author: GIBBONS, Circuit Judge.

text:
    Thomas P. STANTON and Wanda S. Stanton v. UNITED STATES of America, Appellant.
    No. 74-1530.
    United States Court of Appeals, Third Circuit.
    Argued Jan. 24, 1975.
    Decided March 3, 1975.
    Scott P. Crampton, Asst. Atty. Gen., Gilbert E. Andrews, Ernest J. Brown, William A. Friedlander, Attys., Tax Div., Dept, of Justice, Washington, D. C., for appellant; Robert E. J. Curran, U. S. Atty., Robert J. Stout, Asst. U. S. Atty., of counsel.
    Eugene R. Lippman, Thomas A. Bell, Krusen, Evans & Byrne, Philadelphia, Pa., for appellees.
    Before VAN DUSEN, GIBBONS and HUNTER, Circuit Judges.
   OPINION OF THE COURT

GIBBONS, Circuit Judge.

The United States appeals from a final judgment in favor of taxpayers Thomas P. Stanton and Wanda S. Stanton for a refund of income tax paid for the tax year 1966. The claimed overpayment depends upon the proper tax treatment to be afforded to Mr. Stanton’s 1966 decision to terminate a Sub-chapter R election which he had made in 1964. By virtue of that election his sole proprietorship, Stanton Refractory Sales Company, was taxed as if it were a corporation. Stanton chose to terminate because Congress, in 1966, had repealed the provision in the Internal Revenue Code which had permitted the election. Act of April 14, 1966, Pub.L. No. 89-389, § 4, 80 Stat. 115, amending Int.Rev.Code § 1361 (now Int.Rev.Code § 1361(n)). The repealing legislation provided that any election not terminated on or before December 31, 1968 would be terminated by operation of law on January 1, 1969. Taxpayers were given the right to terminate Subehapter R elections voluntarily by the December 31st date.

Along with his decision to terminate, which was made as of November 1, 1966, Stanton decided to form a new corporation. This decision grew out of discussions he had had, prior to the termination date, with E. M. Harvey, President of North State Pyrophyllite Co., a North Carolina refractory manufacturer. The proprietorship was the exclusive sales representative for North State to both the United States and Canadian steel industries. The discussions dealt with the desirability of incorporating so that there would be continuity in the operation of the business in the event of Stanton’s death. Harvey had expressed the preference that Mrs. Wanda Stanton, who was an active participant in the business of the proprietorship, have an ownership interest in any corporation that might be formed. But there were other motivations for incorporation unrelated to Mrs. Stanton.

As planned, Stanton was to transfer some, but not all, of the assets of the Subchapter R proprietorship to the new corporation, and Mrs. Stanton was to receive 49% of the newly-issued stock. This was precisely how the new corporation was formed. On November 1, 1966, the date of the Subchapter R termination, Stanton caused the incorporation of Stanton Refractories, Inc., and transferred the operating assets of the proprietorship to it. The stock of the corporation was issued 51% to Mr. Stanton and 49% to Mrs. Stanton. The opening balanee sheet of the corporation, as of November 1, 1966, reflected the following:

ASSETS
Cash $ 8,261.83
Accounts Receivable 4,263.97
Inventory-39.144.74
Furniture and Equipment
(Net of depreciation) 10.242.75
Insurance Deposit 140.00
Telephone Deposit 100.00
TOTAL ASSETS • $62,153.29
LIABILITIES:
Accounts Payable $50,406.33
Accrued Taxes 1,746.96
Net Equity Capital Stock $10,000
Retained Earnings 0 10,000.00
TOTAL LIABILITIES $62,153.29

The consideration for the $10,000 in capital stock came entirely from the assets transferred from the Subchapter R proprietorship. As of October 31, 1966, the balance sheet of the Subchapter R proprietorship was as follows:

ASSETS
Cash $122,314.41
Accounts Receivable 45,561.18
Inventory 39.144.74
Furniture and Equipment
(Net' of depreciation) 10.242.75
Insurance Deposit 140.00
Telephone Deposit 100.00
TOTAL ASSETS $217,503.08
LIABILITIES
Accounts Payable I 50,406.33
Accrued Payroll Taxes 1,746.96
Provision for Federal Income
Taxes 4,933.52
Equity:
Paid-In Capital $22,067.54
Retained Earnings 138,348.73
160,416.27
TOTAL LIABILITIES $217,503.08

Thus the effect of the termination of the election was that the corporation received all the proprietorship’s furniture and equipment, its deposits and inventory and sufficient cash and accounts receivable, such that the value of these assets equalled the value of the accounts payable and accrued payroll taxes assumed plus the value of the capital stock. Stanton retained $114,052.58 in cash and $41,297.21 in accounts receivable, and assumed liability for Subchapter R federal income taxes in. the amount of $4933.52. On their 1966 return the taxpayers reported a long term capital gain on the liquidation of the Subchapter R proprietorship in the amount of $138,-348.73. This sum was equal to the retained earnings of the proprietorship, an amount we note was the equivalent of the earned surplus of a corporation. Stanton’s basis for the assets of the proprietorship was $22,067.54, an amount which was the equivalent of the paid-in capital of a corporation. The Internal Revenue Service treated the transaction as resulting in a taxable dividend in the amount of the claimed capital gain and assessed a deficiency of $48,104.65 in income tax for the year 1966. This amount with interest was paid on April 8, 1970, and a claim for a refund in the amount of $56,673.20 followed, resulting in the instant suit.

It is the taxpayers’ position that termination of the election must be treated as a corporate liquidation. They rely on Int.Rev.Code § 1361(7) which provides:

“A distribution in partial or complete liquidation with respect to a proprietorship or partnership interest by an enterprise as to which an election has been made under subsection (a), shall be- treated as a corporate liquidation in accordance with part II of sub-chapter C [§§ 331-346] of this chapter.”

Treatment as a liquidation under Int. Rev.Code § 331 would result in a long term capital gain in the amount reported. The government concedes that this would have been the effect of the termination of election prior to the enactment of the repealing legislation if a termination had then been possible. A major reason for the repeal of Subchapter R was that sole proprietorships were not often exercising the option. 7 CCH 1975 Stand.Fed.Tax Rep. 114845A.01. This in turn was probably because the tax-free reorganization provisions of the Code were practically unavailable to electing proprietors who wanted to change to the corporate form of doing business. See Estate of Wein v. Commissioner of Internal Revenue, 330 F.2d 957 (3d Cir. 1964), aff’g 40 T.C. 454 (1963). As originally structured § 1361(m) provided that, with stated exceptions, an enterprise as to which a Subchapter R election had been made could not be considered a corporation, nor its proprietors nor partners be considered shareholders, for purposes of the Internal Revenue Code provisions relating to corporate reorganizations. The 1966 legislation repealed § 1361(m). The legislative history makes clear that terminations of Subchapter R elections made on or after April 14, 1966, the date of enactment, and before the cut-off date of January .l, 1969, were intended to be covered by the reorganization provisions of the Code. A Subchapter R enterprise could have been liquidated, as if it were an actual corporation, and the proceeds in liquidation would have been afforded capital gains treatment pursuant to Int.Rev.Code § 331. The enterprise could have been transferred completely in a tax-free reorganization to a corporation controlled by the old owners. But, just as in the ease of a corporation, the owners of a Subchapter R enterprise could not achieve the transfer of that enterprise to a corporation controlled by them while at the same time distributing earned surplus at capital gains rates. The government contends that the November 1, 1966 transactions were a reorganization within the meaning of Int. Rev. Code § 356 and that the property retained by Stanton was “boot”. In a reorganization this “boot” is taxable as ordinary income at least to the extent it represents earned surplus.

The taxpayers, recognizing that a liquidation of a Subchapter R enterprise followed by a transfer of the enterprise to a corporation controlled by the former owner may, since April 4, 1966, be classified as a corporate reorganization, urge that the November 1, 1966 transactions were nevertheless a liquidation-reincorporation rather than a reorganization. The argument is based on the contention that the transactions did not meet any of the reorganization definitions set out in Int.Rev.Code § 368. This position was accepted by the district court. It rejected the government’s principal contention that the transactions constituted a reorganization as defined in Int. Rev.Code § 368(a)(1)(D). That subsection reads as follows:

“[A] transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor, or one or more of its shareholders (including persons who were shareholders immediately before the transfer), or any combination thereof, is in control of the corporation to which the assets are transferred; but only if, in pursuance of the plan, stock or securities of the corporation to which the assets are transferred are distributed in a transaction which qualifies under section 354, 355, or 356 [is a reorganization].”

The court held that Mrs. Stanton’s ownership of 49% of the stock of the new corporate enterprise, Stanton Refractories, Inc. prevented Stanton from having the requisite 80% control of that enterprise as required by the definition of “control” found in Int.Rev.Code § 368(c):

“For purposes of part I (other than section 304), part II, and this part, the term ‘control’ means the ownership of stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote and at least 80 percent of the total number of shares of all other classes of stock of the corporation.”

The district court emphasized the undisputed fact that Stanton had a sound business purpose for giving his wife, an active participant in his business, a percentage of stock which would reassure his supplier of her continued participation. But in looking only at the percentage of ownership which resulted from that gift, the court disregarded what the government contends is the controlling reality; that at the time of the transfer of the operating assets from the Sub-chapter R enterprise to the new enterprise Stanton had the absolute right to designate who would receive all the stock. That his business judgment strongly suggested the wisdom of a gift of 49% to his wife in no way lessened his control.

A closely analogous case is American Bantam Car Co. v. Commissioner of Internal Revenue, 177 F.2d 513 (3d Cir. 1949), affirming per curiam and adopting the reasoning of 11 T.C. 397 (1948). In that case the transfer of assets to a new corporation for 300,000 shares of stock took place on June 3, 1936. Five days later the new corporation executed an underwriting agreement pursuant to which the underwriters would receive up to 100,000 shares of the shareholders’ common stock as and if preferred stock was sold. The underwriters received 87,-900 shares of common stock by October 1937. The Tax Court held that in June 1936 the stockholders had the requisite control even though prior to the transfer of assets it was contemplated that a preferred stock underwriting would be attempted. The reality was that as of June 1936 the stockholders could have called off the underwriting. Thus there was a tax-free reorganization.

Another closely analogous case is Wilgard Realty Co. v. Commissioner of Internal Revenue, 127 F.2d 514 (2d Cir.), cert. denied, 317 U.S. 655, 63 S.Ct. 52, 87 L.Ed. 527 (1942). There the transferor acquired all the stock of a new corporation. It was his intention to give away three-fourths of that stock to members of his family on the same day as he received it and after the transfer of assets took place. The gifts were, in fact, made. The court held that a tax-free exchange had taken place:

“In the absence of any restriction upon his freedom of action after he acquired the stock, he had ‘immediately after the exchange’ as much control of the petitioner as if he had not before made up his mind to give away most of his stock and consequently his control.” Id. at 516.

See also Manhattan Building Co., 27 T.C. 1032 (1957); B. Bittker & J. Eustice, Federal Income Taxation of Corporations and Shareholders 13.10 (3d ed. 1971).

Taxpayers rely heavily on Fahs v. Florida Machine & Foundry Co., 168 F.2d 957 (5th Cir. 1948). That case is clearly distinguishable. The issue was the transferee corporation’s basis for certain real estate it had sold. If it had acquired the real estate in a tax-free exchange it had the same basis as the transferor, rather than the higher basis for which it contended. Whether the exchange was tax-free depended, in turn, on whether one of two stockholders was in control when the transfer was made. The stockholders were father and son. The father owned a machine shop conducted as a proprietorship. Its assets included the real estate. In 1921, in order to induce the son, an engineer, to stay with the business, the father entered into an agreement whereby the son would eventually receive a one-half interest if he did stay. In 1924, and pursuant to that agreement, the transferee corporation was formed. The father transferred all the proprietorship assets to it, and the stock was issued one-half to him and the other half (except for 3 qualifying shares) to the son. The government contended that the father was in control. The Fifth Circuit held:

“We are of [the] opinion the district court’s finding that Franklin Russell, Senior, was not in ‘control’ of taxpayer corporation ‘immediately after the transfer’ on July 16, 1924 and therefore, that Section 112(b)(5) did not apply, is abundantly supported by the evidence.” Id. at 959.

The evidence, of course, was that unlike Stanton, Franklin Russell, Sr. had undertaken by a contract supported by consideration, prior to the transfer, to give his son one-half the business. Thus he did not at the time of the transfer have the absolute right to designate who would receive all the stock in the transferee. That distinction suffices, and we need not consider whether, as the government contends, Fahs was erroneously decided since Franklin Russell, Jr. was in practical effect, a 50% owner of the transferred enterprise. That would, of course, have caused the aggregation of his and his father’s control, and have made the reorganization tax-free. Even if the record supported a finding that prior to November 1, 1966 Mrs. Stanton had acquired in some binding manner a 49% interest in the transferred enterprise (and nothing in the record so suggests) we would be inclined to agree with the government that in such case her interest and that of her husband would be aggregated for purposes of § 368(c).

We recognize that by attempting to ameliorate the lot of one group of unwary Subchapter R taxpayers Congress, in repealing Int.Rev.Code § 1361, erected a snare for another in which the Stantons became enmeshed. The taxpayer could, however, have liquidated his Subchapter R enterprise with long term capital gain consequences had he foregone the benefits of carrying on the same enterprise in corporate form. He could also have transferred all of the assets of the enterprise to a successor corporation in a tax-free reorganization. He could not, following such a transfer, have distributed earned surplus at long term capital gain rates. The “boot” provisions in the reorganization sections of the Code are designed to prevent the equivalent of such a distribution in connection with partial transfers in reorganization.

The judgment of the district court will be reversed.

      . The decision of the district court is reported. Stanton v. United States, 371 F.Supp. 103 (E.D.Pa.1974).

      . The election was made pursuant to Int.Rev. Code § 1361.

      . The parties stipulated and the district court found:
      “Plaintiff formed the formal corporation after discussion with his advisers for the following business purposes: (1) organization of a business entity with nominal paid-in capital to facilitate the transfer of business to employees upon retirement, and (2) the adoption of a profit sharing plan whose benefits to employees would be substantially in excess over those permitted to a sole proprietorship.” 371 F.Supp. at 105. The district court also found:
      “In 1965, as set forth in the uncontested affidavit of E. M. Harvey, President of North State, Mr. Harvey and Mr. Stanton discussed the desirability of incorporating Stanton Refractory Sales Company in order to provide business continuity in the event of Mr. Stanton’s death.
      Also, Mr. Stanton wished to incorporate his business for the purpose of facilitating the transfer of the enterprise to employees of the business upon his retirement and to permit the adoption of a profit sharing plan in order to encourage employee loyalty and incentive. These are both valid business purposes and are uncontested as such by the government.
      The final motivating force behind incorporation was the fact that Mr. Stanton faced automatic termination of his 1361 election on January 1, 1969. The obvious answer was incorporation.” Id. at 110-11.

      . “Thus, for example, if after the date of enactment and before January 1, 1969, the partners of an enterprise, which has a valid election in effect under section 1361(a) transfer all of the assets of such enterprise to an actual corporation and receive stock in proportion to their interests there will be no tax on the transfer of property and on the issuance of stock, under sections 368(a)(1) and 354 of the code. On the other hand, if the partners retain money or property of the enterprise, this may be treated as 'boot’ for purposes of section 356 of the code.” 2 U.S. Code Cong. & Admin.News, 89th Cong., 2d Sess., p. 2162 (1966).

      . The government also contended at one stage or another that the transaction was a “C” or an “F” reorganization. Int.Rev.Code § 368-(a)(1)(C), (F). The “F” contention apparently has been abandoned. Because we conclude there was a “D” reorganization we do not reach the “C” contention raised for the first time in this appeal.

      . Certiorari was denied. 339 U.S. 920, 70 S.Ct. 622, 94 L.Ed. 1344 (1950).


source: Caselaw Access Project

author: TONE, Circuit Judge.

license: Public Domain

text:
    CHICAGO HOUSING TENANTS ORGANIZATION, INC., et al., Plaintiffs-Appellees, v. CHICAGO HOUSING AUTHORITY, a Municipal Corporation, and Harry J. Schneider, Executive Director of the Chicago Housing Authority, Defendants-Appellants.
    No. 74-1037.
    United States Court of Appeals, Seventh Circuit.
    Argued Nov. 15, 1974.
    Decided Feb. 13, 1975.

      Calvin H. Hall, Chicago, 111., for defendants-appellants.
    Nelson A. Soltman, Legal Assistance Foundation of Chicago, Thomas A. Grippando, Chicago, 111., for plaintiffs-appellees.
    Before BARNES, Senior Circuit Judge, and CUMMINGS and TONE, Circuit Judges.

       This opinion was originally filed as an unpublished order under our Circuit Rule 28 on February 13, 1975 and was ordered published as a signed opinion, with revisions of form, on March 4, 1975.

       Senior Circuit Judge Stanley N. Barnes of the United States Court of Appeals for the Ninth Circuit is sitting by designation.

   TONE, Circuit Judge.

This is an appeal from a District Court’s order granting an injunction and other relief. Plaintiffs, individual tenants of the Chicago Housing Authority (“CHA”), and the Chicago Housing'Tenants Organization, a not-for-profit corporation, all of whose members are tenants of CHA, brought this action individually and on behalf of all others similarly situated against CHA and its Executive Director. In their two-count complaint, plaintiffs sought declaratory and injunctive relief. Count I of the complaint alleges that certain actions of the defendants violated plaintiffs’ constitutional right to due process. Count II, based upon the same factual allegations as those contained in Count I, alleges as an alternative basis of relief that defendants’ action violated U.S. Department of Housing and Urban Development (“HUD”) Circulars RHM 7465.6, RHM 7465.8, and RHM 7465.9 (“Circulars 6, 8, and 9”).

The District Court, by order of November 21, 1973, denied plaintiffs’ request that the cause be maintained as a class action, granted plaintiffs’ motion for summary judgment as to Count II, found Circulars 6, 8, and 9 enforceable against CHA, and ordered the defendants and their agents to follow the provisions of the circulars. On December 3, 1973, the defendants moved to amend the District Court’s order to make additional findings of fact with reference to Count I of the complaint and to enter judgment upon that count, or, in the alternative, to amend the order as permitted by 28 U.S.C. § 1292(b) to include a statement that the question of whether there is a conflict between Illinois law and the grievance procedure contained in the circulars was a controlling question of law as to which there was substantial ground for difference of opinion, decision of which might materially advance the ultimate termination of the litigation. The District Court denied this motion. Defendants then appealed from the order of November 21, 1973.

We must first determine whether we are reviewing a final judgment or a preliminary injunction order. The District Court’s order required only that defendants and their agents comply with Circulars 6, 8, and 9. The court did not rule on other prayers for relief in Count II. These include requests for a declaration that CHA’s standard Dwelling Lease (which, we are advised, has been amended during the pendency of the ease) violated the United States "Housing Act of 1937, 42 U.S.C. § 1401 et seq., or regulations issued thereunder, and for a declaration “that any action taken or about to be taken by defendants against the plaintiffs . . other than pursuant to the requirements of” Circulars 6, 8, and 9 is “null and void and unenforceable.” To rule on the latter request the court would have been required to adjudicate the legality of past actions, which it did not attempt to do. When the court does rule on that request it will presumably specify the past actions that were violative of the circulars.

Count I, which alleges violation of plaintiffs’ due process rights, has not been ruled on by the District Court. Although this count is based on the same factual allegations and seeks essentially the same relief as Count II, the court refused to grant summary judgment on the count or to dismiss it, and plaintiffs have not withdrawn it despite defendants’ motion to amend the order of November 21, 1973, to include disposition of Count I.

In view of the foregoing, it cannot be said that the order leaves nothing to be done in' the case except to superintend, ministerially, execution of the judgment. Accordingly, the order is not a final judgment. See, e. g., John Simmons Co. v. Grier Bros. Co., 258 U.S. 82, 88, 42 S.Ct. 196, 66 L.Ed. 475 (1921); First National Bank in Dodge City v. Johnson County National Bank & Trust Co., 331 F.2d 325, 327 (10th Cir. 1964).

It is also to be noted that the order appealed from deals with matters other than permanent or final relief. It not only grants summary judgment as to Count II and orders defendants to comply with the circulars but denies defendants’ motion to dismiss pursuant to Rule 12(b) and their motion to strike affidavits and also denies plaintiffs’ request that the action be maintained as a class action. The record on appeal indicates that no separate document setting forth a judgment was ever filed. Rule 58, Fed.R.Civ.P., provides: “Every judgment shall be set forth on a separate document.” Nor was a separate judgment recorded on the civil docket. See Rule 79(a), Fed.R.Civ.P. Failure to observe the separate-document requirement, which is designed to make certain the matter of appealability, see United States v. F. & M. Schaefer Brewing Co., 356 U.S. 227, 232-233, 78 S.Ct. 674, 2 L.Ed.2d 721 (1958); 9 J. Moore, Federal Practice, H 110.08[2] (2d ed. 1973), is at the very least a reason for resolving any doubts against finality.

Further confirmation, if any were needed, of our conclusion that the order before us is not a final judgment may be found in defendants’ motion to amend the order to include a certification under 28 U.S.C. § 1292(b) of the question whether or not Illinois law and the grievance procedure contained in Circulars 6, 8, and 9 were in conflict. While the District Court’s refusal, without explanation, may be ambiguous, the filing of the motion indicates that defendants considered certification a prerequisite to appealability.

Two consequences follow from the status of the order under review as an interlocutory order granting a preliminary injunction: First, except to the extent that our judgment may operate as a constraint, the District Court retains the power to modify the terms of the order, and may, in framing its final decree, take into account any change in circumstances, such as use of a different dwelling lease by the CHA or modifications of Circulars 6, 8, and 9, which has taken place since the entry of the order. See Marconi Wireless Telegraph Co. v. United States, 320 U.S. 1, 47, 63 S.Ct. 1393, 87 L.Ed. 1731 (1943); Fidelity Trust Co. v. Board of Education, 174 F.2d 642, 645 (7th Cir. 1949). Second, our review is limited to a determination of whether the District Court abused its discretion in issuing the injunction, which must be regarded as interlocutory. United States v. Corrick, 298 U.S. 435, 437-438, 56 S.Ct. 829, 80 L.Ed. 1263 (1936). We turn now to that review.

Defendants challenge the plaintiffs’ standing to bring the action. To decide whether any of the seven named plaintiffs have standing, we must consider whether they are injured in fact by the actions of which they complain and whether their interests are arguably within the zone of interests to be protected by the Housing Act of 1937, supra, under the authority of which HUD issued the circulars. Sierra Club v. Morton, 405 U.S. 727, 733, 92 S.Ct. 1361, 31 L.Ed.2d 636 (1972). Turning first to the latter test, since all the individual plaintiffs were tenants in public housing at the time the complaint was filed, their interests are within the zone of interests protected by the Act. It is unnecessary for present purposes to determine whether that is also true of the Chicago Housing Tenants Organization.

The injury-in-fact requirement is also satisfied. Several of the six individual plaintiffs have sufficiently alleged that they were injured in fact by the defendants’ actions:

Plaintiff Cowan asked to be transferred from her present apartment to another apartment for health reasons. Her request was denied without written reason, and she has been unable to obtain a review of the decision. She is harmed by the defendants’ failure to initiate the grievance procedure required by the circulars.

Plaintiffs Cannon, Jamison, and Thompson allege unsafe and unsanitary conditions in the buildings they live in and refusal by CHA to remedy those conditions; they allege that CHA has terminated services in those buildings; and they allege that CHA has refused to afford plaintiffs with a forum to challenge the legality of these actions. Defendants argue that, since these plaintiffs have failed to state in their affidavits that they gave defendants written notice of the unsafe and unsanitary conditions in compliance with the terms of their leases, they do not have standing to object to the failure of defendants to implement the procedures contained in the circulars. Since federal law protecting plaintiffs’ interests has supremacy and we are reviewing only a preliminary injunction, we need only determine, as we do, that these three plaintiffs have sufficiently alleged facts upon which the court will probably determine that their interests have suffered injury in fact.

Plaintiff Gilbert alleges that she has been harmed by an assessment against her of charges for fire damage to her apartment and for costs incurred by CHA in a forcible entry and detainer suit against her, without a hearing on the validity of the charges. Defendants urge that, since the assessment has been rescinded, her claim is moot. No factual allegations concerning plaintiff Bennett were made other than that she is a CHA tenant. We need not determine whether these two plaintiffs have standing and leave that determination to the District Court.

Turning to the merits of the case, we hold that there is sufficient probability that at least some of the plaintiffs will ultimately succeed to warrant the issuance of a preliminary injunction. The decision in Housing Authority of City of Omaha v. United States Housing Authority, 468 F.2d 1 (8th Cir. 1972), cert. denied, 410 U.S. 927, 93 S.Ct. 1360, 35 L.Ed.2d 588 (1973), and the subsequent District Court order in that case already bind the CHA to comply with the requirements of Circulars 8 and 9, CHA having been a member of the (b)(2) class (Rule 23(b)(2), Fed.R.Civ.P.) represented by plaintiffs in that action. Research Corp. v. Asgrow Seed Co., 425 F.2d 1059, 1060 (7th Cir. 1970). This court and the Fifth Circuit have also held Circular 9 to be within HUD’s rule-making authority and enforceable against a local housing authority. Brown v. Housing Authority of City of Milwaukee, 471 F.2d 63, 67 (7th Cir. 1972); Glover v. Housing Authority of City of Bessemer, 444 F.2d 158, 161-162 (5th Cir. 1971). The Supreme Court held in Thorpe v. Housing Authority of City of Durham, 393 U.S. 268, 274-281, 89 S.Ct. 518, 21 L.Ed.2d 474 (1969), that the predecessor of Circular 9 was valid and also that it was mandatory and not merely advisory. Although none of these decisions involved Circular 6, the reasoning of the courts in the cases cited above indicates that probably the plaintiffs will ultimately succeed in having that circular enforced as well.

The rights plaintiffs assert are important and would have been subjected to irreparable harm had interlocutory relief been denied. Since defendants are legally bound by the judgment in the Omaha ease in any event, no appreciable additional burden is imposed by the interlocutory injunction here. The District Court did not abuse its discretion in granting preliminary injunctive relief.

Affirmed.


author: VAN OOSTERHOUT, Circuit Judge.

text:
    UNITED STATES of America, Third-Party Plaintiff-Appellant, v. SAN FRANCISCO ELEVATOR COMPANY, Third-Party Defendant-Appellee.
    No. 72-2524.
    United States Court of Appeals, Ninth Circuit.
    Feb. 28, 1975.

      William E. Gwatkin (argued), U. S. Dept, of Justice, San Francisco, Cal., for appellant.
    Ernest M. Thayer, San Francisco, Cal., (argued), for appellee.

       Honorable Martin D. Van Oosterhout, Senior Circuit Judge, Eighth Circuit, sitting by designation.

   OPINION

Before VAN OOSTERHOUT, BROWNING and SNEED, Circuit Judges.

VAN OOSTERHOUT, Circuit Judge.

This is an appeal by third-party plaintiff United States of America from that part of the judgment of the district court limiting its recovery from third-party defendant San Francisco Elevator Company for indemnity to $300,000, although provable damages were established at $370,000 plus attorneys’ fees. We reverse and hold that the United States is entitled to indemnity from San Francisco Elevator in the full amount the United States was required to pay in a maritime wrongful death action by a San Francisco Elevator employee.

In 1966 the United States and Todd Shipyard Corporation (Todd) entered into a master ship repair contract for repair of a navy refrigerator ship, the USS ALUDRA, which was moored at the United States Naval Air Station in Alameda, California. One of the repairs provided for in the contract was the repair of a vertical cargo elevator in the ship. This job was subcontracted to third-party defendant San Francisco Elevator. The master or prime contract between the United States and Todd contained an indemnity and hold harmless clause which provided:

“(c) The contractor indemnifies and holds harmless the Government, its agencies and instrumentalities, the vessel and its owners, against all suits, actions, claims, costs or demands (including, without limitation, suits, actions, claims, costs or demands resulting from death, personal injury and property damage) to which the Government, its agencies and instrumentalities, the vessel or its owner may be subject or put by reason of damage or injury (including death) to the property or person of any one other than the Government, its agencies, instrumentalities and personnel, the vessel or its owner, arising or resulting in whole or in part from the fault, negligence, wrongful act or wrongful omission of the Contractor, or any subcontractor, his or their servants, agents, or employees; provided, that the Contractor’s obligation to indemnity under this paragraph (c) shall not exceed the sum of $300,000 on account of any one accident or occurrence in respect of any one vessel.”

The subcontract between Todd and San Francisco Elevator also contained an indemnity clause which provided:

“GOVERNMENT CONTRACTS — If this purchase order is issued under a government contract, whether or not such government contract is specifically referred to in this purchase order, the seller agrees to indemnify and hold harmless the buyer from any liability, claims of liability and expense under said government contract arising out of seller’s failure to perform in accordance with this purchase order and seller agrees that such liability and the amount thereof may be negotiated by buyer in accordance with the terms of said government contract or determined in accordance therewith, and seller agrees to be bound thereby.
12. If deceased sustained injuries as alleged . . . such injuries were solely and proximately caused by the faulty and negligent performance of [San Francisco] Elevator Co. in breach of its contractual warranties, express or implied, of a safe place to work and [provide] workmanlike services.
LIABILITY AND INSURANCE— the seller agrees to save the buyer harmless from all claims for personal injuries, including death, and all damage to property arising out of any cause whatsoever and resulting directly or indirectly from the seller’s performance hereunder. Workmen engaged in the performance hereof shall at all times be considered employees of the seller.”

The United States was not made a party to the subcontract.

On April 25, 1960, Steven R. Bigham, an employee of San Francisco Elevator, was killed while working as an elevator mechanic on the vertical cargo elevator on the ship. The decedent’s heirs filed suit in admiralty against the United States and Todd alleging that the decedent’s death was caused by the negligence of both Todd and the United States and by the unseaworthiness of the USS ALUDRA. The United States cross-claimed against Todd claiming indemnity rights pursuant to the prime contract clause. The United States also brought a separate third-party complaint directly against San Francisco Elevator asserting its right to indemnity pursuant to San Francisco Elevator’s breach of its implied warranty to perform workmanlike service.

The Consolidated cases were, tried in admiralty to the court. The court found that Bigham’s death was caused by the unseaworthiness of the ALUDRA and the negligence of both the United States and San Francisco Elevator. Damages were assessed against the United States at $370,000. The propriety of the court’s findings as to negligence are not before us. On the basis of the limited indemnity provision in the prime contract, recovery against Todd in favor of the United States was limited to $300,000. San Francisco Elevator was ordered to indemnify Todd in accordance with the provisions of the subcontract. The court further found that the negligence of the United States did not prevent San Francisco Elevator from performing its contractual duties in a workmanlike manner and that there was a warranty of workmanlike service running from San Francisco Elevator to the United States which it breached by performing its repair work negligently. Accordingly, the court initially awarded indemnity to the United States (third-party plaintiff) in the full amount the United States was required to pay the decedent’s estate plus attorneys’ fees. However, in a subsequent Order and Supplemental Findings of Fact the court held that the indemnity limiting clause in the Todd-United States prime contract included by reference subcontractors and was applicable to the United States’ third-party action against San Francisco Elevator. Thus, the United States’ recovery against San Francisco Elevator was limited to $300,000, together with taxable costs. The sole question presented for review by this court is whether the indemnity provisions of the prime or subcontract involved limit the indemnity rights of the United States in its third-party action against San Francisco Elevator Company.

In Ryan Stevedoring Company v. Pan-Atlantic Steamship Corp., 350 U.S. 124, 76 S.Ct. 232, 100 L.Ed. 133 (1956) the Supreme Court held that stevedores who go aboard a vessel by the owner’s consent on an arrangement to perform a service for the ship’s benefit impliedly warrant to the ship owner that they will accomplish their task in a workmanlike manner. The Court emphasized that the implied “Warranty of Workmanlike service” finds its origin in contract, rather than tort, and is “comparable to a manufacturer’s warranty of the soundness of its manufactured product.” Id. at 133-34, 76 S.Ct. at 237. See Waterman Steamship Corp. v. Dugan & McNamara, Inc., 364 U.S. 421, 81 S.Ct. 200, 5 L.Ed.2d 169 (1960); Crumady v. The Joachim Hendrik Fisser, 358 U.S. 423, 79 S.Ct. 445, 3 L.Ed.2d 413 (1959). The cited and other Supreme Court cases have involved injuries to longshoremen employed by stevedoring companies. The circuit courts of appeal are in agreement, however, that the workmanlike warranty applies to non-stevedore maritime contractors and subcontractors. See United New York Sandy Hook Pilots Ass’n v. Rodermond Industries, Inc., 394 F.2d 65 (3d Cir. 1968) (subcontractors); H & H Ship Service Co. v. Weyerhaeuser Line, 382 F.2d 711 (9th Cir. 1967) (ship repair contractor); Lusich v. Bloomfield S. S. Co., 355 F.2d 770 (5th Cir. 1966) (ship repair contractor); American Export Lines v. Norfolk Shipbuilding & Drydock Corp., 336 F.2d 525 (4th Cir. 1964) (shipyard contractor); Booth S. S. Co. v. Meier & Oelhaf Co., 262 F.2d 310 (2d Cir. 1958) (engine repair contractor). Moreover, even though the warranty in question is contractual in origin, Ryan, supra, the nature of the obligation of a contractor to indemnify a shipowner does not depend upon the existence of privity of contract between the shipowner and contractor. Waterman Steamship Corp. v. Dugan & McNamara, Inc., 364 U.S. 421, 81 S.Ct. 200, 5 L.Ed.2d 169 (1960). See Whisenant v. Brewster-Bartle Operating Co., 446 F.2d 394, 401 (5th Cir. 1971); DeGioia v. United States Lines Co., 304 F.2d 421, 425-26 (2d Cir. 1962). In Crumady v. The Joachim Hendrik Fisser, 358 U.S. 423, 428, 79 S.Ct. 445, 448, 3 L.Ed.2d 413 (1959) the Court said:

“We think this case is governed by the principle announced in the Ryan case. The warranty which a stevedore owes when he goes aboard a vessel to perform services is plainly for the benefit of the vessel whether the vessel’s owners are parties to the contract or not.” (Emphasis added.)

Furthermore, the concurrent negligence of the shipowner is not necessarily a bar to recovery of indemnity. If the contractor breaches its warranty, and the breach proximately causes liability on the part of the shipowner, then the shipowner is entitled to indemnity unless its own negligent conduct is “sufficient to preclude recovery.” Weyerhaeuser S. S. Co. v. Nacirema Operating Co., 355 U.S. 563, 567, 78 S.Ct. 438, 2 L.Ed.2d 491 (1958). “ ‘Conduct sufficient to preclude recovery’ means only conduct on the part of the shipowner which prevents the [contractor’s] workmanlike performance.” Brock v. Coral Drilling Co., 477 F.2d 211, 217 (5th Cir. 1973). In this respect, the trial court in the case at bar made a finding that “the negligence of the United States did not prevent the defendant elevator company from doing a workmanlike job.”

From the law as set out, supra, we conclude that San Francisco Elevator, as the ship repair contractor, owed an independent duty to the shipowner, United States, to perform in a workmanlike manner. The third-party complaint against San Francisco Elevator stated a claim based on the breach of this warranty and was not limited to contractual rights. Although contractual in nature, this independent duty to perform in a workmanlike manner does not require privity of contract between San Francisco Elevator and the United States. San Francisco Elevator owed an independent duty to the United States to perform in a workmanlike manner by virtue of its undertaking to repair the elevator aboard the ship. Failure to so perform was a breach of an independent duty owed to the United States for which the latter is entitled to indemnity for its losses.

We cannot agree, however, with the district court’s ruling that the indemnity limiting clause in the prime contract between Todd and the United States limits, the United States’ indemnity rights over against San Francisco Elevator. Nor does the indemnity provision in the subcontract between Todd and San Francisco Elevator limit San Francisco Elevator’s obligation to indemnify the United States. The indemnity action against San Francisco Elevator is independent from any contractual obligation owed by Todd to indemnify the United States pursuant to the prime contract. Furthermore, San Francisco Elevator’s agreement to indemnify Todd for its losses in no way affects San Francisco Elevator’s independent duty to the United States to perform in a workmanlike manner. This was a direct action by a shipowner against an independent contractor for indemnification pursuant to maritime law. The lack of privity between the shipowner and the contractor does not bar those indemnification rights.

Appellee San Francisco Elevator contends that the only indemnity rights the United States has arise from its position as a third-party beneficiary to the subcontract between San Francisco Elevator and Todd. Similarly, San Francisco Elevator argues that it is a third-party beneficiary to the prime contract and is entitled to the benefit of the indemnity limiting clause. The Supreme Court and this circuit have recognized that shipowners are within “the zone of modern law that recognizes rights in third-party beneficiaries” when a stevedore breaches its warranty of service. Crumady v. The Joachim Hendrik Fisser, 358 U.S. 423, 428, 79 S.Ct. 438, 2 L.Ed.2d 491 (1959); Arista CIA DeVapores, S. A. v. Howard Terminal, 372 F.2d 152, 154 (9th Cir. 1967). The shipowner, however, may recover indemnification whether it is strictly a third-party beneficiary or not. La Capria v. Compagnie Maritime Beige, 427 F.2d 244, 247 (2d Cir. 1970); DeGioia v. United States Lines Company, 304 F.2d 421, 426 (2d Cir. 1962). In any event, the United States was not a third-party beneficiary of the indemnity provision of the subcontract between Todd and San Francisco Elevator. That contract provides only that “[San Francisco] agrees to indemnify and hold harmless [Todd] from any liability . under [the] government contract arising out of [San Francisco Elevator’s] failure to perform in accordance with the terms of said government contract . . . This provision of the contract was made for the benefit of Todd and not the United States. Similarly, San Francisco Elevator was not the beneficiary, intended or otherwise, of the indemnity limiting provision of the prime contract. Said provision provides only that “The Contractor’s obligation to indemnity under this paragraph (e) shall not exceed the sum of $300,000 on account of any one accident or occurrence in respect of any one vessel.” (Emphasis added.) Nothing in this clause could be construed to extend the $300,000 limitation to subcontractors. The limitation clearly applies only to Todd. The district court based its decision on liability on its finding that “there was an implied warranty of workmanlike service by the elevator company running to the United States which was breached; that being so, the United States is entitled to damages that the plaintiff may have sustained and is entitled to receive against the United States.” The warranty exists independently of the contractual provisions here involved between the parties. Neither San Francisco Elevator or the United States were third-party beneficiaries of the prime or subcontract indemnity provisions. Accordingly, the order of the district court limiting San Francisco Elevator’s indemnity obligation to the United States must be reversed.

As a part of its costs in defending the wrongful death suit the United States submitted a bill for attorneys’ fees of $21,194.90. It is well settled admiralty law that a shipowner is entitled to recover attorneys’ fees where it has been successful in obtaining a judgment on its third-party indemnity action. Arista CIA DeVapores v. Howard Terminal, 372 F.2d 152, 154 (9th Cir. 1967). See Brock v. Coral Drilling, Inc., 477 F.2d 211, 217 (5th Cir. 1973); Kelloch v. S & H Subwater Salvage, Inc., 473 F.2d 767, 771 (5th Cir. 1973). The district court recognized this to be the law but found it unnecessary to pass on the reasonableness of the claimed fees because of the erroneous view that the United States’ right to indemnity was limited to $300,000.

We hold the United States is entitled to recover from San Francisco Elevator the full amount of the judgment rendered against it and in addition reasonable attorneys’ fees incurred in defending itself in the wrongful death suit brought by plaintiffs. The determination of the amount of attorneys’ fees allowable shall be determined by the district court on remand.

Reversed and remanded.

      . The third-party complaint was brought as an admiralty and maritime claim pursuant to Rule 14(c), F.R.Civ.P. With respect to the nature of the claim, the complaint provided in pertinent part:

      . Various notices of appeal were timely filed by the parties. However, San Francisco Elevator’s appeal on the issue of liability was voluntarily dismissed in February 1973 and the United States has chosen not to pursue its appeal on the negligence issue.

      . The basis for the warranty for workmanlike service in maritime contracts is found in Ryan Stevedoring Co. v. Pan-Atlantic S.S., 350 U.S. 124, 76 S.Ct. 232, 100 L.Ed. 133 (1956), in which the Court held that a warranty of workmanlike service ran from a stevedoring company to a shipowner and that such a warranty amounted to an agreement to hold the shipowner harmless.

      . In its Appellee’s Brief, San Francisco Elevator attempts to challenge the Government’s right to indemnity at all because of its concurrent negligence in creating an unseaworthy ship. However, San Francisco Elevator has not appealed or cross-appealed the district court’s determination that the negligence of the United States did not prevent San Francisco Elevator from performing its duties in a workmanlike manner. Thus, the correctness of that holding is not here before us.

      . The “Ryan doctrine” was apparently abrogated by the 1972 amendments to the Longshoremen’s and Harbor Workers’ Act, 33 U.S.C. § 901 et seq. See 33 U.S.C. § 905(b). ■ However, the amendments are not retroactive and the injuries to the decedent in this case occurred prior to the effective date of those amendments.

      . See footnote 1, supra.


author: WILLIAM E. MILLER, Circuit Judge.

text:
    John L. KING, Trustee, Plaintiff-Appellant, v. NATIONAL INDUSTRIES, INC., Defendant-Appellee.
    No. 74-1625.
    United States Court of Appeals, Sixth Circuit.
    March 6, 1975.

      Linda N. Coffee, Philip Palmer, Jr., Dallas, Tex., Glenn L. Schilling, Louisville, Ky., for plaintiff-appellant.
    Paul N. Kiel, Boyce F. Martin, Jr., Barnett, Greenebaum, Martin & McConnell, Louisville, Ky., for defendant-appellee.
    Before MILLER and LIVELY, Circuit Judges, and McALLISTER, Senior Circuit Judge.
   WILLIAM E. MILLER, Circuit Judge.

Plaintiff as a Trustee in Reorganization instituted the present action in the court below to set aside an alleged transfer of property by the debtor occurring within one year prior to the filing of a petition under Chapter X of the Bankruptcy Act. Summary judgment having been granted for defendant, plaintiff perfected an appeal to this Court.

The pertinent facts are undisputed and may be summarized as follows:

The Institute for Financial Planning, Incorporated (I.F.P.), a New York Corporation, purchased from defendant, National Industries, Inc. (National), a Kentucky Corporation, and RIC International Industries, Inc., (RIC) certain shares of Hamilton Life Insurance Company of New York. At this time and until September 26, 1966, National was RIC’s parent, owning 88.8% of RIC’s common stock. In payment for the shares, I.F.P. issued two promissory notes, one payable to the order of RIC and one to the order of National. Both notes were guaranteed by one Phillip Goldberg who controlled I.F.P.

On September 26, 1966, pursuant to a purchase agreement between National and South Atlantic Co. (SAC), SAC acquired the 38.8% of the outstanding shares of the capital stock of RIC. Section 2.03 of Article II of the 1966 agreement reads as follows:

National shall be liable for 38.8 percent of any deficiency in the payment by Phillip Goldberg of his indebtedness to RIC.

Goldberg and I.F.P. subsequently defaulted in the payment of their obligations to National and RIC and a judgment against Goldberg was entered in the Supreme Court of New York in favor of National in the amount of $754,-604.58 and in favor of RIC in the amount of $596,458.20. Efforts to collect on these judgments were unsuccessful.

On May 27, 1970, National, SAC and RIC executed an agreement which, in pertinent part, provided:

National, coincident with the execution of this Agreement, shall pay to RIC the sum of $110,000 as settlement and in full payment and satisfaction of all obligations of National to SAC and/or to RIC arising out of said Agreement of September 26, 1966, above described, and out of the transactions set forth in such agreement, and National shall have no further liability or obligation to SAC or RIC whatsoever with respect to such agreement and transactions.

Pursuant to this agreement, National gave its check to RIC for $110,000.00 in satisfaction of the settlement.

On September 16, 1970, RIC filed a voluntary petition for reorganization under Chapter X of the Bankruptcy Act. The present action was commenced on September 15, 1972 by the plaintiff as Trustee in Reorganization of RIC. The gravaman of plaintiff’s complaint is that the release by RIC of National from the balance of its guaranty obligation as evidenced by the 1970 agreement constituted a transfer of property belonging to RIC under the 1966 agreement within one year prior to the filing of the Chapter X petition, without fair consideration and while RIC was insolvent. Plaintiff thus claimed that the said release or transfer is voidable under 67d and 70e of the Bankruptcy Act. The complaint sought judgment setting aside or voiding the release and granting the plaintiff a recovery on National’s guaranty.

On November 15, 1973, defendant National moved, pursuant to Rule 12(b) of the Federal Rules of Civil Procedure, to dismiss plaintiff’s complaint for failure to state a claim upon which relief could be granted. This motion was accompanied by an affidavit of National’s vice president, Solomon, who had executed the 1966 agreement and the 1970 agreement on its behalf. This affidavit stated that Section 2.03 of the 1966 agreement was included “in order to provide SAC with a reduction in its purchase price of RIC as a result of a possible reduction in value of the RIC stock resulting from a potential failure by Goldberg to pay his indebtedness to RIC” and that “[t]he liability of National under Section 2.03 was an obligation to run only to SAC and existed solely for the purpose of protecting SAC’s investment in the RIC shares to the extent indicated and for no other reason.”

In the course of extensive briefing of the question and in response to the Solomon affidavit, plaintiff submitted the affidavit of his lawyer, Phillip I. Palmer, Jr. This affidavit stated that while plaintiff was unable at that time to offer countervailing affidavits from persons having personal knowledge of the circumstances surrounding the execution of the 1966 agreement, he could point to evidence which would be available to him at trial to support his position. This evidence was to show that 38.8% of the Goldberg debt was approved by RIC’s accountants to be carried as an asset on RIC’s books, and perhaps that this was done after consultation with National. Palmer explained his failure to obtain depositions or affidavits by stating that he was surprised at the position taken by National.

After the trial court had granted summary judgment for the defendant, plaintiff filed a motion to reconsider the entry of summary judgment and alternatively for leave to file amended pleadings. With this motion was submitted a supplemental affidavit of plaintiff’s attorney further outlining his efforts to obtain affidavits to rebut the Solomon affidavit. This motion was denied by the district court.

To prevail in the present case plaintiff must show that there was a “transfer” of certain “property” of RIC. This requirement of the Bankruptcy Act has as its purpose the preclusion of fraudulent conveyances of property of an insolvent debtor to the prejudice of the debtor’s creditors.

The Act defines a transfer as the sale and every other and different mode, direct or indirect, of disposing of or of parting with property or with an interest therein or with the possession thereof or of fixing a lien upon property or upon an interest therein, absolutely or conditionally, voluntarily or involuntarily, by or without judicial proceedings, as a conveyance, sale, assignment, payment, pledge, mortgage, lien, encumbrance, gift, security, or otherwise; the retention of a security title to property delivered to a debtor shall be deemed a transfer suffered by such debtor. 11 U.S.C. § 1(30).

To satisfy this definition plaintiff attempts to show that RIC is a third-party beneficiary entitled to sue under Section 2.03 of the 1966 agreement. It is thus theorized that the 1970 agreement, by relieving defendant of part of an obligation to RIC under the 1966 agreement, in effect “transferred property” or a cause of action from RIC to defendant by cancelling a possible indebtedness without fair consideration. Unless RIC is a third-party beneficiary, under the 1966 agreement, plaintiff is unable to show that the transaction in question transferred any property to defendant National.

Plaintiff was required to show that the 1966 agreement was for the “direct benefit” of RIC before he could claim any rights under it. As the Supreme Court recognized in German Alliance Insurance Co. v. Home Water Supply Co., 226 U.S. 220, 230, 33 S.Ct. 32, 35, 57 L.Ed. 195 (1912):

[E]ven where the right is most liberally granted it is recognized as an exception to the general principle, which proceeds on the legal and natural presumption, that a contract is only intended for the benefit of those who made it. Before a stranger can avail himself of the exceptional privilege of suing for a breach of an agreement to which he is not a party, he must, at least, show that it was intended for his direct benefit.

This view has been generally endorsed by the leading commentators. See, e. g., 2 S. Williston, Contracts, § 356A at 836. (3d ed. 1959), 4 A. Corbin, Contracts, § 773 at 4 (1951).

It clearly represents the law of Kentucky:

To entitle a stranger seeking to recover under a contract asserted by him to have been made for his benefit it is indispensably essential that he allege and prove that the contract was intended for his benefit in the sense that it embraces the claim asserted by him. Louisville & Nashville R. R. v. Dry Branch Coal Co., 252 Ky. 124, 65 S.W.2d 1008, 1011 (1933).

The Kentucky courts have further held that “[i]t must appear, in order that a third person may derive a benefit from a contract between two other parties, that the contract was made and entered into directly or primarily for the benefit of such third person.” Long v. Reiss, 290 Ky. 198, 160 S.W.2d 668, 674 (1942).

To determine whether the presumption that the contracting parties did not intend to benefit a third party has been overcome, we must look first to the 1966 agreement itself. An examination of the agreement reveals no indication of an intent on the part of the promisee (SAC) to benefit RIC. A contrary intention is indicated by Section 7.02 of the agreement which provides that “[t]he terms, provisions and conditions of this agreement shall bind and benefit the parties hereto and their respective successors, legal representatives and assigns,” making no reference to RIC.

It would require a strained interpretation of contractual language to support a finding that SAC intended to benefit RIC. It has been stated that such pn

attempt by a third party to become a beneficiary by strained and unusual interpretation, expanding the terms of the promise and increasing the extent of the promised performance, should always fail. Such third persons are not even “incidental” beneficiaries; they are merely “would-be” beneficiaries.
4 A. Corbin, Contracts, § 779C at 42 (1951) citing Kentucky Rock Asphalt Co. v. Fidelity and Casualty Co., 37 F.2d 279 (6th Cir. 1930).

Thus, if RIC can be said to be a third-party beneficiary at all, it is at best an incidental beneficiary, a category of beneficiaries having no rights under the contract. The only third parties having such rights are donee beneficiaries and creditor beneficiaries. One is a do-nee beneficiary if the purpose- of the promisee in buying the promise is to make a gift to the beneficiary. A person is a creditor beneficiary if the promisee’s expressed intent is that the third party is to receive the performance of the contract in satisfaction of an actual or supposed duty or liability of the promisee to the beneficiary. Any others who may incidentally benefit from a contract are no more than incidental beneficiaries with no enforceable rights under the contract. See generally 4 A. Corbin, Contracts, § 779C at 40-41 (1951), 2 S. Williston, Contracts, § 356 at 824-827 (3d ed. 1959), Restatement of Contracts § 133 at 151-52 (1932).

Plaintiff has argued that RIC may properly be considered a donee beneficiary. Plaintiff has not, however, pointed to any indication that the promisee, SAC, intended to make a gift to RIC or that the 1966 contract was made for RIC’s benefit. Without such a showing, Kentucky law does not permit RIC to sue on the contract. Fidelity and Casualty Co. of New York v. Martin, 163 Ky. 12, 173 S.W. 307 (1915), Hendrix Mill & Lumber Co. v. Meador, 228 Ky. 844, 16 S.W.2d 482 (1929), International Brotherhood of Boilermakers v. Holt, 418 S.W.2d 758 (Ky.1967). Neither has there been any showing that performance of the promise would satisfy any real or asserted duty of the promisee to RIC so as to make RIC a creditor beneficiary. We therefore conclude that RIC was not a third-party beneficiary under the 1966 agreement and that it had no enforceable rights under it.

RIC points to the 1970 agreement as evidence that “National was at least very concerned that it might be obligated to RIC.” The 1970 agreement, however, cannot enlarge the rights of RIC as set forth in the earlier 'reement. The intent on the part of t.-.< promisee, SAC, must have existed at ..he time of the execution of the 1966 agreement. United States v. Alleutian Homes, Inc., 193 F.Supp. 571, 576 (D.Alask. 961).

Summary judgment in this case for National was proper since no genuine issue of material fact was raised by plaintiff. The issue upon which the case turns is whether plaintiff had “property” which could be transferred under the 1970 agreement in violation of the Bankruptcy Act. This issue has been extensively briefed and was an appropriate one for decision by the district judge as a matter of law. The affidavit of plaintiff’s attorney Palmer was insufficient to rebut the affidavit of Solomon accompanying defendant’s motion for summary judgment. Plaintiff may not raise an issue of fact by merely referring to the proposed testimony of possible witnesses. Palmer in his affidavit indicates no personal knowledge of the facts relevant to the case. An affidavit stating what the attorney believes or intends to prove at trial is insufficient to comply with the burden placed on a party opposing a motion for summary judgment under Rule 56. Automatic Radio Mfg. Co. v. Hazeltine Research Inc., 339 U.S. 827, 831, 70 S.Ct. 894, 94 L.Ed. 1312 (1950), Mercantile National Bank at Dallas v. Franklin Life Insurance Co., 248 F.2d 57, 59 (5th Cir. 1957).

Plaintiff also contends that he has met the conditions of Rule 56(f) which provides for the refusal of an application for summary judgment or the ordering of a continuance when affidavits have been shown to be unavailable for justifiable reasons.

Plaintiff, in claiming to have had insufficient time to engage in discovery, has offered one of the most common reasons for being unable to present specific facts in opposition to a summary judgment motion. We are not able to accept plaintiff’s expression of surprise at defendant’s position as a justification for his not having sought depositions from certain individuals. Approximately four months elapsed between the time of the filing of defendant’s motion to dismiss accompanied by the affidavit of Allen B. Solomon and the entry of summary judgment by Judge Gordon. In addition, plaintiff ' had more than a year’s time from filing of the complaint until defendant filed its motion to dismiss. It should have been apparent from the time plaintiff filed the action that a cause of action existed only if plaintiff could show that RIC was a third-party beneficiary. Against this background plaintiff’s expressions of surprise carry a ho' •v rin; We find that tl> ■ present ca ■, : net the type of :L" kr wok. .'■/•.k '*) was desig.iod. ,!he reason j' t’.y plaintiff for his difficulty ir '.ibt.’.ming opposing affidavits is that those from whom he would take the affidavits are defendants in a case brought by plaintiff in another district. This problem is one that would have been foreseen by plaintiff if he had been diligent in securing the information necessary to his case. See Southern Rambler Sales, Inc. v. American Motors Corp., 375 F.2d 932 (5th Cir. 1967) cert. denied 389 U.S. 832, 88 S.Ct. 105, 19 L.Ed.2d 92.

Consideration of the authorities and arguments relied upon by plaintiff compels us to conclude that the district judge did not err in granting summary judgment. Plaintiff has not met his burden of countering defendant’s motion with affidavits showing the existence of a genuine issue of material fact justifying a trial.

It is apparent therefore that the judgment must be and is hereby

Affirmed.

      . 11 U.S.C. § 501 et seq.

      . At the time of this agreement 38.8% of Goldberg’s unpaid indebtedness to RIC was $231,406.38. This obligation of National was thus settled for less than 50 cents on the dollar.

      . 11 U.S.C. §§ 107(d), 110(e).

      . Although the motion of defendant was under Rule 12(b), the court, after allowing an opportunity to present all materials pertinent to a motion for summary judgment and after considering matters outside the pleadings, treated the motion as one for summary judgment and disposed of it as provided in Rule 56. Plaintiff, in his reply brief in opposition to the motion to dismiss (filed February 19, 1974) recognized that defendant’s motion had “presumably . . . been converted into a Motion for Summary Judgment by the offer of the Solomon affidavit.”

      . Section 7.06 of the 1966 agreement provided that the contract “and the transactions contemplated [herein] shall be governed by the laws of the Commonwealth of Kentucky.”

      . The relevant intent is that of the promisee who purchases the promise of the promisor. See 4 A. Corbin, Contracts § 776 at 16, § 777 at 25 (1951).

      . Defendant’s motion was filed Nov^mb t 15, 1973. Judge Gordon’s opinion and judgment were signed on March 12, 1974 and entered on March 15, 1974.

      . The mplaint was filed September 15 1972.


author: PER CURIAM.

text:
    UNITED STATES of America, Plaintiff-Appellee, v. Ronald David CARABBIA et al., Defendants-Appellants.
    No. 74-2266.
    United States Court of Appeals, Sixth Circuit.
    March 13, 1975.

      Elmer A. Giuliani, Cleveland, Ohio, for defendants-appellants.
    Frederick M. Coleman, U. S. Atty., David Margolis, Steven R. Olah, Paul R. Corradini, Cleveland, Ohio, David E. Roseberry, Dept, of Justice, Washington, D. C., for plaintiff-appellee.
    Before PHILLIPS, Chief Judge, PECK and MeCREE, Circuit Judges.
   PER CURIAM.

Carabbia appeals from an order denying his motion to withdraw his plea of guilty to the offense of conducting a gambling business in violation of 18 U.S.C. § 1955. Appellant was one of several defendants who pleaded guilty to a violation of 18 U.S.C. § 1955 apparently in exchange for dismissal of the other count of the indictment charging them with a conspiracy to violate 18 U.S.C. § 1955 in violation of 18 U.S.C. § 371, and for the dismissal of both counts against one defendant. After sentencing, appellant and the other defendants who had pleaded guilty moved to withdraw their guilty pleas under Rule 32(d) of the Federal Rules of Criminal Procedure on the grounds that the pleas were involuntary and had been induced by threats and promises. No claim was made that Rule 11 F.R.Crim.P. had not been complied with. The district judge who had accepted the pleas and imposed the sentences scheduled an evidentiary hearing on the motions.

At the hearing, there was testimony that the defendants had been advised that the district judge would impose a prison sentence if they were convicted after electing to stand trial but that a prison sentence would not be imposed if they would plead guilty. During the hearing, the judge asked one of the defense lawyers whether he had told the lawyer that it was his policy to impose prison sentences upon convicted defendants who elected to stand trial, and the attorney who was under oath, responded that the judge had.

Q (By the Court) When did I make that statement?
A (Ralph Ross) At the time when the jury was outside of the box and I believe we were in here arguing on some motions, to the best of my recollection.
Q Oh, that would be on the record then, is that correct, Sir?
A No, it was not on the record because if I recall correctly, your hon- or, you didn’t want anything on the record there because you got a little hot at Bob Rotatori.
Q And I made the statement as to what? Now, you repeat the words as accurately as you possibly can.
A To the best of my knowledge what took place was the fact that if these men proceeded and went on through trial, you could pretty well guarantee they were going to go to jail if they were found guilty.

And during the same examination by the court, the following exchange occurred:

Q And I told you and Bob Rotatori that if their defendants did not plead guilty, that they were going to go to jail?
A Yes, sir.

When the court observed that the record did not reveal these statements that Ross attributed to the judge, Ross responded, “I am sure the court did not put that in the record because it has no place in the record. It is merely a conversation between the court and the lawyer and perhaps plea-dealing.”

Appellant presents two issues on appeal: (1) whether the sentencing judge should have conducted the evidentiary hearing, and (2) whether the court abused its discretion in denying the motion to withdraw the plea. We hold that the evidentiary hearing should have been conducted by a judge other than the one who imposed the sentence, and we find it unnecessary to decide the other issue.

Rule 32(d) of the Federal Rules of Criminal Procedure provides:

A motion to withdraw a plea of guilty or of nolo contendere may be made only before sentence is imposed or imposition of sentence is suspended; but to correct manifest injustice the court after sentence may set aside the judgment of conviction and permit the defendant to withdraw his plea.

After sentence has been imposed, a district court’s decision not to permit the withdrawal of a plea of guilty will not be disturbed unless there is an abuse of the wide discretion accorded him in the rule quoted above. Scott v. United States, 292 F.2d 49 (6th Cir. 1961). And when the files and records of the court show that a movant is not entitled to relief, the motion may be denied without a hearing. Here, however, the trial judge decided to conduct a hearing and he did not err in commencing to preside over it. However, when the state of the evidence demonstrated that the issue of involuntariness turned on a critical question of fact, and that the judge’s own version of the occurrence was challenged, and that the issue could not be resolved by recourse to a stenographic record, he should have referred the motion for disposition to another judge. In making this determination, we follow the decision in Bryan v. United States, 481 F.2d 272, 274 (5th Cir. 1973) where the court held that when a claim is made that a guilty plea was induced by a plea-bargain that was subsequently broken, the hearing should be held before a judge other than the one claimed to have been a party to the bargain “both for the. judge’s sake and the appearance of justice.” Cf. Cooke v. United States, 267 U.S. 517, 45 S.Ct. 390, 69 L.Ed. 767 (1925).

In the appeal before us, after analyzing the conflicting testimony, the judge found “the Court is firmly convinced that, as a matter of fact, the Court made neither promises nor threats to any of the defendants herein concerning sending them to jail if they were found guilty, or concerning what sentences they would receive if they pleaded guilty.” The trier of fact should not be required to choose between his version of an event and a different one offered by a witness in the proceeding before him. We announce no per se rule for routine reassignment of motions to set aside guilty pleas because in most instances the remarks of the court in any discussions preliminary to the offering of a plea will be made of record.

For the foregoing reasons, the order denying leave to withdraw the guilty plea will be set aside and the cause will be remanded with instructions to assign the motion to another judge for determination.