author: ALDISERT, Circuit Judge.

text:
    Harry J. COMAN, Appellant, v. Sylvia R. COMAN.
    No. 73-1569.
    United States Court of Appeals, Third Circuit.
    Argued Dec. 17, 1973.
    Decided Feb. 21, 1974.

      Harold Cramer, Philadelphia, Pa., for appellant; Mesirov, Gelman, Jaffe & Levin, Philadelphia, Pa., of counsel.
    D. H. Robinson, Robinson, Rectenwald, Tackett & DeMoss, Louisville, Ky., for appellee; John E. Stout, Grunert, Stout, Hymes & Mayer, St. Thomas, V. I., of counsel.
    Before VAN DUSEN, ALDISERT and ROSENN, Circuit Judges.
   OPINION OF THE COURT

ALDISERT, Circuit Judge.

This appeal by the former husband from an alimony award authorized under the Virgin Islands Code presents questions whether an alimony claim should be dismissed for failure to join indispensable parties, whether the district court’s decree should be modified to include provisions protective of the husband, and absent persons, and whether the district court abused its discretion in awarding alimony in gross instead of utilizing a trustee to make installment payments to the former wife.

The court granted the parties “a divorce absolute, each from the other,” awarded lump sum alimony of $200,000.-00 to the former wife, annual child support in the amount of $3,000.00 for both children commencing September 1, 1973, and an additional $200.00 per month for each of the two children as of May 1, 1973.

“Alimony upon divorce in the Virgin Islands is purely statutory. Under 16 V.I.C. § 109(3) the district court, upon dissolving a marriage, may provide for the recovery ‘from the party in fault such an amount of money, in gross or in installments, as may be just and proper for such party to contribute to the maintenance of the other.’ ” Barrows v. Barrows, 489 F.2d 661, (3d Cir., 1974). Our review will therefore follow the parameters outlined by statute and the appropriate procedural rules.

I.

Distilled to its essence, appellant’s first point suggests that the court erred somehow by not requiring the joinder of his brother, Morris Cohen, and his sister, Rebecca Knapp, as indispensable parties to his divorce action. Although we confess to a lack of certainty as to how a joinder of a husband’s brother and sister could be effected in a divorce proceeding, we have decided to meet the merits of the contention. Chief Judge Christian has described the background of this issue:

The chasm which divides the litigants in their prayers for relief is the significance of certain assets, primarily securities, held in the names of Rebecca Knapp, plaintiff’s sister, Morris Cohen, his brother, and the children of the parties, Stacie and Sari (or in plaintiff’s name on their behalf). As to the extensive holdings in the names of Knapp and Cohen, Mrs. Coman charges that they are in actuality the property of her husband, who has always managed, possessed, and received the dividends from these shares to the total exclusion of the record title holders. The evidence adduced tends to bear her out in this respect. Plaintiff, on the other hand, denies ownership, characterizing himself as a mere representative or manager for his siblings, entirely without beneficial interest in such securities.

The court heard testimony from plaintiff and defendant and had the depositions of plaintiff’s brother Joseph and his sister Rebecca, and concluded that plaintiff “exhibited every incident of ownership which the law recognizes over the securities, except paper title, 42 Am.Jur. § 40, 41. In this respect, Knapp and Cohen were totally ignorant of the securities, in what they consisted, their number or value, and neither received any income from them.” It found “that plaintiff [was] the beneficial owner of the securities held under the names of Rebecca Knapp and Morris Cohen,” concluding that this finding “[did] not, of course, bind them,” but that it was “justified in proceeding [upon the finding] for purposes of fixing alimony and child support.” Because the court found appellant to be the beneficial owner of the securities, he argues that his brother and sister, holders of the legal title, should have been named as indispensable parties to the divorce proceedings under the provisions of F.R.Civ.P. 19; 5 V.I.C. App. I R 19 (1966).

Although appellant frames this first issue . in terms of indispensability, he seeks not to have the absent persons joined but rather to have the district court’s decree modified to include provisions protective of him and those absent persons. Appellant fails to understand the meaning of “indispensable.” “Whether a person is ‘indispensable,’ that is, whether a particular lawsuit must be dismissed in the absence of that person, can only be determined in the context of a particular litigation.” Provident Tradesmens Bank & Trust Co. v. Patterson, supra, 390 U.S. at 118, 88 S.Ct. at 742 (Emphasis supplied) (Footnote omitted). Therefore, if we conclude that appellant’s brother and sister are indispensable parties, then the alimony claim must be dismissed. If, however, modification of the court's decree is appropriate, we need not remand but can “require suitable modification as a condition of affirmance.” Ibid., at 112, 88 S.Ct. at 739.

Haas v. Jefferson National Bank, 442 F.2d 394, 398-399 (5th Cir. 1971), set forth the distinction between 19(a) Persons to be Joined if Feasible, and 19(b) Determination by Court Whenever Join-der not Feasible. Strictly speaking, we may not consider the criteria of Rule 19(a) because neither Cohen nor Knapp are persons “subject to service of process.” They reside in New York, more than 100 miles from the place where the action was commenced, and are therefore not amenable to service of process. F.R.Civ.P. 4f; 5 V.I.C. App. I. R. 4f (1966).

This, however, does not end the matter. As in Haas where the action proceeded in the district court in Florida and the person sought to be joined lived in Cleveland, Ohio, it becomes necessary to apply the provisions of Rule 19(b) and the specific factors enumerated therein.

First, we must consider “to what extent a judgment rendered in the person’s absence might be prejudicial to him or those already parties. . . .” The district court specifically stated that “any decision by this Court on the ownership of these securities would not be res judicata as to the non-parties. . ” We are mindful that this does not end our inquiry into the potential prejudice to absent persons, Haas v. Jefferson National Bank, supra, 442 F. 2d at 399, n. 6. Nevertheless, there are sound reasons for concluding that any prejudice to appellant’s brother and sister is trivial. The district court’s finding of beneficial ownership was merely one “upon which ... [if felt] justified in proceeding for the purposes of fixing alimony and child support.” (Emphasis supplied). Mrs. Coman was not declared the owner of any interest in the securities nor was Mr. Coman ordered to convey any or all of the securities to her. Rather, the court was simply determining appellant’s assets for the purpose of establishing his ability to pay alimony and child support. We fail to perceive how such a limited finding —limited as to effect and purpose— prejudices the rights of appellant’s brother and sister. Indeed, the attorney for Rebecca Knapp, in proceedings before the United States District Court for the Eastern District of New York, filed an affidavit in support of a motion to dismiss in which he stated:

12. The complaint shows that Mrs. Coman has a great deal of knowledge with respect to the securities, as can be seen from the schedule attached to the complaint. Such knowledge was secured through the discovery proceedings held in the Virgin Islands divorce suit. Mr. Coman was examined, as was Mrs. Knapp, and I am informed, Mr. Cohen, brother of Mr. Co-man. Obviously, the sole purpose of such discovery proceedings would be to' establish Mr. Coman’s capacity to pay alimony, if the District Court in the Virgin Islands should decide to award any.

Post-Trial Brief of Defendant with Attachments, filed April 27, 1972, in Coman v. Coman, Civil No. 326-1969 (Div St. Croix, April 30, 1973).

Moreover, a review of the proceedings in the Virgin Islands persuades us that appellant was unable to construct a convincing case that he was not the beneficial owner of the securities. Rejected by the Virgin Islands court was appellant’s argument that the securities in the names of Knapp and Cohen were derived in one of two ways: by gift from their parents or by purchase from re-invested dividends from the original gift shares. Rebecca’s testimony received by deposition was summarized by the fact finder: “Rebecca Knapp testified in her deposition that she had no knowledge as to what she may have inherited from either parent, and she particularly indicated that she knew nothing of any stocks' in her father’s estate. . . . She was aware of stocks held in her name which were in Coman’s custody but she testified she had never had any such certificates in her own possession. .” Plaintiff testified that his brother Morris Cohen knew nothing about the stocks in his (Cohen’s) name because Morris was “wholly incapable of handling money matters and therefore [their brother Joseph Cohen] was the one who handled everything for him.” However, Joseph testified by deposition that he knew of no stock dealings on Morris’ part beyond one unsuccessful effort to follow a neighbor’s “tip.” Joseph further testified that he believed his mother died intestate, that he received nothing from her estate, and that he and Morris Cohen received the proceeds of a $2,000 life insurance policy, and nothing more, from his father’s estate. Morris Cohen’s annual income approximates $5,200.00; Mrs. Knapp is unemployed. By deposition her husband reported that his earnings have never been invested in securities. The district court’s finding that neither Knapp nor Cohen could have bought the securities is well-supported and uncontested on appeal.

In sum, after an independent examination of the record, we are not persuaded that the beneficial ownership conclusion reached by the district court, rendered in the absence of Coman’s brother and sister as parties, amounted to an overriding prejudice to Mr. Coman or to his brother and sister. Although not parties, Mrs. Knapp testified by deposition and Morris Cohen’s observations were introduced through the plaintiff’s testimony and that of the brother Joseph Cohen. Although we cannot be certain, we are hard put to contemplate what evidence would have been produced in any court which was not presented in the Virgin Islands. At best, we can say that appellant is exposed to a remote potential for prejudice.

We turn now to the second factor, “the extent to which, by protective provisions in the judgment, by the shaping of relief, or other measures, the prejudice can be lessened or avoided.” It would seem that appellant can persuasively argue that any potential prejudice to him was not lessened or avoided in the alimony decree. However, as we have pointed out, any potential prejudice to appellant or his sister and brother is so trivial we are unwilling to condition affirmance upon the addition of “protective” provisions.

The third factor to be considered is whether a judgment rendered in the person’s absence will be adequate.” In this case, the alimony and support decree was adequate without joinder of appellant's sister and brother. The fourth and final factor we deem to be very critical to our decision: “whether . [Mrs. Coman] will have an adequate remedy if the [alimony] action is dismissed for nonjoinder.” The brute fact is that the Virgin Islands is the only jurisdiction where the wife may proceed for alimony qua alimony. The Virgin Islands divorce decree itself has not been challenged by either party. It was the husband-appellant who chose the Virgin Islands forum to obtain the divorce. Having chosen this forum to obtain his divorce, he may not deprive his wife of the opportunity of obtaining the benefits allowed by that forum. He cannot have the best of two worlds. He may not invoke Virgin Islands jurisdiction to shed himself of his wife and deny to her the rights and privileges afforded by that jurisdiction. We hold that Mrs. Coman would not have an adequate remedy if the alimony claim were dismissed for nonjoinder.

Evaluating the four factors in Rule 19(b) we cannot hold the brother and sister to be indispensable parties under Rule 19(b). To so consider them as indispensable parties would require a dismissal of the alimony claim. Under the “equity and good conscience” test, Provident Tradesmens Bank & Trust Co. v. Patterson, supra, 390 U.S. at 109, 88 S.Ct. 733, we will not deny appellee a forum to present her alimony claim.

II.

We now consider whether the district court abused its discretion in awarding the alimony in gross, 16 V.I.C. § 109(3), instead of appointing a trustee to make installment payments as directed by the court. 16 V.I.C. § 109(5). We have previously formulated standards for awarding alimony: “Whether an award of alimony shall be made, as well as the amount to be awarded, is within the discretion of the court, having regard to the conduct of both parties, the amount of property of each, and all the other circumstances of the case.” Burch v. Burch, 195 F.2d 799, 812 (3d Cir. 1952) (Footnote omitted). “It is the circumstances surrounding the parties, the wife’s necessities, and the husband’s financial ability, the physical condition of the parties, the nature of their life together, and in these' modern times the wife’s independence and ability to earn her own way, which must all be considered by the court in the exercise of its discretion in awarding or denying alimony.” Poe v. Poe, 409 F.2d 40, 43 (3d Cir. 1969).

Ostensibly, at issue here is not the amount of the $200,000.00 award. Appellant states: “For purposes of this argument the husband does not dispute the amount of the alimony award. .” Rather, he contends that using the device of a “gross” amount instead of a trust is “clearly erroneous,” citing Del Peschio v. Del Peschio, supra, 356 F.2d at 404. Appellant mistakes the appropriate standard of review. Having stated in Burch that “the amount to be awarded, is within the discretion of the court,” we have set forth the standard for the trial court. The responsibility of the reviewing court is to affirm the amount and terms of the award unless an abuse of discretion is found.

It would seem that appellant wants to have it both ways. Initially, he argues that the amount of alimony is not in issue, then he contends that a reversion-ary trust should have been imposed so that in the event appellee remarried or died, the corpus or the balance thereof would revert to him. This trust alternative clearly affects the ultimate amount of the award. Indeed, we conclude that the thrust of appellant’s trustee argument, stripped of persiflage, is an attempt to bring about a reduction in the sum upon the happening of a condition subsequent, her remarriage or death. While appellant intones solemnly that he does not quarrel with the amount of the award, the reality is that precisely what he seeks is a device which may in fact reduce the amount of this award.

We think it clear that the court intended to bestow upon the wife a lump sum amount for alimony — whether she remarried or stayed single. The court had the choice of ordering installment payments, but reasoned that a gross award was indicated because “there is evidence that the husband may be inclined to obscure or dissipate his estate.” Appellant does not dispute the district court’s reasoning; he merely asserts that the appointment of a trustee would be more appropriate. We are not convinced that the district court abused its discretion in awarding alimony in gross.

We have considered all of appellant’s contentions and find them to be without merit.

The judgment and decree of the District Court of the Virgin Islands will be affirmed.

      . Under tlie Virgin Islands Code the court may decree an amount “in gross or in installments . . . for such party to contribute to the maintenance of the other,” 16 V.I.C. § 109(3), or may appoint a trustee or “trustees to collect, receive, expand, manage, or invest . . . any sum of money adjudged for the maintenance of the wife. ...” 16 V.I.C. § 109(5).

      . Although plaintiff-appellant did not attempt the novel joinder of additional parties in the district court, lie is not precluded from raising the issue on appeal. In Provident Tradesmens Bank & Trust Co. v. Patterson, 390 U.S. 102, 88 S.Ct. 733, 19 L.Ed.2d 936 (1968), we raised the indispensable party issue sua sponte when the appeal was before us. 365 F.2d 802, 805 (3d Cir. 1966).

      . Rule 19.

        Joinder of Persons Needed for Just Adjudication.

      (a) Persons to be Joined if Feasible. A person who is subject to service of process and whose joinder will not deprive the court of jurisdiction over the subject matter of the action shall be joined as a party in the action if (1) in his absence complete relief cannot be accorded among those already parties, or (2) he claims an interest relating to the subject of the action and is so situated that the disposition of the action in his absence may (i) as a practical matter impair or impede his ability to protect that interest or (ii) leave any of the persons already parties subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations by reason of his claimed interest. If he has not been so joined, the court shall order that he be made a party. If he should join as a plaintiff but refuses to do so, he may be made a defendant, or, in a proper case, an involuntary plaintiff. If the joined party objects to venue and his joinder would render the venue of the action improper, he shall be dismissed from the action.
      (b) Determination by Court Whenever Joinder not Feasible. If a person as described in subdivision (a) (l)-(2) hereof cannot be made a party, the court shall determine whether in equity and good conscience the action should proceed among the parties before it, or should be dismissed, the absent person being thus regarded as indispensable. The factors to be considered by the court include: first, to what extent a judgment rendered in the person’s absence might be prejudicial to him or those already parties; second, the extent to which, by protective provisions in the judgment, by the shaping of relief, or other measures, the prejudice can be lessened or avoided; third, whether a judgment rendered in the person’s absence will be adequate; fourth, whether the plaintiff will have an adequate remedy if the action is dismissed for nonjoinder.
      The Federal Rules of Civil Procedure are made applicable to the District Court of the Virgin Islands by Section 25 of the Revised Organic Act of the Virgin Islands, 48 U.S.C. § 1615 (1954).

      . For res judicata operates only to bar “repetitious suits involving the same cause of action. [The bar] rests upon considerations of economy of judicial time and public policy favoring the establishment of certainty in legal relations. The rule provides that when a court of competent jurisdiction has entered a final judgment on the merits of a cause of action, the parties to the suit and their privies are thereafter bound ‘not only as to every matter which was offered and received to sustain or defeat the claim or demand, but as to any other admissible matter which might have been offered for that purpose.’ Cromwell v. County of Sac, 94 U.S. 351, 352 [24 L.Ed. 195], The judgment puts an end to the cause of action, which cannot again be brought into litigation between the parties upon any ground whatever, absent fraud or some other factor invalidating the judgment. See Von Moschzisker, ‘Res Judicata,’ 38 Yale L.J. 299; Restatement of the Law of Judgments, §§ 47, 48.” Commissioner v. Sunnen, 333 U.S. 591, 597, 68 S.Ct. 715, 719, 92 L.Ed. 898 (1948).
      Sea-Land Services, Inc. v. Gaudet, 414 U.S. 573, 94 S.Ct. 806, 39 L.Ed.2d 9 (1974).

      . Sylvia R. Coman v. Rebecca Knapp, Morris Cohen, and Arkay Properties, Inc., No. 71 Civ. 1192-JM (E.D.N.Y., Dec. 3, 1971), an action brought by Mrs. Coman against the legal title holders of the securities. The case was discontinued on December 3, 1971, without prejudice and without costs to either party. A joint stipulation was entered into by the parties at the request of the plaintiff, Sylvia Coman, with the consent of the defendants Rebecca Knapp, Morris Cohen and Arkay Properties, Inc. We take judicial notice of these matters of record in the District Court for the Eastern District of New York. Moore v. United States, 432 E.2d 730, 736, n. 21 (3d Cir. 1970); Zahn v. Transamerica, 162 F.2d 36, 48, n. 20 (3d Cir. 1947).

      . Cf., Haas v. Jefferson National Bank, supra, 442 F.2d at 400, where the court found that the plaintiff had another forum to adjudicate his rights against the non-party.

      . See also, Del Peschio v. Del Peschio, 356 F.2d 402, 406 (3d Cir. 1966).

      . The “clearly erroneous” test was applied in Del Peschio to factual findings as to incompatibility of temperament.

      . 16 V.I.C. § 109(5) empowers the court to appoint “one or more trustees to collect, receive, expand, manage, or invest, in such manner as the court shall direct, any sum of money adjudged for the maintenance of the wife. . . .’’At best, the express language of the statutory trust provision describes a trust on a sum certain, “any sum of money adjudged for the maintenance of the wife. . . .” We do not indicate that authority for a reversionary trust could not be implied from statutory language. We note simply the absence of express language authorizing it.

      . At oral argument his counsel also suggested a trust wherein the corpus would revert to the children. This suggestion overlooks the reality that the financial aspects of this divorce decree took two separate routes: one, an award to the wife, and two, a separate award to the children. To commingle the awards now would be to flout the clear language of the decree and the basic schema of the court’s adjudication.

      . Appellant’s additional argument that there was no evidence to support the award to the children is rejected as frivolous.


source: Caselaw Access Project

author: WIDENER, Circuit Judge:

license: Public Domain

text:
    ALSTON STUDIOS, INC., Appellant, v. LLOYD V. GRESS & ASSOCIATES et al., Appellees.
    No. 73-1152.
    United States Court of Appeals, Fourth Circuit.
    Argued Nov. 7, 1973.
    Decided Feb. 28, 1974.

      Robert F. Brooks, Richmond, Va. (Lathan M. Ewers, Jr., Hunton, Williams, Gay & Gibson, Richmond, Va., Arnold D. Abelson, Abelson, Bromberg & Katz, New York City, on brief) for appellant.
    Leonard A. Orman, Baltimore, Md. (John J. Dilli, Jr., Orman & Dilli, Baltimore, Md., and Albert H. Grenadier, Alexandria, Va., on brief) for appellees.
    Before HAYNSWORTH, Chief Judge, and BUTZNER and WIDENER, Circuit Judges.
   WIDENER, Circuit Judge:

This is an appeal from an action involving the termination of a written contract of employment and the effect of that termination upon non-competition and severance compensation provisions of the contract. The suit was instigated by Alston Studios, Inc. (Alston) against Lloyd V. Gress & Associates and Lloyd V. Gress (Gress) seeking enforcement of a covenant not to compete and damages for its breach. Gress filed a counterclaim alleging that the noncompetition provision was unenforceable as a matter of law and that he was entitled to severance compensation whether or not he terminated the contract and whether or not he competed with Alston. Although both parties maintained that the other had terminated the contract, Alston asserted that the non-competition provision was valid in either event, and that, since it provided the consideration for severance compensation, Gress had forfeited any right to post-termination pay by competing with Alston.

The district court found the non-competition provision unenforceable, declined to enjoin Gress from competition, and awarded him $13,307.69, a part of which was for compensation due following termination of the contract. This appeal followed. Because the covenant not to compete - lacks geographic limitations, and is excessively broad as to the activities prohibited to Gress after his termination, we agree with the district court that it is excessively broad and unenforceable. But, for reasons that follow, we hold that Gress may not recover compensation after April 23, 1971, the day his notice became effective.

Alston is a Massachusetts corporation, whose principal activity is the photography of school children during the school year. Photographs are taken and developed on a speculative basis and offered to the children in various sizes and packages. The schools whose students purchase the pictures receive a percentage of the purchase price as a commission. Alston carries on these activities through a number of regional agents, one of whom was Gress.

Gress first became associated with Alston in 1951 and worked there for two years. He then left Alston’s employ for approximately five years and returned for the second time, in 1959. From that time, he worked continuously for Alston until the contract about which this dispute revolves was entered into in April 1966, and made retroactively effective to date from August 1, 1965.

The contract employed Gress “as District Sales Manager in the States of Virginia, Maryland and Washington, D.C.,” for an annual salary of $12,000.00, plus a specified, commission based on sales and various described fringe benefits and expenses. The term of the contract was for one year and “for such further time as the parties shall mutually agree upon subject to: Termination by either party after July 31, 1966, upon thirty (30) days’ written notice. . . . ” The effect of termination upon the parties’ subsequent obligations and activities was also treated in the contract by the following provisions:

“2. Whereas in consideration of the mutual cancellation of the aforesaid agreement of employment, and in further consideration of compensation to be paid as stated in Paragraph 3 of this Agreement and in further consideration of this contract of employment from August 1, 1965, for such period as the parties shall continue said employment, the said Lloyd V. Gress agrees that upon termination of said employment as District Sales Manager, he will not continue in the school picture business, either directly or indirectly, for himself or any individual or company in said business for a period of two (2) years.
«g * * * *
(b) It is agreed that on termination of this agreement by death or otherwise, the said Lloyd V. Gress is to receive compensation for the first two (2) years following termination as follows:
First year: Fifty (50) percent of
compensation paid to him for the previous twelve (12) months employment including base salary and bonus paid to him for override of packages shipped in the area in which he was employed.
Second year: One half of the compensation paid to him for the first year after said termination.”

Thereafter, on September 1, 1970, National Color Laboratories (NCL) acquired Alston as a wholly owned subsidiary. Within a short time, a series of meetings followed in Cleveland, attended by Gress, for the purpose of introducing to the sales force a plan known as the NCL profitability program. Fearing that the new program, if implemented, might yield results to his detriment, Gress submitted, on March 1, 1971, a letter of resignation effective one month from date of receipt. A period of negotiations ensued and drafts of different agreements were exchanged but never mutually executed. Gress reaffirmed the termination of his contract with Alston effective April 23, 1971, by telegram.

The same date on which Gress’ termination of his relationship with Alston became effective, he signed an agreement with School Pictures, Inc., a competitor of Alston. Gress then began calling on Alston’s customers whom he had previously served for his former employer. Alston brought suit on June 4, 1971, seeking to enjoin Gress from competing, and claiming damages for breach of contract. Gress answered and counterclaimed on June 24, 1971, asserting that the covenant not to compete was unenforceable as a matter of law, and that he was entitled to severance compensation in accordance with Paragraph 3 of the contract. The district court held in favor of Gress on both the complaint and counterclaim as before indicated.

In Paragraph 2 of their agreement, Gress agreed that upon termination of his employment with Alston as district sales manager he would “not continue in the school picture business, either directly or indirectly, for himself or any individual or company in said business for a period of two (2) years.” Restrictive provisions of this general nature have been dealt with by Virginia courts in several cases.

The two issues before us are: (1) Whether the non-competition clause was void or unenforceable; and (2) whether Gress may recover severance compensation despite his competing with Alston in violation of the terms of the contract.

In Meissel v. Finley, 198 Va. 577, 95 S.E.2d 186 (1956), the Virginia Supreme Court adopted three criteria to be used as a guide to decision by courts passing upon such contracts: (1) Is the restraint, from the standpoint of the employer, reasonable in the sense that it is no greater than is necessary to protect the employer in some legitimate business interest?; (2) From the standpoint of the employee, is the restraint reasonable in the sense that it is not unduly harsh and oppressive in curtailing his legitimate efforts to earn a livelihood?; (3) Is the restraint reasonable from the standpoint of a sound public policy? Citing Worrie v. Boze, 191 Va. 916, 62 S.E.2d 876 (1951), the Meissel court acknowledged that restrictive covenants which reasonably protect the employer’s business may be enforceable in equity, if they are incident and ancillary to the contract of employment and limited as to area and duration.

In Virginia, the “employer has the burden of proving that the restraint is reasonable and the contract is valid. Since the restraint sought to be imposed restricts the employee in the exercise of a gainful occupation, it is a restraint in trade; as such it is carefully examined and strictly construed before the covenant will be enforced.” Richardson v. Paxton Co., 203 Va. 790, 795, 127 S.E.2d 113, 117 (1962).

One obvious difficulty with the restriction in the instant case is that it lacks geographic limitation. Another is that it is too broad in that it encompasses activities in which Gress was not engaged. Under the explicit terms of the agreement, Alston is free to prevent its former employee, Gress, from engaging in any aspect of “the school picture business, either directly or indirectly” thi'oughout the fifty states, or, indeed, anywhere in the world. There is no language limiting the restriction to areas of possible competition, or zones of Gress’ past representation, or areas in which Alston actually does business, or to activities in which Gress had been engaged. Viewed in this light, the provision appears far broader than necessary to protect Alston’s legitimate business interests. Indeed, it imposes an unduly harsh burden upon Gress by curtailing his legitimate efforts to earn a living. Accordingly, because of its limitless geographic application, and too-broad encompassment of activities in which Gress was not engaged, we hold the provision unenforceable and void.

A non-competition clause unlimited both as to the activities of future employment and as to geography has never been considered by the Virginia Supreme Court.

Welcome Wagon did consider such a covenant unlimited as to future activities and geographically limited only by those parts of “the United States or Canada” in which the employer had been in business or had signified his intention to be in business. The court there held “that the restrictive covenant, taken in its entirety, is void,” and further went on to say that, even had the court not held the covenant void “. . .we think this covenant here might fairly be characterized as harsh and oppressive.” A similar covenant binding an employee not to compete without geographical limitation for a period of five years was held to be unenforceable under Virginia law in Davis Robertson Agency v. Duke, 119 F.Supp. 931 (E.D.Va.1953). The court said the covenant was “unnecessarily restrictive of the employees’ rights.”

In Richardson v. Paxton Company, supra, concerning a salesman for a marine supply company, the Virginia court again followed the reasoning of Welcome Wagon and held unenforceable a covenant unrestricted in scope as to activities in future employment as is the one under consideration here, although later activities of the salesman under his new employer were substantially the same as under the old employer. The covenant is “. . . unreasonable from the standpoint of . [the employee] because it is unduly harsh on him in curtailing his legitimate efforts to earn a livelihood.” 203 Va. p. 795, 127 S.E.2d p. 117.

Alston maintained in the district court and argues here that, although the non-competition clause did not expressly specify in Paragraph 2 the area to which it applied, implicit throughout the contract is the meaning that its terms are to apply to Gress only in the geographic area (Maryland, Virginia, and Washington, D.C.) assigned to him in Paragraph 1. In further support of this argument, National Homes Corp. v. Lester Industries, Inc., 293 F.Supp. 1025 (W.D.Va.1968), affirmed as modified, 404 F.2d 225 (4 Cir. 1968), is cited for the proposition that a restrictive covenant, although broad on its face, might nevertheless be enforced in those areas where the parties involved are in actual competition. We find National Homes inapposite since the clear terms of the restriction construed in that case applied only to those areas where the parties were “in competition.”

An equally strong, or even stronger, reason for distinguishing National Homes is that National Homes involved the sale of a regional manufacturing business to a large national manufacturer. The owner of the business sold was made the president and chief executive of it as a subsidiary of the purchaser, also received substantial stock options, and was made a director of the parent corporation (the purchaser). As such, he was bound to have acquired knowledge of the most important records of the parent company, including financial statements, price scale, and trade secrets. The district court on these aggravated facts, on default judgment, enjoined the former owner of the business sold from competing with the parent company during the term for which he was employed within the United States in accord with a literal reading of the agreement.

We note particularly that in National Homes the decree of the district court was entered by way of default judgment, so the validity and extent of the covenant not to compete was not considered by us on appeal, our opinion confining itself to the application of the order of the district court and the proper extent of the injunction entered by default to the facts at hand in that case. Neither the district court nor this court, then, in National Homes decided that the broad covenant there enforced by way of default judgment was susceptible of partial enforcement resulting from a judgment not by way of default, and we have found no Virginia case so holding.

In all events, the law applicable when the sale of a business is involved and that when only an employee is involved, as here, is different. “[T]he scope of permissible restraint is more limited between employer and employee than between seller and buyer, and the covenant is construed favorably to the employee.” Richardson, 203 Va. p. 795, 127 S.E.2d p. 117. Conversely, greater latitude is allowed in determining the reasonableness of a restrictive covenant when the covenant relates to the sale of a business than in those ancillary to an employment contract. Day Companies v. Patat, 403 F.2d 792 (5th Cir. 1968).

This precise question, however, was presented to this court in Welcome Wagon where the geographical extent of the covenant, although not worldwide as here, was limited only by the United States and Canada. The plaintiff there had asked the court to “. . . hold it valid insofar as this covenant applies to the City of Gastonia, and that we might enjoin . . . [the employee] from pursuing her present activities in Gas-tonia.” We held: “We cannot agree with this suggestion. We think the restrictive covenant must be judged as a whole and must stand or fall when so judged.” Welcome Wagon, 224 F.2d p. 701. We see no reason to depart from the holding in Welcome Wagon, and we follow it here.

Because restraints of trade are disfavored in Virginia, we must give effect to the language of the agreement, strictly construed. See Linville v. Servisoft of Virginia, Inc., 211 Va. 53, 55, 174 S.E.2d 785 (1970); Richardson v. Paxton Co., 203 Va. 790, 127 S.E.2d 113 (1962). We construe the agreement, reading it literally and construing it favorably to the employee, as. an attempt to impose a post-employment restraint upon Gress without geographic or other limitation. We must therefore decline Alston’s invitation to read into the agreement limitations which simply are not there.

The second issue involves the district court’s award of post-termination compensation to Gress in the amount of $13,307.69. The court’s action was predicated on the view that there was nothing in the employment agreement making Gress’ post-employment compensation contingent upon his compliance with the restrictive covenant after termination and that, even if there had been, that contingency would not have been enforceable since the covenant was unenforceable.

The two provisions, however, appear inextricably tied. Paragraph 2 of the Alston contract specifically states that “in further consideration of compensation to be paid as stated in Paragraph 3 of this Agreement . . . Gress agrees that upon the termination of said employment as District Sales Manager, he will not continue in the school picture business. . . .” The provisions are mutually dependant since “neither party could insist upon the other’s performing his part of the covenants, unless he himself performed, or offered to perform his covenants at the appointed time.” Robertson v. Robertson, 3 Rand. (24 Va.) 68, 70 (1824); see also Bolling v. King Coal Theatres, 185 Va., 991, 41 S.E.2d 59, 62 (1947).

Generally, when a contract covers several subjects, some of whose provisions are valid and some void, those which are valid will be upheld if they are not so interwoven with those illegal as to make divisibility impossible. Bristol v. Dominion National Bank, 153 Va. 71, 149 S.E. 632 (1929); cf. Norfolk Motor Exchange v. Grubb, 152 Va. 471, 147 S.E. 214 (1929). Here, the excessively broad covenant not to compete is ancillary to an otherwise valid contract of employment between Gress and Alston Studios. But the severance compensation clause, the principal consideration for the covenant, is so interwoven with the void portion of the agreement as to be unenforceable. Bristol v. Dominion National Bank, supra. Consequently, Alston is under no obligation to make severance payments.

The case must be remanded for entry of judgment in favor of Gress in an amount not to include compensation under the contract for any period after April 23, 1971, and for such other proceedings as may not be inconsistent with this opinion.

Affirmed in part, reversed in part, and remanded.

      . The district court found that Gress had not violated the agreement, and we are bound by that finding, F.R.Civ.P. 52(a); however, in the context of the dispute presented here, it is not material, for the contract provides for compensation following the severance of Gress . . on the termination of this agreement by death or otherwise. . . . ” Cf. Meissel, infra, 198 Va. p. 584, 95 S.E.2d p. 186, as to the effect of the agreement after termination.

      . In this diversity case, mindful of Erie Ry. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938), the forum being Virginia, and nothing to the contrary appearing in the record, the law of Virginia should apply. Klaxon Co. v. Stentor Mfg. Co., Inc., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941); Moreland v. Moreland, 108 Va. 93, 60 S.E. 730 (1908); Waggaman v. General Finance Co., etc., 116 F.2d 254 (3rd Cir. 1940).

      . The Virginia Supreme Court, in essence, adopted the standards applied in the then-recent Fourth Circuit decision in Welcome Wagon v. Morris, 224 F.2d 693, 698 (4th Cir. 1955), decided under North Carolina law.

      . In Meissel, the agreement of a limited partner not to compete within 50 miles of Norfolk after ilissolution of the partnership was held enforceable.

      . Those cases in which Virginia courts have upheld similar restrictions have involved quite narrow and well defined geographic limitations. See Meissel, supra. Worrie v. Boze, supra, enforced such an agreement “within 25 miles” of Richmond.

      . The employee here is a middle echelon employee, neither a principal executive, nor merely an hourly paid worker.

      . Bolling, at p. 996, 41 S.E.2d at p. 62, stated a rule of construction in such cases: “In early times refined distinctions were made, but it is now thoroughly settled that covenants are dependent or independent, according to the intention of the parties, and the good sense of the case.” Gress’ intent that' the covenants be dependent is shown in his letter to Alston dated March 26, 1971:
      “Accompanying this letter is a proposal with alternative clauses for my franchise agreement. It is acceptable to me for the following reasons:
      * * * * *
      because I feel very strongly at this point in time that I owe Alston Studios nothing and they owe me nothing (except for the payment under current contract if I do not compete for two years). This is fair because each party receives value.”


author: FAIRCHILD, Circuit Judge.

text:
    Sol DIAMOND and Muriel Diamond, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
    No. 71-1760.
    United States Court of Appeals, Seventh Circuit.
    Argued Dec. 11, 1972.
    Decided Feb. 27, 1974.
    Richard Weinberger, Chicago, Ill., for petitioners-appellants.
    Scott P. Crampton, Asst. Atty. Gen., John A. Townsend, Atty., Tax Div., Dept. of Justice, Washington, D. C., for respondent-appellee.
    Before KILEY, Senior Circuit Judge, and FAIRCHILD and SPRECHER, Circuit Judges.
   FAIRCHILD, Circuit Judge.

This is an appeal from a decision of the Tax Court upholding the commissioner’s assessment of deficiencies against Sol and Muriel Diamond for the years 1961 and 1962. The deficiencies for each year were consolidated for trial, but are essentially unrelated. The Tax Court concluded that Diamond realized ordinary income on the receipt of a right to a share of profit or loss to be derived from a real estate venture (the 1962 partnership case), and that certain commission payments he made were not deductible business expenses (the 1961 commissions case). The facts in both cases appear in Diamond v. Commissioner, 56 T.C. 530 (1971). Unnecessary repetitions will be avoided.

The 1962 Partnership Case.

During 1961, Diamond was a mortgage broker. Philip Kargman had acquired for $25,000 the buyer’s rights in a contract for the sale of an office building. Kargman asked Diamond to obtain a mortgage loan for the full $1,100,000 purchase price of the building. Diamond and Kargman agreed that Diamond would receive a 60% share of profit or loss of the venture if he arranged the financing.

Diamond succeeded in obtaining a $1,100,000 mortgage loan from Marshall Savings and Loan. On December 15, 1961 Diamond and Kargman entered into an agreement which provided:

(1) The two were associated as joint venturers for 24 years (the life of the mortgage) unless earlier terminated by agreement or by sale;
(2) Kargman was to advance all cash needed for the purchase beyond the loan proceeds;
(3) Profits and losses would be divided, 40% to Kargman, 60% to Diamond;
(4) In event of sale, proceeds would be devoted first to repayment to Kargman of money supplied by him, and net profits thereafter would be divided 40% to Kargman, 60% to Diamond.

Early in 1962, Kargman and Diamond created an Illinois land trust to hold title to the property. The chief motivation for the land trust arrangement was apparently to insulate Diamond and Kargman from personal liability on the mortgage note.

The purchase proceeded as planned and closing took place on February 18, 1962. Kargman made cash outlays to-talling $78,195.33 in connection with the purchase. Thus, under the terms of the agreement, the property would have to appreciate at least $78,195.33 before Diamond would have any equity in it.

Shortly after closing, it was proposed that Diamond would sell his interest and one Liederman would be substituted, except on a 50-50 basis. Liederman persuaded Diamond to sell his interest for $40,000. This sale was effectuated on March 8, 1962 by Diamond assigning his interest to Kargman for $40,000.' Karg-man in turn then conveyed a similar interest, except for 50-50 sharing, to Lied-erman for the same amount.

On their 1962 joint return, the Diamonds reported the March 8, 1962 $40,000 sale proceeds as a short term capital gain. This gain was offset by an unrelated short term capital loss. They reported no tax consequences from the February 18 receipt of the interest in the venture. Diamond’s position is that his receipt of this type of interest in partnership is not taxable income although received in return for services. He relies on § 721 and Reg. § 1.721-1(b)(1). He further argues that the subsequent sale of this interest produced a capital gain under § 741. The Tax Court held that the receipt of this type of interest in partnership in return for services is not within § 721 and is taxable under § 61 when received. The Tax Court valued the interest at $40,000 as of February 18, as evidenced by the sale for that amount three weeks later, on March 8.

Both the taxpayer and the Tax Court treated the venture as a partnership and purported to apply partnership income tax principles. It has been suggested that the record might have supported findings that there was in truth an employment or other relationship, other than partnership, and produced a similar result, but these findings were not made. See Cowan, The Diamond Case, 27 Tax Law Review 161 (1972). It has also been suggested (and argued, alternatively, by the government) that although on the face of the agreement Diamond appeared to receive only a right to share in profit (loss) to be derived, the value of the real estate may well have been substantially greater than the purchase price, so that Diamond may really have had an interest in capital, if the assets were properly valued. This finding was not made. The Tax Court, 56 T.C. at 547, n. 16, suggested the possibility that Diamond would not in any event be entitled to capital gains treatment of his sale of a right to receive income in the future, but did not decide the question.

Taking matters at face value, taxpayer received, on February 18, an interest in partnership, limited to a right to a share of profit (loss) to be derived. In discussion we shall refer to this interest either as his interest in partnership or a profit-share.

The Tax Court, with clearly adequate support, found that Diamond’s interest in partnership had a market value of $40,000 on February 18. Taxpayer’s analysis is that under the regulations the receipt of a profit-share February 18, albeit having a market value and being conferred in return for services, was not a taxable event, and that the entire proceeds of the March 8 sale were a capital gain. The Tax Court analysis was that'the interest in partnership, albeit limited to a profit-share, was property worth $40,000, and taxpayer’s acquisition, thereof on February 18 was compensation for services and ordinary income. Assuming that capital gain treatment at sale would have been appropriate, there was no gain because the sale was for the same amount.

There is no statute or regulation which expressly and particularly prescribes the income tax effect, or absence of one, at the moment a partner receives a profit-share in return for services. The Tax Court’s holding rests upon the general principle that a valuable property interest received in return for services is compensation, and income. Taxpayer’s argument is predicated upon an implication which his counsel, and others, have found in Reg. § 1.721-1(1) (b), but which need not, and the government argues should not, be found there.

26 U.S.C. § 721 is entitled “Nonrecognition of gain or loss on contribution,” and provides: “No gain or loss shall be recognized to a partnership or to any of its partners in the case of a contribution of property to the partnership in exchange for an interest in the partnership.” Only if, by a strained construction, “property” were said to include services, would § 721 say anything about the effect of furnishing services. It clearly deals with á. contribution like Kargman’s, of property, and prescribes that when he contributed his property, no gain or loss was recognized. It does not, of course, explicitly say that no income accrues to one who renders services and, in return, becomes a partner with a profit-share.

Reg. § 1.721-1 presumably explains and interprets § 721, perhaps to the extent of qualifying or limiting its meaning. Subsec. (b)(1), particularly relied on here, reads in part as follows:

“Normally, under local law, each partner is entitled to be repaid his contributions of money or other property to the partnership (at the value placed upon such property by the partnership at the time of the contribution) whether made at the formation of the partnership or subsequent thereto. To the extent that any of the partners gives up any part of his right to be repaid his contributions (as distinguished from a share in partnership profits) in favor of another partner as compensation for services (or in satisfaction of an obligation), section 721 does not apply. The value of an interest in such partnership capital so transferred to a partner as compensation for services constitutes income to the partner under section 61.

The quoted portion of the regulation may well be read, like § 721, as being directly addressed only to the consequences of a contribution of money or other property. It asserts that when a partner making such contributions transfers to another some part of the contributing partner’s right to be repaid, in order to compensate the other for services or to satisfy an obligation to the other, § 721 does not apply, there is recognition of gain or loss to the contributing partner, and there is income to the partner who receives, as compensation for services, part of the right to be repaid.

The regulation does not specify that if a partner contributing property agrees that, in return for services, another shall be a partner with a profit-share only, the value of the profit-share is not income to the recipient. An implication to that effect, such as is relied on by taxpayer, would have to rest on the proposition that the regulation was meant to be all inclusive as to when gain or loss would be recognized or income would exist as a consequence of the contribution of property to a partnership and disposition of the partnership interests. It would have to appear, in order to sustain such implication, that the existence of income by reason of a creation of a profit-share, immediately having a determinable market value, in favor of a partner would be inconsistent with the result specified in the regulation.

We do not find this implication in our own reading of the regulation. It becomes necessary to consider the substantial consensus of commentators in favor of the principle claimed to be implied and to look to judicial interpretation, legislative history, administrative interpretation, and policy considerations to determine whether the implication is justified.

The Commentators: There is a startling degree of unanimity that the conferral of a profit-share as compensation for services is not income at the time of the conferral, although little by way of explanation of why this should be so, or analysis of statute or regulation to show that it is prescribed. See publications cited pp. 181-2 of Cowan, The Diamond Case.

One of the most unequivocal statements, with an explanation in terms of practicality or policy, was made by Arthur Willis in a text:

“However obliquely the proposition is stated in the regulations, it is clear that a partner who receives only an interest in future profits of the partnership as compensation for services is not required to report the receipt of his partnership interest as taxable income. The rationale is twofold. In the first place, the present value of a right to participate in future profits is usually too conjectural"to be subject to valuation. In the second place, the service partner is taxable on his distributive share of partnership income as it is realized by the partnership. If he were taxed on the present value of the right to receive his share of future partnership income, either he would be taxed twice, or the value of his right to participate in partnership income must be amortized over some period of time.”

Judicial Interpretation: Except for one statement by the Tax Court no decision cited by the parties or found by us appears squarely to reach the question, either on principle in the absence of the regulations, or by application of the regulations. In a footnote in Herman M. Hale, 24 T.C.M. 1497, 1502 (1965) the Tax Court said: “Under the regulations, the mere receipt of a partnership interest in future profits does not create any tax liability. Sec. 1.721-1(b), Income Tax Regs.” There was no explanation of how this conclusion was derived from the regulations.

Legislative History: The legislative history is equivocal.

An advisory group appointed in 1956 to review the regulations evidently felt concern about whether the provision of Reg. § 1.721-1 that the value of an interest in capital transferred to a partner in compensation for services constitutes income had a statutory basis in the light of § 721 providing that there shall be no recognition of gain or loss in the case of a contribution of property. The group proposed enactment of a new section to provide such basis, and legislation introduced into the 86th Congress in 1959 incorporated this recommendation. The" bill, H.R. 9662, would have created a new § 770 providing specifically for the taxation of a person receiving an interest in partnership capital in exchange for the performance of services for the partnership. However, neither proposed § 770 nor anything else in H.R. 9662 dealt with the receipt merely of a profit-share. The lack of concern over an income tax impact when only a profit-share was conferred might imply an opinion that such conferring of a profit-share would not be taxable under any circumstances, or might imply an opinion that it would be income or not under § 61 depending upon whether it had a determinable market value or not.

Several statements in the course of the hearings and committee reports paralleled the first parenthetical phrase in Reg. § 1.721-1 (b) and were to the effect that the provision did not apply where a person received only a profit-share. There was, however, at least one specific statement by the chairman of the advisory group (Mr. Willis) that if the service partner “were to receive merely an interest in future profits in exchange for his services, he would have no immediate taxable gain because he would be taxed on his share of income as it was earned.’’ H.R. 9662 passed the House of Representatives, and was favorably reported to the Senate by its finance committee, but never came to a vote in the Senate. Even had the bill become law, it would not have dealt expressly with the problem at hand.

Administrative Interpretation: We are unaware of instances in which the Commissioner has asserted delinquencies where a taxpayer who received a profit-share with determinable market value in return for services failed to report the value as income, or has otherwise acted consistently with the Tax Court decision in Diamond. Although the consensus referred to earlier appears to exist, the Commissioner has not by regulation or otherwise acted affirmatively to reject it, and in a sense might be said to have agreed by silence.

Consideration of partnership principles or practices: There must be wide variation in the degree to which a profit-share created in favor of a partner who has or will render service has determinable market value at the moment of creation. Surely in many if not the typical situations it will have only speculative value, if any.

In the present case, taxpayer’s services had all been rendered, and the prospect of earnings from the real estate under Kargman’s management was evidently very good. The profit-share had determinable market value.

If the present decision be sound, then the question will always arise, whenever a profit-share is created or augmented, whether it has a market value capable of determination. Will the existence of this question be unduly burdensome on those who choose to do business under the partnership form ?

Each partner determines his income tax by taking into account his distributive share of the taxable income of the partnership. 26 U.S.C. § 702. Taxpayer’s position here is that he was entitled to defer income taxation on the compensation for his services except as partnership earnings were realized. If a partner is taxed on the determinable market value of a profit-share at the time it is created in his favor, and is also taxed on his full share of earnings as realized, there will arguably be double taxation, avoidable by permitting him to amortize the value which was originally treated as income. Does the absence of a recognized procedure for amortization militate against the treatment of the creation of the profit-share as income ?

Do the disadvantages of treating the creation of the profit-share as income in those instances where it has a determinable market value at that time outweigh the desirability of imposing a tax at the time the taxpayer has received an interest with determinable market value as compensation for services ?

We think, of course, that the resolution of these practical questions makes clearly desirable the promulgation of appropriate regulations, to achieve a degree of certainty. But in the absence of regulation, we think it sound policy to defer to the expertise of the Commissioner and the Judges of the Tax Court, and to sustain their decision that the receipt of a profit-share with determinable market value is income.

Diamond’s final argument in the 1962 partnership case is that he is entitled under § 702 to a deduction not claimed on his return: his share of the partnership’s loss resulting from unamortized loan expense. The Tax Court rejected the claim because the record failed to show whether there was income during the period prior to the sale, and thus failed to establish the existence and amount of partnership loss.

Apparently the Tax Court understood that Diamond was referring to the $33,000 paid to the lender as unamor-tized loan expense. In this court, Diamond argues that the figure should be $73,000, theorizing that if the value of his profit-share at the time of creation was $40,000, and compensation to him for services to the partnership, $40,000 should also be added to the unamortized loan expense.

Whichever figure may be appropriate, we agree with the Tax Court’s reasoning, noting also that there are additional reasons why Diamond is not entitled to a deduction for a share of partnership unamortized loan expense: (1) The sale of petitioner’s interest did not effect a termination under § 708(b)(1)(B). Petitioner was entitled to a 60 percent share only after restoration to Kargman of $78,195.33. Even if the value of Diamond’s interest was $40,000, it was substantially less than 50 percent of the total interest in partnership capital and profits. (2) If statutory termination were to have occurred, it would have taken place after and not before the sale. The unamortized loan expenses would have passed to the new partners and the new partnership, not to petitioner. Reg. § 1.708-1(b) (1) (iv).

The 1961 Commissions Case.

Before 1961 Diamond had earned his living as a builder. In the course of this activity he became acquainted with Henry Moravec, Jr. and Henry Moravec, Sr., the principal officers of Marshall Savings and Loan. The Moravecs suggested that Diamond serve as a mortgage broker for Marshall. Diamond was to find builders in need of funds and arrange for them to receive loans from Marshall. Diamond would charge the builders a fee for arranging these loans. However, he paid a portion of these fees to the Moravecs. During 1961, Diamond received commissions totaling $145,186.37 and remitted $39,398.-50 to the Moravecs.

On his 1961 return, Diamond included $145,186.37 in income but deducted the $39,398.50 as an ordinary and necessary business expense. Alternatively, he now maintains that the $39,398.50 should not have been included in gross income in the first place because he received these fees merely as a conduit for the Mo-ravecs.

The Tax Court considered and rejected both the deduction and the conduit theories. The court found that Diamond had failed to prove that he had received this money as a conduit and not under a claim of right. The court also found that Diamond had failed to prove that this type of payment to the lender’s officers was ordinary and necessary. The findings were not clearly erroneous and the Tax Court’s conclusions therefrom were correct.

The judgments of the Tax Court in both the 1962 partnership and the 1961 commissions case are affirmed.

      . The Diamonds are husband and wife. Muriel Diamond’s only role in the cases arises from her joint returns with her husband.

        . Citations are to the Internal Revenue Code of 1954 as amended (title 26 U.S.C.) and to the current regulations. Except as indicated, the current provisions are identical to those in effect during 1961 and 1962.

      . Because of the decision we reach, it is also unnecessary for us to consider this possibility and we express no conclusions concerning it.

      . See also Halperin & Tucker, Low Income Housing (FHA 236) Programs: One of Few Tax Shelter Opportunities Left, 36 J. Taxation 2, 5-6 (1972); Research Institute of America, Tax Coordinator B-1210.1, Developments 15,010; Surrey & Warren, Federal Income Taxation: Cases and Materials (1964 Supp. to 1960 ed.), p. 146.

      . Willis on Partnership Taxation 84-85 (1971). See Cowan, The Diamond Case, 27 Tax Law Review 181 n. 56 (1972).

      . See., e. g., Senate Rep.No.1616, 86th Cong., 2d Sess. 117 (1960).

      . See Hearings on Advisory Group Recommendations on Subchapters C, J, and K of the Internal Revenue Code before the House Comm, on Ways and Means, 86th Cong., 1st Sess. 53 (1959).

      . 56 T.C. 547-548.

      . Id. 540-43.


author: SNEED, Circuit Judge:

text:
    Jeannette M. GATES, Appellee, v. GEORGIA-PACIFIC CORPORATION, a corporation, Appellant.
    Nos. 26868 and 72-2348.
    United States Court of Appeals, Ninth Circuit.
    Feb. 22, 1974.

      Paul Haerle (argued), Stephen D. Bulter, Thelen, Marrin, Johnson & Bridges, San Francisco, Cal., John B. Crowell, Jr., Georgia-Pacific Corp., Portland, Or., for appellant.
    Keith Burns (argued), Portland, Or., George H. Darden, EEOC (amicus curiae), Washington, D. C., for appellee.
    Before DUNIWAY and SNEED, Circuit Judges, and SHARP, District Judge.

       Honorable Morell E. Sharp, District Judge, Western District of Washington, sitting by designation.

   OPINION

SNEED, Circuit Judge:

This is an action brought under Title VII of the 1964 Civil Rights Act, 42 U.S.C. 2000e-5, alleging discriminatory-hiring practices.

Appellee Jeannette Gates, a Black woman, has a strong background in accounting. She holds a bachelor’s degree in business administration and a Master of Business Administration degree from New York University. Mrs. Gates took 23 hours of accounting in her undergraduate program, and she became qualified to teach accounting as a result of her graduate work. In addition to working as an accountant for a federal agency and the City of Portland, Mrs. Gates has taught accounting at the college level. In sum, Mrs. Gates possesses strong academic and practical experience in her profession of accounting.

As a result of a transfer of its administrative offices to Portland, appellant Georgia-Pacific Corporation had four cost accountant vacancies. In order to fill the vacancies which could not be met by intracompany transfers, Georgia-Pacific placed newspaper advertisements in daily newspapers. One of these advertisements appeared in the Portland Oregonian for January 22, 1967. Responding to this advertisement, Mrs. Gates contacted Georgia-Pacific’s Portland office and was interviewed for the position on January 26, 1967. At that time, she completed and returned an application for employment. Mrs. Gates heard nothing from Georgia-Pacific thereafter. She did not learn that the accounting positions had been filled until she re-applied on September 14,1967.

Mrs. Gates brought this action under Title VII of the 1964 Civil Rights Act, 42 U.S.C. § 2000e-5, alleging racial discrimination in hiring practices. Her initial complaint was filed on October 12, 1967, with the Equal Employment Opportunity Commission. She was notified by letter of December 16, 1968, that her case was closed by the Commission for lack of jurisdiction. On December 20, 1968, appellee contacted the Commission, expressing her dissatisfaction with the decision. On January 14, 1969, the Commission sent appellee a letter indicating that her case could not be reconsidered by the Commission but, in accordance with the notice previously sent to her, she could file a suit in District Court within 30 days. Appellee advised the Commission on January 20, 1969, that she had not received a right-to-sue notice. Appellee then received a letter from the Commission dated January 23, 1969, stating that through error it had not sent her a 30 day notice and it was enclosing a 30 day right-to-sue letter.

Mrs. Gates commenced her action in the United States District Court for the District of Oregon on February 20, 1969. In due course a judgment in her favor was obtained.

Georgia-Pacific appealed to this court from that judgment. Because jurisdictional issues involving the 30 day notice letter has not been resolved at the lower court level, we remanded to the District Court to determine whether the civil action had been timely filed in the District Court. After receiving additional evidence and permitting the 30 day letter to be introduced into evidence, the District Court again ruled in favor of ap-pellee. For purposes of this appeal, the appeals from the original judgment and the judgment on remand have been consolidated.

I

Jurisdictional Issues

(a) Authority on Remand

We must first dispose of an issue raised by appellant concerning the scope of our remand. The problem arises because of a bureaucratic mishap. In the first pretrial order, appellant admitted appellee’s receipt of the Commission’s 30 day notice letter of January 23, 1969. Through clerical error, the first pretrial order was lost and has never been found. Appellant asserted in the amended pretrial order that appellee had not timely filed her action with the Commission and that she had not received the January 23, 1969 letter. This amendment went unnoticed by appellee and the trial judge. Thus, the issue of receipt of the 30 day letter was never expressly raised at trial, and the trial judge never ruled on the matter.

We remanded for a ruling on the jurisdictional issue. Our order provided:

On appeal, Georgia-Pacific poses a jurisdictional question as to the 30 day letter notice asserted in plaintiff’s contentions in the amended pre-trial order and denied in defendant’s contentions in the same pre-trial order. The letter does not seem to be in the official record. Further, this court is not satisfied that the issue was squarely presented to the district court.
Therefore, the case is remanded to the district court for that court to rule on the jurisdictional issue here posed.
From any such ruling, a party aggrieved may take a new appeal and on motion may then consolidate it with the pending appeal.

On remand, the trial judge admitted additional evidence on the issue and permitted the letter to be introduced. He then entered a judgment order in favor of plaintiff appellee. Appellant asserts that neither the remand order nor Federal Rule of Civil Procedure 60(b) permitted the trial judge to re-open the record on remand. We disagree.

Our order was clearly designed to permit the trial judge to rule both on questions of fact and questions of law surrounding the 30-day letter. This quite obviously necessitated re-opening the record. Viewing our remand order as sufficiently broad to sustain the actions of the trial judge, we express no opinion on whether Rule 60(b) provides an independent and adequate basis for reopening the record under the facts of this case.

(b) Timely filing with Commission

The relevant portion of Section 706(d) of Title VII of the 1964 Civil Rights Act provided that an unlawful employment practice charge “shall be filed by the person aggrieved within two hundred and ten days after the alleged unlawful employment practice occurred.” Appellee was interviewed for the position on January 26, 1967, at which time she submitted an application for employment. Further, there is adequate support in the record for the trial judge’s finding that the position to which appellee could have been hired was vacant on March 17, 1967, and was filled on March 28, 1967. Appellee filed her complaint with the Commission on October 12, 1967. Appellant contends this was not timely on the ground that the “alleged unlawful employment practice” occurred, if at all, when appellee was interviewed for the position and submitted her application. We reject this argument. The alleged unlawful employment practice is not complete until the position is filled and no longer available to the claimant. Thus, the complaint was timely because it was filed within the required 210 days after the position had been filled.

(c) Timely filing of action in the District Court

Section 706(e) of the Civil Rights Act provided, inter alia, that:

If within thirty days after a charge is filed . . . the Commission has been unable to obtain voluntary compliance with this title, the Commission shall so notify the person aggrieved and a civil action may, within thirty days thereafter, be brought against the respondent named in the charge.

Appellee’s action was not commenced in the District Court until 66 days after the Commission’s letter of December 16, 1968. While this letter informed appel-lee that the Commission was closing her case for lack of jurisdiction, it did not advise her that she could commence an action in the District Court within 30 days. In neglecting to so advise appel-lee, the Commission failed to comply with Section 1601.25 of its own regulations. Appellee was finally advised of this right by letter of January 23, 1969, and she promptly commenced her action. The issue presented by the unusual facts of this case is whether the 30 day period within which the civil action may be brought commenced when the January 23, 1969 formal notice was received. We believe that it did.

Preliminarily, we note that Section 706(e), narrowly speaking, was not addressed to “no jurisdiction letters.” More significant, however, is the fact that certain equitable principles may operate to toll the 30 day requirement. See, e. g., Stebbins v. Nationwide Mutual Insur. Co., 469 F.2d 268 (4th Cir., 1972), cert. denied, 410 U.S. 939, 93 S.Ct. 1403, 35 L.Ed.2d 606; McQueen v. E. M. C. Plastic Co., 302 F.Supp. 881 (E.D.Tex.1969). We are convinced that, as a result of the Commission’s error, appellee was confused, and, under the circumstances, acted with all of the diligence and promptness which could be expected. We restrict our holding to the facts of this case, and we express no opinion on the form of notice which might trigger the 30 day period under other circumstances.

II

Sufficiency of Evidence

We now reach the merits of this appeal. On this subject we are guided in large part by the decisions of the Supreme Court in Griggs v. Duke Power Co., 401 U.S. 424, 91 S.Ct. 849, 28 L.Ed.2d 158 (1971), and McDonnell Douglas Corp. v. Green, 411 U.S. 792, 93 S.Ct. 1817, 36 L.Ed.2d 668 (1973). In Griggs the Court noted that Title YII requires “[t]he removal of artificial, arbitrary, and unnecessary barriers to employment when the barriers operate invidiously to discriminate on the basis of racial or other impermissible classification.” 401 U.S. at 431, 91 S.Ct. at 853. Lack of discriminatory intent is not a defense, for “Congress directed the thrust of the Act to the consequences of employment practices, not simply the motivation.” 401 U.S. at 432, 91 S.Ct. at 854 (emphasis in the original). And in McDonnell Douglas the Court set forth four criteria which may be used to establish a prima facie case of racial discrimination: 411 U.S. at 802, 93 S.Ct. at 1824. The Court was careful to note, however, that the burden then shifts to the employer to show “some legitimate, nondiscriminatory reason for the [employee’s] rejection.” 411 U.S. at 802, 93 S.Ct. at 1824.

This may be done by .showing (i) that he belongs to a racial minority; (ii) that he applied and was qualified for a job for which the employer was seeking applicants; (iii) that, despite his qualifications, he was rejected; and (iv) that, after his rejection, the position remained open and the employer continued to seek applicants from persons of complainant’s qualifications.

We have no difficulty under the facts of this case in concluding that appellee met her burden and established a prima facie case of racial discrimination. We also find that appellant failed to meet its burden of showing a legitimate nondiscriminatory reason for not hiring ap-pellee. The appellant offered as its primary justification for not hiring appel-lee the existence of a company, promotion-from-within policy. This presumably serves two functions: (1) it saves the company time and expense in the training of new employees; and (2) it improves the morale of employees.

While we recognize the potential importance and validity of a promotion-from-within policy, it does not serve as a valid defense to a charge of unlawful hiring practices when applied to the facts of this case. The record clearly supports the finding of the trial judge that the effect of this policy as applied was inherently discriminatory. In addition, a question exists concerning the extent to which appellant was committed to a promotion-from-within policy. Only three of the four vacancies were filled in this manner. The fourth was filled by an agency referral. The background of the individual who filled this position was, in the words of the trial judge, “conspicuously unimpressive when compared with that of the (appellee).” We agree with this characterization and also share the skepticism of the trial judge concerning the extent to which the placement of newspaper advertisements is consistent with strict adherence to a promotion-from-within policy.

The judgment is, therefore, affirmed.

      . Appellant had previously filed a charge with the Oregon Bureau of Labor, Civil Rights Division, under the provisions of Oregon Revised Statutes 659.040. The state agency dismissed the charge on the merits.

      . The statute has since been amended. See 42 U.S.C. § 2000c-5(e).

      . The statute now appears in its amended form at 42 U.S.C. § 2000e-5(f) (1).

      . In its amended form, the regulation may now be found at 29 C.F.R. § 1601.25.

      . We quote from his findings:
      Such a policy, if it does not result in unlawful employment practices, does not violate the statute. However, this defendant has few, if any, Negro accountants or accounting clerks at the entry levels. A company policy of recruiting all cost accountants from among accountants and clerks already employed by the company would result in de facto exclusion of Negroes from the better jobs whether the policy is intended to have that result or not.
      When a large company which has no Negro employees in a certain promotion line recruits and promotes primarily within that line, the result can be inherently discriminatory.