author: HUTCHESON, Circuit Judge. PER CURIAM.

text:
    BROTHERHOOD OF LOCOMOTIVE ENGINEERS SECURITIES CORPORATION OF NEW YORK v. W. L. SHEPHERD LUMBER CO. et al.
    No. 6078.
    Circuit Court of Appeals, Fifth Circuit.
    June 30, 1931.
    Rehearing Denied Aug. 7, 1931.
    John F. Burket, of Sarasota, Fla., and Maxwell Brandwene, of New York City (Irvine J. Shubert, of New York City, of counsel; Szold, Perkins & Brandwene, of New York City, on the brief), for appellant.
    H. F. Crenshaw, of Montgomery, Ala., H. C. Tillman, of Tampa, Fla., Whitley P. McCoy, of University, Ala., and'T. M. Shack-leford, Jr., of Tampa, Fla. (N. G. Robertson, of Sarasota, Fla., Shackleford, Ivy, Far-rior & Shannon and Sutton, Tillman & Reeves, all of Tampa, Fla., Rushton; Cren-shaw & Rushton, of Montgomery, Ala., and N. G. & John Fite Robertson, of Sarasota, Fla., on the brief), for appellees.
    Before FOSTER, SIBLEY, and HUTCHESON, Circuit Judges.
   HUTCHESON, Circuit Judge.

This is an appeal by a single defendant from a decree rendered against this defendant and others. Appellees move to dismiss because of the failure to join the other two defendants against whom the decree ran, asserting that the decree was joint and can only be jointly appealed from, invoking the rule in Hardee v. Wilson, 146 U. S. 179; 13 S. Ct. 39, 36 L. Ed. 933; Davis v. Mercantile Trust Co., 152 U. S. 590, 14 S. Ct. 693, 38 L. Ed. 563; Beardsley v. Arkansas & L. R. Co., 158 U. S. 123, 15 S. Ct. 786, 39 L. Ed. 919; American Baptist Home Mission v. Barnett (C. C. A.) 26 F.(2d) 350, 351.

Appellant defends against the motion, asserting that this is a ease “where the respective interests of several defendants who are affected by a judgment or decree against all of them are separate and different, one of them may appeal without joining the others.” Orleans-Kenner Electric R. Co. v. Dunbar (C. C. A.) 218 F. 344, 345.

We agree with appellant that this is such a case and that the motion should be denied. The suit had for its object the bringing to book of defendant Price and Price Company for their dealings ex maleficio with plaintiff, and to compel them to account for properties in which plaintiff had an interest wrongfully concealed from and denied to it. The brotherhood, appellant here, was joined in the suit for the single purpose of subjecting to the satisfaction of any judgment plaintiff might obtain against Price the excess over the brotherhood’s indebtedness of the securities deposited with it by Price.

The decree established in favor of plaintiff an absolute liability against Price and Price Company. It placed a conditional obligation upon the brotherhood to surrender the securities which it held in the event Price did not pay the judgment. The Prices were content to abide the decree against them. Neither that decree nor any of the record pertaining to it is brought here for revision.

Here is involved the sole question of the correctness as between plaintiff and the brotherhood of that part affecting them alone. The decree is severable in fact and in law. City National Bank of Port Worth v. Hunter, 129 U. S. 557, 9 S. Ct. 346, 32 L. Ed. 752; Orleans-Kenner Electric R. Co. v. Dunbar (C. C. A.) 218 F. 344; Winters v. U. S., 207 U. S. 565, 28 S. Ct. 207, 52 L. Ed. 340.

Appellant on its part raises the preliminary question that the court below erroneously assumed jurisdiction over it, and that because it did the judgment should be reversed and the cause dismissed.

Without reviewing the tortuous course which the record has taken with its stipulations and continuances, its affidavits and denials, we think it plainly appears that there never was any jurisdictional question involved ; that there was merely a question of venue which not only can be but is easily waived, and that it would be a sticking in the bark to find that appellant has managed by stipulations, appearances, motions, and orders, agreed and consented to, to take its part in this mass of complicated proceedings, while maintaining a precarious but safe balance on the fence just beyond the court’s power to reach it. Substantial and vigorous proceedings such as occurred here do not go so daintily, and there can be no doubt that in the brush of them at some place in the proceedings appellant fell or was pushed off of its precarious perch.

Coming to the merits of the case, it appears to us to be one of those cases in which the chancellor with an eye single to bringing about substantial justice has reached the decision per saltum, seeing not at all, or only dimly and with the tail of his eye, the many obstacles which really stand in the way. A case in which finding that plaintiff has been grievously defrauded, the chancellor determining that no artifice nor subterfuge shall perpetuate the wrong, lays the ax to the root of the tree, dislodging from its branches in the fall of it at once the just and the unjust. Having concluded .that Price has acted faithlessly toward his trust, and having formed the opinion of him that he is resourceful and determined in giving effect to his fraudulent aims, the chancellor, we think, too readily and upon too slight evidence found that the $100,009 note under which the brotherhood claims to hold the collaterals in question was acquired by it not in due course and before the filing of plaintiff’s suit, but afterward and for the purpose of defeating plaintiff’s just claim upon the property of which Price had defrauded it.

We do not so read the record. We think it plain that, whatever facts may be developed on another trial, the present record does not permit of any other conclusion than that the $100,000'note was acquired by the brotherhood in due course and for value some time before this suit was brought, and that it owned the note as a valid subsisting obligation on July 12 when the new collateral note was executed. The collateral agreement attached to this note was, apart from Price’s testimony that it was intended that the attached collaterals should secure both of the notes then held by the- brotherhood, broad enough and comprehensive enough in its terms and of its own force to place the col-laterals back of both of appellant’s notes.

The collateral agreement attached to this note as it bears upon the issue here read: “Having deposited with the said Company as collateral security for the payment of this and all other liabilities of the undersigned to the said Company due or to become due, or which may hereafter be contracted or existing, whether incurred directly or indirectly by the undersigned to the said Company including as well promissory notes, bills of exchange and other evidences of indebtedness in writing made, endorsed, or accepted by the undersigned and purchased or owned by said company.” ■

While we can and do agree with appellees that it is the intention of the maker which must be sought in the circumstances surrounding the transaction and the terms of the collateral agreement, and that collateral pledged with and to a specific note will not be considered in the absence of adequate terms of appropriation pledged to secure other notes of the maker acquired by the pledgee not directly from him but indirectly from others, we think it admits of no question but that the collateral agreement of July 12, by the force of its language and without resort either to interpretation or construction of it or the parol evidence offered in support, plainly declares an intent which the law will take hold of, and give effect to, to place all of the collateral pledged with it behind any indebtedness of the maker held by the pledgee. Citizens’ Bank & Trust Co. v. Thornton (C. C. A.) 174 F. 752; Commercial & Savings Bank v. Lumber Co. (C. C.) 194 F. 732; Mulert v. Nat. Bank of Tarentum (C. C. A.) 210 F. 857.

Since we have found upon the record as it now stands that the appellant became the owner in due course of the $100,000 note before this suit was filed, and that such note was actually owned by it and in its possession when the collateral agreement of July 12 was executed, it would be, but for the fact of another trial, unnecessary to notice the claim of the appellant that, even if it were a fact that appellant acquired this note after the suit, the decree of the court was wrong in subjecting other collateral than the Cummer notes to plaintiff’s claim. We think we should say that, if upon a retrial it should appear that the $100,000 note was in fact acquired not before, but after, the filing of this suit, and because thereof appellant’s claim to the collateral as to the Cummer notes should be found to be subordinate to plaintiff’s claim, appellant would still be entitled to hold the balance of the collateral other than the Cummer note free from plaintiff’s claim, for plaintiff’s bill does not, nor could it, assert any lien or charge upon collateral in which plaintiff never had nor claimed an interest.

The judgment of the court below is reversed, and the cause remanded for further proceedings not inconsistent with this opinion.

On Application for Rehearing.

PER CURIAM.

We think it plainly enough appears from the opinion that the proceeds of the Cummer note collected by appellant after this suit was filed stand as to plaintiff’s claim in the same case as the note itself stood before collection, and that nothing in the paragraph complained of by appellee undertakes to at all determine the rights of plaintiff as to collateral other than the Cummer notes and their proceeds, either upon the theory of marshaling or in the event plaintiff should prove that the $100,000 note had been paid.

In deference to appellee’s apprehension, however, we in overruling its motion for rehearing, directly say so.

The motion for rehearing is denied.


source: Caselaw Access Project

author: WILBUR, Circuit Judge.

license: Public Domain

text:
    INSURANCE CO. OF NORTH AMERICA v. DETROIT & SECURITY TRUST CO.
    No. 6300.
    Circuit Court of Appeals, Ninth Circuit.
    June 15, 1931.
    As Amended on Denial of Rehearing August 3, 1931.

      Charles A. Strong, Redman, Alexander & Bacon, and A. B. Weiler, all of San Francisco, Cal., for appellant.
    Chickering & Gregory, Evan Williams, and M. L. Crimmins, Jr., all of San Francisco, Cal., for appellee.
    Before RUDKIN, WILBUR, and SAW-TELLE, Circuit Judges.
   WILBUR, Circuit Judge.

This is an appeal from a judgment in favor of appellee rendered in an action upon a fire insurance policy, which was in the form known as the California standard form, issued by appellant August 16, 1927, to the Feather River Pine Mills, Incorporated, a Nevada corporation, hereinafter referred to as the Feather River Company, to recover for a loss by a fire which occurred October 6> 1927.

Appellant claimed that the evidence was insufficient to support the judgment, and that its motion for judgment in its favor should have been granted by the trial court. The claim of the appellant is that its fire insurance policy, although duly and regularly issued before the fire, was not accepted by the Feather River Company, or, if accepted, had been repudiated and canceled by the Feather River Company. The policy was procured by Marsh & McLennan, insurance brokers, purporting to act on behalf of the Feather River Company. It cannot be seriously contended under the evidence that Marsh & Mc-Lennan were not authorized to apply for the policy in question, and the principal contentions of the appelllant are based upon occurrences subsequent to the receipt of the policy by Marsh & McLellan, nevertheless we 'will indicate in a general way the evidence with reference to the authority of the brokers to-procure the insurance in question.

The Feather River Company owned and operated a lumber mill and yard at Oroville, Cal. The property was incumbered by a trust deed to secure a bond issue which contained a proviso that the Feather River Company should keep the property insured against loss by fire to the extent of not less-than 80 per cent, of the insurable value thereof, and each policy should be payable to the-trustee as his interest might appear. A trust deed had been executed by the Hutchinson-Lumber Company, predecessor to the Feather River Company, and the property purchased by the Feather River Company under' a foreclosure proceeding of a second mortgage, a receiver having been appointed. The receiver, Mr. Fentress Hill, became the general manager of the Feather River Company, in pursuance of an agreement between the officials of that company and the creditors and bondholders. Marsh & McLennan had handled all the insurance upon the lumber plant for the Hutchinson Company and for the receiver, and, after the termination of the receivership, for the Feather River Company, for severaL years.

By the course of dealing between the Feather River Company and Marsh & Mc-Lennan, it had been assumed that these agents would keep the property insured- in conformity with the obligation of the insured under the trust deed. Some months before the policy in question was procured, the insurance companies were demanding a higher rate due to a change in conditions at the plant caused by the construction of new buildings which reduced the space between the various units making up the plant, from 200 feet to about 30 feet. It was contended by the board of fire underwriters which establishes insurance rates that the premium should be increased from $1.39 per $100 to $3.14 per $100. This claim for increased premium resulted in several interviews between Marsh & McLennan and the officers-of the Feather River Company regarding the increased rates and the establishment of an automatic fire-protection system to reduce the fire hazard, and thus to procure reduced rates. The sprinkling system was not established, and therefore the new rate of $3.14 per $100 made in April, 1927, remained in effect. During the period of negotiations with the board of fire underwriters with reference to the new rate and its possible reduction, Marsh & McLennan had procured policies which carried the insurance for sixty days, and when they could not get a definite reduction of the insurance rate they arranged for carrying the insurance on “cover notes” which fixed no definite rate. It was, however, arranged that the rate should be lower than the amount fixed by the board of fire underwriters. Finally the companies insisted upon the surrender of the covering notes and the writing up of the policies at the higher rate. During this period Marsh & McLen-nan were insisting upon the installation of a sprinkling plant, or at least making a contract therefor, which it was assumed would have the effect of an immediate reduction in rates. This was not done before the issuance of the policy in question. Thereafter, Marsh & McLennan procured insurance in the sum of $348,750 in which was included the appellant’s policy for $75,000 with a premium of $2,355, for the term of one year from July 15th. Marsh & McLennan were not only insurance brokers, but also agents for a number of insurance companies in which they issued policies covering a part of the $348,750 insurance.' About September 1, 1927, all of these policies were forwarded by Marsh & McLennan to the Feather River Company and received by it at Oroville about September 1, 1927. The policy issued by appellant had been in effect nearly a month and a half at the time it was sent to the Feather River Company, if the application therefor was authorized. It was retained by the Feather River Company until September 15th, at which time the policy had been in effect for two months, and one-sixth of the premium had been earned. At the time these policies were returned, a letter was written by the Feather River Company to Marsh & McLennan directing them to .cancel the policies and get new insurance, and stating that the Feather River Company would not pay premiums on these policies at the new rate. This letter, however, was written in pursuance of an agreement between the Feather River Company and Marsh & McLennan that such a letter should be written with a view to forcing the insurance companies to reconsider the rates established, and perhaps of getting better terms. In view of the fact that this letter from the officers of the company to its insurance brokers was not communicated by them to the appellant until after the fire, it is immaterial, except that it tends to show the view of the Feather River Company and its agents as to the authority of the agents with reference to the procurement of insurance.

It should perhaps be here stated that a different situation exists with reference to those insurance companies for which Marsh & McLennan was acting agent. The letter of September 15th from appellant to Marsh & McLennan directed them, in pursuance of the conversation of the day previous, to “cancel without charge to us for either the so-called earned premiums or otherwise, the following policies,” including the policy issued by the appellant. The letter proceeds:

“The above policies were handed to you by the writer on yesterday with the advice that we would not pay for these policies and would not want any policies issued at figures above our old rate, namely, $1.391. ‘ *
“The writer understood that you would hind on yesterday General Form Contracts in amount of $348,250 or more” with certain companies named. “ * * * It is understood that you will place all possible with the cheapest concerns.
“It is also understood that any and all renewals hereafter will be on the old basis with stock companies or with Reciprocals or Mutuals if the stock companies will not write at the rate.
“We appreciate very much your attitude in connection with our present desires on the subject and trust that we will be able to continue to secure your cooperation until the matter can be definitely settled by the signing of sprinkler contracts.”

It will be observed that this letter is not based upon the claim that Marsh & Mc-Lennan had acted in excess of their authority as insurance brokers. It was also understood by Marsh & McLennan and by Feather River Company, that the policies could not be canceled without the payment of, or the obligation to pay, the earned premium, unless such premium was waived by the insurance company carrying the risk. It was also known by both that the refusal to pay earned premium could not affect the obligation to pay such earned premium. So understood, the letter merely amounted to an instruction by Feather River Company to its broker to procure new insurance and cancel the old, if possible, without paying any premium therefor. It is also recognized that the only hope of securing such an agreement from the insurance company was based upon the belief .that the insurance company would be willing to make concessions in order to hold the business of the Feather River Company. Marsh & McLennan, in pursuance of this letter, procured additional insurance as directed for the sum specified, but did not direct the appellant to cancel the policy sued on. After the fire the policy was retained by Marsh & McLennan until after October 10th, when it was returned to appellant without any authorization other than that in the letter of September 15th. On October 26th, Marsh & McLennan sent a check to the appellant to cover the premium upon the policy sued on, but this amount was returned by appellant December 5, 1927, to them and was credited in their accounts to the appellant. These transactions after the loss, however, are not material. Cassville Roller Mill Co. v. Ætna Ins. Co., 105 Mo. App. 146, 79 S. W. 720; Waterloo Lumber Co. v. Des Moines Ins. Co., 158 Iowa, 563, 138 N. W. 504, 51 L. R. A. (N. S.) 539.

The foregoing evidence justifies the conclusion of the trial court that the procurement of the policies in question was authorized by the Feather River Company, and that its instruction to cancel these policies had not been carried out before the fire, and that therefore the policies were in force at the time of the fire,

Appellant contends that even if it be held that the occurrence of the fire terminated the authority of Marsh & McLennan to cancel the policy in question, nevertheless they actually did so, purporting to act on behalf of the Feather River Company, and that the Feather River Company, with full knowledge of such attempted .cancellation, ratified the same by filing claims with insurance companies whose policies were not returned, for an amount based upon the assumption that the policy here involved and the other policies which were returned with it had been can-celled. The evidence tends to show, however, that in making claim against the other insurance companies every proof of loss was accompanied by letter of the Feather River Company setting forth the situation with reference to the disputed policies, including that issued by the appellant, and agreeing to a refund of any sums due in the event it should be decided that the disputed policies covered the property in question at the time of the fire. In this regard it is sufficient to say that the Feather River Company made it apparent that it intended,to enforce its rights under the disputed policies, and did not intend by its claims filed against the companies which had issued other unquestioned policies, to waive its claim upon disputed policies.' Such claims so made could not in any event be deemed a ratification by the Feather River Company of the attempted cancellation of the policies by the unauthorized act of its agents after the occurrence of the fire.

It should be borne in mind in this connection that under the terms of the various policies involved herein (which were in standard statutory form) a loss was to be prorated among them (Cal. Stats, and Amendments 1909, p. 404; Fireman’s Fund Ins. Co. v. Palatine Ins. Co., 150 Cal. 252, 88 P. 907), and it was the duty of the claimant to pursue its remedy against the various companies with expedition. It is difficult to see how the Feather River Company could do either moro or less than it did do to preserve its right to the disputed policies. The trial court was correct in its conclusion that the attempted cancellation after the fire had occurred was not ratified by the Feather River Company.

Appellant also contends that the insurance subsequently obtained by Marsh & Mc-Lennan was substituted insurance, and therefore, as soon as it became effective, discharged the existing policies upon the property including the policy of the appellant. In support of this contention the appellant cited the following cases: Finley v. New Brunswick Fire Ins. Co. (C. C.) 193 F. 195; White v. Ins. Co. of N. Y. (C. C.) 93 F. 161; Larsen v. Thuringia Amer. Ins. Co., 208 Ill. 166, 70 N. E. 31; Arnfeld v. Guardian Assur. Co. of London, 172 Pa. 605, 34 P. 580.

In the case at bar we have an unusual situation with reference to the procurement of policies. • We have held that Marsh & Mc-Lennan were authorized to procure all the insurance that they did in fact procure, so that the question of authority to substitute one set of policies for another set, or one policy for another policy, is not strictly involved. After procuring the first set of policies (including that of appellant), the Feather River Company raising no objection whatever as to the authority of their agents to procure them, gave instructions to obtain cancellation of those policies, without payment of the portion of the premium which the policies provided should be paid by the insured in ease of cancellation by it; and said company, without awaiting the outcome of its instructions, caused the second set of policies to be obtained, thus, with full knowledge of the coexistence of both sets of policies, assuming the risk that should their agents fail in the attempt to cancel the first set without payment of premium, the insured would be liable to retain those policies or to pay a portion of the premium as a prerequisite to, or condition of cancellation. The loss occurred before negotiations with reference to waiver or reduction of premium were consummated. In these circumstances the filing of claims upon the second set of policies did not operate to ratify attempted cancellation, after the fire, of the first set of policies, particularly in view of the fact that in making claim upon what appellant terms the substituted policies the Feather Biver Company expressly reserved its rights under the policies first written. ■ With reference to appellant’s contention that other insurance had been substituted for the policy here involved, thereby discharging that policy, we hold that these facts distinguish the case at bar from the cases cited by appellant. In each of those cases the cancellation was by the insurance company, and it was not within the contemplation of the insured prior to or at the time of the fire, that the policies so canceled and the policies intended to take their place should be in force at the same time. It was in effect held in the cases cited that the insured could not ratify the act of the agent in procuring the new insurance and at the same time repudiate his action in accepting cancellation of the prior policies, the transaction in each case being virtually one and undivided and in pursuance of general authorization to insure the property for a specific amount. In such a case the acceptance of the new policy within the authorized amount necessarily ratified the action of the agent, taken because of cancellation by the insurer, in substituting the later policy for the prior one, such acceptance necessarily involving a ratification —if ratification were necessary in the circumstances — of the cancellation of the prior policy by the company which issued it. In the ease at bar, as already stated, the authorization of the insured company to take out new insurance was specific and direct, but its authorization to cancel existing policies was contingent upon a cancellation without liability for premium. The policy did not permit such a cancellation without liability for premium, and therefore it was necessary to procure the consent of the insurer to cancellation; and this consent was never procured. The decision of the trial court upon this matter was correct.

The only remaining questions to be disposed of are the contentions of the appellant that, under the apportionment clause of the policy in suit, the amount of the loss apportioned to it should have been only 84 per cent, of the face of the policy, or $63,000, and that the court erred in not deducting from the judgment the unpaid premium of $2,355.

The first contention is based upon the proposition that the court should have determined, in rendering its judgment, that the entire $348,750 of insurance covered by the policies mailed to the Feather Biver Company by its brokers on September 1st was in effect, whereas the court concluded that those policies returned by the Feather Biver Company to Marsh & McLennan on September 15th were thereby canceled as to those companies for which they were acting as general agents, for the reason that as to such policies the communication was one to the agent of the insurance companies concerned, and therefore operated as a repudiation of the policy, whereas with reference to the other companies, including appellant, the communication was addressed to its own brokers and was not effective until transmitted by them to the insurance company concerned. The conclusion of the trial court was correct.

With reference to the contention that the trial court should have deducted the amount of the prémium, it is sufficient to say that, while the appellant is clearly entitled to the amount of the premium, the obligation to pay the premium under the express terms of the policy rested on the Feather Biver Company, and hot on the appellee, and that no effective claim was made therefor in the trial court.

Judgment affirmed.

SAWTELLE, C. J., concurs.


author: FOSTER, Circuit Judge. PER CURIAM.

text:
    WHITE v. HOPKINS, Collector of Internal Revenue.
    No. 5966.
    Circuit Court of Appeals, Fifth Circuit.
    July 2, 1931.
    Rehearing Denied Aug. 5, 1931.

      BRYAN, Circuit Judge, dissenting.
    F. B. Walker, of Fort Worth, Tex., and L. E. Cahill and W. Leo Austin, both of Tulsa, Okl., for appellant.
    Norman A. Dodge, U. S. Atty., of Fort Worth!, Tex., and Wright Matthews, Sp. Atty., Bureau of Internal Revenue, of Washington, D. C. (C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, of Washington, D. C., on the brief), for appellee. '
    Before BRYAN, FOSTER, and SIBLEY, Circuit Judges.
   FOSTER, Circuit Judge.

This is an appeal from a judgment sustaining a demurrer, which asserted no right or cause of action, and dismissing a suit by appellant to recover back some $13,000 of income taxes, alleged to have been illegally collected.

From the allegations of the petition and annexed exhibits the following material facts are sufficiently shown: The Imperial Gasoline Company, of which appellant is a stockholder, filed its return for income and profits taxes for the year 1918 on April 28,1919. On December 29, 1923, additional taxes were assessed against the corporation in the sum of $13,853.77. On January 12, 1924, the corporation filed a claim for abatement which was allowed to the extent of $2,350.78, leav-* ing a balance of $11,502.99, for which the claim was, rejected. On May 1, 1925, demand was made for payment. On April 26, 1926, a warrant of distraint was issued by the collector of internal revenue for the First district of Texas against the property of the Imperial Gasoline Company to enforce collection of the said taxes, with interest and penalty, a total amounting to $14,-351.57. The warrant was addressed to the company in care of appellant. The collector made demand upon appellant for payment of the taxes, threatened execution of the said warrant against his property, and threatened to file suit against him. In fear of execution of the said warrant and the institution of the suit, under duress, appellant in two payments, on July 27 and September 10, 1926, paid out of his own funds the sum of $17,712.-50 to the collector under protest. On April 24, 1928, appellant made application to the commissioner of internal revenue for a refund of the taxes, penalties and interest paid, on the following grounds: That he was not the taxpayer against whom the assessment was made; that he had paid the taxes, interest, and penalty under duress and threat of distraint; that there had been no waiver of the statute of limitations as to the assessment and collection of the taxes executed by the Imperial Gasoline Company; that the statute of limitations had run against both the assessment and collection of the 1918 tax. This claim was apparently made on a blank furnished by the Internal Revenue Department. The claim for refund was disallowed by the Commissioner, on a schedule dated September 21, 1928, and a notice to that effect, addressed to appellant, was sent to him on November 30, 1928. The letter notifying appellant gave no reasons for the action of the Commissioner in disallowing the claim. It appears that this suit was filed on August 27, 1929.

For a better understanding of the case, we may briefly review the law. The right to sue a tax collector to recover hack taxes illegally exacted is derived from the common-law and does not depend upon statute. The rule is this. If the payment is made voluntarily, there can be no recovery. But if the payment is,made under compulsion and with protest, sufficient to notify the collector that he will be sued to recover it back, he is personally liable whether he has covered the money into the treasury or not. This question was exhaustively discussed, and the rule just stated was announced by the Supreme Court, and applied to a elaim against a collector of customs dues, in an early ease, Elliott v, Swartwout, 10 Pet. 137, 9 L. Ed. 373, decided in 1836. As the principle is the same, the ground of illegality is immaterial. The right exists whether a person is compelled to pay a tax illegally imposed upon himself or which in reality is the debt of another. City of Wilmington v. Ricaud (C. C. A.) 90 F. 214; Lyon v. Receiver of Taxes, 52 Mich. 271, 17 N. W. 839; Lindsey v. Allen, 19 R. I. 721, 36 A. 840.

There is no statute of the United States expressly giving the right to sue a tax collector to recover back taxes illegally exacted, but the common law has been greatly modified by various statutes in this respect. These statutes recognize the right and by necessary implication grant it as to suits against federal tax collectors.

By Revised Statutes, § 3220, as amended (Revenue Act 1926, § 1111, 26 USCA § 149), the Commissioner is authorized to remit, refund, and pay back all taxes erroneously or illegally assessed or collected, all penalties collected without authority, all taxes that appear to be unjustly assessed or excessive in amount or in any manner wrongfully collected. The same section provides for the relief of the collector in the event of an adverse judgment.

Revised Statutes, § 3226 as amended by the Revenue Act of 1926, § 1113, and previous enactments (26 USCA § 156) is as follows: “No suit or proceeding shall be maintained in any court for the recovery of any internal-revenue tax alleged to. have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected until a claim for refund or credit has been duly filed with the Commissioner of Internal Revenue, according to the provisions of law in that regard, and the regulations of the Secretary of the Treasury established in pursuance thereof; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress. No such suit or proceeding shall be begun before the expiration of six months from the date of filing such claim unless the commissioner renders a decision thereon within that time, nor after the expiration of five years from the date of the payment of such tax, penalty, or sum, unless such, suit or proceeding is begun within two years after the disallowance of the part of such claim to which such suit or proceeding relates. The commissioner shall within 90 days after any such disallowance notify the taxpayer thereof by mail.”

While appellant’s cause of action is governed by the provisions of Revised Statutes, § 3226, above quoted, his fundamental right of recovery is not infringed by the statute. We need not discuss whether the compulsion alleged amounted to duress in law or whether the protest was sufficient, as neither duress nor protest was by this section necessary to be shown. He alleges compliance with the condition precedent of appealing to the Commissioner for a refund. The statute applies to the recovery of any tax “in any manner wrongfully collected” from any one and is broad enough to support the cause of action alleged.

There is no doubt from the allegations of the petition that the taxes were wrongfully collected. Under the provisions of the Revenue Act of 1918, § 250 (d), 40 Stat. 1083, the assessment and collection of the taxes were barred after five years from the filing of the return. Subsequent acts do not affect this limitation as applied to this case, considering the facts shown. See Revenue Act of 1926, § 1109 (b) (26 USCA § 108). The assessment was in time, but the collection was made more than five years after the filing of the return. This was sufficient to invoke the limitation. Bowers v. New York & Albany Lighterage Co., 273 U. S. 346, 47 S. Ct. 389, 71 L. Ed. 676.

Appellee relies upon the following sections of the Revenue Act of 1926:

“See. 2 (a) When used in this act * * (9) The term ‘taxpayer’ means any person subject to a tax imposed by this act.” 26 USCA § 1262 (a) (9).
“See. 284 (b) (1) No such credit or refund shall be allowed or made * * * after four years from the time the tax was paid in the ease of a tax imposed by any prior Act, unless before the expiration of such period a elaim therefor is filed by the taxpayer.” 26 USCA 1 1065 (b) (1).

The claim was filed by appellant in less than four years after payment, so that part of section 284 does not apply. However, apt pellee contends that the Imperial Gasoline Company was the taxpayer as defined by the act and has neither appealed to the Commissioner nor brought the suit, and that no one but the Imperial. Gasoline Company could appeal to the Commissioner or maintain a suit to recover back the taxes alleged in this case "to have been illegally collected. In other words, appellee assumes the position that, having collected the tax from oqe who did not owe it, when it could not have been legally collected from one who did, no right of redress exists. It cannot be assumed that the United States has adopted any such illogical and inequitable attitude towards her citizens unless the enactments of Congress clearly leave no alternative.

As appellee’s contention is based mainly on the definition of “taxpayer,” we may consider that section in the light of well-settled rules of construction. “A statute will not be construed as taking away a common-law right existing at the date of its enactment, unless that result is imperatively required.” Texas & Pacific R. Co. v. Abilene Cotton Oil Co., 204 U. S. 426, 27 S. Ct. 350, 354, 51 L. Ed. 553, 9 Ann. Cas. 1075. “All laws should receive a sensible construction. General terms should be so limited in their application as not to lead to injustice, oppression, or an absurd consequence. It will always, therefore, be presumed that the legislature intended exceptions to its language, which would avoid results of this character.” U. S. v. Kirby, 7 Wall. 482, 486, 19 L. Ed. 278; Lau Ow Bew v. U. S., 144 U. S. 47, 12 S. Ct. 517, 36 L. Ed. 340; Jacobson v. Mass., 197 U. S. 11, 25 S. Ct. 358, 49 L. Ed. 643, 3 Ann. Cas. 765.

It is evident that to construe subdivision'9 of section 2 (a) literally would lead to injustice and absurd consequences, as it would exclude from relief any person upon whom a tax was imposed by previous acts. Of course, no such intention can be attributed to Congress, and therefore by necessary implication persons subject to taxes imposed by previous acts are included in the term “taxpayer.”

Said section 2, not only defines “taxpayer,” but also defines the terms, “person,” “corporation,” “domestic,” “foreign,” “United States,” “secretary,” “commissioner,” “collector,” and “military or naval forces of the United States.” Subsection (b) of said section 2 (26 USCA § 1262 (b) furnishes a guide for construing the various definitions. It provides: “The terms ‘in-eludes’ and ‘including’ when used in a definition contained in this act shall not be deemed to exclude other things otherwise within the meaning of the term defined.”

It is obvious that the various definitions were adopted for convenience only and to facilitate the drafting of the act, by eliminating the necessity of repetition. The reasonable construction of the section is that the definition of “taxpayer” does not exclude other definitions in general use and commonly understood. The dictionaries all define “taxpayer” as “one who pays a tax.”

Undoubtedly appellant paid the tax which he sought to recover back, and therefore would be a taxpayer under the usual and ordinary definition. In paying the tax appellant was not a mere volunteer. A tax imposed upon a corporation is indirectly a tax upon its stockholders. Cooley on Taxation (4th Ed.) § 969. As a stockholder of the Imperial Gasoline Company he had an interest in paying the tax, although slight, to stop the running of the statute of limitations barring a suit to recover it back, and to prevent further accumulation of interest. The collector demanded payment of the tax and enforced collection by threats. Whether these threats could be made effective is immaterial. They were sufficient to operate on the mind of appellant and induce him to make payment against his will. The Commissioner received the money and retained it. He entertained and passed upon the application for a refund and notified appellant personally of the rejection of his claim, without suggesting that he did so because he was not considered the taxpayer.

The word “subject” is given many shades of meaning by the dictionaries, among which are “actually placed or brought under,” “exposed to,” “made liable.” See Webster’s Standard and New Century Dictionaries, verbo “subject.” The Revenue Act imposes taxes upon different classes of persons, but, except by requiring returns, does not subject any particular individual to the tax. That is left to the administrative officers. The return is not conclusive on the government. The Commissioner determines and assesses all income taxes (26 USCA § 97), and the collector collects them (26 USCA § 103). It is not necessary that a tax be assessed in all eases before a person becomes subject to it. By the provisions of section 1109 (a), Revenue Act of 1926 (26 USCA § 106), in the case of a false or fraudulent return, with attempt to evade the tax, or a failure to file a return within the time required by law, or a willful attempt in any manner to defeat or evade the tax, a proceeding in court for collection of the tax may be begun without assessment. A proceeding may also be begun in court to collect a tax assessed against a corporation from stockholders who have received the assets of a corporation in liquidation.

The conclusion is reasonable that, as the tax was imposed by the Revenue Act of 1918 (40 Stat. 1057), and appellant was treated as the taxpayer and made subject to it by the Commissioner and collector, he comes within the meaning and intent of the definition. Any other conclusion would work injustice and deprive appellant of his common-law right of recovery. The definition of “taxpayer” relied upon is not a bar to a recovery by appellant.

It follows that the.judgment appealed from was erroneous. If appellee has any defense not raised by the demurrer, he is not precluded from asserting it.

Reversed and remanded.

BRYAN, Circuit Judge, dissents.

On Motion for Rehearing.

PER CURIAM.

As neither of the judges who concurred in the judgment of the court in the above numbered and entitled cause are of opinion that the petition for rehearing should be granted, it is ordered that the said petition be, and the same is hereby, denied.


author: BRYAN, Circuit Judge.

text:
    PEAVY-WILSON LUMBER CO. v. COMMISSIONER OF INTERNAL REVENUE, and Eleven Other Cases.
    Nos. 6084-6092, 6158-6160.
    Circuit Court of Appeals, Fifth Circuit.
    June 30, 1931.
    Motion for Amendment of Opinion Denied July 28, 1931.

      S. L. Herold and John B. Files, both of Shreveport, La. (S. P. Cousin, of Shreveport, La., on the brief), for petitioners in Nos. 6084 to 6092, inclusive, and for respondents in Nos. 6158 to 6160, inclusive.
    G. A. Youngquist, Asst. Atty. Gen., Se-wall Key, John MaeC. Hudson, Sp. Assts. to Atty. Gen., and C. M. Charest, Gen. Counsel., Bureau Internal Revenue, Percy S. Crewe, Sp. Atty., Bureau Internal Revenue, both of Washington, D. C., for respondent in Nos. 6084 to 6092, inclusive, and for petitioner in Nos. 6158 to 6160; inclusive.
    Before BRYAN, SIBLEY, and HUTCH-ESON, Circuit Judges.
   BRYAN, Circuit Judge.

These are petitions in two sets, one by three corporations and the other by the Commissioner of Internal Revenue, to review a decision of the Board of Tax Appeals reported in 14 B. T. A. 625. The corporations complain because the board, in arriving at the amounts of income and profit taxes payable by them during all or a part of the period covered by the taxable years 1916 to 1922, adopted November 20, 1909, the date of a timber contract referred to below, as the date upon which the timber described in that contract should be included as invested capital, under the provisions of Revenue Acts which provide for the valuation of tangible property at the time of its acquisition. They contend that the board should have ascertained the value of the timber as of July 28, 1913, the date on which one of them, the Peavy-Byrnes Lumber Company, exchanged half of its capital stock, less one share, for the interest of the other party to the contract. The importance of this contention lies in the fact that the timber had so increased in value as that what remained of it on July 28, 1913, was worth considerably more than the timber that was on the land at the date of the contract, notwithstanding that in the meantime much of it had been cut and converted into lumber. The adoption by the board of the earlier of the above-named dates resulted in an increase of the amounts found to be due as income taxes during the taxable years in question over the amounts that would be payable if the later is the correct date for ascertaining the value of the timber as invested capital.

On November 20, 1909, the Krause & Managan Lumber Company, as party of the first part, and the Peavy-Bymes Lumber Company, as party of the second part, entered into the contract above mentioned. The first paragraph of that contract purports on its face to effect a sale by the party of the first part to the party of the second part of all merchantable pine timber, measuring 12 inches or over in diameter at the stump, on certain described lands. The second paragraph obligates the party of the second part to pay $4 per thousand feet as the timber is cut, of which it was to retain $1 to retire an indebtedness of $100,000, secured by a second mortgage executed by the party of the second part on the land and timber. In other paragraphs the party of the second part agreed to build a sawmill, and to cut annually twenty million feet of timber. The party of the first part obligated itself to pay the taxes on the timber as well as the land, and reserved the right at its option to revoke the contract upon the failure of the party of the second part, without legal cause, to operate the sawmill continuously for as long a period as six months. It was agreed, finally, that the party of the second part, when it had received out of the net profits of its business a sum equal to its total original investment, should pay to the party of the first part half of all subsequent net profits, and should transfer a half interest in all its assets, or half of its capital stock, less one share, to the party of the first part, at the latter’s option. The Peavy-Bymes Company complied with all its obligations. It had received, by July 28, 1913, from net earnings an amount equal to its total investment, including all loans and advances it had made to the Krause & Managan Company; and on that date the latter company exercised its option and received in exchange for its half interest in future earnings the stock of the Peavy-Bymes Company to which it was entitled.

The interest of the Krause & Managan Company in the timber was tangible property within the meaning of the Revenue Acts. See Revenue Acts of 1918 and of 1921, § 325_ (a), 40 Stat. 1091, 42 Stat. 273. There is no contention that actual value was not paid in for the stock. Section 326 (a) of the Revenue Acts just referred to (40 Stat. 1092, 42 Stat. 274) allows as invested capital the cash value of tangible property at the time it is paid in or surrendered. The only question presented by this branch of these cases is: What is the date upon which the value of such property should be ascertained? The board construed the contract as a sale of timber as of its date in 1909, and held that the stock issued in 1913 to the Krause & Managan Company was delivered and received in payment of the purchase price of the timber. We are of opinion that the contract did not effect an immediate sale of the timber. The first paragraph of it was indeed couched in the language of a sale; but other paragraphs placed upon the Krause & Managan Company the burden of paying taxes, conferred upon it the contingent right of revocation, and retained for it a half interest in all the assets of the Peavy-Bymes Company, including a half interest in net profits accruing after the latter company had received back its original investment in the sawmill, and all loans and advances.' The obligations to pay the taxes and the amount secured by the second mortgage are such as are usually assumed by the owner, and only an owner could assert the right to terminate the contract. Prior to July 28, 1913, the Peavy-Bymes Company had only the right to cut the timber, and that right was subject to revocation upon its default in the operation of the sawmill. If during the life of the contract the timber had been destroyed by fire or otherwise, the loss of it would have fallen on the Krause & Managan Company. The Peavy-Byrnes Company did not become the owner of the timber until July 28, 1913, when it paid for it in stock. The Krause & Managan Company upon the exercise of its option to take the stock surrendered its interest in the contract, and thereafter became only a stockholder. It therefore cannot be held, as argued on behalf of the Peavy-Bymes Company and the other two petitioning corporations, that the stock was issued to the Krause & Managan Company only for the purpose of evidencing its right to continue to receive half of the future net profits. We are of opinion that the board erred in failing to accept July 28, 1913, as the date for ascertaining the value of the timber received by the Peavy-Bymes Company in exchange for its capital stock.

The commissioner assigns error on a finding of the board to the effect that during the taxable years the three corporations were affiliated within the meaning of applicable Revenue Acts, and were therefore entitled to make consolidated returns.

Of the three corporations, the Peavy-Bymes was organized in November, 1909; the Peavy-Wilson in December, 1916; and the Peavy-Moore in August, 1919. Bach operated a sawmill and cut timber off of separate tracts of land, but in disposing of the lumber they were operated as a business unit. They had the same executive offices, practically the same officers, directors, and salesmen. A. J. Peavy was president of each company, and h'e directed and controlled their business affairs. Fifteen stockholders and members of their families owned in 1919 of the total stock of the three corporations, 94.10 per cent, of the Peavy-Bymes, 79.72 per cent, of the Peavy-Wilson, and 69.90 per cent, of the Peavy-Moore. The stock owned by employees increased these percentages to 94.65 per cent, of the Peavy-Byrnes, 83.31 per cent, of the Peavy-Wilson, and 85.51 per cent, of the Peavy-Moore. The employees owned outright the stock standing in their names, but they were enabled to purchase it through the financial assistance of Peavy.

The variations in stock ownership during the other years need not be stated, as they were so slight as to be negligible. The remaining stock of each company was practically all owned by business partners of one or more of the principal stockholders, or by officers or directors of banks which were depositories of the funds of the corporations. Some of the principal stockholders, including Peavy, were officers or directors of these banks. The principal stockholders voted from 95 to 100 per cent, of the stock represented at stockholders’ meetings. The board found that Peavy and his associates exercised actual control and domination of all three corporations. Nor is it to be doubted that they exereised actual control of substantially all the stock.

The Revenue Act of 1918 provides by section 240(a) that corporations which are affiliated shall make a consolidated return; and section 240(b) reads: “For the purpose of this section two or more domestic corporations shall be deemed to be affiliated (1) if one corporation owns directly or controls through closely affiliated interests or by a nominee or nominees substantially all the stock of the other or others, or (2) if substantially all the stock of two or more corporations is owned or controlled by the same interests.” 40 Stat. 1081, 1082. The Revenue Act of 1921 by section 240(a) permits, but does not require, affiliated corporations to make a consolidated return; and its section 240(c) is the same as section 240(b) above quoted from the 1918 Act. 42 Stat. 260. The 1921 act also by section 1331 repeats the above definition of affiliated corporations, and provides that the Revenue Act of 1917 shall be deemed to impose taxes upon the basis of consolidated returns in the case of domestic corporations that were affiliated during that year. 42 Stat. 319. The commissioner contends that the control meant by the above section 240 (b) (2) is a legally enforceable control. He is supported in that position by the following cases decided by the Circuit Court of Appeals for the Second Circuit: Ice Service Co. v. Commissioner, 30 F.(2d) 230; Commissioner v. Hirch, 30 F.(2d) 645, and Handy & Harman v. Commissioner, 47 F.(2d) 184, now pending in the Supreme Court on certiorari, 51 S. Ct. 353, 75 L. Ed. -; Commissioner v. Gong Bell Mfg. Co., 48 F.(2d) 205. To the same effect is United States v. Cleveland, 42 F.(2d) 413, decided by the Circuit Court of Appeals for the Sixth Circuit. Actual control, whether legally enforceable or not, has been held sufficient in the First, Third, Fifth, Seventh, and Ninth Circuits, and by the Court of Claims. Kile v. Commissioner, 41 F.(2d) 925; Flannery v. Commissioner, 42 F.(2d) 11; Pelican Ice Co. v. Commissioner, 37 F.(2d) 285, 286; Great Lakes Hotel Co. v. Commissioner, 30 F.(2d) 1; Commissioner v. Richfield Co., 42 F.(2d) 360; Burnet v. Wilshire Oil Co., 46 F.(2d) 975; Eby Shoe Co. v. United States, 44 F.(2d) 273. Ownership of at least 95 per cent, of the voting stock is required by the Revenue Act of 1924 and later acts. 26 USCA § 993. The making of a consolidated return for 1929 or any subsequent year is treated as a privilege. 26 USCA § 2141. Control of stock, not resulting from ownership, since the effective date of the 1924 Revenue Act, is not to be considered in determining the question whether or not corporations are affiliated. Rut the Revenue Acts of 1918 and 1921 make control as well as ownership of stock a material factor; by the former affiliated corporations were required to file a consolidated return; under the latter they had the right to do so. In both these earlier acts control was the broader term and indicated something in addition to ownership. Corporations were to be deemed affiliated under the first subdivision of section 240(b) of the 1918 act and section 240(c) of the 1921 act where one of them owned directly or controlled through closely affiliated interests or by nominees substantially all the stock of the other or others; and under the second subdivision where substantially all the stock of two or more corporations was owned or controlled by the same interests. The control of stock was used in the same sense in each subdivision, and therefore control through partners or close business associates by the same interests is to be given the same effect as control by one corporation of another through closely affiliated interests or by nominees. We are of opinion still, as stated in Pelican Ice Co. v. Commissioner, supra, that “a primary object of the statutory provision requiring corporations owned or controlled by the same interests to make a consolidated return was to prevent a single business enterprise, by splitting up its net profits and dividing them with its subsidiaries, from avoiding payment of the surtaxes imposed under the higher brackets of a graduated income tax law.” It is always to be borne in mind that the Revenue Act of 1918 was passed just after the close of the World War, when the temptation was very great to escape taxation by resorting to the device of scattering among affiliated corporations the net profits of what in reality was a single business enterprise. Congress had a practical end in view, and as we think was dealing with actual as distinguished from legal control of the stock. Its purpose would have been thwarted if stockholders, owning substantially all the capital stock of several corporations, had been permitted materially to. reduce their holdings by placing stock in the names of members of their families, of employees, of business associates, and of friendly banks. One who gives stock to any of these classes parts with the legal control. What constitutes substantially all the capital stock of a corporation is a material question here. Treasury Regulation 45-, by Article 633 adopted pursuant to the Revenue Act of 1918, recognized that the ownership or control of 95 per cent, is sufficient, and that percentage, as already stated, has since 1924 had the approval of Congress. The principal stockholders, their families, business partners, and associates, and employees of the companies owned practically 95 per cent, of the Peavy-Byrnes Company. The percentages owned by the above classes of stockholders of the stock of the Peavy-Wilson and Peavy-Moore Companies was not substantially all of such stock. In our opinion, however, the actual control of the minority stock by Peavy and his associates justified the board in holding that the Peavy-Bymes and Peavy-Wilson Companies were affiliated in 1917 and 1918; and that all three corporations were affiliated during the later taxable years, within the meaning of the Revenue Acts then in force.

The petitions of those corporations are, and each of them is, granted, and the causes remanded for further proceedings not inconsistent with this opinion.

The petitions of the Commissioner of Internal Revenue are, and each of them is, denied.

On Motion for Amendment of Opinion.

PER CURIAM.

The motion in behalf of petitioners for amendment of opinion in the above numbered and entitled causes is denied.


author: MANTON, Circuit Judge.

text:
    UNITED STATES v. QUIMBY.
    No. 436.
    Circuit Court of Appeals, Second Circuit.
    July 7, 1931.
    SWAN, Circuit Judge, dissenting.
    Brodek, Raphael & Eisner, of New York City (Eugene J. Raphael, Louis P. Eisner, Ralph H. Raphael, and Charles A. Brodek, all of New York City, of counsel), for appellant.
    George Z. Medalie, U. S. Atty., of New York City (William B. Herlands, Asst.-U. S. Atty., of New York City, of counsel), for the United States.

      Before MANTON, SWAN, and CHASE, Circuit Judges.
   MANTON, Circuit Judge.

The appellant was convicted on eleven counts of an indictment, containing twelve counts, charging use of the mails in furtherance of a scheme to defraud. The tenth count was dismissed at the trial, and his co-defendant Cutler was acquitted on all counts.

Clarke Bros., a private banking institution, carried on business for 88 years, but closed its doors June 29, 1929, when bankruptcy followed. The fraudulent scheme charged was that the appellant and one Cutler, together with James R. Clarke, William H. Clarke, and Philip Clarke, unlawfully and fraudulently devised and intended to devise a scheme to defraud certain named depositors and others unnamed, “as depositors and lenders.” The scheme is charged to have existed from April, 1927, to June 29, 1929. Clarke Bros, were private bankers and lawfully held themselves out as such. They accepted deposits of moneys offering interest at 5% per cent, on special accounts, and 3 per cent, on ordinary accounts. The appellant and his codefendant are charged with taking sums of money placed on deposit, as loans without sufficient security. The theory of the indictment is that such lending of money was part of the scheme to defraud and was made with the knowledge of Clarke Bros., and used not only to enrich the appellant, but also one of the Clarkes. In this way it is said that. money was fraudulently obtained from depositors.

Appellant was not an officer of the bank nor in its employ. It is further claimed that accounts were solicited and deposits obtained so that money might be borrowed by the appellant, and that representations were made that Clarke Bros, were conducting a sound conservative business, under the supervision of the New York state banking department, and that Clarke Bros, were solvent. It is claimed that the representations were false and untrue; that Clarke Bros, were not doing a legitimate business, and were not financially sound, nor was it a staple and reliable banking house, and that it did not conduct its business in accordance with the principles of sound banking and disregarded the banking laws of the state of New York. Private banks of this kind are not under the supervision of the hanking department under the law of New York.

The first count, after charging the alleged scheme to defraud, says that Clarke Bros. placed in the post office on June 29, 1929, a printed circular and calendar addressed to one McGovern, soliciting deposits from the addressee; count 2, a letter of May 29, 1928; count 3, on June 25, 1928; count 4, September 28, 1928; count 5, January 13', 1927; count 6, June 30, 1927; count 7, May 29, 1928; count 8, November 26, 1928; count 9, March 16, 1929'; count 11, December 31, 1928; count 12, June 28, 1929. These letters inclosed a blotter or calendar used for advertising purposes and suggested the service of Clarke Bros, as bankers, or offered their services to persons wishing to travel by way of selling travelers’ checks.

There was no direct proof of an agreement or scheme to defraud; the jury were asked to infer it from the circumstances. Appellant was shown to have been a depositor and a borrower of money from the bank. He frequented the bank often in the years preceding its failure, as often as once or twice a week. He was seen sometimes lunching with members of the firm. The loans made to the appellant were at various times during the two years preceding the failure, and on the closing of the bank amounted to $185,000. He gave his note each time to •James R. Clarke. The notes were not entered on the books of the bank until September 18, 1928, when James R. Clarke instructed the note teller to make entries in the discount ledger under appellant’s name. As collateral for these notes, appellant gave a claim for commissions against the New York Edison Company for $750,000, and from that time on moneys were loaned against the security. Of the $185,000, $55,000 was represented by notes made by the appellant to James R. Clarke, which he gave Clarke for his personal accommodation so he could discount them at some other bank. About $40,000 of this sum was used by Clarke to build a home for his daughter. Appellant was never asked to pay this $55,000, and he assumed Clarke would take care of these obligations. The validity of the claim given as collateral security was severely questioned at the trial. Three eminent members of the bar testified to its legality, and it might well have been reasonable for Clarke Bros, to accept it as collateral. From time to time subsequent to the assignment to the bank appellant made several assignments of interest therein to others, amounting in all to about one-third of the amount of the claim.

The appellee was permitted to prove some judgments recovered against the appellant by third parties.

Years before tbe failure of tbe bank, James R. Clarke advanced $150,000 to the P.ort Terminal Corporation, a corporation which appellant had promoted, and held its note for that amount. This company had an enterprise in New Jersey, but it was a failure. It was shown to have been carried on the books of the bank at $840,000. Appellant disclaimed any knowledge of the book entries of the bank. The appellant was interrogated in a preliminary examination before a commissioner, and he was asked by the United States attorney to explain why Clarke Bros, carried this loan at $840,000, to which he replied that he knew nothing of the book entries and knew no reason therefor. But in this fraud charge it is argued that this amounted to proof of some improper entry made in the Clarke Bros, books and therefore was fraudulent. An interest in a McCarter Syndicate was carried on the books of the bank at $700,000, and the appellant was interrogated before the commissioner as to whether he knew that fact. He disclaimed knowledge thereof. No proof was offered at the trial below to show such an entry was made on the books of the bank or that appellant knew thereof. But the argument proceeded that this was another transaction to defraud the creditors. Indeed, no proof was offered that the books of the bank carried either of these items, and. the United States attorney argued as if they had been proven. The deposition before the commissioner was received in evidence.

It is further said that there “Was a scheme to defraud lenders of money. In June, 1929, Clarke Bros, were endeavoring to obtain a loan from two banks in the city of New York, and offered as collateral very questionable security. The appellant made affidavits making false statements as to this proposed collateral. One was an alleged interest in some oil property rights at Magdalena Bay, Southern California, given as collateral for appellant’s demand note of $500,000. The property was said to be worth $25,000,000, and was controlled by one Heney, and such statement was made in an affidavit by Heney. James R. Clarke used this in an effort to obtain a loan of $500,000. Appellant said that he had obtained for Heney a contract for the oil rights in this property to the Merrill-Sinclair Syndicate, and that Heney had already been paid $500,000, and that a balance of $4,500,000 was to be paid in August, 1929, and that appellant would be entitled to a commission of $500,000 at that time. This was established to be false. In the McCar-ter Syndicate referred to, appellant made an affidavit, June 14, 1929, representing that he had performed services there which entitled him to $6,850,000 in cash, and stated that he had assigned one-half of this sum to James R. Clarke. It was established that he had no interest. His affidavit, relating to the so-called Merrill-Sinelair Syndicate, involved oil-producing lands in Venezuela and other South American countries, and said that in the distribution of the profits, which would take place in sixty days, there would be paid $17,000,000 for services rendered. This was false. The so-called Merrill-Sinelair Syndicate did not exist. He made still another affidavit as to a claim against the republic of Georgia in which it was stated that he would receive $25,000,000 for services rendered there. These affidavits were used by Clarke Bros, in an endeavor to borrow money from the banks. No money was loaned by either or any bank. For making such false affidavits, there is ample criminal punishment.

Appellant never mailed or caused to be-mailed any of the calendars or circulars, the-subjects of the counts on which he has been, convicted. Clarke Bros, mailed them as part of their business in accordance with a custom in use for years. They made- known to the appellant the financial embarrassment of the bank, and asked for this, his alleged collateral, as security for a prospective loan they wanted to negotiate. But the letters which were mailed did not bear on these loans; they inclosed either a blotter or monthly calendar. They were letters notifying depositors that interest had been credited ; a letter urging the purchase of traveler’s cheeks for use on foreign journeys; a letter recommending the rental of safe deposit vaults; a letter recommending an investment; letters calling attention to the maturity date of Liberty bonds of the third series; a letter inquiring about the responsibility of a new depositor who had given the addressee’s name as reference; and a letter suggesting that, if the depositor was pleased with Clarke Bros.’ service, he recommend the bank to others. From all that appears, such letters, as an advertising plan, might have and had been customarily used over a long period of the 88 years of the bank’s existence.

The case was submitted to the jury on the theory that there was a scheme to defraud both depositors and lenders of the bank — one enterprise. There was no use of the mails. made in any endeavor to defraud institutions into loaning money to- the bank. The use of the affidavits was of no effect, and the claimed use of the mail to defraud lenders may be eliminated. The mail was used in respect to depositors only. The letters, blotters, and calendars which were sent through the mail were not unusual, nor did they make known any scheme or plan which was fraudulent. There was no scheme of the appellant with the Clarkes to defraud depositors and lenders wherein the mail was used in its furtherance. No effort was made to borrow money from any financial institutions until June, 1929, which was long after the use of the mails as set forth' in the counts of the indictment, except the calendar which was marked and mailed and is the subject of the twelfth count. The use of the mails, in execution of the fraudulent scheme, is the gist of the offense for which the appellant was indicted. Olsen v. U. S. (C. C. A.) 287 F. 85.

The government has proved that appellant was a borrower when the bank failed in June, 1929, and the bank had his notes for $185,009, which were payable to the order of James E. Clarke and indorsed by him, that $130,000 of these notes represented loans made by James E. Clarke, and that the balance were accommodation notes by the appellant to Clarke, and that there was collateral for these notes; there had been pledged a claim of $750,000. The circumstances of the borrowing of these moneys and the acceptance of the securities may give rise to a charge of crime under the state law, but we cannot find from the proof that there was any evidence of a fraudulent use of the mails with which the appellant is in any way connected. The letters were sent to depositors or prospective depositors of the bank in furtherance of the Clarke Bros, business. One of the objects of the firm’s business was to secure depositors, and advertising, sueh as sending blotters and calendars with a request to purchase travelers’ checks, cannot be said to be a fraudulent scheme. The firm, while in existence, might endeavor to secure depositors. This record shows appellant to have been a customer of the bank, good or bad, but it does not establish directly or circumstantially his use of the mails in a scheme to defraud. Salinger v. U. S. (C. C. A.) 23 F.(2d) 48.

There was no evidence to indicate that the appellant had reason to believe that his borrowing on notes which he gave to Clarke and which Clarke indorsed and discounted at the bank would cause any loss to depositors. Clarke Bros, was a partnership, and partners could not have been engaged individually in defrauding themselves; of course they could defraud depositors, but it has not been established that they had a plan or scheme to defraud their depositors. The lessening of the financial ability to meet the claims of its depositors may have been very wrong, but there is no fraudulent use of the mails in furtherance of a scheme to defraud. If there was- unlawful use made of the funds of the bank by the Clarke Bros., that was a subject of some other crime, possible of prosecution in the state courts.

Indeed, the record does not disclose the financial position of the bank on the day it was closed, and, on the proof here, the court should have directed a verdict of acquittal of the charged crime.

Judgment reversed.

SWAN, Circuit Judge, dissenting.


author: McDERMOTT, Circuit Judge.

text:
    NICOLAY v. UNITED STATES.
    No. 395.
    Circuit Court of Appeals, Tenth Circuit.
    June 30, 1931.

      Kenaz Huffman, of Denver, Colo. (Frank E. Gove, Luke J. Kavanaugh, and Sherman A. Sutliff, all of Denver, Colo., on the brief), for appellant.
    Edward S. Ragsdale, of Washington, D. C. (William Wolff Smith, Gen. Counsel, United States Veterans’ Bureau, of Washington, D. C., Richard A. Toomey, Regional Atty., United States Veterans’ Bureau, of Denver, Colo., Lawrence A. Lawlor, of Washington, D. C., Ralph L. Carr, U. S. Atty., of Denver, Colo., and John G. Reid, Asst. U. S. Atty., of Hugo, Colo., on the brief), for the United States.
    Before COTTERAL, PHILLIPS, and MeDERMOTT, Circuit Judges.
   McDERMOTT, Circuit Judge.

The appellant (plaintiff below) sued on a war risk insurance policy which had lapsed for nonpayment of premiums on May 2,1919. His claim.is that he was totally and permanently disabled on or before that date. At the conclusion of all the evidence, the court directed a verdict for the United States. The correctness of that ruling is the only question in the case. If there is no substantial evidence of total and permanent disability on or before May 2, 1919, the trial court was right; otherwise not. Woolworth Co. v. Davis (C. C. A. 10) 41 F.(2d) 342; Waddell v. Guthrie & Co. (C. C. A. 10) 45 F.(2d) 977; Larabee Flour Mills v. Carignano (C. C. A. 10) 49 F.(2d) 151, and eases cited therein. '

Disregarding conflicting testimony, the plaintiff’s evidence developed substantially the following facts: He enlisted in May, 1917, and went overseas in April, 1918. Bfe suffered the exposures incident to active service both in this country and abroad. He had an attack of bronchitis in March, 1918; his cold and cough did not leave him, and he was compelled on occasions to fall out while on forced marches. He was gassed on September 26, 1918, and the next day received a shrapnel wound in the arm and was evacuated for hospital treatment. His arm remained in a cast until a day or so before his discharge on March 10, 1919. He returned to his home on a farm in Kansas, and did a little farm work that summer and fall. He was not strong, had a cough, raised mucous and blood, and his doctor suspected the existence of tuberculosis, and prescribed rest and wholesome food. His doctor testified he was not then able to do “steady, all-day, hard work.” In 1920 he took vocational training for about ten months; he then attempted to look after chicken incubators, but the work was too heavy. In January, 1922, his lungs were X-rayed by Dr. Owen, an X-ray expert and a witness for plaintiff, and the findings summarized as “chronic, active tuberculosis of the left apex.” Dr. Owen believed him to be then totally disabled. Following the advice of his doctors, he went to New Mexico, and. in March, 1923, his lungs were again Xrayed by Dr. Owen, with a finding of “chronic, probably inactive, tuberculosis of the upper left lobe.” At that time, Dr. Owen did not believe him to be permanently and totally disabled. He returned to New Mexico, and later came back to his home in Kansas. He did little or no work until 1925. In 1925 he worked at manual labor for a contractor for about eight months, but his condition was such that he was off from one-third to one-half the time. (In his statement to his sue-' coeding employer, he says he worked for Maxwell & McBride from August 31, 1924, to August 20, 1925.) On September 2,1925, he made written application to the Topeka Railway Company for a job as bus driver, and represented that he was in fair health and had never had a chronic disease, and specifically that he had never had consumption. He secured the job applied for”, and worked for that company from September 15, 1925, to December 31, 1926. His work was irregular, running from two to seventeen hours a day, and he did not work every day. The undisputed records disclose that during those sixteen months he worked 3,626% hours, an average of approximately eight hours a day, including Sundays. In five of the months he worked more than 275 hours; in nine he worked more than 240 hours; in thirteen he worked more than 200 Sours; and of the other three months (including the partial months at the beginning and ending of the employment) he worked 149% hours in one, 142% hours in one, and 140 hours in one. There is no evidence that he was favored in this work by either his employer or his fellow employees, although he testified that he was compelled to call for relief many times, and that all during this period he ran a temperature,, had pains in his chest, and a cough accompanied by spitting. During the first six months of 1927, he drove a bus between Kansas . City and Topeka, but only worked about a third of the time. He was a fourteen-hour bed patient at a government hospital from July, 1927, until early in 1929. He was a filling station attendant the last half of 1929, but worked only four or five days a week; he was in California for about two months, and then returned to the government hospital, where he now is.

There is substantial evidence that he was ,a tubercular when he was discharged from the army. There is little doubt that from the middle of July, 1927, he has been a sick man. The question is not, however, his present condition; the question is, What was his physical condition on or before May 2,1919? Evidence as to his condition since is pertinent, but only as il bears upon his condition while his policy was in force. The plaintiff’s right to recover depends upon whether or not he was permanently and totally disabled in May, 1919; the fact that he was then in the early stages of tuberculosis is not conclusive, for we are not required to close our eyes to a fact known to most mankind, and that is that many men and women are now doing their daily tasks who have at one time been so afflicted.

Two factors must be considered, the totality of the disability and its permanence. Treasury Department Regulation 20, issued March 9,1918, under the authority of section 13 of the War Risk Insurance Act (40 Stat. 399), defines total disability as “any impairment of mind or body which renders it impossible for the disabled person to follow continuously any substantially gainful occupation.”

This definition is couched in understandable language, and we are aided in construction by many authorities. This court has decided that, while “substantially gainful occupation” means any occupation, as contra-distinguished from the prewar occupation of the insured, Runkle v. United States (C. C. A.) 42 F.(2d) 804, it must be an occupation which the insured is by nature fitted for, Barksdale v. United States (C. C. A.) 46 F.(2d) 762. See, also, United States v. Cox (C. C. A. 5) 24 F.(2d) 944; United States v. Rasar (C. C. A. 9) 45 F.(2d) 545. It has also been held that the totality of the disability is not conclusively disproven by the fact that the insured was employed for a period after the policy lapsed. United States v. Eliasson (C. C. A. 9) 20F.(2d) 821; United States v. Cox (C. C. A. 5) 24 F.(2d) 944; United States v. Sligh (C. C. A. 9) 31 F.(2d) 735; United States v. Acker (C. C. A. 5) 35 F.(2d) 646; Hayden v. United States (C. C. A. 9) 41 F.(2d) 614; Malavski v. United States (C. C. A. 7) 43 F.(2d) 974; United States v. Meserve (C. C. A. 9) 44 F.(2d) 549; United States v. Phillips (C. C. A. 8) 44 F.(2d) 689; Ford v. United States (C. C. A. 1) 44 F.(2d) 754; United States v. Cole (C. C. A. 6) 45 F.(2d) 339; United States v. Rasar (C. C. A. 9) 45 F.(2d) 545; United States v. Godfrey (C. C. A. 1) 47 F.(2d) 126; Carter v. United States (C. C. A. 4) 49 F.(2d) 221. Back of these authorities are two reasons: The regulation reads that it must be “impossible” to follow “continuously” any substantially gainful occupation. An insured who is able to work only spasmodically, with frequent interruptions or change of jobs made necessary by his condition, cannot be said to be able to work with substantial continuity. Again, the word “impossible” must be given a rational meaning; it cannot fairly be said that it is “possible” for an insured to work because, under the stimulus of a strong will power, it is physically possible for him to stick to a task, if the work is done at the risk of substantially aggravating his condition. United States v. Acker (C. C. A. 5) 35 F.(2d) 646; United States v. Phillips (C. C. A. 8) 44 F.(2d) 689; United States v. Cole (C. C. A. 6) 45 F.(2d) 339.

Like any other question of fact, the subsequent employment may be of such duration, and be of such a nature, that it conclusively refutes any idea that the insured might have been permanently and totally disabled prior to and during the employment. United States v. Barker (C. C. A. 9) 36 F.(2d) 556; United States v. Rice (C. C. A. 9) 47 F.(2d) 749; United States v. Harrison (C. C. A. 4) 49 F.(2d) 227; United States v. Le Due (C. C. A. 8) 48 F.(2d) 789; Ross v. United States (C. C. A. 5) 49 F.(2d) 541. These cases are in accord with the principles of the long list of eases cited above holding the question to be for the jury; they do no more than to apply the further settled principle that, “ ‘when the testimony of a witness is positively contradicted by the physical facts, neither the court nor the jury can be permitted to credit it.’ American Car & Foundry Co. v. Kindermann (C. C. A. 8) 216 F. 499, 502; Missouri, K. & T. Ry. Co. v. Collier (C. C. A. 8) 157 F. 347, cert. denied 209 U. S. 545, 28 S. Ct. 571, 52 L. Ed. 920. Cases from many jurisdictions are gathered in a note in 8 A. L. R. 798, supporting the proposition that uneontradieted evidence which is contrary to physical facts should be disregarded. Judgments cannot and should not stand if they are entered upon testimony that cannot be true.” Woolworth Co. v. Davis (C. C. A. 10) 41 F.(2d) 342, 347.

No hard and fast rule can be laid down to the effect that, if the insured works a certain length of time, he cannot recover. The nature of the work done, the circumstances under which it is done, the character of work the insured is equipped to do, and perhaps other circumstances, all enter into the equation. While the rule may be difficult of application, it is nevertheless a simple one, and it is that the question of the totality and permanence of the disability is a question of fact for the jury, if the evidence is such that reasonable men may differ as to the answer.

In this ease we are of the opinion that there was evidence from which a jury might properly have found that the insured was totally disabled on May 2, 1919 ; there was some evidence that he was then an active tubercular, and the record discloses what is coming to be a matter of common knowledge, that active tubereulars should have complete rest. But, in addition to the disability being total, it must be permanent. If the insured had suffered a broken leg on May 1,1919, or had contracted the scarlet fever on that day, he would have been totally disabled while his policy was in force; but, unless he disregarded the advice of his doctors, no one would say that such a disability was permanent.

The same regulation defines permanent disability. as follows: “ ‘Total Disability’ shall be deemed to be ‘permanent’ whenever it is founded upon conditions which render it reasonably certain that it will continue throughout the life of the person suffering from it.”

Unless the plaintiff has produced some substantial proof that it was reasonably certain, on or before May 2, 1919, that his condition of total disability was one that would continue throughout his life, the case must be affirmed. We cannot find any such substantial evidence in the record. If, for the moment, we disregard the evidence as to the succeeding years, we have at best an insured in the early stages of tuberculosis. It is a matter of common knowledge that many such incipient tubereulars respond readily to the simple treatment of rest and nourishment; the-activity is arrested, and, while there probably always will be a susceptibility of recurrence, they are able to, and do, live out their lives following gainful occupations. On the other hand, there are some that do not respond to treatment, and their condition is incurable from the start. The burden of proof is upon the plaintiff; if his evidence leaves it a mere matter of speculation as to the permanence of his condition in May, 1919, he cannot recover. Atchison, T. & S. F. Ry. Co. v. Toops, 281 U. S. 351, 50 S. Ct. 281, 74 L. Ed. 896. In Blair v. United States (C. C. A. 8) 47 F.(2d) 109, 111, Judge Kenyon said, in affirming a judgment against an insured: “Por a court to find under this evidence that prior to March 31, 1919, appellant was totally and permanently disabled would be a mere guess, unsupported by any substantial evidence.” But if wé consider, as we must, the evidence of the succeeding years, it seems to us to be clear that his condition in May, 1919, was not a hopeless one. In 1923, following the advice of his doctors, he went to New Mexico, and in March, 1933, an X-ray photograph was interpreted by plaintiff’s expert as indicating a present inactivity. That his condition was then arrested is borne out by later events. Disregarding the eight months or a year he worked for the contractor in 1924r-25, and the six months he worked as a stage driver in 1927, and his contradictory statements which affect the weight of his testimony, the record discloses that he held a steady job as a bus driver for nearly sixteen months, averaging approximately eight hours a day, including Sundays, and that each month of that period he worked a substantial part of the time.

While there must and should be a liberal contraction of this statute and the contracts made under it; and while it is unfortunate that the plaintiff permitted his policy to lapse, we are of the opinion that, if the jury had found that the plaintiff was permanently and totally disabled on or before May 2,1919, the verdict would not have found substantial support in the record. United States v. Barker (C. C. A. 9) 36 F.(2d) 556; United States v. Rice (C. C. A. 9) 47 F.(2d) 749.

The judgment of the court is therefore affirmed.