author: VAN VALKENBURGH, Circuit Judge.

text:
    PAYNE v. OSTRUS et al.
    No. 8871.
    Circuit Court of Appeals, Eighth Circuit.
    June 5, 1931.

      Harry B. Swan, of Atlantic, Iowa (Swan, Martin & Martin, of Atlantic, Iowa, on the brief), for appellant.
    Addison G. Kistle, of Council Bluffs, Iowa (George S. Wright, of Council Bluffs, Iowa, and Russell E. Oistrus, of Des Moines, Iowa, on the brief), for appellees.
    Before KENYON and YAN YALKEN-BURGH, Circuit Judges, and DAYIS, District Judge.
   VAN VALKENBURGH, Circuit Judge.

This is a suit in equity by the receiver of the First National Bank of Cumberland, Iowa, against T. E. Ostras, C. E. -Studley, O. E. Ostrus, E. E. Wollenhaupt, and G. E. Wollenhaupt, directors of said bank. The bank closed its doors June 30, 1926. The bill of complaint is divided into three divisions, each division being subdivided into several counts, and each count into a number of paragraphs. Described generally, division 1 bases the liability of the directors upon their acts in making or approving excessive loans. This charge is thus stated: “That during the time said defendants were directors of said First National Bank of Cumberland, Iowa, and while they were in th$> active management of said banking association they and each of them knowingly permitted and approved loans to be made by their officers and agents in excess of 10% of their capital and surplus, and by reason of their knowing participation in and consent to such excessive loans, contrary to the United States Revised Statutes, paragraphs 5,200 and 5,239, said defendants and directors are severally liable for the items and amounts hereinafter set forth, which damage is the property of the Receiver for the benefit of the creditors, and no part of which has been paid.”

Division 2 is in five counts. Count 1 seeks to hold the defendants for alleged negligence in failing to enforce the claimed liability of former directors, including T. E. Ostrus, O. E. Ostrus, and Studley, for damages resulting from excess loans made while they were directors, and for allowing the statute of limitations to bar recovery against such named directors. Count 2 also charges defendants themselves with losses resulting from excess loans made prior to April 30, 1919. Count 3 charges appellee E. E. Wol-lenhaupt, in violation of his oath, with failure to attend directors’ meetings at which excess loans were approved. Count 4 charges negligence with respect to what is designated the Mueller farm mortgage transaction, and count 5 relates in like manner to what may be termed the Trego farm mortgage transaction. Division 3, in eight counts, charges that the directors violated section 5239, Rev. St. U. S. (12 USCA § 93), by renewing loans, which became excessive, by reason of the fact that, pending the term of the original loan, the bank’s surplus had been reduced, thereby automatically reducing the loan limit. The court found the issues for appellees and dismissed the bill.

The causes of action embraced in divisions 1 and 3 fall concededly within the terms of section 5200, Rev. St. U. S., 12 USCA § 84, which, so far as pertinent, reads thus: “The total liabilities to any association of any person or of any company, corporation, or firm for money borrowed, including in the liabilities of a company or firm the liabilities of the several members thereof, shall at no time exceed 10 per centum of the amount of the capital stock of such association, actually paid in and unimpaired, and 101 per centum of its unimpaired surplus fund: Provided, however, That * * * the discount of commercial or business paper actually owned by the person, company, corporation, or firm negotiating the same * * * shall not be considered as money borrowed within the meaning of this section.’?

It is further well established that the liability of a director of a National Banking Corporation is defined by section 5239, Rev. St. U. S., 12 USCA § 93, as follows: “If the directors of any national banking association shall knowingly violate, or knowingly permit any of the officers, agents, or servants of the association to violate any of the provisions of this chapter, all the rights, privileges, and franchises of the association shall be thereby forfeited. Such violation shall, however, be determined and adjudged by a proper district, or Territorial court of the United States, in a suit brought for that purpose by the Comptroller of the Currency, in his own name, before the association shall be declared dissolved. And in cases of such violation, every director who participated in or assented to the same shall be held liable in his personal and individual capacity for all damages which the association, its shareholders, or any other person, shall have sustained in consequence of such violation.”

This section affords “the exclusive rule by which to measure the right to recover damages from directors based upon a loss alleged to have resulted solely from violation by such directors of a duty expressly imposed upon them by a provision of the National Banking Act.” McCormick v. King (C. C. A. 9) 241 F. 737, 743, affirmed 250 U. S. 504, 39 S. Ct. 549, 63 L. Ed. 1113; Yates v. Jones National Bank, 206 U. S. 158, 177, 27 S. Ct. 638, 51 L. Ed. 1002. That, to impose liability upon the director, the act in violation must be intentional as distinguished from one of mere negligence, is thus stated by the Supreme Court in Corsicana Nat. Bank v. Johnson, 251 U. S. 68, 72, 73, 40 S. Ct. 82, 84, 64 L. Ed. 141: “Under the rule settled by familiar decisions of this court, in order for the bank to prevail in this action it must appear not only that the liabilities of a person, company, firm, etc., to the bank for money borrowed were permitted to exceed the prescribed limit, but that defendant, while a director, participated in or assented to the excessive loan or loans, not through mere negligence, but knowingly and in effect intentionally (Yates v. Jones National Bank, 206 U. S. 158, 180, 27 S. Ct. 638, 51 L. Ed. 1002), with this qualification, that if he deliberately refrained from investigating that which it was his duty to investigate, any resulting violation of the statute must be regarded as cin effect intentional’ (Thomas v. Taylor, 224 U. S. 73, 82, 32 S. Ct. 403, 56 L. Ed. 673; Jones National Bank v. Yates, 240 U. S. 541, 555, 36 S. Ct. 429, 60 L. Ed. 788).”

So far as the personal liability of the director is concerned, it is limited to loss or damage sustained by the bank as a result of the violation. Such loss or damage must be shown before recovery can be permitted.

We turn our-attention first to the violations-charged under division 3 of the bill of complaint. As has been said, these alleged violations consisted of the renewal of loans that had become excessive by reason of the fact that the bank’s surplus had been reduced, thus reducing the loan limit. In the absence of exceptional circumstances and a course of conduct pointing unavoidably to a deliberate purpose to evade the law and to extend unwarranted lines of credit, we do not think the taking of renewal notes falls within the inhibition of the letter and spirit of the statute. No new money leaves the bank’s vaults. None of the, conditions which attend the making of the original notes are present. To bring these acts of directors within the purview of the statute prohibiting excess loans, the court must look beyond the mere act of renewal in any particular case “to find out what was the real and true transaction.” McRoberts v. Spaulding (D. C.) 32 F.(2d) 315, 318; Curtis v. Metcalf (D. C.) 265 F. 293, 296. In Coffin v. United States, 162 U. S. 664, 677, 16 S. Ct. 943, 948, 40 L. Ed. 1109, it is held that, “if the money of a bank be misapplied by paying it out on worthless paper, it is obvious that a subsequent renewal of such paper upon which nothing was actually obtained could not have misapplied the money of the bank.” So if a note be worthless when made, or become so before maturity, a renewal, in which the bank parts with no money, and upon which nothing is added but accrued interest, “would not amount to a new loan for borrowed money.” McRoberts v. Spaulding supra. This likewise disposes of the same contention respecting the interest notes taken on renewal. It does not appear that the bank was damaged by the taking of these renewal and interest notes, nor is it shown that the original notes were collectible or that the interest could have been paid by the makers. Furthermore, the best interests of banks often demand that notes should be renewed, and that, on occasion, collections should not be pressed. It may be that to continue the operations of the bank at this time, and to pay operating expenses, was bad policy from a business standpoint, but that is a consideration not within the issues of this action.

A number of the charges in division No. 1 of the bill of complaint involve alleged excess loans in the form of renewals with accompanying interest notes. To such the fore- . going remarks equally apply. But with re-aspect to both divisions, 1 and 3, we find it unnecessary to go further deeply.into the merits. In division 1 there are charges of the making and approval of excess loans other than by acceptance of renewals and notes for interest upon original loans. To such charges, while appellees stoutly challenge their merit, the defense of limitation is interposed. The court in finding for appellees, as appears from the record, was governed largely by its views respecting the application of the Iowa statutes of limitation. This case is governed by the applicable limitation statutes of that state. Curtis v. Connly, 257 U. S. 260, 42 S. Ct. 100, 66 L. Ed. 222; McClaine v. Rankin, 197 U. S. 154, 158, 25 S. Ct. 410, 49 L. Ed. 702, 3 Ann. Cas. 500.

It is conceded that the application of the Iowa statutes must be confined to the following paragraphs-of section 11007 (Iowa Code 1924):

“3. Injuries to person or reputation—relative rights—statute penalty—setting aside will. Those founded on injuries to the person or reputation, including injuries to relative rights, whether based on contract or tort, or for a statute penalty, within two years. * * *
“5. Unwritten contracts—-injuries to property—fraud—other actions. Those founded on unwritten contracts, those brought for injuries to property, or for relief on the ground of fraud in eases heretofore solely cognizable in a court of chancery, and all other actions not otherwise provided for in this respect, within five years.”

Since directors of a national bank are not trustees of an express trust, but of an implied and resulting trust created by operation of law, statutes of limitation apply and may be invoked by them. Cooper v. Hill (C. C. A. 8) 94 F. 582.

The trial court at one time expressed itself as satisfied that the two-year limitation applied, and such seems to be the understanding of counsel respecting the court’s attitude. The record' is not entirely satisfactory upon this point; but, in any event, we are of opinion that this case does not fall within the two-year limitation period. The cause of action is not founded upon injuries to person or reputation as those terms are commonly understood; and “the plain, obvious and rational meaning of a statute is always to be preferred to any curious, narrow, hidden sense that nothing but the exigency of a hard case and the ingenuity and study of an acute and powerful intellect would discover.” Lynch v. Alworth-Stephens Co. (C. C. A.) 294 F. 190, 194. By this same test we must reject the suggestion that relative rights are involved. We think the nature of such rights is very satisfactorily stated by the Supreme Court of Iowa in Chase v. City of Winterset, 203 Iowa, 1361, 214 N. W. 591, 592: “We need not attempt a comprehensive definition of relative rights, but they include such as may arise out of the relationship of husband and wife, master and servant, guardian and ward, and similar relationships.”

Of course if substantial doubt exists, the longer, rather than the shorter, period of limitation is to be preferred. Hughes v. Reed (C. C. A. 10) 46 F.(2d) 435, 440. On behalf of appellant it is strongly urged that “from January 13, 1920, there was never a time but when three of the five directors, who were directors of the bank when it closed, were members of the board, and had control of said bank”; that a majority of the board is sufficient to constitute such control; and that, for this reason, no statute of limitations has run. The following cases would seem, at first, thought, to support this statement of the law: Rankin v. Cooper (C. C. Ark.) 149 F. 1010, 1015; Cockrill v. Abeles (C. C. A. 8) 86 F. 505, 512; Schilling v. Parman (D. C. Or.) 35 F.(2d) 780; Adams v. Clarke (C. C. A. 9) 22 F.(2d) 957, 959; National Bank of Commerce v. Wade (C. C. Wash.) 84 F. 10, 15.

In general it may be said that in practically all of these eases the decision was based upon the conception of a full, complete and exclusive control in the directors or officers charged. In Coekrill v. Abeles, supra (this court), the following significant statement is found: “Moreover, the complaint alleges, in substance, that at the time of the commission of the wrongful acts in question, and after-wards, until the appointment of a receiver, the defendants who were concerned therein constituted a majority of the directors, and that, in consequence of their having full control of the corporation, no suit could be brought to redress the alleged grievance, until a receiver was appointed. In view of these considerations, and because all the transactions relating to the increase of the stock must be fully investigated in the further progress of the ease, it is deemed both unnecessary and inexpedient to express a decisive opinion upon the point last suggested.”

Of course, where fraud, concealment, or unusual conditions or extraordinary circumstances exist, the chancellor, in a suit of this nature, will not be bound by the statute, but “will determine the extraordinary case in accordance with the equities which condition it.” Cooper v. Hill (C. C. A. 8) 94 F. 582, 591. The Supreme Court speaking to the point now under consideration has' held: “The running of a statute of limitations on a cause of action of a hank against directors will not be suspended by its fraudulent concealment beyond a period in which new directors, performing their duty to learn the bank’s affairs, would presumably have discovered it.” In the body of the opinion it is said: “Knowledge of the facts by the new directors was knowledge by the bank, and none the less that according to the bill they in their turn were unfaithful. It is not alleged that they conspired with the defendants whose case we are considering. They came to the board as the eyes of the bank. Any one of them having notice was bound to do what he could to avert or diminish the loss. Indeed the bill seeks to charge one of them for not having done his duty. Notice to an officer, in the line of his duty, was notice to the bank. A single director like a single stockholder could proceed in the courts. * The statute of limitations must not be applied so narrowly that business men will be afraid to take directorships.” Curtis v. Connly, 257 U. S. 260, 264, 42 S. Ct. 100, 101, 66 L. Ed. 222. See, also, Cooper v. Hill, supra.

In Anderson v. Gailey, 33 F.(2d) 589, 592, Judge Sibley of the District Court for the Northern District of Georgia, in a very able opinion, reviewing many applicable decisions, including Curtis v. Connly, supra, concludes that:

“It cannot be said generally that a director has no protection by the statute of limitations so long as he continues in office. * * *
“Whether the conduct of the majority is wise and diligent under all the circumstances, or wrongful, is often a close question, and controversy over it needs the quieting of limitation as much as any other controversy. Without it business men would hesitate to become bank directors. Adams v. Clarke (C. C. A.) 22 F.(2d) 957, involved the entire board. I do not think the rule can be established that no limitation begins to run so long as the majority continue in control, provided there is no fraudulent concealment of the cause of aetion, and provided the cause of •action is not itself a fraud. Curtis v. Connly, 257 U. S. 260, 42 S. Ct. 100, 66 L. Ed. 222.”

The cause of action for liability of a national bank director under section 5239, Rev. St. U. S. (12 USCA § 93), is complete when the excess loan is made. Corsicana National Bank v. Johnson, 251 U. S. 68, 86, 40 S. Ct. 82, 64 L. Ed. 141; Adams v. Clarke (C. C. A. 9) 22 F.(2d) 957, 959. The fiduciary relation between a bank and its directors ceases when they leave the board. Curtis v. Connly, 257 U. S. 260, 262, 42 S. Ct. 100, 66 L. Ed. 222. Appellee Studley became a director October 7, 1918. He resigned July 6, 1921, and was succeeded by one Patrick, a nondefendant. He came to the board again November 19, 1923. From July 6, 1921, to July 13,1921, the board of directors consisted of T. E. and O'. E. Ostrus, defendants, and appellees herein, and Becker, Bell, and Patrick, nondefendants. Appellee George E. Wollenhaupt became a director July 13, 1921, and E. E. Wollenhaupt, on November 19,1923.

Neither fraud, concealment, nor other unusual conditions or extraordinary circumstances attending the operations of the bank during the periods under examination, are charged or shown. Under the facts above recited, and the rules announced in Curtis v. Connly, Corsicana National Bank v. Johnson, Cooper v. Hill, Anderson v. Gailey, and other cases herein cited, the five-year Iowa statute of limitations began to run against appellees Studley, T. E. Ostrus, and O. E. Ostrus, July 6,1921, for all violations, if any, committed prior to that date. Of course, appellees George E. Wollenhaupt and E. E. Wollenhaupt were not members of the board until later, and could not have participated in any happenings prior to the last-named date. This suit was filed April 17,1928, nearly seven years later. Since July 6, 1921, a careful analysis of the evidence discloses but one transaction in which an excess loan resulted, as follows: August 23, 1923, one E. L. Cannon owed the bank $4,400. The loan limit at that time was $4,500. On that date he executed his note for $155, which sum was credited to his cheeking account. At that time appellees Studley and E. E. Wollenhaupt were not members of the board. The loans to Cannon would thus appear to have been excessive by $55. November 17, 1923, $120 of this last loan was repaid, leaving a net excess of $35 remaining. It is apparent that this small excess over the loan limit was inadvertent rather than intentional, and we do not, therefore, regard it as a substantial violation of the provisions of section 5200 (12 USCA § 84), as construed by the Supreme Court.

What is known as the Mueller mortgage transaction is charged in division 1 as in violation of the excess loan provision of section 5200 (12 USCA § 84). A brief explanation of the nature of this transaction is deemed appropriate, if not necessary, in this connection. January 13,1921, A. W. Mueller gave to the hank a mortgage upon his farm, consisting of 160 acres, to secure an existing indebtedness of about $7,608.24. There was then upon the land a first mortgage of $14,-000, and a second mortgage of $7,000. It became necessary to foreclose the bank’s mortgage, and a decree was entered November 23,1921. January 23,1922, the bank became the purchaser at sheriff’s sale. The second mortgage and note secured thereby were made and executed by one A. W. Mueller. This note fell due May 1,1925, and to protect its interest in the land, the bank paid the assignees of the second mortgage $6,758.33, and ■procured an assignment thereof, and of the note secured thereby. Upon the- advice of bank examiners the bank carried this transaction upon its books in the “Bills Receivable Account” as a $7,000 note of A. W. Mueller. It transpires that it should have been carried more properly as “other real estate,” having to do with real estate taken in collection of a debt. In any view, that transaction did not constitute an excess loan within the meaning of section 5200 (12 USCA § 84).

Division 2 of the bill- of complaint charges appellee directors with common-law negligence, in violation of their duty to exercise due care in the management of the bank. The exclusive application of section 5239 with respect to violations of the National Banking Act (section 5200) does not prevent an action under the common-law rule for measuring violations of common-law duties. Bowerman v. Hamner, 250 U. S. 504, 511, 39 S. Ct. 549, 63 L. Ed. 1113. This division contains five counts. We take them up in inverse order. The fifth count has to do with a transaction which may be described as the Trego mortgage deal. It appears that, November 12, 1921, the First National Bank of Cumberland instituted an action in foreclosure of a mortgage it held against the 160-aere farm of one Roy Trego to secure an indebtedness approximating $8,000, subject, however, to a prior mortgage of $24,000 upon the same land. November 30, 1921, the bank accepted a warranty deed from Trego and wife in full settlement of its mortgage claim. Subsequent foreclosure of the first mortgage resulted in loss to the bank and to the receivership, and the taking over and carrying the Trego farm in the assets of the bank, with the expenditures incidental thereto, is charged as negligence. It appears that, of the total of $10,120.12, alleged to .be involved in this'transaction, $5,645.80 in' the way of rentals and' cash payments were recovered. The second count of this second division charges like negligence with respect to the Mueller transaction, the facts concerning which have been stated hereinabove. It conclusively appears from the agreed statement of facts that the steps taken in both these matters were deemed necessary and advisable to protect the interest's of the bank, and as an effort to collect indebtedness due the bank. In such eases large discretion is lodged in managing officers and directors. Mere error of judgment and resulting loss is no‘t sufficient to support a charge of negligence. In both eases the charges against the lands, including the claims of the First National Bank of Cumberland, did not exceed $200 per acre. We do not think an attempt to collect upon the basis of such a valution is necessarily evidence of negligence or improvidence. The same may be said of loans made to Iowa farmers during the period under considera^ tion. The situation in Iowa at that time is so well described by Judge Dewey in McRoberts v. Spaulding (D. C.) 32 F.(2d) 315, 316, 317, that we .quote liberally from his opinion:

“The evidence shows, and the court will take judicial notice of, the banking situation, and the method and manner of its conduct prior to the deflation period, which started about the year 1920. The surety for country banks in Iowa and the basis of credit is real estate. From the time of the Civil War up to the year 1920, real estate in Iowa had a standard and fixed valuation, increasing gradually, and a person engaged in farming in Iowa prior to 1920, if honest and industrious, was worthy of credit. And the banks in Iowa generally loaned such individuals money or extended them credit, based upon the ainount of property which they owned; and if the borrowers had real estate, upon thó amount or equity in the real estate owned by such individual borrower. * * *
“In retrospection it is easy to criticize the actions of the officers of the two or three hundred banks in Iowa that failed, with being derelict in their duties and making improvident loans, and yet, during all of the period in which it is charged that, these de7 fendants were negligent in making loans to individuals that were insolvent, the banking department of the state of Iowa was encouraging banks to remain open, having their directors sign guaranties of bank loans, and using every effort to maintain the former business relations, in the hope and expectation that such values would again become sound and substantial, and thus prevent the •closing of banks with resultant loss to stockholders and creditors.”

Error is assigned to the alleged refusal of the court to allow appellant to show the market value of the real estate involved in the Mueller and Trego transactions. No real offer of such evidence was made. At or near the close of the testimony the court said: “Is there anything else upon this disputed question?” Mr. Swan (for appellant): “Not unless Your Honor wants to hear as to what the value of the real estate was, as to that time.” The Court: “I don’t think it makes any difference that I can now see.” To this ruling, if it be one, no exception was taken.

Count 3, division 2, charges negligence on the part of Director E. E. Wollenhaupt in failing to attend directors’ meetings, as a. result of which certain excess loans were made and approved. This charge, however, has not been urged in assignment, argument, or brief, and has therefore been abandoned.

Counts 1 and 2 of division 2 charge negligence against appellees for failure to bring an action against themselves, or any other persons named' as directora, -for the making of excess loans in violation of section 5200 (12 USCA § 84), especially during the period from 1917 to 1920. Conceding, without deciding, that the failure to bring the suits indicated amounted to a breach of duty op. the part of appellees, it is to be noted that counsel for appellant were somewhat doubtful of the practical value to the bank of such actions as is evidenced by paragraph YII of count 2 of division 2, to wit: “That said C. E. Studley, one of the defendants herein, is of doubtful financial ability and is not financially responsible to the amount of the excess loans referred to in this count, and that the other defendants herein may be found by the court, after a hearing upon the merits of said case, to not have knowingly violated section 5200 of the U. S. Revised Statutes with reference to the excess lines set forth in this count.”

The record is barren of any tangible evidence that recovery could have been realized from suits of the nature specified in counts 1 and 2, except that it is-incidentally shown that Lewis J. Groves, a former director, who resigned September 19, 1919, died November 28, 1925, leaving a personal estate of $33,-461.52. Whether it would have been of advantage to the bank to institute proceedings ■ of this nature is not made clear by the evidence. The policy of the bank is indicated by the following action on the part of certain of its stockholders:

“ ‘Farmer’s Savings Bank, Atlantic, Iowa’
“Dated Cumberland, Iowa, October 19,-1921. “To Whom It May Concern: In view of the existing conditions in the First National Bank of Cumberland, Iowa, we, the undersigned stockholders, who hold all of the stock of the bank, except that part held by the directors, sanctions the action of the Board of Directors, in charging certain losses of the bank, incurred on former excessive loans, aggregating $7,836.98, to the undivided profits account, and willingly accept our part of the loss incurred thereby.
“[Signed] F. L. Butzloff,
Atlantic, Iowa, 25 shares, J. A. Nelson,
Atlantic, Iowa, 35 shares, Mrs. Alice .Trainer,
Atlantic, Iowa, 5 shares, Harold Ostrus,
Wiota, Iowa, 10 shares, Wm. Waters,
Wiota, Iowa, 10 shares, Hillary H. Studley,
Cumberland, Iowa, 30 shares.”

■ “The degree of care required of directors of a national bank depends upon the subject to which it is to be applied,' and each case is to be determined in view of all the circumstances.” Bates v. Dresser, 251 U. S. 524, 40 S. Ct. 247, 64 L. Ed. 388.

The chancellor evidently found that appellees were not negligent in the respect charged, and the record furnishes no ground for setting aside this finding By amendment to the bill of complaint, appellant made an additional charge against appellees T. E. Ostrus, O. E. Ostrus, and George E. Wollenhaupt of $8,000 based upon the following facts: February 8, 1922, these appellees, with Director Patrick, made their own note for $4,000 and credited it to undivided profits account, in order to charge off a worthless note of one Rogue for the same amount. May 22,1922, the board of directors, by Wollenhaupt, made a note for $12,500, credited in the same way, and the $4,000 note was charged out. As his part of this obligation, J. W. Reihman, as director and president of the bank, gave notes in the sum of $4,000 which he failed to pay. It is evident that the original director’s note of $4,000 was merged in the later note for $12,500. The record shows that, in 1922 and 1923, appellees and their associates paid into the bank approximately $40,000, an amount greatly in excess of the obligations upon which recovery is sought by this amendment. This claim of appellant appears highly technical, if, indeed, it is not lacking in substance.

All things considered, we find no substantial ground for reversing the findings of the chancellor, and the decree is accordingly affirmed.


source: Caselaw Access Project

author: POLLOCK, District Judge.

license: Public Domain

text:
    KANSAS CITY LIFE INS. CO. v. SHIRK et al.
    No. 419.
    Circuit Court of Appeals, Tenth Circuit.
    May 27, 1931.
    Frank W. McAllister, of Kansas City, Mo., and Robert Stone, James A. McClure, Robert L. Webb, Beryl R. Johnson, and Ralph W. Oman, all of Topeka, Kan., for appellant.
    John S. Dean, John S. Dean, Jr., Frazor T. Edmondson, and George W. Ball, all of Topeka, Kan., for appellees.
    Before LEWIS and COTTERAL, Circuit Judges, and POLLOCK, District Judge.
   POLLOCK, District Judge.

This is an action at law brought on two policies of life insurance, one for $2,000 and the other for $3,000. The parties will be referred to as they stood on the record below. These policies were issued on the life of Alfred L. Waterman. As written, they were payable to the estate of the insured, but later the policy of $3,000 was made payable to Mary E. Waterman, and the $2,000 policy to Flossie B. Waterman. It is claimed by plaintiff these policies were assigned to one George G. Shirk, a creditor of Waterman, and that Shirk became the beneficial owner of the policies, to the extent of the money he had advanced to Waterman to pay premiums on the policies. In September, 1926, the Insurance Company had possession of the policies to secure loans, paid Waterman the balance of their surrender value without the knowledge of Shirk, and canceled the policies. Waterman died March 26, 1928. Proofs of death were furnished in April, 1928, and were denied by the Insurance Company, and an action on the policies was instituted, and the ease removed into the federal court. Issue was joined and the case was tried before the court, a jury having been waived, on an agreed statement of facts found in the record.

The first question presented is: What question or questions are presented by the-record that can be reviewed by this court? No declarations of law were requested by defendant below which were by the court denied, and exception saved, as must be done-to obtain a review in this court of an action at law tried by a court without a jury. It is true, defendant requested findings of fact and conclusions of law to be made by the court, and such request was not granted, except in so far as stated hereinafter, but no exception was saved to the refusal or failure of the-court to grant defendant’s motion, and, under-the settled rule of decision, the granting or refusal to grant such motion is purely discretionary.

As said by Judge Phillips in Alexander T. White, Appellant, v. United States of America, Appellee, 48 F.(2d) 178, 181, January term, 1931, Tenth circuit, delivered March 17,1931: “Whether the findings shall be special or general rests in the discretion of the trial court and its refusal to make special findings is not reviewable on appeal. Modoc County Bank v. Ringling (C. C. A. 9) 7 F.(2d) 535, 536; Bank of Waterproof v. Fidelity & Deposit Co. (C. C. A. 5) 299 F. 478, 480; Compania Trans. de Petroleo v. Mexican Gulf Oil Co. (C. C. A. 2) 292 F. 846, 848; United States v. Smith (C. C. A. 1) 39 F.(2d) 851, 853; Denver L. S. Comm. Co. v. Lee (C. C. A. 8) 18 F.(2d) 11, 16; Southern Surety Co. v. United States (C. C. A. 8) 23 F.(2d) 55, 59; Merriam v. Huselton (C. C. A. 8) 45 F.(2d) 983.”

In this state of the record, is there any question raised that may be considered under the well-settled rule of decision obtaining in the Federal Appellate Courts when considering judgments in actions at law tried before the court without a jury?

“In a jury waived ease, where the parties make and file an agreed statement of the ultimate facts, or the court makes and files special findings of the ultimate facts, the sufficiency of such facts to support the judgment presents a question of law reviewable on appeal. Supervisor of Wayne County v. Kennicott, 103 U. S. 554, 556, 26 L. Ed. 486; Wilson v. Merchants’ L. & T. Co., 183 U. S. 121, 127, 22 S. Ct. 55, 46 L. Ed. 113; United States Trust Co. v. New Mexico, 183 U. S. 535, 540, 22 S. Ct. 172, 46 L. Ed. 315; Tatum v. Davis (C. C. A. 8) 283 F. 948, 949; Panama R. Co. v. Beckford (C. C. A. 5) 231 F. 436, 440; Abernathy v. Oklahoma (C. C. A. 8) 31 F.(2d) 547, 548; Newlands v. Calaveras M. & M. Co. (C. C. A. 9) 28 F.(2d) 89, 90.

“Such an agreed statement of facts or special findings must be of the ultimate facts, as distinguished from the evidentiary facts. Wilson v. Merchants’ Co., supra; United States Trust Co. v. New Mexico, supra; Kentucky L. & A. Ins. Co. v. Hamilton (C. C. A.) 63 F. 93; Raimond v. Terrebonne Parish, 132 U. S. 192, 194, 10 S. Ct. 57, 33 L. Ed. 309; Grayson v. Lynch, 163 U. S. 468, 472, 16 S. Ct. 1064, 41 L. Ed. 230; United States v. Sioux City Stock Yards (C. C. A. 8) 167 F. 126; United States v. Smith (C. C. A. 1) 39 F.(2d) 851, 854. An exception is not a prerequisite to a review of the question of the sufficiency of the agreed statement of” (the ultimate) “facts or the specific findings to support the judgment, since such a question is presented on the record proper. Chicago, R. I. & P. Ry. Co. v. Barrett (C. C. A. 6) 190 F. 118, 123; Seeberger v. Schlesinger, 152 U. S. 581, 586, 14 S. Ct. 729, 38 L. Ed. 560; Webb v. National Bank of Republic (C. C. A. 8) 146 F. 717, 719; United States v. La Franca, decided February 24, 1931, 282 U. S. 568, 51 S. Ct. 278, 75 L. Ed. 551.” White v. United States, supra.

Now it is to be noted the instant case was submitted to and heard by the court on an agreed statement of the facts, and which facts, twenty-five days after judgment, were ordered by the court incorporated in the decree on the overruling of a motion for a new trial. Incorporation of the agreed facts into the decree was in violation of equity rule 71 (28 USCA § 723). Yet, considering this •to have been done contrary to the express provisions of the rule as to the form and contents of a decree in equity, what is the effect of the agreed facts on which this case was tried, and which facts were incorporated by the court into thó decree? As the special findings of fact found by the trial court were the same identically with the stipulated facts, it is evident defendant below did not and could not well except to the same. However, where a ease tried before the court, a jury being waived, upon agreed facts, such agreed facts, if the ultimate facts of the case as contradistinguished from mere evidentiary facts, may be examined on review for the purpose of determining whether such ultimate agreed facts, on which the ease was heard and determined, support the judgment rendered, without any exception thereto; but if the agreed facts, or the special findings of fact made by the trial court are merely evidentiary in their nature, as contradistinguished from the ultimate facts of the ease, in such case said facts may not be examined, without exception saved in the record, for the purpose of determining whether the evidentiary facts support the judgment rendered. This proposition is settled by a wealth of decisions controlling here. Supervisor of Wayne County v. Kennicott, 103 U. S. 554, 556, 26 L. Ed. 486; Wilson v. Merchants’ L. & T. Co., 183 U. S. 121, 127, 22 S. Ct. 55, 46 L. Ed. 113; United States Trust Co. v. New Mexico, 183 U. S. 535, 540, 22 S. Ct. 172, 46 L. Ed. 315; White v. United States, supra; Tatum v. Davis (C. C. A. 8) 283 F. 948, 949; Panama R. Co. v. Beckford (C. C. A. 5) 231 F. 436, 440; Abernathy v. Oklahoma (C. C. A. 8) 31 F.(2d) 547, 548; Newlands v. Calaveras M. & M. Co. (C. C. A. 9) 28 F.(2d) 89, 90.

Again, where the faets agreed, upon are the ultimate faets of the- ease, and not merely evidentiary faets, an exception thereto is not a prerequisite to review of the question of the sufficiency of the agreed facts or special findings to support the judgment. See Seeberger v. Schlesinger, 152 U. S. 581, 586, 14 S. Ct. 729, 38 L. Ed. 560; Chicago, R. I. & P. Ry. Co. v. Barrett (C. C. A. 6) 190 F. 118, 123; Webb v. National Bank of Republic (C. C. A. 8) 146 F. 717, 719; United States v. La Franca, 282 U. S. 568, 51 S. Ct. 278, 75 L. Ed. 551, decided February 24, 1931.

In Wilson v. Merchants’ L. & T. Co., 183 U. S. 121, 22 S. Ct. 55, 58, 46 L. Ed. 113, Mr. Justice Peckham delivering the opinion for the court, said:

“The result of the decisions under the statutes providing for a wavier of trial by jury, and the proceedings on a trial by the court (Rev. St. §§ 649, 700) is that when there are special findings they must be findings of what are termed ultimate faets, and not the evidence from which such faets might be but are not found. If, therefore, an agreed statement contains .certain faets of that nature, and in addition thereto and as part of such statement there axe other facts of an evidential character only, from which a material ultimate fact might be inferred, but which'is not agi-eed upon or found, we cannot find it, and we cannot decide the case on the ultimate facts agreed upon without reference to such other faets. In such ease we must be limited to- the general finding by the court. We are so limited because the agreed statement is not a compliance with the statute.
“As to what is necessary in special findings or in an agreed statement of facts, the authorities are decisive. It is held that upon a trial by the court, if special findings are made, they must be not a mere report of the evidence, but a finding of those ultimate faets on which the law must determine the rights of the parties; and if the finding of faets be general, only such rulings of the court in the progress of the trial can be reviewed as are presented by a bill of exceptions; and in such ease the bill-cannot be used to bring up •the whole testimony for review, any more •than in a trial by jury. Norris v. Jackson, 9 Wall. 125, 19 L. Ed. 608.
“In this case the finding is general, and .strictly construing the. statute, the only questions which .would be rpviewable would be those questions which arose during the progress of the trial, and which were presented by bill of exceptions. It has, however, been held that where there was an agreed statement of facts submitted to the trial court and upon which its judgment was founded, such-agreed statement would be taken as an equivalent of a special finding of facts. Supervisors v. Kennicott, 103 U. S. 554, 26 L. Ed. 486. But as such equivalent, there must' of course be a finding or an agreement upon all ultimate faets, and the statement must not merely present evidence from which such-facts or any of them may be inferred.
“An exception to a general finding of the court on a trial without a jury brings up no question for review. The finding is conclusive, and there must be exceptions taken to the rulings of the court during the trial in order to permit a review thereof. Insurance Company v. Folsom, 18 Wall. 237, 21 L. Ed. 827.”

In United States Trust Co. v. New Mexico, 183 U. S. 540, 22 S. Ct. 172, 174, 46 L. Ed. 315, that great and accurate lawyer, Mr. Justice Brewer, delivering the opinion for-the court, said:

“The ease was heard in the district court upon an agreed statement of faets, which was thereafter certified by the supreme court of the territory as a statement of facts under the act of April 7, 1874. We have had several occasions to consider the effect of an agreement of the parties as to the faets. See Wilson, Receiver, etc., v. Merchants’ Loan & Trust Co., 183 U. S. 121, 22 S. Ct. 55, 46 L. Ed. 113, and eases cited in the opinion. An agreed statement of faets may be the equivalent of a special verdict or a finding of faets upon which a reviewing court may declare the-applicable law, if such agreed statement is of the ultimate faets, but if it be merely a recital of testimony or evidential facts, it' brings nothing before an appellate eo-urt for - consideration. The same rule obtains in cases of appeals from territorial.courts under-the act of 1874. * * *
“Tested by the various authorities just cited, the certified statement of faets is insufficient, and presents nothing for our examination. This disposes of most of the questions discussed by counsel.”

Under all the authorities, this distinction between eases tried on agreed ultimate facts,. and the finding of the ultimate faets in a case, and a statement of the evidential faets, is kept clearly in mind in determining the right of an appellate court to review the findings-.made for the purpose of determining whether the judgment rendered is supported by the facts found or agreed. It is therefore necessary to determine whether the agreed facts in the instant ease can be examined to ascertain whether they support the judgment rendered. In other words, are the agreed facts found in this record in their nature the ultimate facts in the ease, or are they merely evi-dentiary facts, or part evidentiary and part ultimate facts, in which latter ease^ under the settled rule of decision, we are powerless to review. When we turn to the agreed facts found in the record in this ease, we find not alone the many facts stipulated to be almost purely evidentiary in their nature, but thereto are attached very many letters passing between the defendant company and the claimant to a beneficial interest in the policies, which evidential facts must be read and construed as to their legal intent and meaning. Not only so, but in finding IX of the agreed facts, the following occurs: “It is understood and agreed that the above is only an agreement of a portion of the facts in said case and that other evidence may be introduced.”

Now, whether further evidence was introduced, or, if so, what it was, is not disclosed by this record. Hence, in this case the agreed facts, in any event, are only a portion of the evidentiary facts, and not an agreed finding of the ultimate facts on which a judgment in the case may be based; and hence, whether the same supports the judgment, in the absence of a declaration of law requested of the court, denied and exception saved, there is no ■right of review of any question of law saved ■for review in this court, and this court is powerless to review the case.

Since we are precluded from considering the errors assigned, the judgment appealed from must be affirmed. It is so ordered.


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    HENDRIE v. TURPEN.
    No. 415.
    Circuit Court of Appeals, Tenth Circuit.
    May 27, 1931.
    W. W. Grant, Jr., Erl H. Ellis, Morrison Shafroth, and Henry W. Toll, all of Denver, Colo., for appellant.
    M. A. Kline, of Cheyenne, Wyo., and Oscar O. Natwick, of Wheatland, Wyo., for appellee.
    Before LEWIS and COTTERAL, Circuit Judges, and POLLOCK, District Judge.
   POLLOCK, District Judge.

This action brought by appellee (hereinafter called plaintiff) against appellant (hereinafter called defendant) is in two counts; the first to recover damages for breach of a contract made between the parties for the construction of a hotel building in Lusk, Wyoming; the second count is for materials and labor furnished and performed by plaintiff for defendant before the contract is alleged to have been breached by defendant ordering plaintiff to cease work under the contract. The contract price agreed to be paid was $51,237.52. Defendant confessed judgment on the second count, hence it needs no further consideration.

A jury to try the issues on the first count was waived and the matter was tried and determined by the court, resulting in a judgment in favor of plaintiff for $11,459.57 on the two counts. Defendant appeals.

After the trial of the ease the court took the matter under advisement, made a general finding of the facts in favor of plaintiff on which the judgment was entered.

While the trial court had the ease under advisement, and on August 5, 1930, defendant moved the court to make certain findings of fact and conclusions of law, which motion was denied and only general findings were made.

The errors as shown assigned in the record are fifteen in number. As appellant’s brief fails to specify the assigned errors on which he relies, the errors assigned may be treated as a whole.

When in an action at law in a national court a jury is waived and the case is tried to the court, while the court may from the evidence' make special findings of fact it is not required to do so. Mercantile Ins. Co. v. Folsom, 18 Wall. 237, 21 L. Ed. 827; Ozark Pipe Line Corporation v. Decker (C. C. A.) 32 F.(2d) 66; Cross Company v. Texhoma O. & R. Co. (C. C. A.) 32 F.(2d) 442; Denver Live Stock Com. Co. v. Lee (C. C. A.) 18 F.(2d) 11, 16; Ewert v. Thompson (C. C. A.) 281 F. 449; American Surety Co. v. Savanah Creosoting Co. (C. C. A.) 35 F.(2d) 272; Bank of Waterproof v. Fidelity & Deposit Co. (C. C. A.) 299 F. 478.

“Issues of fact in civil eases in any district court may he tried and determined by the court, without the intervention of a jury, whenever the parties, or their attorneys of record, file with the clerk a stipulation in writing waiving a jury. The finding of the court upon the facts, which may be either general or special, shall have the same effect as the verdiet of a jury.” 28 USCA § 773.

In Denver Live Stock Com. Co. v. Lee, supra, Circuit Court of Appeals, Eighth Circuit, said: “The court did not err in denying the request of the defendants for special findings. ‘The making of special findings of fact in an action at law tried by the court on a waiver of a jury is discretionary with the trial court, and its action in making such findings, in refusing to make requested findings, or in refusing to amend findings made, is not subject to exception, or to a subsequent review in a federal appellate court.’ ”

In Ozark Pipe Line Corporation v. Decker, supra, it is said: “A jury was waived by a stipulation in writing. A judgment was rendered in favor of the plaintiff. The defendant assigns as error that the court refused findings of fact which it had requested, but, where a trial by jury is waived by a written stipulation, the refusal of findings of fact tendered, even though they are correct deductions from the pleadings and evidence, is not error, because the making of special findings of fact is entirely discretionary with the court.”

It therefore follows the assignments of error based upon the refusal of the court to make special findings, or in refusing to find, are not reviewable here, and may be denied.

When a case is tried by the court without the intervention of a jury, as this case' was tried, and there are no findings of fact made save a general finding for the one party or the other, there is no right of review by an appellate court except as to the rulings of the court made during the progress of the trial excepted to at the time and presented by the bill of exceptions. This proposition is abundantly supported by authority. Wilson v. Merchants’ Loan & Trust Co., 183 U. S. 121, 22 S. Ct. 55, 46 L. Ed. 113; Law v. United States, 266 U. S. 494, 45 S. Ct. 175, 69 L. Ed. 401; Lehnen v. Dickson, 148 U. S. 71, 13 S. Ct. 481, 37 L. Ed. 373; Vicksburg, etc., Ry. Co. v. Anderson-Tully Co., 256 U. S. 408, 41 S. Ct. 524, 65 L. Ed. 1020; Cooper v. Omohundro, 19 Wall. 65, 69, 22 L. Ed. 47.

In Cooper v. Omohundro, supra, Mr. Justice Clifford, delivering the opinion of the court, said: '“Where issues of fact are submitted to the Circuit Court and the finding is general, nothing is open to review * * * except the rulings of the Circuit Court in the progress of the trial, and * * * the phrase ‘rulings of the court in the progress of the trial’ does not include the general finding of the Circuit Court nor the conclusions of the Circuit Court embodied in such general finding.”

The reason for this rule is well stated in the ease of Wear v. Imperial Window Glass Co. (C. C. A.) 224 F. 60, 63. Judge Sanborn, delivering the opinion of the court, said: “There is another reason why no reviewable question of law is presented to this court in this case. A trial court is entitled to a clear specification by exception of any ruling or rulings which a party challenges and desires to review, to the end that the trial court itself may correct them if so advised, and, if it fails to do so, that there may be a clear record of the rulings and the challenges thereof. For this purpose a rule has been firmly established that an exception to any ruling which counsel desire to review, which sharply calls the attention of the trial court to the specific error alleged, is indispensable to the review of such a ruling.”

In the record we find not a single exception to any ruling of-the trial court. The trial court’s attention was never in any way called to any of these alleged errors and was never given a ehanee to consider them or correct them. Under such a state of facts there is nothing in this record for review.

It follows, the judgment of the trial court must be affirmed.


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    QUALITY REALTY CO. v. WABASH RY. CO.
    No. 8770.
    Circuit Court of Appeals, Eighth Circuit.
    May 25, 1931.
    Ben A. Wood and John M. Goodwin, both of St. Louis, Mo., for appellant.
    N. S. Brown, of St. Louis, Mo. (Homer Hall, of St. Louis, Mo., on the brief), for ap-pellee.
    Before KENYON and VAN VALKEN-BURGH, Circuit Judges.
   VAN VALKENBURGH, Circuit Judge.

The Hawthorne Investment Company, a corporation of St. Louis, Mo., on and prior to July 11,1911, was the owner of all of city block 3917 of said city. On that date, it entered into a contract with the Wabash Railroad Company, predecessor of appellee Railway Company. Block 3917 is bounded on the north by Forest Park boulevard, on the east by Sarah' street, on the south by Duncan avenue, and on the west by Boyle avenue. The main line of the Wabash runs parallel with, and somewhat more than a city block south of, Duncan avenue. Prior to July 11, 1911, that portion of block 3917 fronting on Forest Park boulevard was restricted to residence use. The restrictions expired about that time, and the Hawthorne Investment Company undertook to convert this entire city block into an industrial district. To this end, in platting the block, it reserved a strip of ground sixteen feet wide, running from the intersection of Sarah street and Duncan avenue northwestwardly a short distance, thence directly west, approximately through the middle of said block to Boyle avenue, for the purpose of placing thereon a railroad lead track, from which switches might be run to the lots on either side thereof, to serve the industries that might be induced to locate on the lots adjoining this sixteen-foot strip, which said lots were offered by the Hawthorne Company for industrial sites. This plan of establishing an industrial district was laid before the Wabash Railroad Company, and, after some negotiations, the contract of July 11, 1911, resulted. This contract recited that the Investment Company, as owner of certain industrial properties in city block 3917 in St. Louis, desired, for the purpose of the industrial development of said property, to have a railroad track constructed from the main line of the Wabash Company, beginning at a point approximately two hundred and fifty-four (254) feet east of the east line of Sarah street in said city, and extending thence in a northerly direction to the south line of Duncan avenue; thence across Duncan avenue by means of an overhead bridge or viaduct (to be constructed as in said contract provided); thence in a general westerly direction to or near the east line of Boyle avenue in said city block 3917. The Wabash Company expressed its willingness to construct, or to have constructed, the railroad track in question, in accordance with the terms and provisions of the contract. Under these terms the Investment Company was to and did, at its own cost and expense, furnish all tools, materials, labor, machinery, and other things necessary to construct, and did construct, the overhead bridge or viaduct across Duncan avenue at its-interseetion with Sarah street, in accordance with an ordinance authorizing this structure. The Investment Company further was to maintain this viaduct in a safe condition for the passage of railway rolling stoek, and as required by the municipal authorities of St. Louis. After the construction and acceptance of this viaduct, the Wabash Company, upon the written request of the Investment Company, was to, and did, construct a railroad track from the point in its main line two hundred and fifty-four (254) feet “east of the east line of Sarah street, over the route hereinabove described, to a point at or near the east line of Boyle avenue. It was further provided that the Investment Company was to deposit with the Wabash Company the estimated cost of the materials and labor necessary for the construction of the track covered by said written request; and should grant to the Wabash Company a right of way for that part of said track located within the- limits of city ^block 3917. The Wabash Company was to-keep an accurate account of the cost of this construction and was, thereafter, to refund to the Investment Company the cost of the construction of that part of the track extending from the point of its connection with the main track of the Wabash Company to the south line of the viaduct or railroad bridge. This refund was to be at the rate of two dollars ($2.00) “per loaded ear shipped from or delivered to any industry which may be now or hereafter located upon the property of the Investment Company situate in City Block' 3917, and upon which the Wabash Company shall have received a road haul. * '* * This refund shall continue to be made by the Wabash Company to the Investment Company until the cost of constructing that part of the said track from the point of connection with the main line of the Wabash Company to the south line of the viaduct or railroad bridge, shall have been refunded to the Investment Company, but not thereafter.”

The Wabash Company was to maintain,, at its own cost and expense, that part of the-track last above described, and was also to keep the remaining part of the track in repair, but at the expense of the Investment Company. Following are other material parts of the contract:

“The Wabash’ Company shall at all times-have the right of full control of the use of the said railroad track and in ease any industries are located upon the property of the Investment Company, in said Block 3917, which may desire extensions leading from the said railroad track to the said industries, then the Wabash Company will construct, maintain and operate such extensions subject to the terms and conditions of thé usual side track agreement of the Wabash Company. * * *
“This agreement shall be binding upon and shall inure to the benefit of the respective successors and assigns of the parties hereto, and shall remain in full force and effect for a period of Five (5) years from the date hereof, and thereafter until either party hereto shall give to the other party Three (3) months written notice of its intention to terminate this agreement and at the end of which time (unless otherwise terminated as herein provided) this agreement shall absolutely cease and determine.”

Meantime, the Hawthorne Investment Company and its successor, the Quality Realty Company, have sold the lots in city block 3917 to various industries, among them J. I. Case Threshing Machine Company, Art Mo-saie & Tile Company, Fires tone Tire & Rubber Company, Linde Air Products Company, Goodyear Rubber Company, Kewanee Boiler Company, Standard Sanitary Manufacturing Company, Ford Motor Company, American Radiator Company, Wolff Manufacturing Company, and St. Louis Comey Company, all of which, except one, own, and all of which maintain industrial spur tracks connecting with the switching lead track on the sixteen-foot strip over which appellee serves the aforesaid industries. In the deeds to these industries, the Hawthorne Investment Company and/or appellant, its successor, has, by instruments of conveyance, conveyed the fee-simple title to their respective lots and parcels of ground, together with permanent easements in and over the sixteen-foot railroad right of way. These grants of easements are in various effective forms. That to American Radiator Company, of date May, 1913, reads thus: “Including the right to forever use in common with other owners of property abutting thereon the certain railroad track laid on the 16 foot railroad right-of-way which track shall be used for switching purposes only.”

That granted to Linde Air Products Company in April, 1915, is as follows: “Including the right to forever use in common with other owners of property abutting thereon the certain railroad right-of-way above set forth now owned by the Hawthorne Investment Company and connecting with main line of Wabash R. R. Which track shall be used for switching purposes only and shall be maintained by Hawthorne Investment Company or its assigns.”

Between March 20, 1917, and February 16, 1917, appellant made continuous efforts to effect a sale of this right of way and tracks to appellee. On the latter date, it gave the three months’ notice of its intention to terminate the contract of July 11, 1911, to become effective May 16,1917. Again it sought to sell or lease this trackage to appellee. The Wabash replied that appellant’s predecessor built this track as an inducement for the location of industries, which would permit it to dispose of the property in block 3917; that the railroad was then performing service for the industries which had purchased property adjacent to this trackage; that appellant owned nothing which the railway desired to purchase. It announced that it would not operate over this lead track on and after May 16, 1917. To prevent injury to the industries, appellant and appellee on May 9, 1917, entered into an agreement containing the following stipulation: “It is hereby stipulated and agreed that in order that such industries may secure the service now accorded them over the tracks referred to, the Wabash Railway Company may and said Wabash Railway Company hereby agrees to, use and operate over said track for a period expiring November 30,1917, for the purpose of serving the industries adjacent thereto, pending a determination of the controversy existing between the parties hereto respecting the obligation of the Wabash Railway Company, if any, to compensate the Quality Realty Company for the use of said track, or the right of the Quality Realty Company to exact compensation therefor. The right hereby granted the Wabash Railway Company, and the obligation hereby assumed by it to perform said service shall be without prejudice to the rights of either of the parties hereto, and shall cease at midnight, November 30, 1917.”

It was further understood that the respective obligations and rights of the parties might be determined either by arbitration or in some proceeding brought by either party, or by any of said industries, or other interested party. This agreement was extended successively by indorsement to March 1, 1918, and September 1, 1918, and not thereafter. Throughout, appellee refused to recognize appellant’s claims for compensation. The Wabash was under federal control from January 1, 1918, to March 1, 1920. September 4, 1918, the Director General rejected appellant’s claim for compensation for the use of the track. Appellee has continued to serve the industries in city block 3917. Appellant continued to pay for-the maintenance of that part of the track which, in the contract of July 11, 1911, it had agreed to maintain, until the close of 1923, the actual work being done by appellee. January 15, 1926, appellant brought suit against appellee in the state court, praying that the Railway Company he enjoined from further using the trackage over said sixteen-foot strip in said city block 3917, and be required to account to appellant for the use of the same since May 16, 1917. The case was removed to the District Court for the Eastern District of Missouri because of diversity of citizenship. September 21, 1926, appellant filed an amended bill of complaint, not contained in the record. June 23, 1927, it filed a second amended bill in which it joined the various industries, pursuant to an order of court entered at the instance of appellee. The prayer of this amended bill, which eliminated that for injunctive relief, reads thus: “‘Wherefore, complainant prays that defendant Wabash Railway Company be required to render strict account to complainant of the number of loaded cars shipped in and out over said track since May 16,1917; that Two Dollars ($2.00) per loaded car compensation to plaintiff for the use of said track be decreed to bo a reasonable compensation for said use; that the defendant be required to account for and pay to the complainant such sum so determined upon as found to be due to complainant for said use, control and occupation of said strip; and for such other and further orders and relief as to the Court seems meet and just.”

Before trial, appellant entered a dismissal as to all defendants except the Wabash Company. The trial court gave certain declarations of law requested by appellee, and entered a decree dismissing appellant’s bill.

At the threshold, we are met with the contention of appellee that “plaintiff’s ease, under its second amended petition, as amended, is an action at law, and this appeal should be dismissed.” It is pointed out that plaintiff voluntarily amended its bill of complaint by striking therefrom its prayer for injunctive relief, leaving as its sole cause of action a claim for money judgment. This action was taken before trial. No written stipulation waiving a jury was filed, and the parties proceeded to trial before the court without a jury. No objection was made to this procedure. Appellee invokes the rule established by this and other courts, that, in such case the decision of the trial court is like the verdict of a jury, assailable only on the ground that there was no substantial evidence in support of it, “and then it is reviewable only when a request has been made to the trial court before the close of the trial that it adjudge, on the specific ground that there was no substantial evidence to sustain any other conclusion, either all the issues or some specific issue in favor of the requesting party.” Wear v. Imperial Window Glass Co. (C. C. A. 8) 224 F. 60, 63; Allen v. Cartan & Jeffrey Co. (C. C. A. 8) 7 F.(2d) 21, 22; Merriam v. Huselton (C. C. A. 8) 45 F.(2d) 983; Buechle v. Montgomery (C. C. A. 8) 45 F.(2d) 987; Fleischmann Const. Co. v. United States, 270 U. S. 349, 46 S. Ct. 284, 70 L. Ed. 624.

In this ease there were no requests for conclusions of law by appellant. No demurrer to the evidence was filed, nor motion for judgment at the close of all the evidence. As said by the late Jjidge Sanborn in Wear v. Imperial Window Glass Co., supra: “The question of law whether or not there was any substantial evidence to sustain any such finding is reviewable, as in a trial by jury, only when a request or a motion is made, denied, and excepted to, or some other like action is taken which fairly presents that question to the trial court and secures its ruling thereon during the trial.”

In the instant case, the court did give declarations of law requested by appellee. Probably this court may examine such declarations to determine whether they justify the decision of the trial court. In the absence of any review of the facts, it could not be successfully claimed that the declarations do not correctly declare the law. So much for the situation presented if the case is to be deemed one purely at law, in which appellant had an adequate remedy.

But another important consideration remains. The case, as brought originally, confessedly belonged to a class cognizable in equity. The question presented is whether, since the elimination of the prayer for injunctive relief, it still retains its equitable character sufficiently to permit disposition on the equity side. Beyond question it was tried to the court as an equity ease, apparently so considered by court and counsel, and without objection from any source. Consistently with this view, the court entered its decision in the form of a “final decree.” It has been frequently held that the right to have a cause brought in equity transferred to or tried on the law side of the court may be waived by failure to make timely objection. Greenberg v. Pennsylvania Trust Co. (C. C. A. 3) 19 F.(2d) 824; Henderson Tire & Rubber Co. v. Reeves (C. C. A. 8) 14 F.(2d) 903, 906; Reynes v. Dumont, 130 U. S. 354, 395, 9 S. Ct. 486, 32 L. Ed. 934; Street Grading Dist. v. Hagadorn (C. C. A. 8) 186 F. 451; Southern Pacific R. Co. v. United States, 200 U. S. 341, 26 S. Ct. 296, 50 L. Ed. 507.

This ruling, however, is subject to the qualification that the subject-matter is of a class over wMeh a court of equity has jurisdiction, and that the trial court is competent to grant the relief prayed for. Southern Pacific R. Co. v. United States, and Street Grading Dist. v. Hagadorn, supra.

The prayer of the second amended bill of complaint is that the Railway Company be required to “render a strict account to complainant of the number of loaded cars shipped in and out over said track since May 16, 1917” and that $2 per loaded ear be decreed to be a reasonable compensation for use of the trackage. We have here not only a prayer for accounting, but a demand that ap-pellee disclose the number of cars shipped in and out over, its line during a stated period, as a basis for recovery of the compensation asked. This savors of a prayer for discovery although inartifieially pleaded.

As said in Southern Pacific R. Co. v. United States, supra: “Discovery, although now seldom the object of a suit in equity, and not always sufficient to uphold a suit when the full information is obtainable by proceedings at law, was a well-recognized ground of equity jurisdiction.”

We think the rules announced by the Supreme Court in Twist v. Prairie Oil & Gas Co., 274 U. S. 684, 47 S. Ct. 755, 71 L. Ed. 1297, are applicable here. We quote from the syllabi as follows:

“When a suit, begun in a state court, on a cause of action at law joined with one for equitable relief concerning the same subject matter, is treated after removal as a suit in equity, results in an equitable decree, and is appealed by both parties as equitable, it is reviewable as such, upon the assignments of error, and the statutory rule limiting the scope of review in jury-waived eases at law is not applicable.
“It is error to treat such a suit in the appellate court as one at law and affirm the decree without considering the assignments of error.
“The objection that the suit is not within the equity jurisdiction, whether taken in the trial court or the appellate court, does not go to the power of the court as a federal court.”

The power and duty of the appellate court is thus stated in the body of the opinion: “The Court of Appeals, being of opinion that the plaintiffs had not established a right to relief in equity, because there was a plain, adequate and complete remedy at law, might, on the undisputed facts, have reversed the decree on that ground without considering the specific errors assigned; and, rightly or wrongly, it might have ordered the bill dismissed without prejudice to the remedy at law; or might conceivably have ordered the case transferred to the law docket; or might have considered the ease on the merits as on an equity appeal, in the view that at such stage of the proceedings it was desirable to hold that the objection to the equity jurisdiction had been waived. Compare Southern Pacific [R.] Co. v. United States, 200 U. S. 341, 26 S. Ct. 296, 50 L. Ed. 507.”

We think it desirable, at this stage of the proceedings to adopt the course last above stated — to consider the case on the merits as on an equity appeal. It is true that there are many cases of accounting where the jurisdiction is exclusively at law. Jurisdiction in equity may attach when the account presented is so difficult, complicated, and confusing that it cannot well be handled by a jury. Goffe et al. v. Milling Co. (D. C.) 26 F.(2d) 801. While these characteristics of the accounting prayed are not expressly pleaded, we think, in the situation presented, they may legitimately be presumed to sustain the equity jurisdiction invoked.

With respect to the merits, appellant and its predecessor halve granted to the various industries the permanent use of this sixteen-foot railroad right of way for switching purposes, in connection with shipments to and from their plants. According to the record, the Wabash Company has been serving the industries in this capacity without additional compensation. It is not a trespasser, because appellant has stipulated that it should thus discharge the duty which appellant owed to the industries; that is, to maintain the traek in question for switching purposes. The contract of July 11, 1911, provided that, during the existence of that contract, the Wabash Company should, at all times, have the right of full control of the use of said traek, and should construct, maintain, and operate any extensions, leading therefrom to industries located upon the property in block 3917, as might be desired by such industries. This contract contemplated no compensation to appellant for the use of this sixteen-foot railroad right of way expressly granted to the Wabash Company. Conceding that this contract of July 11,1911, expired May 16,1917, nevertheless, the agreement of May 9, 1917, invited and permitted the railroad to continue to use the property in serving the industries in the same manner as theretofore. That invitation and permission has never been withdrawn. It is true that the Investment Company was asserting a claim to compensation, but the right to such compensation was consistently denied by the Wabash. Nowhere in the record can be found any evidence that the minds of the parties met in agreement upon this point. Nor is there in the record anything from which the right to compensation can be implied. Certainly not from the use of the property under the express invitation extended and license granted, and in the face of appellee’s consistent denial of any obligation on its part to pay therefor. It is clear that, under the permanent easements granted to them, the industries are entitled to procure switching service over this sixteen-foot railroad right of way without compensation to appellant. Nor is any common carrier, employed by the industries for this purpose, under obligation to compensate appellant for such use of this track, the right to which use appellant and its predecessor has granted in perpetuity to the vendees of industrial sites in block 3917 adjacent to this trackage. We do not think the record discloses the granting of a permanent easement to appellee over the track in question, as, in effect, decided by the trial court. The only issue, presented by the second amended bill of complaint, was whether appellant is entitled to compensation for the use of this track since May 16, 1917. The trial court decided that it is not so entitled, and in this we concur. The ease is remanded to the District Court, with directions to modify its decree by confining it to a determination of this, the sole issue in the case. As so modified, the decree will be, and is, affirmed. It is so ordered.


author: NORTHCOTT, Circuit Judge.

text:
    MURCHISON NAT. BANK v. GRISSOM, Collector of Internal Revenue.
    No. 3130.
    Circuit Court of Appeals, Fourth Circuit.
    June 17, 1931.
    James Craig Peacock, of Washington, D. C. (John W. Townsend, of Washington, D. C., on the brief), for appellant.
    Lester L. Gibson, Sp. Atty., Bureau of Internal Revenue, of Washington, D. C. (Walter H. Fisher, U. S. Atty., of Clinton, N. C., and C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, of Washington, D. C., on the brief), for appellee.
    Before PARKER and NORTHCOTT, Circuit Judges, and ERNEST F. COCHRAN, District Judge.
   NORTHCOTT, Circuit Judge.

The appellant is a national bank organized under the laws of the United States, having its principal office at Wilmington, N. C. During the year 1920, N. P. Sloan & Company, engaged in the cotton business, failed. The company was indebted to appellant at the close of that year in the sum of $91,492.92 on account of loans made to it, against which the bank held as security, cotton in storage, having an estimated value, based upon market quotations, of $30,000. The bank charged off as a bad debt at the end of 1920, $61,492.92, the amount of the loan in excess of the estimated value of the security. The cotton was sold in 1921. It proved to be of a lower grade and poorer quality than was supposed, and brought $12,172.16 less than its estimated value. Appellant charged off the $12,172.16 as a loss in 1921. At the time N. P. Sloan & Company failed, its assets were of little or no value, and the bank has never recovered from it on its debt anything except the amount received from the sale of the cotton held as security for the loan. No receiver was ever appointed. The bank deducted said $61,492.92 as a bad debt in its income and profits tax return for 1920. The Commissioner of Internal Revenue disallowed the deduction and assessed against the taxpayer additional income and profits taxes for 1920 in the amount of $17,567.78, of which additional taxes $17,218.02 is attributable to the disallowance of said deduction of $61,492.92. This amount was paid by appellant on May 18,1925. On April 24, 1929, the taxpayer filed claim for refund for $17,567.78, alleging in the claim the facts and reasons set forth in its complaint. The claim was disallowed by the Commissioner of Internal Revenue on August 16, 1929.

In September, 1929, the taxpayer filed its complaint in the District Court of the United States for the Eastern District of North Carolina against the appellee as Collector of Internal Revenue, seeking to recover the said sum of $17,567.78. The action was submitted to the court below upon an agreed statement of facts, a jury being waived. The court gave judgment for the defendant, from which action this appeal was brought.

The pertinent provisions of the Revenue Act of 1918 are (40 Stat. 1077):

“Sec. 234. (a) That in computing the net income of a corporation subj'eet to the tax imposed by section 230 there shall be allowed as deductions: * * *
“(4) Losses sustained during the taxable year and not compensated for by insurance or otherwise;
“(5) Debts ascertained to be worthless and charged off within the taxable year.”

The sole question here is whether, under the act, so much of .a debt as is admittedly worthless may be deducted by the taxpayer, and this question has been passed upon directly by the Circuit Court of Appeals for the Second Circuit in Sherman & Bryan, Inc., v. Blair, 35 F.(2d) 713, 716; by the Court of Appeals of the District of Columbia in Davidson Grocery Co. v. Lucas, 59 App. D. C. 176, 37 F.(2d) 806, 808, and by the Court of Claims in Southern California Box Co. v. United States, 46 F.(2d) 724, 726, decided February 9, 1931. All three of these courts reached the conclusion that the deduction should be allowed.

In Darling v. Commissioner of Internal Revenue, 49 F.(2d) 111, decided April 13, 1931, this court, while there dealing with a somewhat different set of circumstances, held practically to the same effect, and in the latter eases, counsel for the government, as we see it, took a position not in accord with the position taken here by it.

We agree with the reasoning and the conclusion of the Circuit Court of Appeals of the Second Circuit in the Sherman & Bryan Case, supra. There the court said:

“This brings us to the seeond question, the refusal to permit so much as is admittedly worthless to be deducted. The government contends that section 234 (a) (5) does not permit the partial charge-off of a debt not wholly worthless. See Minnehaha National Bank v. Commissioner, 28 F.(2d) 763 (C. C. A. 8); Selden v. Heiner, 12 F.(2d) 474, 478 (D. C. W. D. Pa.). Further support for the argument is sought in the faet that in the Revenue Act of 1921 (42 Stat. 255, § 234 (a) (5), Congress expressly gave permission for a partial charge-off of a debt recoverable only in part. But such subsequent legislation is not conclusive that the construction claimed for the earlier act must be accepted. See Russell v. United States, 278 U. S. 181, 188, 49 S. Ct. 121, 73 L. Ed. 255. ‘Debts ascertained to be worthless’ might, it would seem, reasonably be construed to mean ‘indebtedness ascertained to be worthless,’ and to permit a charge-off of such part of a claim as was proven to be un-collectible by so definite an event as seizure of the debtor’s property by a receiver. We do not, however, find it necessary to decide this point, because, if clause (5) does not permit the deduction, we think it may be made under clause (4). The taxpayer relies upon both clauses. * * *
“Upon the facts proved, the issue of law became the deductibility of so much of the debt as was proved worthless. If an amendment of the pleadings had been thought necessary, it would undoubtedly have been permitted. Without any amendment the board considered the issue of law presented by the facts proven, for its opinion states: ‘An ascertainment that a debt is worthless only in part does not meet the requirements of the statute.’ The correctness of that ruling is raised by this appeal, and the court not only may, but must, consider all pertinent provisions of the statute.
“The government urges that clauses (4) and (5) are mutually exclusive, so that, since clause (5) covers losses arising from worthless debts, clause (4) must cover only losses otherwise arising. But, since the argument assumes that clause (5) does not permit the charge-off of a debt partially; bad, there would seem to be no inconsistency in allowing the partial loss as a deduction under clause (4), even if the two clauses be deemed mutually exclusive. However, it does not appear to have been authoritatively determined that they are mutually exclusive.
“In Lewellyn v. Electric Reduction Co., 275 U. S. 243, 246, 48 S. Ct. 63, 64, 72 L. Ed. 262, Mr. Justice Stone said: ‘We assume without deciding, as was assumed by both courts below, that subsection (4) and subsection (5) are mutually exclusive, so that a loss deductible under one may not be deducted under the other.’ There the taxpayer had prepaid a seller for merchandise which was never delivered, the seller proving to be irresponsible. It was held that the buyer’s contract rights were not a ‘debt,’ and that the loss suffered by reason of their being worthless was deductible under clause (4), but that the loss was not sustained in the year when the prepayment was made, but in a later year, when events proved the buyer’s rights worthless.”

In the Davidson Grocery Co. Case, supra, the court said:

“We are impressed with the reasoning and conclusions of the court in the Sherman & Bryan Case. Where losses 'are fixed by identifiable events, such as the sale of property * * * or caused by its destruction or physical injury * * * or, in the case of debts, by the occurrence of such events as prevent their collection’ (United States v. S. S. White Dental Mfg. Co., 274 U. S. 398, 47 S. Ct. 598, 600, 71 L. Ed. 1120), there is no apparent reason either in fact or in law why a deduction from gross income should not be made in the year in which such losses are fixed. As observed by the court in the Sherman & Bryan Case, if it subsequently develops that the taxpayer has overestimated his loss, the amount or amounts received may be treated as income in the year in which they are received. In the instant case, the taxpayer in good faith fixed his aggregate loss by identifiable events at $11,000. It was in fact greater than that, and yet under the ruling appealed from appellant was compelled to include that amount as gross income for the year 1920, and the rate and amount of its income tax were affected accordingly. We are of the view that such a result was not contemplated by section 234 (a) of the Act of 1918 (40 Stat. 1077). In our view, the amendment in the later act specifically authorizing a partial charge-off of a debt recoverable only in part amounts to nothing more than a clarification of the earlier act, and may not be regarded as inconsistent with the interpretation placed upon that act in the Sherman & Bryan Case.
“The question whether the taxpayer in a given case has established a proper basis for the deduction from gross income of losses or bad debts is primarily for the determination of the Commissioner of Internal Revenue. In the instant case, no - question has been raised as to the good faith of the taxpayer, and, under the interpretation we have placed upon the law, and on the showing made by him, he was clearly entitled to the deduction claimed. As observed in United States v. S. S. White Dental Mfg. Co., 274 U. S. 398, 403, 47 S. Ct. 598, 600, 71 L. Ed. 1120, 'The taxing act does not require the taxpayer to be an incorrigible optimist.’ In other words, he is required only to exercise good faith and to establish as a basis for his deduction facts upon which a prudent business man would act.”

In the Southern California Box Co. Case, supra, the court said:

“Under the circumstances it can be fairly said that plaintiff had ascertained this balance unpaid on the debt to be worthless and was justified in charging it off in the year 1920. It is immaterial for the purposes of the ease whether this balance is treated as a bad debt or as a business loss. All bad debts •are losses, although not always a business loss, nor arq .business losses always bad debts, but in this particular instance the balance owing from Hill to plaintiff was both a bad debt and a business loss.”

In Avery v. Commissioner, 22 F.(2d) 6, 7, 55 A. L. R. 1277, Circuit Court of Appeals, Fifth Circuit, the court said:

“A man is presumed to know what a reasonable person ought to know from facts brought to his attention.' A taxpayer should not be permitted to close his eyes to the obvious, and to carry accounts on his books as good when in fact they are worthless, and then deduct them in a year subsequent to the one in which he must be presumed to have ascertained their worthlessness. To do so would enable him to withhold deductions in his less prosperous years, when they would have little effect in reducing his taxes, and then to apply the accumulation at another time to the detriment of the fisc. This would defeat the intent and purpose of the law.”

Here there is no question as to the good faith of the taxpayer, and the part of the debt that was worthless was definitely ascertainable by the market value of the cotton, and in fact the loss was afterward ascertained to be greater than that claimed at the time of the charging off of a part of the debt, by more than $12,000. Certainly in fairness and justice to the taxpayer, having in mind the rule as to the construction of statutes of this character, the taxpayer should be allowed to make the deduction. In Burnet, Commissioner of Internal Revenue, v. Sanford & Brooks Co., 282 U. S. 359, 51 S. Ct. 150, 75 L. Ed.-, Mr. Justice Stone points out that, the year is necessarily the unit for the purposes of taxation. This being true, the gain or loss of the taxpayer for a certain year when definitely ascertainable should be the basis upon which he is taxed.

Certainly no injustice can result from such a course. Should any unexpected re> covery be made by taxpayer of any part oi the amount charged off in good faith, such amount so recovered would have to be included by taxpayer in his return for the year in which the recovery is had.

We are also of .the opinion that the principles laid down by the Supreme Court in United States v. S. S. White Dental Mfg. Co., 274 U. S. 398, 47 S. Ct. 598, 71 L. Ed. 1120, support the position that the deduction should be allowed.

The more recent decisions of the Board of Tax Appeals seem also to support this position.

■ See Darling v. Commissioner, 19 B. T. A. 337, decided March 24,1930; Appeal of Benjamin Colitz, 3 B. T. A. 947; Appeal of Mason Machine Works Co., 3 B. T. A. 745; Burguieres Co. v. Commissioner, 12 B. T. A. 879; Higginbotham-Bailey-Logan Co. v. Commissioner, 8 B. T. A. 566; American Warehouse Co. v. Commissioner, 19 B. T. A. 8.

In the recent case of Berrymont Land Company v. Davis Creek Land & Coal Co. et al. (W. Va. Supreme Court of Appeals, decided March 24, 1931) 158 S. E. 651, Judge Maxwell in an able opinion holds such a deduction to be allowable.

The counsel for appellee rely upon a number of cases, including Deeds v. Commissioner, 47 F.(2d) 695, decided by the Circuit Court of Appeals, Sixth Circuit, March 4, 1931; Henry v. Burnet, 60 App. D. C. 90, 48 F.(2d) 459, decided by the Circuit Court for the District of Columbia, March 2, 1931; United States v. S. S. White Dental Mfg. Co., 274 U. S. 398, 47 S. Ct. 598, 71 L. Ed. 1120; Van Smith Building Material Co. v. Commissioner (C. C. A.) 44 F.(2d) 54, and Collin County National Bank v. Commissioner, 48 F.(2d) 207, 208, decided by the Circuit Court of Appeals for the Fifth Circuit, March 31, 1931; but an examination of these eases shows them, in our opinion, not to be controlling here. In the Collins County National Bank Case, for instance, the court in its opinion says that there- “it was not ascertained, and could not have been, that any particular part of the debt was worthless.” In the instant ease, it not only could have been ascertained but it was ascertained that a part of the debt was worthless, and that part was charged off on the books of the company. A number of the eases relied on turned on the point that the action of the commissioner when doubtful should be sustained, or that the making of the allowance lay within the discretion of the commissioner. Here there is no question that the action of the commissioner in refusing the deduction was clearly wrong.

For the reasons above stated, the judgment of'the court below is reversed, and the cause remanded for further proceedings in accord with this opinion.

Reversed.


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    FRANKLIN LUMBER & POWER CO. v. COMMISSIONER OF INTERNAL REVENUE.
    No. 3140.
    Circuit Court of Appeals, Fourth Circuit.
    June 17, 1931.
    J. H. Bridgers, of Henderson, N. C., for. petitioner.
    Wm. Cutler Thompson, Sp. Asst, to Atty. Gen. (G. A. Youngquist, Asst. Atty. Gen., Sewall Key, Sp. Asst, to Atty. Gen., and C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, and William E. Davis, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., on the brief), for respondent.
    Before PARKER, NORTHCOTT, and SOPER, Circuit Judges.
   NORTHCOTT, Circuit Judge.

This petition is brought to review a decision of the United States Board of Tax Appeals. 18 B. T. A. 1207. The appeal involves income taxes for the year 1923, in the sum of $506.26. As found by the Board of Tax Appeals, the facts are as follows:

The petitioner, a North Carolina corporation, was organized in March, 1912, and has its principal office at Franklinton. About the time of incorporation, the petitioner acquired at the price óf $4,000' a plant for the manufacture of lumber, for which it paid $1,500 in cash and $2,500 par value of its capital stock of $8,000.

During 1912, the petitioner constructed an electric light plant, which contained a dynamo and other generating equipment. Contracts were obtained for lighting residences and the streets of the town. After testing out the equipment and remedying defects in connections and elsewhere, the petitioner began uninterrupted service to its customers about September 1, 1912. Petitioner also put into the business $5,000, borrowed capital.

After operating for little more than a year, the petitioner, in 1913, sold the lumber manufacturing plant and certain equipment, used in connection with its electric light plant, at the sale price of $3,000', discontinued the generation of electricity, and thereafter obtained its current from a company which had a hydroelectric line near by, and continued in the lighting business. The Board of Tax Appeals further found that during the period from 1912 to 1922, inclusive, the income of petitioner, after deducting dividends, showed net profit of $5,419.63.

Petitioner’s plant was sold in 1923 for the sum of $17,000. When petitioner began the operation of the electric light plant in 1912, it had fifty-seven customers, and when its plant was sold in 1923, the number of customers had increased to two hundred sixty-three. Certain sums were deducted for depreciation of the plant, when petitioner made its annual returns.

It has been repeatedly held by this court that findings of the Board of Tax Appeals, supported by evidence, will not be disturbed on appeal. Darling v. Commissioner, 49 F.(2d) 111, decided April 13, 1931, and authorities there cited. The decision of the Board of Tax Appeals, in deducting the aggregate amount of depreciation claimed during the years the property is held, is not only supported by the evidence, but, in our opinion, is clearly right. United States v. Ludey, 274 U. S. 295, 47 S. Ct. 608, 71 L. Ed. 1054.

But where there is no evidence to sustain the -finding of the. Board the courts will set such finding aside. Here the Board refused to make any allowance other than $1,-000 for additions^ or extensions to the plant of petitioner during its existence from 1912 to 1923. This action of the Board, based on the theory that the testimony respecting the expenditures for additions and extensions was indefinite and uncertain, is, in our opinion, based upon an erroneous conclusion of law. The evidence of the only witness before the Board clearly showed that most of the available funds of the taxpayer, after ■ paying back $5,000 of borrowed money, went into extensions and additions, including $3,-000 received from the sale of a portion of the original plant, the net profits of the business (except $4,800 paid out in dividends), and the amounts deducted for depreciation in the taxpayer’s returns. This testimony is amply supported by the annual returns of petitioner. The number of customers increased from fifty-seven to two hundred sixty-three. The testimony was direct and positive that it cost petitioner the average of $40 per customer to put in the necessary additions to the plant to serve each customer, and that the addition necessary to supply one customer, a college, cost between $1,000 and $1,200, yet, the Board only allowed for additions and expenditures the total sum of $1,000. Certainly, there is nothing “indefinite” and “uncertain,” to use the language of the Board in its opinion, about this testimony. The money was earned, and was not paid out for any other purpose. There is no suspicion of bad faith on part of petitioner, nor is there anything in the record that would justify such suspicion. It seems to us clear that an allowance should have been made to petitioner of $8,200 instead of the sum of $1,000 that was allowed, making a difference of $7,200.

The aetion of the Board of Tax Appeals was in this respect erroneous, and the case is remanded, with instructions to correct its findings, in accordance with this opinion, by allowing the petitioner $7,200 additional for additions and extensions.

Beversed.


text:
    FINANCE & GUARANTY CO. v. COMMISSIONER OF INTERNAL REVENUE.
    No. 3144.
    Circuit Court of Appeals, Fourth Circuit.
    June 17, 1931.
    Theodore B. Benson, of Washington, D. C. (Enos S. Stockbridge, of Baltimore, Md., on the brief), for petitioner.
    Wm. Cutler Thompson, Sp. Asst, to Atty. Gen. (G. A. Youngquist, Asst. Atty. Gen., and Sewall Key and Morton K. Rothschild, Sp. Assts. to Atty. Gen., on the brief), for respondent.
    Before PARKER, NORTHCOTT, and SOPER, Circuit Judges.
   NORTHCOTT, Circuit Judge.

This is a petition to review a decision of the United States Board of Tax Appeals (reported in 19 B. T. A. 1313), and involves income and profits taxes for the year 1920 in the amount of $10,833.73.

The taxpayer, a Delaware corporation, with its principal office at Baltimore, Md., is a finance company given broad powers under its charter, enabling it, in addition to its financing business, to “buy, sell, exchange, hold and own * * * personal property of any kind whatsoever.” A subsidiary of the petitioner, known as the Finance Trust, was organized, and through this subsidiary, it operated in New York. In the fall of 1919, the Finance Trust Company entered into a contract with the Moreott Company of New York, under the terms of which contract the trust purchased in Japan and imported into the United States certain silk, paying, in addition to the purchase price and shipping charges, eustom duties, warehouse charges, etc. The silk was purchased to meet sales which the Moreott Company had made or was to make, was warehoused in the name of , the trust, and when sold was shipped out on orders of the Moreott Company, being paid for by that company as shipped. The silk was carried on the books of the trust as an account receivable from the Moreott Company. Some time in 1920, the Moreott Company failed. The petitioner and its subsidiary, the Finance Trust, filed a consolidated return for 1920, for the purpose of taxation, in which return a deduction of $37,384.66 was claimed as a loss, arising from the business relations between the trust and the Moreott Company. The amount of the deduction claimed represents the difference between the cost of the silk, as carried- in the Moreott Company account, and the market value at the close of the taxable year, as determined by an inventory of the silk on hand.

The Commissioner of Internal Revenue disallowed the deduction claimed upon the theory that the silk was held by the trust as security for advances on credits given the Moreott Company. The petitioner appealed to the Board of Tax Appeals from this finding of the commissioner, and the board affirmed the finding.

On hearing before the board, it was stipulated by counsel representing petitioner that if it were found that the petitioner was not engaged in buying and selling silk, but, on the contrary, was engaged in financing sales of silk, that the action of the commissioner should be sustained.

The statute involved is section 203 of the Revenue Act of 1918, chapter 18, 40 Stat. 1057, 1060, and reads as follows: “That whenever in the opinion of the Commissioner the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer upon such basis as the Commissioner, with the approval of the Secretary, may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income.”

Under the stipulation entered into at the hearing before the board, the only question presented is whether the board ’ erred in finding that the action of the commissioner could not be set aside, and no question is here presented as to whether the amount claimed as a deduction could have been properly claimed as a deduction for a bad debt. As will be seen from the act, Congress plainly placed the question of the proper use of inventories within the opinion of the commissioner, and that question was left by Congress to the discretion of the commissioner. In such a ease a heavy burden of proving that the commissioner’s action was plainly arbitrary rests upon the taxpayer. Lucas, Commissioner of Internal Revenue, v. Kansas City Structural Steel Company, 281 U. S. 264, 50 S. Ct. 263, 74 L. Ed. 848.

Where a statute commits to an executive department of the government a duty requiring the exercise of administrative discretion, the decision of the executive department, as to such questions, is final and conclusive^ unless it is clearly proven arbitrary or capricious, or fraudulent, or involving a mistake of law. Work v. Rives, 267 U. S. 175, 45 S. Ct. 252, 69 L. Ed. 561; Silberschein v. United States, 266 U. S. 221, 225, 45 S. Ct. 69, 69 L. Ed. 256; United States v. Atchison, T. & S. F. Ry. Co., 249 U. S. 451, 39 S. Ct. 325, 63 L. Ed. 703; Ross v. Day, 232 U. S. 110, 34 S. Ct. 233, 58 L. Ed. 528. See, also, Williamsport Wire Rope Co. v. United States, 277 U. S. 551, 48 S. Ct. 587, 72 L. Ed. 985.

A study of the record leads us to the conclusion that the action of the commissioner was not only not arbitrary or capricious, but was correct. So far as the record shows, this was the only purchase of silk made by the trust company, and the purchase was made under an express contract with the Morcott Company, and while made in the name of the trust company all sums expended were charged to the Morcott Company on the books of the trust company. The account was increased or diminished as money was paid out for the silk, and as the Morcott Company paid for the silk withdrawn. Had the Morcott Company not failed, it could have been made to carry out the contract with the trust company. The principal business of the trust company was not the silk business, but was the financing of transactions of general character, and the Board of Tax Appeals so found. Findings of the board on questions of fact will not be disturbed by the courts where there is substantial evidence to support them. Van Smith Building Material Co. v. Commissioner of Internal Revenue (C. C. A.) 44 F.(2d) 54, and authorities there cited.

It is contended on behalf of the petitioner that because the board said in its opinion that “ * * * the silk was purchased in Japan by the Trust for its own account * * * ” it found as a fact that the trust company was engaged in the business of buying and selling silk. We do not think so. The board was evidently referring to the fact that the purchase was made in the name of the trust company.

Under the stipulation above referred to, the question as to whether the amount would be properly allowable as a bad debt was not before the board, and is not before us to review. There is nothing in the record to show whether Morcott Company gave any security to the finance company for the performance of the contract, or whether the Morcott Company paid anything to its creditors upon its failure.

The decision of the Board of Tax Appeals is accordingly affirmed.