author: BUTZNER, Circuit Judge: WIDENER, Circuit Judge

text:
    David SPRINGER et al., Appellants, v. JOSEPH SCHLITZ BREWING COMPANY, Appellee.
    No. 73-2360.
    United States Court of Appeals, Fourth Circuit.
    Argued June 4, 1974.
    Decided Jan. 14, 1975.

      Jonathan R. Harkavy, Greensboro, N. C. (Norman B. Smith, Smith, Carrington, Patterson, Follín & Curtis, Greensboro, N. C., on brief), for appellants.
    W. P. Sandridge, Winston-Salem, N. C. (Charles F. Vance, Jr., Winston-Salem, N. C., on brief), for appellee.
    Before WINTER, BUTZNER and WIDENER, Circuit Judges.
   BUTZNER, Circuit Judge:

This North Carolina diversity case raises the question of the liability of an industry to downstream riparian owners when its wastes overload a city’s treatment facilities and cause water pollution. The plaintiffs, David and Diana Springer, own an interest in a large farm on the Yadkin River. Seeking an injunction and compensatory and punitive damages, they contend that, beginning in late 1969, wastes from a new brewery owned by Joseph B. Schlitz Brewing Company in Winston-Salem, North Carolina, overloaded the city’s sewage treatment plant, causing it to pollute the Yadkin and interfere with their riparian rights. The Springers introduced evidence, which, viewed in the light most favorable to them, showed that Schlitz knew, or in the exercise of reasonable care should have known, that the city sewage plant lacked the capacity to treat the brewery’s waste; that in discussions with the city, Schlitz underestimated the quantity and harmfulness of the waste; and that the company violated the city sewage ordinance. The evidence also established that in the spring and summer of 1970, after Schlitz reached full production, inadequately treated sewage from the overloaded plant caused six unprecedented fish kills and otherwise impaired the quality of the Yadkin River.

At the close of the Springers’ case, the court directed a verdict for Schlitz on the ground that North Carolina absolves the user of a municipal sewer system of liability for the city’s failure to adequately treat its sewage. We reverse because we believe the case is controlled by exceptions to North Carolina’s rule of immunity.

I

In North Carolina, a riparian landowner has a right to the agricultural, recreational, and scenic use and enjoyment of the stream bordering his land, subject, however, to the rights of upstream riparian owners to make reasonable use of the water without excessively diminishing its quality. Though he does not own the fish in the stream, the riparian owner’s rights include the opportunity to catch them. Interference with riparian rights is an actionable tort, and a riparian owner may join several polluters as joint tort-feasors. See generally, Aycock, Introduction to Water Use Law in North Carolina, 46 N.C.L. Rev. 1, 11-13 (1967).

Nevertheless, an industry that uses a municipal sewage system to dispose of its waste is not liable to a riparian landowner for the pollution caused by the city’s failure to provide adequate treatment. Quoting from 43 C.J. 1158, the North Carolina Supreme Court stated in Hampton v. Spindale, 210 N.C. 546, 548, 187 S.E. 775, 776 (1936):

“[T]he inhabitants of a city who invoke its power to construct and control a sewer, and who use the sewer . . . for the purpose and in the way prescribed by law, are not liable jointly with the city for the damages which result to third persons from the negligence of the city in the construction, management, or operation of the sewer.”

In the only other North Carolina case to consider the point, the court justified the rule by emphasizing the inability of a private sewer user to control a city’s treatment of • its wastes after they entered the system. Clinard v. Town of Kernersville, 215 N.C. 745, 748, 3 S.E.2d 267, 270 (1939). The district court considered itself bound by these decisions to enter a directed verdict for Schlitz.

The Springers claim that their proof is sufficient to invoke exceptions to the general rule of immunity. Specifically, they contend that Schlitz should be held liable if it violated the city sewage ordinance, or if Schlitz knew, or should have known, of the inability of the city to adequately treat the brewery’s wastes. Since no North Carolina court has considered these exceptions, we must determine the common law of the state by examining the rationale for the established rule, developments on this point in other states, and analogous areas of the state’s common law. See Bernhardt v. Polygraphic Company of America, Inc., 350 U.S. 198, 208, 76 S.Ct. 273, 100 L.Ed. 199 (1956) (Frankfurter, J., concurring); Corbin, The Laws of the Several States, 50 Yale L.J. 762, 770 (1941). We will treat the exceptions on which the Springers rely in Parts II and III of this opinion.

II

In February 1970 the City of Winston-Salem enacted a comprehensive sewage ordinance to take effect in May. The ordinance requires every user of industrial sewers to have a discharge permit. Users may discharge only wastes containing 2500 ppm BOD or less, and they are forbidden to release sewage containing a wide variety of dangerous or difficult-to-treat substances. The ordinance imposes surcharges for BOD pound loadings caused by a concentration above 300 ppm. Originally, it allowed the city to furnish advice and technical assistance, but it did not provide for variances or exemptions. By state law, its violation is a misdemeanor.

Schlitz’s effluent contained more than 2500 ppm BOD until April 1971. Beginning in May 1970, the city billed, and Schlitz paid, all BOD surcharges. The brewery and other industries, however, were allowed to operate in violation of the ordinance and without permits as long as they submitted schedules for compliance and conformed to them. It received its permit, one of the first issued to any industry, in May 1971.

The violation of a municipal sewage ordinance which is intended to protect downstream riparian owners can subject an industrial sewage source to private civil liability. Hampton v. Spindale, 210 N.C. 546, 548, 187 S.E. 775, 776 (1936), expressly restricts freedom from liability to those persons who use the sewers “in the way prescribed by law.” Although this is dictum, it is consistent with the rationale for the private user’s immunity. When an industry turns over the control of its sewage to the city, it can reasonably expect that the city will safeguard riparian property by effective treatment. But it is not reasonable for an industry to expect a city to safely treat prohibited sewage. Consequently, the reason for granting immunity does not then apply.

This reading of Hampton conforms to North Carolina’s general law regarding the effect of regulatory legislation on civil liability. The state is firmly committed to the proposition that the “violation of a statute designed to protect persons or property is a negligent act, and if such negligence proximately causes injury, the violator is liable.” Murray v. Bensen Aircraft Corp., 259 N.C. 638, 131 S.E.2d 367 (1963) (federal aircraft safety statute); accord, Bell v. Page, 271 N.C. 396, 156 S.E.2d 711 (1967) (town ordinance regulating private swimming pools). The statute or ordinance, serving as a legislative declaration of a standard of care, creates a private right not to be harmed by its violation. Bell v. Page, supra; King v. Pope, 202 N.C. 554, 163 S.E. 447 (1932).

Schlitz’s failure to obtain a permit until May 1971 does not afford the Springers a ground for recovery. The permit does not protect riparian owners. It is only an instrument of the city’s enforcement program, and its absence does not pollute the stream. Moreover, the ordinance does not explicitly forbid the discharge of wastes containing more than 2500 ppm BOD. The ordinance is a criminal statute which must be construed in the defendant’s favor in civil proceedings as well as in criminal ones. Hinson v. Dawson, 241 N.C. 714, 86 S.E.2d 585 (1955). Since the discharge of more than 2500 ppm BOD is not a crime, it does not constitute negligence per se.

In contrast, the discharge of sewage prohibited by Section 23-2(2) is a crime, and under North Carolina law it is actionable if it proximately causes damage to riparian property. Section 23-2(2) states in part:

“(2) Except as hereinafter provided, it shall be unlawful for any person to discharge or cause to be discharged any of the following described materials, waters, liquids, or wastes into any public sanitary sewer:
“(g) Liquid wastes containing any toxic or poisonous substances in sufficient quantities to (i) interfere with the biological processes used in a sewage treatment plant, or (ii) which, in combination with other liquid wastes, upon passing through a sewage treatment plant will be harmful to persons, livestock, or aquatic life utilizing the receiving streams into which water from a sewage treatment plant is discharged.”

In order to establish that Schlitz’s violation of the ordinance was negligence, the Springers would have to prove that the brewery wastes had the characteristics forbidden by Section 23-2(2). Viewed in the light most favorable to them, the evidence showed that the brewery’s wastes had a toxic or poisonous effect on bacteria that are essential to the sewage treatment process. The evidence also showed that after passing through the plant the wastes were harmful to aquatic life in the receiving stream. The jury should therefore be allowed to determine whether or not the discharge violated the ordinance. If it did, this was negligence, and the jury should then decide whether it proximately caused damage to the Springers’ property.

Schlitz argues that its discharge of brewery wastes is not actionable because the city’s officials did not require compliance with the ordinance until May 1971, except for the payment of surcharges. This contention lacks merit. Section 23-4(d) of the ordinance authorized the water and sewer officials to:

“consult with and furnish technical assistance and advice to industrial users of the city’s sewerage system in order to assist them in devising procedures and constructing equipment to reduce or eliminate from industrial wastes objectionable characteristics or properties which may not otherwise be discharged into the public sanitary sewers under Section 23 — 2.”

While this provision recognized that compliance was not instantly attainable and allowed city officials to furnish technical assistance and advice, its terms gave them no power to affect the rights of third parties. A statute protecting life or property creates a private right not to be harmed by its violation unless the legislature specifically provides otherwise. Carr v. Murrows Transfer, Inc., 262 N.C. 550, 138 S.E.2d 228 (1964). Public officials have no more power to alter these private rights than the legislature chooses to give them. Swaney v. Peden Steel Co., 259 N.C. 531, 542, 131 S.E.2d 601, 609 (1963); Kotkins v. Seattle, 119 Wash. 590, 206 P. 11 (1922).

It is argued, however, that the ordinance should not be read literally because the only reasonable construction is one which would allow city officials to dispense with its requirements. While it is true that the city’s director of water and sewers believed that immediate, rigorous enforcement would be undesirable because it would “shut down just about every industry in Winston-Salem,” there is no conflict between the public interest in keeping a factory open and the private right to recover damages for pollution. The two may be reconciled by requiring the source of pollution to pay damages while allowing it to operate. See Boomer v. Atlantic Cement Co., 26 N.Y.2d 219, 309 N.Y.S.2d 312, 257 N.E.2d 870 (1970). Since the plain language of the ordinance does not authorize city officials to dispense with its requirements, their actions could not affect the Springers’ rights. Weingand v. City of North Platte, 108 Neb. 17, 187 N.W. 90, 91 (1922); Kotkins v. Seattle, 119 Wash. 590, 206 P. 11, 13 (1922).

In addition, paying effluent surcharges did not relieve Schlitz from having to obey the rest of the ordinance. The city levies these charges “to cover some of the cost to the city of treating such wastes.” They begin not at 2500 ppm but at 300 ppm, the approximate dividing line between domestic and industrial strength sewage. The charges are enumerated in the ordinance section which sets other fees, not in the one which describes prohibited uses. They are revenue measures rather than substitutes for civil liability.

Ill

As an alternative ground of recovery, the Springers argue that Schlitz should be held liable if it knew, or in the exercise of reasonable care should have known, that the city could not adequately treat the brewery’s waste. The validity of this claim depends on an analysis of the underlying reasons for the general rule of immunity.

In absolving the user of a municipal sewage system from liability, North Carolina follows the leading case of Carmichael v. Texarkana, 116 F. 845 (8th Cir. 1902). See Hampton v. Spindale, 210 N.C. 546, 187 S.E. 775, 776 (1936); Clinard v. Town of Kernersville, 215 N.C. 745, 748, 3 S.E.2d 267, 270 (1939). Carmichael involved a suit by a riparian owner against a city and its inhabitants. The court affirmed the dismissal of the complaint against the inhabitants, holding that the city alone was responsible for the nuisance created by its sewer system. It analogized the problem to a more familiar area of vicarious responsibility — the employer’s liability for the torts of an independent contractor:

“If [the inhabitants] had taken their own sewage to the creek, and poured it into its waters above the premises of the complainants, they would undoubtedly . have been liable . . On the other hand, if they had made an agreement with an independent contractor ... to remove all their sewage from their premises to a place where, and in a manner in which, it could do no unnecessary injury to any one, and their contractor had carelessly deposited it in the stream above [complainants’] property, the [inhabitants] would not have been liable for these wrongful acts of their contractor. Their relation to the city and to its negligence is not of a different character.” 116 F. at 849.

The city, in the court’s view, undertook to dispose of the residents’ wastes in a nuisance free manner, and they in turn consented to such conditions as the city might put on the use of the sewers.

Although there was no actual contract of employment, Carmichael correctly analyzed the relation between the inhabitants and the city. The city controls the choice of methods that will be used to achieve the desired result, and the individual sewer user lacks authority to control the city’s performance. The Supreme Court of North Carolina accepted this view in Clinard v. Town of Kernersville, 215 N.C. 745, 748, 3 S.E.2d 267, 270 (1939), where it said:

“The [polluter] has no control over the disposition of the water. It is disposed of under the sole supervision and control of the defendant Town. Under such circumstances no liability is imposed upon [the polluter] for any damage caused to the property of the plaintiffs on account of the emptying of such dye water into Abbotts Creek. Carmichael v. Texarkana It

It

The liability of the user of a municipal sewer system therefore appears to be limited in the same way as the liability of an independent contractor’s employer.

A North Carolina employer is not liable for his contractor’s negligence when he lacks the power to control the contractor’s actions. He remains, though, responsible for negligent acts within his own control even when the contractor is also at fault. State Highway Commission v. Diamond Steamship Transportation Corp., 226 N.C. 371, 38 S.E.2d 214 (1946); Evans v. Rockingham Homes, Inc., 220 N.C. 253, 17 S.E.2d 125 (1941). Since the selection of the contractor is within the employer’s control, “if it appears that the employer knew, or by the exercise of reasonable care might have ascertained that the contractor was not properly qualified to undertake the work, he may be held liable for the negligent acts of the contractor.” Page v. Sloan, 12 N.C.App. 433, 183 S.E.2d 813, 817 (1971) , aff’d, 281 N.C. 697, 190 S.E.2d 189 (1972) .

The owner of a large industrial source of sewage, particularly one only planned or under construction, is similarly situated. A manufacturing company is in a position to know enough about its own operations to understand the nature of its wastes and the problems of treating thém. If it has not yet selected a plant site, it may have a choice among cities and disposal systems. It may also be large enough to pre-treat or properly dispose of its own sewage. When the company represents a desirable source of jobs and tax revenues, the local authorities can be expected to provide it with technical information about the municipal sewers. In brief, a large industrial sewer user can make an informed decision whether to use a city sewer system to render its wastes nuisance free.

According to the Springers’ evidence, Schlitz, which has more than a century of experience in brewing beer, considered several cities in the Southeast before selecting Winston-Salem for a brewery site. As part of its investigation, the company requested information about the city’s sewage facilities, and its representatives toured the treatment plant. Had the company inquired, it would have learned that the plant was operating at or over its daily capacity of 18 million gallons of sewage containing 76,000 pounds of BOD. The city assured Schlitz that it would adequately treat its wastes after Schlitz advised the city to expect 15,000 pounds of BOD per day. Before the brewery had been open a year, however, it was discharging 56,000 pounds of BOD per day into a system which had previously reached its 76,000 pound capacity. Brewery wastes are known by sanitary engineers to be difficult to treat and to interfere with the treatment of other wastes because of their high concentration of BOD and fluctuating alkalinity.

These facts disclose that Schlitz knew the characteristics of its own sewage and that it exercised control over its selection of a site and of the sewage system which would dispose of its waste. The evidence also indicates that Schlitz could not rely on the city’s acceptance of its sewage, because it had not furnished the city accurate information. Finally, the proof supports an inference that Schlitz knew, or in the exercise of reasonable care shoüld have ascertained, that the city could not adequately treat its brewery wastes. The jury might reasonably have decided that Schlitz negligently selected the city of Winston-Salem to treat its sewage. Drawing upon North Carolina’s common law principles governing the liability of an employer of an independent contractor, we conclude that Schlitz is not, as a matter of law, immune from liability. Accordingly, on remand, the district court should submit the issue of Schlitz’s liability on the Springers’ alternative theory.

IV

The record discloses that after the 1970 fish kills, Schlitz expended more than $1,300,000 for sewage treatment facilities, and it is now in compliance with the effluent quality standards of the city ordinance. The city has doubled the size of its treatment plant, and it can now properly treat the waste from the brewery. In view of this evidence, it is unlikely that an injunction is appropriate under North Carolina law. Cf. Morgan v. High Penn Oil Co., 238 N.C. 185, 77 S.E.2d 682, 690 (1953); Rhyne v. Flint Mfg. Co., 182 N.C. 489, 109 S.E. 376 (1921); see generally, Aycock, Introduction to Water Use Law in North Carolina, 46 N.C.L.Rev. 1, 14 (1967).

On remand, the court should instruct the jury that the Springers cannot recover if the evidence discloses only that Schlitz’s waste, after passing through the Winston-Salem treatment plant, polluted the Yadkin, killed fish, and caused other damage to the Springers’ riparian property. Under North Carolina’s general rule of immunity, Schlitz cannot be held liable if the evidence discloses no more than those facts.

The jury should be told that in order for the Springers to recover they must prove by a preponderance of the evidence that Schlitz violated Winston-Salem’s sewage ordinance by discharging sewage prohibited by § 23-2(2) or that Schlitz knew, or in the exercise of reasonable care should have ascertained, that the city’s treatment plant could not adequately treat its sewage. In either event, the Springers must also prove that the brewery’s waste proximately caused their injury; that is, that it was foreseeable that Schlitz’s waste, alone, or in conjunction with other waste, would damage the Springers’ riparian property. This outline of the elements of the plaintiffs’ claim, of course, is not intended to preclude the court from charging the jury about defenses Schlitz may present when the case is fully tried.

The judgment of the district court is vacated, and this case is remanded for a new trial. The Springers shall recover their costs.

WIDENER, Circuit Judge

(concurring and dissenting):

While I concur in part with the opinion of the court, I must respectfully dissent from the holding of the majority that liability may be predicated on a violation of the city sewer use ordinance and from its holding that the district court should reexamine its ruling with respect to the defendant’s Texas plant absent any evidence showing a similarity of the two operations.

I

I think it of some consequence that the factual background of the case concerning dates be stated in slightly more detail than is done by the majority opinion, which to me lumps together whatever liability there may be.

Schlitz produced its first beer at the Winston-Salem brewery about July 1, 1969. At that time, there was no sewer use ordinance, that is to say, no limitation was placed by the city upon the character, quantity or strength of waste which could be put into the sewer system.

On February 2, 1970, the sewer use ordinance referred to in the opinion was enacted to become effective May 1, 1970. The city did not advise Schlitz or any other industrial user of the ordinance and of the necessity of obtaining a permit until June 11, 1970. As the majority opinion sets out, the waste containing more than 2500 ppm BOD from Schlitz has not continued after April 1971. So any liability of Schlitz under any theory must be limited by the April 1971 date, and any liability based on an unlawful discharge into the system must commence with the May or June 1970 date.

II

Since there was no municipal ordinance or statute requiring Schlitz to connect to the sewer facility of Winston-Salem, and Schlitz was not within the city but rather in Forsyth County, I am in agreement with the majority opinion as it compares the relation of Schlitz and the city as that of a disposer of waste who has agreed with an independent contractor to have such waste disposed of.

With that in mind, I believe the proper rule is as stated in Page v. Sloan, supra, that if Schlitz knew, or if by the exercise of reasonable care might have ascertained that the city was not properly qualified to undertake the work, Schlitz may be held liable for the negligent act of the city. And I note this rule requires not only knowledge or lack of reasonable care on the part of Schlitz, but also the negligent act of the city in the disposal of the waste, or in the agreement so to do.

Ill

In my opinion, no violation of the sewer use ordinance was shown because of the construction placed on the ordinance by the city.

The last paragraph of § 23-4 allows the city to assist “industrial users” “in devising procedures and constructing equipment to reduce or eliminate . . . objectionable characteristics or properties which may not otherwise be discharged into the public sanitary sewers under § 23-2.” Thus, as the majority recites, the ordinance shows on its face that it was not meant for instantaneous compliance. At the very best, from the plaintiff’s viewpoint, it is ambiguous.

The uncontradicted and undenied testimony of the plaintiff’s witness Styers supports this conclusion:

“This is something that had never been developed before. It’s new for municipalities. It’s new for industries, and when you pass a law of this sort, you don’t the next morning go out and clamp a padlock on every industry in town. You have to give them some period of time in which they can comply with the ordinance. If we had done that, then we would have shut down just about every industry in Winston-Salem.”

Styers further stated:

“When we were making this ordinance, we knew — this came up quite a bit — we knew that on the date that the ordinance was passed, we could not expect these industries to be informed of their wastes, the characteristics of their wastes, and what they would have to do to their wastes. We knew that after we made tests and confronted them with the quantities of materials they were discharging, that they would have to hire engineers to construct or to design plants. They would have to hire contractors to build these facilities and to alter their characteristics of waste. And, therefore, in that ordinance, we provided for this interim period where the City would have the opportunity to give them the opportunity to do whatever was necessary to comply with the regulations.” [Italics added]

It is then clear from the uncontradicted testimony that the city did not view the sewer use ordinance as requiring immediate compliance, but rather interpreted the set of ordinances as requiring reasonable efforts to comply. There is no evidence that Schlitz did not act in a reasonable manner in seeking to comply with the provisions after their passage; indeed, as the district court pointed out, the plaintiff’s own evidence showed Schlitz made a determined cooperative effort to comply with the ordinances.

The city officials, then, who were entrusted with the administration of the ordinance construed it as permitting time to comply.

Courts generally prefer an ordinary and practical construction of an ordinance, and the construction given an ordinance by those charged with the duty of applying its provisions and enforcing them prior to the controversy “is very persuasive.” 6 McQuillin, Municipal Corporations (3rd Ed. 1969) § 20.45; United States v. Cerecedo Hermanos y Compania, 209 U.S. 337, 339, 28 S.Ct. 532, 52 L.Ed. 821 (1908).

While the statement in the majority opinion that “[p]ublic officials have no more power to alter . . . private rights than the legislature chooses to give them,” is a correct abstract statement, in my opinion it should not be applied here. It does not take into account the chronological setting of events in this case, and does not take into account the construction the city placed on its own ordinance. Prior to 1970 there had been no ordinance so regulating waste placed into the system. Then, the ordinances in issue here were passed. Conceding that the acts and interpretations of the officials of the city may not be used to abrogate private rights, such contemporaneous acts and interpretations are admissible and important to the construction of such ordinances, and the determination of whether such ordinances have in fact been violated.

The general rule is that when dealing with the interpretation of an ambiguous city ordinance, one must consider contemporaneous interpretations of the ordinance by city officials, 6 McQuillin, Municipal Corporations § 20.45 (3rd Ed. 1969); Heeht Co. v. McLaughlin, 93 U.S. App.D.C. 382, 214 F.2d 212 (1954); Savings Bank of Rockville v. Wilcox, 117 Conn. 188, 167 A. 709 (1933).

An unambiguous ordinance should be interpreted on its face alone, but “in doubtful cases where the language of an ordinance is ambiguous, a contemporaneous construction adopted by the parties interested in the enforcement of the ordinance, while not controlling, is entitled to great weight, and is sometimes given an effect in the nature of estoppel or waiver with respect to the assertion of a different meaning.” 6 McQuillin, Municipal Corporations (3rd Ed. 1969) § 20.45.

Since it is clear to me that the construction placed by the city on its own ordinances was the only reasonable one (a contrary construction would have shut down about every industry in Winston-Salem), and that Sehlitz had complied with the ordinances as construed by the city authorities charged with their enforcement, I am of opinion liability should not be based upon a violation thereof.

IV

With the district judge, I see no connection between the Texas operation of Sehlitz and the North Carolina operation. If the operations were proven to be similar, then I think what Sehlitz knew about the Texas operation at the relevant times in the North Carolina affair might be admissible as evidence of knowledge. But I cannot find that the similarity of the operations has been proved. Therefore, I would not require the district court to reexamine its ruling that the evidence was irrelevant absent some proof of similarity of the Texas and North Carolina operations. “The determination of the relevancy of proof offered at the trial is a matter resting largely within the sound discretion of the trial court and is not ordinarily reviewable upon appeal.” Beaty Shopping Center v. Monarch Insurance Company of Ohio, 315 F.2d 467, 471 (4th Cir. 1963).

      . The Springers also assert that Schlitz both defrauded the city and conspired with it to violate the state’s water quality regulations. The district court properly dismissed these claims.

      . Winston-Salem Code of Ordinances § 23-4.

      . Winston-Salem Code of Ordinances § 23-3(l)(a) provides as follows:
      “[A]ny waters or wastes discharged by any person, which have the following characteristics, and which do not have any of the characteristics prohibited by Sec. 23-2, may be discharged into the public sanitary sewers:
      (a) a five-day B.O.D. not exceeding 2,500 ppm. . .
      § 23-1(2) defines B.O.D.:
      “B.O.D. (denoting Biochemical Oxygen Demand) shall mean the quantity of oxygen utilized in the biochemical oxidation of organic matter under standard laboratory procedure in five (5) days at 20° C, expressed in parts per million by weight. B.O.D. is a measure of the polluting strength of wastes.”
      In other words, BOD is not a separate substance but a measure of the ability of decomposing sewage to remove dissolved oxygen from the water.
      BOD has two important polluting effects, depending on the manner in which it decays. It first removes dissolved oxygen necessary for fish and other aquatic life from the stream, causing fish kills and other biological changes. Once the dissolved oxygen has been exhausted, the remaining BOD undergoes septic decomposition, which produces slime, scum, gas, and fecal odors.

      . Winston-Salem Code of Ordinances § 23-2(2).

      . Winston-Salem Code of Ordinances § 23-12.
      The pound loading is the actual amount of BOD in a given volume of sewage (the hydraulic load) that the treatment plant must remove. It is obtained by multiplying the volume of sewage in millions of gallons per day by the weight of a gallon of water (8.34 pounds) and the concentration of BOD in parts per million. For example, the Winston-Salem treatment plant was designed to treat a flow of 18 million gallons per day containing 500 ppm of BOD, or 75,060 pounds of BOD per day (18 million gallons/day x 500 parts/million x 8.34 pounds = 75,060 pounds/day).

      . Winston-Salem Code of Ordinances § 23 — 4(d).
      In 1972 the ordinance was amended to provide for variances. The new sections allow the Superintendent of Water and Sewers to grant a conditional permit to a noncomplying firm if the firm submits an acceptable schedule of compliance and agrees to follow it. Failure to adhere to the schedule may lead to the exaction of a performance bond and ultimately to revocation of the permit and forfeiture of the bond. See Winston-Salem Code of Ordinances § 23-4(e)-(h).

      . North Carolina Gen.Stat. § 14-4.

      . Accord, Weingand v. City of North Platte, 108 Neb. 17, 187 N.W. 90 (1922).

      . A town is liable for pollution it causes by dumping inadequately treated sewage. Clinard v. Town of Kernersville, 215 N.C. 745, 3 S.E.2d 267 (1939); see Aycock, Introduction to Water Use Law in North Carolina, 46 N.C. L.Rev. 1, 11-13 (1967).

      . Dissolved BOD is removed from sewage by exposing it to decay causing bacteria under controlled conditions. In Winston-Salem this was done in trickling filters, which consist of beds of crushed stone coated with bacterial slime. Excessive pound loadings of BOD cause the slime to be stripped from the filters, rendering them almost useless until a fresh growth of bacteria forms. Thus a large source of BOD may interfere with the treatment capacity of the entire system. Excess acidity or alkalinity also interferes with the operation of trickling filters by killing the bacteria. Excessive amounts of BOD, alone or in combination with other wastes, can kill fish and other aquatic life by depleting the oxygen in the receiving stream,

      . In 1972 the ordinance was amended to explicitly authorize the city to suspend the requirements of § 23-2(2). Winston-Salem Code of Ordinances § 23-4(e)-(h); see note 6 supra.

      . In Hampton v. Spindale, 210 N.C. 546, 548, 187 S.E. 775, 776 (1936), the Court relied in part on the statement of the rule of immunity found at 43 C.J. 1158. The same chapter of the treatise states that a property owner’s violation of a municipal drainage ordinance constitutes negligence although excused in advanee by an administrative officer.

      . Winston-Salem Code of Ordinances § 23-12(c).

      . According to the evidence, the conventional value for the strength of untreated household sewage is approximately 275 ppm BOD.

      . Hampton also cites Kraver v. Smith, 164 Ky. 674, 177 S.W. 286 (1915), in which a distiller was absolved from liability despite the claim that it had discharged sewage which it should have known the town pumping station could not handle. Kraver provides no rationale for this holding other than the general rule. Its summary rejection of the claim is not persuasive.
      Other cases recognizing the Carmichael rule are Athey v. Tennessee Coal, Iron & R. R. Co., 191 Ala. 646, 68 So. 154 (1915); Ratzlaff v. Franz Foods of Arkansas, 250 Ark. 1003, 468 S.W.2d 239 (1971); and Johnson v. Kraft-Phenix Cheese Corp., 19 Tenn.App. 648, 94 S.W.2d 54 (1935); cf. People v. City of Los Angeles, 83 Cal.App.2d 627, 189 P.2d 489 (1948); Weingand v. City of North Platte, 108 Neb. 17, 187 N.W. 90 (1922).

      . Cf. Ratzlaff v. Franz Foods of Arkansas, 250 Ark. 1003, 468 S.W.2d 239 (1971), in which an industry that had contracted with a city not to overload its treatment plant with BOD was held liable to a riparian owner.

      . When an activity is dangerous although reasonable care is exercised, i. e. inherently dangerous, the employer remains liable for resulting injuries even when the work is done by an independent contractor. Greer v. Callahan Construction Company, 190 N.C. 632, 130 S.E. 739 (1925).
      One state has held that the source of high BOD wastes remains liable for treatment in all circumstances under the theory that they are inherently dangerous substances which must be rendered safe before they are allowed to leave his land. Klassen v. Central Kansas Cooperative Creamery Ass’n, 160 Kan. 697, 165 P.2d 601 (1946); see Fletcher v. Rylands, L.R. 1 Ex. 265 (1866); 2 Harper & James, The Law of Torts § 14.4, at 798-99 n. 25 (1956). But see Restatement, Torts § 520; Prosser, Handbook of the Law of Torts 525-530 (3rd ed. 1964). In view of our disposition of the case, we find it unnecessary to pursue this theory.

      . We express no opinion about the possible liabilities of a large industrial sewage source already connected to a sewer system which subsequently becomes overloaded through the acts of others.
      Moreover, our decision is not intended to alter the liabilities of the ordinary sewer user. Most of the inhabitants of a city, including all of the households, lack the skill and resources to learn the characteristics of their own sewage or the city’s ability to treat it. Even if they know that the sewer system is inadequate, they have no practical alternative but to continue using it. The general rule of immunity therefore protects them when they knowingly use an overloaded system, as long as they do so in a lawful manner.

      . See note 10 supra.

      . The district court excluded testimony which disclosed that sewage from a brewery Schlitz had recently built in Longview, Texas, greatly exceeded its expected effluent strength and volume, causing a treatment plant similar to Winston-Salem’s to malfunction. On remand, the district court should reexamine its ruling in the light of this opinion. The evidence appears admissible to show Schlitz’s knowledge about the characteristics of its brewery’s sewage and the problems that it could cause. It should be admitted unless its probative value is offset by the prejudice it will generate. McCormick, Evidence § 185, at 438-40 (2d ed. 1970); Stansbury, North Carolina Evidence § 80 (1946).
      We find no error in the district court’s other rulings on the admission of evidence.

      . Styers had been Superintendent of the Sewage Treatment Plant for the city.


source: Caselaw Access Project

author: ROBERT P. ANDERSON, Circuit Judge: MULLIGAN, Circuit Judge

license: Public Domain

text:
    ESTATE of David SMITH, Deceased, et al., Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
    No. 133, Docket 74-1617.
    United States Court of Appeals, Second Circuit.
    Argued Nov. 4, 1974.
    Decided Feb. 4, 1975.

      George G. Wolf, Tax Div., Dept, of Justice, Washington, D. C. (Scott P. Crampton, Asst. Atty. Gen., Gilbert E. Andrews, and William S. Estabrook, Attys. Tax Div., Dept, of Justice, Washington, D. C., on the brief), for respondent-appellee.
    M. Bernard Aidinoff, New York City (Sullivan & Cromwell, Ira M. Lowe, Henry Christensen, III, and Laurie L. Malman, New York City, on the brief), for petitioners-appellants.
    Before KAUFMAN, Chief Judge, and ANDERSON and MULLIGAN, Circuit Judges.
   ROBERT P. ANDERSON, Circuit Judge:

David Smith, a sculptor, died on May 23, 1965 possessed of 425 pieces of sculpture, which he had created, along with cash and other liquid assets totalling $210,647.08. His will, dated January 21, 1965, was admitted to probate by the Surrogate’s Court of Warren County, New York, and Ira M. Lowe, Clement Greenberg, and Robert Motherwell were duly appointed and qualified as co-executors.

Had the large number of artistic works which he left at his death been generally known and had all of these works been immediately placed on the market they would have brought substantially less than could be received by feeding them slowly into the market over a period of time. Shortly after Smith’s death, therefore, the executors began an orderly process of gradual liquidation of the Estate’s holdings of sculpture through Marlborough-Gerson Galleries, which was entitled to a commission on each piece of sculpture sold in accordance with a 1963 contract that was subsequently renewed by the executors in 1968 and 1970. From May 23, 1965 through April 30, 1970, an aggregate of $1,187,144.67 in commissions was paid to Marlborough and allowed by the Surrogate’s Court. Further commissions of $396,400 were paid by the Estate to Marlborough from May 1, 1970 through August 21, 1973 and the Surrogate’s Court allowed these as well.

A federal estate tax return was filed on August 24, 1966 and a deficiency was agreed upon and paid on July 10, 1968. On August 7, 1969, the Commissioner of Internal Revenue (Commissioner) issued a notice of deficiency for $2,444,629.17 based upon a valuation of Smith’s estate of $5,256,918 and a disallowance of any payments of commissions in excess of $289,661.65.

Upon a petition by the executors for redetermination, the Tax Court reduced the value of the estate to $2,700,000, and no appeal has been taken from this appraisal. From the time of Smith’s death to August 21, 1973, the executors paid to the Galleries, with the approval of the Surrogate’s Court, the total sum of $1,583,544.67 in commissions for sales of Smith’s works, but the Tax Court allowed the Estate only $750,447.74 as deductions for sales commissions under § 2053(a) of the Internal Revenue Code of 1954 (26 U.S.C. § 2053(a)) and Treas. Reg. § 20.2053-3. This allowance was the exact amount necessary to pay the decedent’s debts, the expenses of administration, and taxes as finally adjudicated.

Appellants first argue that, given the speculative and volatile market value of the sculptures, which were the Estate’s major assets, they were under a duty to liquidate sufficient of these assets as were necessary adequately to preserve their value, provide for debts, anticipated administration expenses and taxes of the Estate and diversify properly the Estate’s investments. In particular, they claim to have been put on notice by the Commissioner’s Notice of Deficiency dated August 7, 1969 that they had to be prepared to meet a contingent liability of $2,444,629.17 in additional federal estate taxes and $570,193.23 in additional New York estate taxes, and that sales to meet these obligations alone would have incurred more in commissions than the entire $1,602,644.67 which they in fact paid and now seek as a deduction. The disputed sale expenses, they contend, were therefore incurred as necessary steps in the course of their administration of the Estate and are deductible under Treas.Reg. § 20.2053— 3(d)(2).. The evidence indicates, however, that all of the expenses disputed by the Commissioner were incurred before the notice of deficiency was issued, all commissions incurred subsequent to the notice of deficiency having- been allowed. In fact, the $579,323.30 in cash needed to pay the expenses, debts, and taxes incurred by the Estate to April 30, 1970 had been realized by the Estate from the sale of sculpture by February 28, 1967. Under these circumstances the Tax Court’s determination that no more than $750,447.74 in sales commissions were necessary either to preserve the estate of pay debts, administrative expenses and taxes is not clearly erroneous. See Commissioner v. Duberstein, 363 U.S. 278, 80 S.Ct. 1190, 4 L.Ed.2d 1218 (1960).

Appellants further contend that the allowance by the New York Surrogate’s Court of all of the sales commissions as administrative expenses is determinative of their deductibility under § 2053(a) of the Internal Revenue Code of 1954 and Treas.Reg. § 20.2053 — 3(d)(2), and that if Treas.Reg. § 2053 — 3(d)(2) is read to deny a deduction for administration expenses properly allowed by state law, § 20.2053— 3(d)(2) is invalid. This argument is inapposite, however, to the facts of the instant case.

Both § 222 of the New York Surrogate’s Court Act and Treas.Reg. § 20.-2053-3, like most state laws concerning executors and administrators, require an administrative expense to be “necessary” in order to be allowable. See 31 Am. Jur.2d Executors and Administrators §§ 524, 527 (1967); In re Rosenberg’s Estate, 169 Misc. 92, 6 N.Y.S.2d 1009, 1012-1013 (Sur.Ct.1938). Normally, therefore, a Surrogate’s court decree approving expenditures by an executor as proper administrative expenses under New York law will be controlling and will not raise questions concerning possible. discrepancies between § 2053 of the Internal Revenue Code of 1954 and Treas.Reg. § 20.2053 — 3(d)(2). See Treas. Reg. § 20.2053 — 1(b)(2) (“The decision of a local court as to the amount and allow-ability under local law of a claim or administration expense will ordinarily be accepted if the. court passes upon the facts upon which deductibility depends.”); Dulles v. Johnson, 273 F.2d 362 (2 Cir. 1959), cert. den., 364 U.S. 834, 81 S.Ct. 54, 5 L.Ed.2d 60 (1960); Sussman v. United States, 236 F.Supp. 507 (E.D.N.Y.1962).

As noted in Pitner v. United States, 388 F.2d 651, 659 (5 Cir. 1967), however, the interest of the federal government in taxing the passage of property from a decedent’s estate to individual beneficiaries or to a trustee will not always completely or accurately be reflected in a state’s interests in supervising the fiduciary responsibilities of executors. In the present case, appellants’ claims for administration expenses were not contested in the Surrogate’s Court and there is some question as to whether some of these expenses were in fact incurred for the benefit of the estate in accordance with the general purpose of § 2053 rather than for the benefit of individual beneficiaries. See Commercial Nat. Bank of Charlotte v. United States, 196 F.2d 182, 183-184 (4 Cir. 1952); Cf. United States v. Stapf, 375 U.S. 118, 130-131, 84 S.Ct. 248, 11 L.Ed.2d 195 (1963), reh. den., 375 U.S. 981, 84 S.Ct. 477, 11 L.Ed.2d 428 (1964). In such circumstances, the federal courts cannot be precluded from reexamining a lower state court’s allowance of administration expenses to determine whether they were in fact necessary to carry out the administration of the estate or merely prudent or advisable in preserving the interests of the beneficiaries. Cf. Commissioner v. Estate of Bosch, 387 U.S. 456, 87 S.Ct. 1776, 18 L.Ed.2d 886 (1967); Commercial Nat. Bank of Charlotte v. United States, 196 F.2d 182, 185 (4 Cir. 1952); Treas.Reg. § 20.2053-1(b)(2). Viewed from this standpoint, the Tax Court’s determination that the additional sales of sculpture were not necessary to preserve the estate or to effect its distribution did not involve a refusal to follow New York law, but rather was the result of a de novo inquiry into the factual necessity for these expenditures.

It is, therefore, unnecessary to pass on whether Treas.Reg. § 20.2053 — 3(d)(2) is invalid if read to deny a deduction properly allowed by state law. As the determination of the Tax Court is not clearly erroneous, it is affirmed.

MULLIGAN, Circuit Judge

(dissenting):

I dissent with respect but without reluctance. Section 2053(a) of the Internal Revenue Code provides that in determining a decedent’s taxable estate there shall be a deduction from the gross estate of

The estate here was administered in the State of New York and the selling commissions at issue here were held to be allowable as proper expenses by the Surrogate of Warren County in several separate accountings. The Code unambiguously provides for their deduction if allowed by the jurisdiction administering the estate and neither the Commissioner of Internal Revenue nor the Tax Court, in my view, can properly reverse the State Court determination. Congress has explicitly left the matter in the hands of the state.

such amounts . . . for administration expenses ... as are allowable by the laws of the jurisdiction, whether within or without the United States, under which the estate is being administered.

In a case squarely in point, the Sixth Circuit reversed the Tax Court’s denial of deductibility, stating:

By the literal language of § 2053(a), Congress has left the deductibility of administrative expenses to be governed by their chargeability against the assets of the estate under state law. As otherwise stated, Congress has committed to the considered judg-. ment of the states whether a particular expense is allowable as a proper or necessary charge against estate assets. In the situation before us, the expenses were admittedly allowable under Michigan law. They were paid out of probate assets and they were approved in two different accountings filed with the probate court. Hence they are deductible under § 2053(a).

Estate of Park v. Commissioner, 475 F.2d 673, 676 (6th Cir. 1973). Park is not alone in holding that the plain meaning of the statute controls and that the Congress intended deductibility to be determined by state law. E. g., Ballance v. United States, 347 F.2d 419, 423 (7th Cir. 1965); Commercial National Bank v. United States, 196 F.2d 182, 185 (4th Cir. 1952); Estate of Louis Sternberger, 18 T.C. 836, 843 (1952), aff’d, 207 F.2d 600 (2d Cir. 1953), rev’d on other grounds, 348 U.S. 187, 75 S.Ct. 229, 99 L.Ed. 246 (1955); see Dulles v. Johnson, 273 F.2d 362, 369-370 (2d Cir. 1959), cert. denied, 364 U.S. 834, 81 S.Ct. 54, 5 L.Ed.2d 60 (1960).

The majority opinion not only ignores Park but the Code as well, focusing instead upon Treasury Regulation § 20.-2053-3(d)(2), which provides deductions from gross estates for selling expenses “if the sale is necessary in order to pay the decedent’s debts, expenses of administration, or taxes, to preserve the estate, or to effect distribution.” As the majority opinion points out, § 222 of the New York Surrogate’s Court Act, which was then in effect, similarly provided for the deduction of administration expenses “necessarily” incurred. The majority opines that the state’s interest in supervising the fiduciary responsibilities of its executors may not always be compatible with the interest of the federal government in collecting taxes. The obvious answer is that in § 2053(a) of the Code, the Congress decided without any limitation that the state law controlled. If the Regulation by adding the word “necessary” gives the Commissioner of Internal Revenue the authority to review the determination of the New York State Surrogate and interpret what is “necessary” solely from the point of view of the federal taxing power, then the Regulation conflicts with the Code, is contrary to the intent of Congress, and is therefore invalid. E. g., United States v. Calamaro, 354 U.S. 351, 359, 77 S.Ct. 1138, 1 L.Ed.2d 1394 (1957); Dorfman v. Commissioner, 394 F.2d 651, 655 (2d Cir. 1968).

The majority here states that the Tax Court was not refusing to follow New York law but rather was making a de novo inquiry into the question of the factual necessity of these expenditures, and thus it is “unnecessary to pass on” the argument that the Regulation conflicts with the Code. I cannot agree that the issue can be so circumvented. The laws of the state are interpreted and administered by the courts of the state and not by the Tax Court of the United States. Pitner v. United States, 388 F.2d 651 (5th Cir. 1967), relied upon by the majority, is totally unlike the case before us. There had been no formal probate of the decedent’s estate in that case and no Texas court had made any ruling which would bind the Tax Court. The Tax Court found no Texas statute or case in point, hence the necessary reliance on federal law.

The functioning of the I.R.S. or the Tax Court as a surrogate Surrogate is particularly unfortunate here. While the commissions paid were substantial, we must bear in mind that the artist had difficulty in selling his works while alive and, two years before he died, of necessity entered into a 3SVs% commission arrangement with a gallery for a five-year period. During the last 25 years of his life he had sold only 75 pieces of his sculpture and died owning 425 pieces, 185 of which were more than seven feet high. Ars longa, vita brevis. This art work represented approximately 93% of the value of his total estate. Smith was an abstract non-representational sculptor who worked with steel and other metals, and his works required substantial space for proper exhibition. Faced with an estate so constituted and recognizing the necessity of liquidation to satisfy estate taxes which could not be determined with any degree of certainty in view of the unpredictable and volatile nature of artistic tastes and fashions, the fiduciaries liquidated some of the sculpture in the estate. The determination below that they were improvident in disposing of the sculptures or that it was done for the benefit of the beneficiaries rather than the estate is made only with the infallible acuity of hindsight. The behavior of testamentary fiduciaries is more appropriately gauged by the surrogate rather than by federal tax authorities.

Since I believe there was a failure to recognize the command of the Code, I would characterize the error here as one of law and not of fact, which would make the “clearly erroneous” test set by the majority inapplicable. Trust of Bingham v. Commissioner, 325 U.S. 365, 371, 65 S.Ct. 1232, 89 L.Ed. 1670 (1945). The five dissenting tax court judges were, in my view, correct in finding that the determination of the New York Surrogate as to deductibility was binding.

      . Section 222 of the New York Surrogate’s Court Act, in effect at the time of decedent’s death, provided as follows:
      “§ 222. Payment of expenses incurred by representative.
      An executor, administrator, guardian or testamentary trustee may pay from the funds or estate in his hands, from time to time, as shall be necessary, his legal and proper expenses of administration necessarily incurred by him, including the reasonable expense of obtaining and continuing his bond and the reasonable counsel fees necessarily incurred in the administration of the estate. Such expenses and disbursements shall be set forth in his account when filed, and settled by the surrogate.”
      § 222 was succeeded as of September 1, 1967, more than two years after decedent’s death, by § ll-l.l(b)(23) of the New York Estates, Powers and Trusts Law (McKinney’s Consol. Laws, c. 17-b, 1967) (renumbered as of June 22, 1973 as ll-l.l(b)(22)), which provides that a fiduciary is authorized:
      “(23) In addition to those expenses specifically provided for in this paragraph, to pay all other reasonable and proper expenses of administration from the property of the estate or trust, including the reasonable expense of obtaining and continuing his bond and any reasonable counsel fees he may necessarily incur.”
      The revisers’ notes state that subparagraph (b)(23) is intended to incorporate the substance of § 222 of the Surrogate’s Court Act.'

      . Section 2053 of the Internal Revenue Code of 1954 (26 U.S.C. § 2053(a)), provides as follows:
      “(a) General rule — For purposes of the tax imposed by section 2001, the value of the taxable estate shall be determined by deducting from the value of the gross estate such amounts—
      (1) for funeral expenses
      (2) for administration expenses,
      (3) for claims against the estate, and
      (4) for unpaid mortgages on, or any indebtedness in respect of, property where the value of the decedent’s interest therein, undiminished by such mortgage or indebtedness, is included in the value of the gross estate,
      as are allowable by the laws of the jurisdiction, whether within or without the United States, under which the estate is being administered.”

      . Treas.Reg. § 20.2053-3 (1958), as amended by T.D. 6826, 30 F.R. 7708, June 15, 1965, provides in relevant part:
      “§ 20.2053-3 Deduction for expenses of administering estate.
      (a) In general. The amounts deductible from a decedent’s gross estate as ‘administration expenses’ of the first category (see paragraphs (a) and (c) of § 20.2053-1) are limited to such expenses as are actually and necessarily incurred in the administration of the decedent’s estate; that is, in the collection of assets, payment of debts, and distribution of property to the persons entitled to it. The expenses contemplated in the law are such only as attend the settlement of an estate and the transfer of the property of the estate to individual beneficiaries or to a trustee, whether the trustee is the executor or some other person. Expenditures not essential to the proper settlement of the estate, but incurred for the individual benefit of the heirs, legatees, or devisees, may not be taken as deductions
      * * * * * *
      (d) Miscellaneous administration expenses

      (2) Expenses for selling property of the estate are deductible if the sale is necessary in order to pay the decedent’s debts, expenses of administration, or taxes, to preserve the estate, or to effect distribution

      . Such administrative expenses must be the “type intended to be deductible” (United States v. Stapf, 375 U.S. 118, 130, 84 S.Ct. 248, 11 L.Ed.2d 195 (1964)), ultimately a question of federal law. See Pitner v. United States, 388 F.2d 651 (5 Cir. 1967). The holding in Pitner differs from the interpretation placed upon it by Judge Mulligan in his dissent. The court in that case assumed that the expense deduction was allowable by the laws of the jurisdiction under which the estate was being administered, and yet held that
      “[i]n the determination of deductibility under section 2053(a)(2), it is not enough that the deduction be allowable under state law. It is necessary as well that the deduction be for an ‘administration expense’ within the meaning of that term as it is used in the statute, and that the amount sought to be deducted be reasonable under the circumstances. These are both questions of federal law and establish the outside limits for what may be considered allowable deductions under section 2053(a)(2).” 388 F.2d at 659.
      Thus, the Fifth Circuit, as well as the Tax Court, have rejected the proposition that the only requirement for deductibility under Section 2053(a) is the allowability of the expense under state law.

      . The other cases cited in the majority opinion are either distinguishable or in fact helpful to the appellant. Commissioner v. Estate of Bosch, 387 U.S. 456, 87 S.Ct. 1776, 18 L.Ed.2d 886 (1967) involved the question of whether a federal court or agency in a federal tax controversy is conclusively bound by a state trial court adjudication regarding the characterization of property interests. There was no act of Congress there ceding jurisdiction to the state but only the report of a Senate Committee recommending that “proper regard,” not finality, should be given to the interpretation of a will by state courts. Id. at 464, 87 S.Ct. 1776. Commercial Nat’l Bank v. United States, supra, did deal with the question of whether attorneys’ fees were administrative expenses under the old Internal Revenue Code but found that the state court had never passed upon the question since the fees were fixed by stipulation between the parties and the issue was intentionally excluded from the judgment of the state court. The position of the United States, namely, that even if the fees had been assessed by the state court they were not deductible for federal tax purposes, was therefore not reached but in dicta was described by the court as “doubtful.” The court cited Lyeth v. Hoey, 305 U.S. 188, 194, 59 S.Ct. 155, 158, 83 L.Ed. 119 (1938) for the proposition that it is the will of Congress which controls in interpreting a tax statute. “Congress establishes its own criteria and the state law may control only when the federal taxing act by express language or necessary implication makes its operation dependent upon state law.” I submit that this was the case here.
      Dulles v. Johnson, supra, and Sussman v. United States, 236 F.Supp. 507 (E.D.N.Y.1962) both followed the state court’s determination of administration-expense deductions.


author: PER CURIAM.

text:
    Nelle CLOYD, Plaintiff-Appellee, v. Elliot RICHARDSON, Secretary of Health, Education and Welfare, Defendant-Appellant.
    No. 74-2273.
    United States Court of Appeals, Sixth Circuit.
    Feb. 13, 1975.
    George J. Long, U. S. Atty., Louisville, Ky., William Kanter, Donald Etra, Appellate Section, Civ. Div., Dept, of Justice, Washington, D. C., for defendant-appellant.
    Robert G. Hunt, King, Deep & Branaman, Henderson, Ky., for plaintiff-appellee.
    Before PHILLIPS, Chief Judge and PECK and LIVELY, Circuit Judges.
   PER CURIAM.

This case is before the court on cross-motions. The appellee has filed a motion to dismiss or affirm. The appellant has filed a motion for summary reversal and alternative petition for a writ of mandamus. All motions have been referred to a panel of the court pursuant to Rule 3(e), Rules of the Sixth Circuit.

Following remand of this case on a previous appeal the District Judge filed, and the clerk of the district court entered, a document styled “Judgment and Order.” This document set forth certain findings of the court and its reasoning in reaching a conclusion on the issue referred to it by our remand. The document also contained a specific order for the payment of an attorney fee. The clerk did not sign or enter a separate judgment as required by Rule 58, Fed.R.Civ.P. A docket entry is not sufficient. Strict compliance with Rule 58 is required. United States v. Indrelunas, 411 U.S. 216, 93 S.Ct. 1562, 36 L.Ed.2d 202 (1973); Richland Trust Co. v. Federal Insurance Co., 480 F.2d 1212 (6th Cir. 1973); Communications Workers of America v. United Telephone Co. of Ohio, 491 F.2d 207 (6th Cir. 1974); Columbus Coated Fabrics v. Industrial Commission of Ohio, 498 F.2d 408 (6th Cir. 1974). The fact that the document which the judge signed was styled “Judgment and Order” is immaterial. The rule requires that there be a “separate document” which is distinct from any other document entered in the case, including an opinion or memorandum. United States v. Indrelunas, supra; Notes of Advisory Committee following Rule 58; 6A J. Moore, Federal Practice para. 58.04 [4.-1], at 58-161 (1972).

In a response to appellant’s cross-motion, appellee complains that the appellant waited four months before raising the issue of the district court’s failure to enter a separate judgment. The Supreme Court found such an argument unavailing in United States v. Indrelunas, supra, 411 U.S. at 221, 93 S.Ct. 1562.

The case is remanded to the district court for entry of a separate judgment in accordance with Rule 58. It is from that document with its new date that an appeal may be taken.

So ordered. Each party will pay its own costs on appeal.


author: MERRILL, Circuit Judge:

text:
    PORTLAND RETAIL DRUGGISTS ASSOCIATION, INC., an Oregon non-profit Corporation, on behalf of its assignors, Plaintiff-Appellant, v. ABBOTT LABORATORIES, an Illinois Corporation, et al., DefendantsAppellees.
    No. 73-2342.
    United States Court of Appeals, Ninth Circuit.
    Dec. 26, 1974.
    Rehearing Denied March 11, 1975.
    Certiorari Granted June 23, 1975.
    See 95 S.Ct. 2655.

      Roger Tilbury (argued), Portland, Or., Henry Kane (argued), Beaverton, Or., for plaintiff-appellant.
    James H. Clarke (argued), Portland, Or., for defendants-appellees.
    Before MERRILL and WALLACE, Circuit Judges, and POWELL, District Judge.

       Honorable Charles L. Powell, Senior United States District Judge for the Eastern District of Washington, sitting by designation.

   MERRILL, Circuit Judge:

Plaintiff-appellant commenced this action as the assignee of the antitrust claims of more than sixty retail pharmacies engaged in business in the Greater Portland, Oregon, area. Suit was brought against twelve manufacturers of prescription drugs and sought injunctive relief and damages. Appellant’s complaint was stated in five claims, only the second of which is involved in this appeal. That claim charges that defendant drug manufacturers have violated the Robinson-Patman Act, 15 U.S.C. § 13 et seq. (1970), by selling to certain hospitals at prices lower than those charged to the retail pharmacies, appellant’s assignors; that the favored hospitals, to some extent at least, then engaged in the resale of the drugs so sold. Defendants-appellees contend that the sales in question are exempt from operation of the Act under 15 U.S.C. § 13c (1970), which reads:

“Nothing in sections 13 to 13b and 21a of this title, shall apply to purchases of their supplies for their own use by schools, colleges, universities, public libraries, churches, hospitals, and charitable institutions not operated for profit.”

After limited discovery and submission of affidavits the district court granted summary judgment in favor of appellees on that claim. The court ruled that each of the fourteen hospitals here involved was “not operated for profit” and that the drugs had been purchased and used for each hospital’s “own use.” Both of these rulings are assigned as error on this appeal.

We reject appellant’s contention that the hospitals did not qualify for exemption (even as to that portion of the purchases which might be “for their own use”), since none of them were “hospitals [or] charitable institutions not operated for profit.” It was undisputed that the hospitals derived substantial profits from the sale of drugs and from time to time enjoyed over-all operating surpluses. However, the existence of such profits or surpluses is not in itself enough to foreclose availability of the exemption. In an integrated medical center it is to be expected that one department may provide financial support to another. No enterprise such as these could long remain in existence if each department consistently operated at a loss. Nor could it expect long to continue the fortuity of operating each department or the hospital as a whole precisely at the break-even point. There was no allegation that these hospitals (with the possible exception of Kaiser, see infra), distributed assets to any interested person, and they could not do so under the terms of their charters. The surpluses were expended in the over-all cost of continuing operations or invested for the improvement of facilities. Accordingly, the district court did not err in ruling that the thirteen hospitals other than Kaiser were “not operated for profit” within the exemption. Logan Lanes, Inc. v. Brunswick Corp., 378 F.2d 212, 216 (9th Cir.), cert. denied, 389 U.S. 898, 88 S.Ct. 219, 19 L.Ed.2d 216 (1967).

We believe the district court erred, however, in granting summary judgment as to sales made to Bess Kaiser Hospital. The effect of this hospital’s operation as an element of an organization providing comprehensive health services to members for a predetermined fee, and the possibility that some of its physicians, partners in the Permanente Clinic, receive distributions based on net revenues of the Kaiser Foundation Health Plan (to which revenues from drug sales may contribute), appear to present disputed issues of fact which may be material to the hospital’s nonprofit status under the exemption. Moreover, in our judgment the proper legal standard for determining whether Bess Kaiser Hospital is “not operated for profit” in these circumstances cannot be developed on the limited record before us. Since we remand the cause for further proceedings, this issue can more fully be explored below.

The remaining issue is whether purchases of drugs for resale were purchases by the hospitals “for their own use” as that phrase is used in § 13c. With disputed issues of fact resolved in favor of appellant for purposes of the motion for summary judgment, it appears that drugs were distributed by the hospitals under the following circumstances:

1. They were dispensed to the hospitals’ in-patients in the course of treatment.

2. They were dispensed in the course of treatment to patients at emergency clinics operated by the hospitals.

3. They were provided to departing in-patients as take-home prescriptions.

4. They were provided to persons who had been in-patients as renewals of prescriptions which had first been filled while those persons were in-patients.

5. They were sold for home treatment to out-patients either at hospital pharmacies or at out-patient clinics.

6. They were sold to the hospitals’ employees and students for the private use of purchasers.

7. They were sold to hospitals’ physicians for their personal or family use or for dispensation in the course of their private practice.

8. They were sold to walk-in customers who were not hospital patients.

The circumstances covered by categories 1 and 2, relating to in-patient and emergency treatment, cover by far the greater part of hospital distribution. There is no dispute that such dispensing of drugs in the course of treatment in the hospital is the hospitals’ own use. It is as to distribution under other circumstances that the parties are in dispute, both factually, as to the frequency of occurrence, and legally, as to whether those uses of the drugs can properly be regarded as the hospitals’ own use.

Appellees justify the uses thus made by the hospitals as proper hospital functions. It is asserted that the need of the departing in-patient for take-home drugs is obvious, and that supplying this need is an essential hospital function; that sales to former patients are in connection with hospital or clinic treatment earlier provided and permit such treatment to continue at home; that sale to employees is pursuant to collective bargaining agreements; that sales to students are an aspect of the hospitals’ educational programs; that sales to physicians associated with the hospitals are a perquisite of that association; that sale to walk-in customers is limited to instances when needed drugs cannot be obtained elsewhere; that in all respects a decent regard for the needs of the community and the position of the hospital as a center for the provision of a full range of health services justifies all use made by the hospitals of the drugs sold to them.

We may concede that in these respects distribution by the hospitals can be justified as a proper and useful community service and thus can be regarded as a proper hospital function. It is not, however, the hospitals’ “own use.” Hospital use under § 13c, in our judgment, must be limited to use made by the hospital in dispensing drugs for hospital or clinic treatment of in-patients or emergency patients. The purpose for which these supplies are purchased — the use to which they are to be put — is their consumption. Section 13c can apply here only to cases in which a hospital can be said to be the consumer. It cannot apply to cases of resale by the hospital to a private consumer.

The hospitals here are (quite properly) accommodating patients, staff and strangers with means whereby they can conveniently purchase for their use. The question is not whether the hospitals can continue to provide this useful community service. The question is whether in providing it they may acquire the drugs for such resale at an acquisition price that discriminates against local retail druggists. We hold that they may not.

Logan Lanes, Inc. v. Brunswick Corp., supra, does not require the contrary result. There the alleged discriminatory pricing was for bowling alley equipment sold to a state university. The lanes had been acquired for use in connection with the university’s physical education program and for recreational use of faculty, staff and students and were operated for those purposes. They were not, however, closed to the general public and some public use (the extent was disputed) was made of them. We held:

“The primary purpose of the purchases established beyond dispute, was to fulfill the needs of the University in providing bowling facilities for its students, faculty and staff. This being the ease, any additional use of the bowling facilities by the general public for a fee, even if such use is substantial, would not establish that the purchases were not made for the use of the University.”

378 F.2d at 217. The university’s public use was indeed in competition with other local alleys, and it may be questioned whether the university should not, in all fairness, have been compelled to choose between the public use and the favorable exemption. But that is not what the statute requires. It requires only that the “supplies” be acquired by the university for its own use. It does not say that once acquired and put to that use they cannot then be used for any other purpose.

Our case does not involve the acquisition of plant equipment. It involves acquisition of stores of supplies. Plant equipment acquired for a university’s own use cannot be segregated from that acquired for use by others, since the same equipment serves both uses. In the case of stores of supplies acquired for consumption the situation is otherwise. Supplies that are resold can readily be segregated from those devoted to a hospital’s own use.

In this respect our case is similar to Students Book Co. v. Washington Law Book Co., 98 U.S.App.D.C. 49, 232 F.2d 49, 50 — 51 n. 5 (1955), cert. denied, 350 U.S. 988, 76 S.Ct. 474, 100 L.Ed. 854 (1956), where the 13c issue was disposed of in a footnote. The plaintiff, a retail seller of law books, complained of the defendant’s sales at lower prices of books to campus bookstores at law schools. The distinction drawn by the court was similar to the one we draw here — between sales of books to universities for their own use, i. e., for their libraries, and sales to university connected bookstores for resale to students.

Our holding makes it unnecessary for us to deal with the remaining assignment of error.

The judgment is vacated and the cause remanded for further proceedings.

      . The district court granted summary judgment on this claim and noted a controlling question; we accepted the interlocutory appeal under 28 U.S.C. § 1292(b).

      . Section 13(a) makes it “unlawful for any person engaged in commerce * * * to discriminate in price between different purchasers of commodities of like grade and quality * * * where such commodities are sold for use, consumption, or resale * * and where the effect of such discrimination may be substantially to lessen competition or tend' to create a monopoly in any line of commerce, or to injure, destroy, or prevent competition with any person who either grants or knowingly receives the benefit of such discrimination, or with customers of either of them * *

      . Appellant designates the following hospitals: Dwyer Memorial Hospital & Medical Center; Emanuel' Hospital; Good Samaritan Hospital & Medical Center; Gresham Community Hospital; Holladay Park Hospital; Physicians and Surgeons Hospital; Portland Adventist Hospital; Portland Osteopathic Hospital; Providence Hospital; St. Vincent Hospital & Medical Center; Tuality Community Hospital; Willamette Falls Community Hospital; Willamette Methodist Convalescent Center; Bess Kaiser Hospital.

      . Since the exemption of appellees’ sales is founded on the purchasers’ status as nonprofit hospitals, we need not consider the possible relevance of the parallel exemption for “charitable institutions not operated for profit.”

      . Since we limit the exemption to purchases by the hospitals .“for their own use,” we need not decide whether other uses to which the drugs purchased were put could be regarded as removing drugs purchased for such other uses from the nonprofit exemption. Assuming arguendo that some purchases by the hospitals were put to uses outside the nonprofit exemption, the exemption as to drugs purchased for hospital uses would not necessarily be unavailable. Cf. Young Men’s Christian Ass’n v. Department of Revenue, 268 Or. 633, 522 P.2d 464 (1974).


author: LIVELY, Circuit Judge.

text:
    INDIANA INSURANCE COMPANY, Defendant-Appellant, v. PARR TRUCKING SERVICE, INC., L & B Express, Inc., Plaintiffs-Appellees, Continental Insurance Company, Defendant-Appellee.
    No. 74-1652.
    United States Court of Appeals, Sixth Circuit.
    Argued and Submitted Dec. 3, 1974.
    Decided Feb. 11, 1975.

      Ridley M. Sandidge, Sandidge, Holbrook & Craig, Owensboro, Ky., Kightlinger, Young, Gray & De Trude, Howard J. De Trude, Jr., Mark W. Gray, Indianapolis, Ind., for defendant-appellant.
    John Wallace Beard, Clarence McCarroll, Bartlett, McCarroll & Nunley, Owensboro, Ky., for appellees.
    Before LIVELY, Circuit Judge, and McALLISTER and O’SULLIVAN, Senior Circuit Judges.
   LIVELY, Circuit Judge.

This diversity case involves the question of which of two insurers is required to pay for damage to cargo being hauled by truck. Indiana Insurance Company (Indiana) issued a cargo liability policy to “Parr Trucking Service, Inc. and/or L & B Express, Inc.” effective July 1, 1971, continuous until cancelled. At the time the policy was issued, Parr and L & B were owned and operated by the same person. Parr was an intrastate trucker whose hauls were confined to the State of Kentucky. L & B held an interstate certificate issued by the Interstate Commerce Commission. In compliance with ICC regulations, Indiana filed a certificate of insurance with the Commission with respect to L & B only. At the time the policy of Indiana was issued, and thereafter, Parr and L & B operated under an agreement by which certain shipments which were originated by Parr and were destined for delivery outside of Kentucky were hauled by Parr under L & B bills of lading and pursuant to L & B’s interstate authority. On these hauls Parr equipment was used and Parr furnished the drivers. The revenues from such hauls were divided with Parr retaining 97V2 percent and L & B receiving 2V2 percent. The authorized agent of Indiana who procured the business of Parr and L & B and through whose agency the policy of July 1, 1971 was issued testified that he understood the operating arrangement between L & B and Parr at the time the policy was issued.

Parr and L & B were involved in litigation that resulted in a court order which separated the ownership of the two trucking companies, with L & B coming under the control of one William Thomas and Parr Trucking Service, Inc. remaining under the control of George W. Parr. After Thomas took over L & B, he acquired a cargo policy from Continental Insurance Company insuring L & B only. Continental, in compliance with regulations, filed a certificate of insurance with respect to L & B with the Interstate Commerce Commission. On March 2, 1972 the ICC notified Indiana that the certificate from Continental had been filed and that Indiana’s certificate of cargo insurance for L & B was can-celled. Indiana did not remove L & B as an insured from its policy, and its agent assured officers of Parr and L & B that the coverage was unaffected by the ICC cancellation of Indiana’s certificate of insurance.

Indiana had other policies outstanding in which Parr and L & B were both named as insured, and certificates were introduced in evidence which contained a hold-harmless agreement from Parr to L & B as endorsements to the other policies. With respect to one of the other policies issued by Indiana, its agent wrote to Parr, “Your insurer is entirely agreeable to cover the interest of L & B Express as an insured but only with respect to those operations conducted by Parr under authority granted to L & B.” The agent of Indiana further testified that he knew of an agreement between Parr and L & B by which operations were conducted after ownership of the two truckers was separated, and was familiar with the hold-harmless language shown on the certificate with respect to one of the other policies issued by Indiana to Parr and L & B. He maintained, however, that he had requested and never received an executed hold-harmless agreement with respect to the cargo insurance policy.

The premium for the cargo insurance policy was based on the revenue of the insured and required monthly reporting. The agent for Indiana testified that Parr paid all of the premiums on the cargo policy and that he believed Parr reported all of its revenue for premium purposes. Though he was not certain whether the revenue produced by the shipment, the damage to which precipitated this law suit, was used in calculating the premium owed Indiana, he testified that it should have been.

Two cargoes of heavy construction equipment shipped from Brandéis Machinery Company in Louisville were damaged while being pulled by Parr under L & B bills of lading and pursuant to L & B’s interstate permit on June 27 and June 29, 1972, while the Indiana policy was in effect. Parr, in reliance on the Indiana policy and its hold-harmless agreement with L & B, demanded payment from Indiana. Indiana denied coverage with respect to these claims because they arose from interstate shipments under the permit of L & B and pursuant to its bills of lading. The position of Indiana was that when Continental filed its certificate of insurance with the Interstate Commerce Commission with respect to L & B and the certificate of insurance of Indiana was cancelled, Continental became the primary insurer and Indiana was, at most, an excess insurer. Indiana maintained that its policy covered only the legal liability of its insured as a carrier and that Parr was not the carrier of the shipment which was damaged and incurred no legal liability for loss to such shipment. Parr paid the shipper the amount of its loss, $30,895.65. Parr and L & B then sued Indiana and Continental (together with Indiana’s admitted agent who was dismissed by the court) for a declaratory judgment determining which insurer was liable for the loss. This action was filed in the Daviess Circuit Court at Owensboro, Kentucky and removed to the United States District Court for the Western District of Kentucky.

After a trial before the court the District Judge entered findings of fact and conclusions of law. He found that Indiana’s agent knew that Parr did not possess an interstate carrier’s certificate, knew that it leased equipment to L & B and knew of the agreement requiring Parr to hold L & B harmless for damages to L & B’s cargo when being pulled by Parr. The court further found that after cancellation of Indiana’s L & B certificate by the Interstate Commerce Commission, Indiana’s agent, knowing of the existence of the operating arrangement and hold-harmless agreement between Parr and L & B with respect to L & B’s cargo, advised Parr that it was still covered. He further found that Indiana continued to accept premiums from Parr based on hauls by Parr of L & B shipments after separation of the ownership and cancellation of Indiana’s ICC certificate of insurance with respect to L & B. Based on these findings, the District Judge concluded that Parr was an “insured” under the policy of Indiana, being an intrastate carrier and a named insured along with L & B on the face of the policy. It was further concluded that the cancellation of Indiana’s ICC certificate did not cancel its policy or coverage and that the “other insurance” clause in Indiana’s policy was no defense in view of the fact that after it had notice of Continental’s coverage it raised no issue with Parr, did not'remove L & B as an insured on its policy and continued to collect premiums from Parr for shipments made pursuant to its agreement with L & B. It was finally concluded that acceptance of Parr’s premium payments by Indiana with knowledge of the hold-harmless agreement obligated Indiana to pay whatever Parr’s liability was under that agreement. Judgment was entered that Parr recover $30,895.65 from Indiana and that Continental’s motion for summary judgment be sustained, and Continental was accordingly dismissed.

On appeal, Indiana contends that Continental became the primary insurer of L & B as a matter of law upon filing its certificate with the Interstate Commerce Commission. It maintains that Indiana was then only an excess insurer of L & B. It further contends that the cancellation of the certificate by the Interstate Commerce Commission resulted in termination of its coverage of L & B except to the extent of liability in excess of coverage of Continental. It argues also that Parr never proved a written indemnity agreement and that an oral hold-harmless agreement between two truckers is void. Finally, Indiana contends that under the terms of its policy, even though both Parr and L & B were named as insured, with respect to the shipment in which the loss occurred, Parr was not a “carrier” since it had no interstate authority and Parr had no “legal liability” to the shipper Brandéis since the cargo was being shipped under an L & B bill of lading and pursuant to its ICC authority.

Indiana has never denied that its policy remained in force or that Parr was covered as to intrastate shipments. It has denied coverage, however, as to cargo being hauled in interstate commerce under L & B bills of lading after the filing of the Continental certificate. Indiana cites a number of cases in which courts have refused to enforce indemnity agreements between motor carriers upon a finding that such agreements violate public policy and are therefore void. See, e.g., Carolina Freight Carriers Corp. v. Pitt County Transp. Co., 358 F.Supp. 1177 (E.D.Va.1973); Alford v. Major, 314 F.Supp. 979 (N.D.Ind.1970), aff’d 470 F.2d 132 (7th Cir. 1972). The district court judgment in Carolina Freight Carriers Corp. v. Pitt County Transp. Co., supra, was reversed on appeal, 492 F.2d 243 (4th Cir. 1974). We agree with the holding of the court of appeals that there is nothing in the ICC regulations which renders an indemnification agreement between truckers illegal. See also Allstate Insurance Co. v. Alterman Transp. Lines, Inc., 465 F.2d 710 (5th Cir. 1972). The holdings in Alford v. Major, supra, and Carriers Insurance Exchange v. Truck Insurance Exchange, 310 F.2d 653 (4th Cir. 1962), also cited by Indiana, were based on facts quite different from those found in the present case. In the cited cases there were findings that the indemnification agreement was intended to circumvent ICC requirements in one case, and, in the other, was part of a lease whose purpose was to give the appearance of compliance with regulations which were in fact being violated. We also note that in none of the cases relied upon by Indiana had a single insurer covered both contracting truckers with knowledge of their operating arrangement and hold-harmless agreement.

Indiana also relies on cases which, while not condemning indemnification agreements between truckers as being against public policy, hold that the insurer who files a certificate with the Interstate Commerce Commission becomes the primary insurer as a matter of law and that responsibility as primary insurer cannot be avoided by indemnity provisions of a lease or other operating agreement. Hagans v. Glens Falls Insurance Co., 465 F.2d 1249 (10th Cir. 1972); Argonaut Insurance Co. v. National Indemnity Co., 435 F.2d 718 (10th Cir. 1971). In these two cases, unlike the present ■ one, the truckers who entered into indemnity agreements were covered by different' insurance companies. The interest of the public in a third party claimant being able to fix responsibility on one carrier and avoiding involvement in a dispute between insurers of two carriers clearly justifies the holding that in such a situation the ICC-certified insurer is the primary insurer as a matter of law. If Indiana had never named L & B as an insured on the policy of cargo insurance, or had removed L & B as an insured upon notification that its ICC certificate had been cancelled and thereafter had neither billed nor accepted premiums based on Parr’s hauling of L & B shipments, it could properly rely on these two cases. In Carolina Casualty Insurance Co. v. Transport Indemnity Co., 488 F.2d 790 (1973), the Tenth Circuit affirmed summary judgment in favor of the insurer of the lessee on the basis of a hold-harmless agreement and provisions of the two insurance policies. If distinguished Hagans, supra, and Argonaut, supra, on the ground that in the case before it both insurance policies contained ICC endorsements whereas in the two earlier cases only one of the insurers was so certified. The court held that since the insurer of the lessee could eventually recover under a right of indemnification as subrogee of the lessee, the court would avoid circuity of actions by permitting direct recovery against the lessor’s insurer.

In Aetna Insurance Co. v. Newton, 315 F.Supp. 860 (D.Del.1970), aff’d, 456 F.2d 655 (3d Cir., 1972), two carriers which operated under ICC permits had an interchange agreement by which the originating carrier continued to haul shipments to their destinations even though these destinations were not in the area served by the originating carrier, but were instead in the area served by the receiving carrier. At the time Continental Insurance Company issued a policy to the carrier Schwartz, there was an agreement that in the event of loss the carrier in whose authorized area the loss occurred would be liable. Thereafter, the two carriers agreed that the originating carrier would be responsible for losses until delivery regardless of the locale of the loss. This was accomplished by means of an agreement by which the initial carrier agreed to hold the receiving carrier harmless for losses to such shipments. Goods which originated with Schwartz were damaged while in the territory of the carrier Newton and while in equipment owned by Schwartz and driven by its employee. Newton paid the shipper’s claim and recovered judgment against its insurer, which then recovered a like judgment against the originating carrier, Schwartz, under the indemnification agreement and as subrogee of Newton. Schwartz then sought to recover from its insurer, Continental. The Court held that Schwartz could not recover from Continental for two reasons. The first reason was that when Continental wrote its policy insuring Schwartz the oral agreement in force provided that Schwartz was not liable for losses occurring in Newton’s territory. Though an endorsement was discussed which would have changed this arrangement and would have required the originating carrier to indemnify the receiving carrier for losses in its territory, such endorsement was never added to the policy. The second basis for denial of recovery was that Schwartz never reported revenues received from hauling in Newton territory to Continental as a basis for premium charges. Neither of the two conditions relied upon by the court in Aetna Insurance Co. v. Newton, supra, to deny recovery by the insured against its insurer existed in the present ease. On the contrary, there was no change in the agreement between the carriers which was known by Indiana when the policy was issued, and Parr reported revenues from L & B hauls which were used by Indiana as a basis for computing premium charges to Parr.

In the present case Parr did not act as a mere volunteer in paying the claims of the shipper Brandéis. The hold-harmless agreement required it rather than L & B to be liable for these losses. The findings of facts by the district court that Indiana, through its authorized agent, knew of the agreement and practice by which Parr hauled certain interstate shipments under the ICC authority and bills of lading of L & B and of the existence of the hold-harmless agreement by which Parr agreed to pay losses occurring to such shipments, are supported by substantial evidence and are not clearly erroneous. Indiana issued a policy to both truckers with this knowledge and, after it was aware that Continental was also insuring L & B and had filed its certificate with the Interstate Commerce Commission, Indiana failed to cancel the coverage of L & B in its policy. The continuance of L & B as an insured in its policy and the acceptance of premium payments based on revenues which included the hauling by Parr of interstate shipments under L & B authority and pursuant to its bills of lading estopped Indiana from denying coverage to Parr for such shipménts. South v. Philadelphia Fire & Marine Insurance Co., 217 Ky. 612, 290 S.W. 493, 494 (1927); Home Insurance Co. of New York v. Caudill, Ky., 366 S.W.2d 167, 170 (1963), cited with approval in Spurlin v. Ranier, Ky., 457 S.W.2d 491, 492 (1970); Hanover Insurance Co. v. McLoney, 205 F.Supp. 49, 54 (E.D.Ky.1962).

The judgment of the district court is affirmed.