 4 specify a metallic temperature detector. In claim 3 this detector is described as “exposed on the outside surface of said Casing.” In claim 4, it is specified as “extending over a .portion of the front surface of said casing.” These elements follow the disclosure of Hynes patent, No. 1,500,-566 and should be construed to exemplify the structure thereof. Under the limitations which should be placed on that patent, the defendant’s device does not infringe claims 3 and 4. ' .

And now, July 28, 1931, it follows that claims 6 and 7 of patent No. 1,293,786, all of the claims of patent No. 1,500,566, and claims 1, 3, 4, and 5 of patent No. 1,664,778, are valid but not infringed, and a decree will be signed, in accordance with this opinion, dismissing the bill of complaint at the cost of the plaintiff.


author: COXE, District Judge.

text:
    GUINZBURG et al. v. ANDERSON, Collector of Internal Revenue.
    District Court, S. D. New York.
    July 28, 1931.
    James Marshall, of New York City (James Marshall and N. H. Kugelmass, both of New York City, of counsel), for plaintiff.
    George Z. Medalie, U. S. Atty., of New York City (Murray I. Gurfein, of New York City, of counsel), for defendant.
   COXE, District Judge.

This is a motion to dismiss the complaint for insufficiency in-law. The action is to recover estate taxes alleged to have been illegally collected; and the question involved is the constitutionality of the irrebuttable presumption provision .of. section 302, subdivision (c), of the 1926 Revenue Act, 26 USCA § 1094 (e), which requires the inclusion.in the gross estate of all transfers made within two years of death without consideration even though not admitted or shown to have been made in contemplation of or intended to take effect in possession or enjoyment at or after death.

The part of the section under attack has recently been held unconstitutional by Judge Gibson in the Western District of Pennsylvania in Donnan v. Heiner (D. C.) 48 F.(2d) 1058, and by Judge Morton in the District of Massachusetts in Hall v. White (D. C.) 48 F.(2d) 1060.

The plaintiffs are executors of the will of Henry A. Guinzburg, who died on November 16, 1928. On July 1, 1927, or one year, four months, and sixteen days prior to his death, the decedent, together with his wife, purchased and presented to their son Harold, as a wedding gift, a private residence in New Yoi-k City, the total cost of which was $71,-368, one-half being contributed by the decedent and one-half by his wife.

The title to the property was taken in the name of the son, who immediately entered into possession, and has ever since occupied the premises as a home. Neither the deceased nor his wife has at any time had title, possession, or control, or any interest in the property. On the present record, therefore, the gift stands as not having been made by the decedent “in contemplation of or intended to take effect in possession or enjoyment at or after his death,” but rather to have been prompted by a natural desire of parents to make some suitable and effective provision for a son on his marriage.

The executors filed a return under the statute stating the facts with respect to the gift, but insisting that it was not taxable. The commissioner, however, in determining the tax, included in the gross estate an item of $30,684, representing the value at the decedent’s death ■ of - the contribution made by him towards the purchase of the residence, less a. statutory exemption of $5,000; and it was on that basis of the inclusion of this item that the resultant tax was computed. The amount of the tax was paid under protest, and, after claim for refund had been made and refused, the present action was commenced.

The plaintiffs contend: (1) That the tax is arbitrary, and in violation of the Fifth Amendment; and (2) that it is an unap-portioned direct tax contrary to article 1, § 9. The defendant insists, on the other hand, that the tax may be sustained either as a gift tax inter vivos, or as a necessary provision to prevent tax evasion.

The federal estate tax is a tax upon “the interest which ceased by reason of the death.” Edwards v. Slocum, 264 U. S. 61, 63, 44 S. Ct. 293, 68 L. Ed. 564; Young Men’s Christian Ass’n v. Davis, 264 U. S. 47, 50, 44 S. Ct. 291, 68 L. Ed. 558. And being an excise tax it need not be apportioned. New York Trust Co. v. Eisner, 256 U. S. 345, 349, 41 S. Ct. 506, 65 L. Ed. 963, 16 A. L. R. 660. The “generating source” of the authority to impose such a tax is death. Knowlton v. Moore, 178 U. S. 41, 56, 57, 20 S. Ct. 747, 44 L. Ed. 969. Therefore, the interest of a decedent in an estate by the entirety is taxable, Tyler v. U. S., 281 U. S. 497, 50 S. Ct. 356, 74 L. Ed. 991, 69 A. L. R. 758; as also is an insurance policy where the power to change the beneficiary is reserved, Chase Nat. Bank v. U. S., 278 U. S. 327, 49 S. Ct. 126, 73 L. Ed. 405, 63 A. L. R. 388; and also property placed in trust for the donor’s life where there is a reserved power of revocation, Reinecke v. Northern Trust Co., 278 U. S. 339, 49 S. Ct. 123, 73 L. Ed. 410, 66 A. L. R. 397. But the law is otherwise where death plays no part in the transfer. Nichols v. Coolidge, 274 U. S. 531, 47 S. Ct. 710, 71 L. Ed. 1184, 52 A. L. R. 1081; Reinecke v. Northern Trust Co., supra. For as stated by Mr. Justice Stone in the Reinecke Case, 278 U. S. at page 346, 49 S. Ct. 123, 125, 73 L. Ed. 410, 66 A. L. R. 397, “The shifting of the economic interest in the trust property which was the subject of the tax was thus complete as soon as the trust was made.” And the taxation of gifts made in contemplation of death has been upheld on the ground of “the prevention of the evasion of estate taxes by gifts made before, but in contemplation of, death.” Milliken v. U. S., 283 U. S. 15, 23, 51 S. Ct. 324, 327, 75 L. Ed. 809; U. S. v. Wells, 283 U. S. 102, 116, 117, 51 S. Ct. 446, 75 L. Ed. 867.

The government’s argument that the tax can be sustained as an inter vivos gift tax, under the authority of Bromley v. McCaughn, 280 U. S. 124, 50 S. Ct. 46, 74 L. Ed. 226, is not only not borne out by the language of the section, but is thoroughly unsound. Under the statute: (a) The gift is included in the estate at the value at the date of death irrespective of the value at the time of receipt; (b) the amount of the tax is not based on the gift itself but on the value of the entire net estate; and (e) the tax falls upon the interest of the beneficiaries in the estate, and not upon the donee, unless the estate is inadequate. I do not think, therefore, there is any possible justification for upholding the tax as a gift tax. As stated by Chief Justice Hughes in U. S. v. Wells, supra, at page 118 of 283 U. S., 51 S. Ct. 446, 452, “If it is the thought of death, as a controlling motive prompting the disposition of property, that affords the test, it follows that the statute does not embrace gifts inter vivos which spring from a different motive.” Furthermore, much the same contention as urged by the government in the present case was made in the Sehlesinger Case, and rejected by the Wisconsin Supreme Court, 184 Wis. 1, 199 N. W. 951, even before the case reached the Supreme Court of the United States. Schlesinger v. Wisconsin, 270 U. S. 230, 238, 239, 46 S. Ct. 260, 70 L. Ed. 557, 43 A. L. R. 1224.

The tax must therefore be sustained, if at all, as a necessary adjunct of the taxing power in order to prevent tax evasion. But that point was squarely met and decided adversely to the government’s contention in the Sehlesinger Case with respect to the Wisconsin statute, which was substantially the same as the federal statute involved in this case. Schlesinger v. Wisconsin, supra. And the two eases are not to be distinguished on the ground of substantial difference between the Fifth and Fourteenth Amendments. Coolidge v. Long, 282 U. S. 582, 51 S. Ct. 306, 75 L. Ed. 562. In each ease, the statute “undertakes to raise a conclusive presumption,” which is “without regard to actualities.” Schlesinger v. Wisconsin, supra, at pages 239, 240 of 270 U. S., 46 S. Ct. 260, 261. And that is sufficient to condemn the statute in the present case just as it was in the Sehlesinger Case. I cannot see, either, that it makes any difference that the prescribed period in this case is two years, whereas the statutory period in the Sehlesinger Case was six years. In either event, the period is purely arbitrary, and the gift is taxed without regard to the facts, or the actual intent. This is enough to bring it within the constitutional bar.

The motion to dismiss the complaint is, therefore, denied.


author: PETERS, District Judge.

text:
    In re NORTH EASTERN SHOE CO.
    No. 3710.
    District Court, D. Maine, N. D.
    July 22, 1931.
    Walter M. Espovich, of Haverhill, Mass., for bankrupt.
    John M. Fogarty, of Lynn, Mass., for some of the creditors.
   PETERS, District Judge.

This matter was heard by me on objections to the granting of an application for confirmation of a composition offered by the alleged bankrupt and accepted by a large • majority of its creditors. •

By petition dated April 28, 1931, the alleged bankrupt represented “that a composition of 20% upon all unsecured debts not entitled to a priority, payable in cash, in satisfaction of its debts, will be proposed by it to its creditors before adjudication, as provided by the acts of Congress,” etc., and prayed that a meeting of its creditors' be called to act upon said proposal for a composition before adjudication. The alleged bankrupt filed its schedule of property and list of creditors on April 29, 1931. On May 8, 1931, the court entered an order staying adjudication and ordering the referee to call a meeting of creditors to consider a proposed offer of composition to be made by the alleged bankrupt, and to take-other necessary preliminary steps. By the report of the referee filed June 20, 1931, and by -the other records in the ease, it appears that by notice dated June 1, 1931, a meeting of creditors was duly called for June 17th, for the allowance of claims, examination of the bankrupt, preservation of the estate, and “to consider a composition offer of 20% in cash.” Meeting was duly held and presided over by the referee, who reports in detail that the alleged bankrupt, through its treasurer, was examined in open court at said meeting; that a majority of all creditors whose claims were allowed, viz., seventy-eight in number representing claims aggregating $31,019.80, accepted in writing alleged bankrupt’s offer of composition; that five creditors, with claims of $4,669.82, stated in writing that they wished to remain neutral; and that fifteen creditors, representing indebtedness of $2,-426.85, voted to reject the offer of composition.

It appearing that a large majority of creditors whose claims had been allowed, representing also a large majority in amount of claims, had accepted in writing the composition offer, and that the consideration to be paid by the bankrupt, and the money necessary to pay all debts which have priority, and the costs of the proceedings had been duly deposited as required, an application for confirmation of the composition was in order, and on June 20, 1931, the alleged bankrupt filed such an application representing that it had been examined at a meeting of its creditors and had filed its schedules, list of creditors, had offered terms of composition, which terms had .been accepted by a majority in number and > amount of creditors, that the consideration necessary had been deposited, and asking that the composition should be confirmed.

A date and place with reference to the convenience of the parties having been fixed, and the hearing having been had, the judge is directed by statute to confirm the composition under the situation presented, if satisfied (1) that it is for the best interest of creditors; (2) that the bankrupt has not been guilty of any acts which would bar a discharge; and (3) that the offer and acceptance are in good faith.

Numerous objections to the confirmation of the composition, many of which have no. legal bearing upon the question, include allegations which might be considered under (2) and (3) above, but the referee has reported that the alleged bankrupt was not guilty of any acts which would bar a discharge, and that the offer and acceptance were in good faith, and neither the evidence produced before me at the hearing nor a review of the evidence before the referee causes me to question the conclusions of the referee in that respect, and I find that the bankrupt has not been guilty of any acts which would bar his discharge, and that the offer of composition and its acceptance were in good faith and not made or procured by any forbidden means, promises, or acts.

The only evidence of bad faith in the case is on the part of one of the only two named creditors opposing this composition. It was testified at the hearing, without contradiction, that one of these creditors had offered to abandon his opposition to the composition if the alleged bankrupt would pay him 100 per cent, of his claim, the amount of it as claimed by the creditor being less than $400, and as claimed by the debtor té be about $150. The claim was not proved, although offered for proof at the time of the hearing. The other named creditor represented by the objections was one whose claims had been proved and allowed for $581. The action of the officers of the alleged bankrupt in rejecting such a fraudulent proposal is to be commended and naturally strengthens one’s belief in their good faith.

I am also clearly satisfied, as was the referee, and as well as a very large majority of creditors, both in number and amount, that it is for the best interests of the creditors that the composition he confirmed.

The principal objection made by the objecting creditors is a technical one looking to the legality of the proceedings. It is claimed that the language of the statute was not complied with, in that the alleged bankrupt offered terms of composition to creditors before it has been examined in open court or at a meeting of its creditors.

The facts, in addition to those mentioned above, as to the routine of the proceedings, appear to be that, immediately after the petition of the alleged bankrupt of April 28, 1931, stating that composition offer would be made to its creditors, had been filed, the alleged bankrupt, through its representatives, sent out letters to its creditors stating that “the North Eastern Shoe Co. is making an offer in composition of 20% to all its creditors,” and expressing an opinion, based on reasons given, that it would he for the best interest of creditors to accept the offer, and that acceptances were procured in advance of the meeting to consider the composition. The record shows these acceptances to have been made on printed forms with dates during May and June, 1931, all having this clause incorporated; “This acceptance however to be effective only after sueh alleged bankrupt shall be examined in open court.”

The wording, of the statute to the effect that terms of composition may be offered, after, but not before, the debtor has been examined in open court, is pointed out as weE as a case in the District Court of New York, in Re Berler Shoe Co., 246 F. 1018, in which it was held that a composition should be rejected because it was offered to the creditors before the bankrupt was examined in open court and had filed in court his schedules. In that case, however, there never was any examination of the bankrupt before the com- • position was approved and confirmed, so the court had no authority under the law to confirm a composition. In a later case in the Circuit Court of Appeals of New York, in Re Jablow, 15 F.(2d) 131, 132, that court says: “There is no prohibition in the law against procuring acceptances in advance of a meeting to consider a composition. In Re Berler Shoe Co., 246 F. 1018, a District Court decision, relied upon by the appellant, there was no examination of the bankrupt in open court before the consents were obtained and the composition approved and confirmed. Such practice was there disapproved. The evidence in this ease, to the effect that there was sueh an examination, makes the ease at bar distinguishable from the principle there announced.”

It is also held in the case In re Jacobs & Rosner (D. C.) 285 F. 443: “The record shows an examination of the bankrupts at a meeting of creditors, and also that while these acceptances were apparently made be- ■ fore such examination no aetion was taken upon them untü such meeting and examination. I am of opinion that procuring sueh acceptances before making sueh offer of composition and examination is not sueh act as would justify the court in refusing confirmation, unless sueh procurement was through fraud and this is not charged.”

The proceedings in the instant case were substantially in accord with the procedure in this district for a long time past. A consideration of all the proceedings does not show that anything has been done in contravention of the statute. The forms used were those provided in the General Orders, and they contemplate a proposal of a composition before any meeting is called. Form No. 60 (11 USCA § 53). There is no prohibition and no objection to debtor communicating with creditors in regard to his offer and procuring conditional acceptances. These are presumed to be held open and may be withdrawn if the examination of the debtor discloses'a valid reason for so doing. For convenience, and to save delay and expense, one meeting is called instead of several, and at this meeting, after debtor has been examined, and any other neeessary steps taken, the proposal of a composition, the nature of which has been communicated to creditors and to the court, and which, in this ease, happens to have been the subject of correspondence between the debtor and its creditors, and the subject of conditional acceptances, ripens into a statutory offer of terms of composition which is in order for consideration and may be then accepted or rejected by creditors. In this case creditors were content to let their written acceptances stand, and the offer was thus accepted.

I can find no substantial merit in the objection made to this composition, and it is ordered confirmed.