text:
    PARAMOUNT FAMOUS LASKY CORPORATION v. NATIONAL THEATRE CORPORATION.
    No. 3090.
    Circuit Court of Appeals, Fourth. Circuit
    April 13, 1931.
    John L. Abbot, of Lynchburg, Va. (A. D. Barksdale and P. H. Hickson, both of Lynch-burg, Va., on the brief), for appellant.
    Broun & Price and A. C. Hopwood, all of Roanoke, Va., for appellee.
    Before PARKER and NORTHCOTT, Circuit Judges, and WATKINS, District Judge.
   NORTHCOTT, Circuit Judge.

This is an action at law in trespass on the case in assumpsit, brought in the District Court of the United States for the Western District of Virginia. The appellant, plaintiff helow, and which will be here referred to as plaintiff, filed its declaration against appellee, defendant below, and which will be here referred to as defendant, alleging a breach of contract for the distribution of certain motion picture films, or photoplays, which the plaintiff furnished, and for which the defendant agreed to pay. The defendant demurred to the declaration, alleging, among other things, that the plaintiff could not maintain the action because it had failed to comply with a condition precedent to suit, in that it had not submitted the matters in controversy to arbitration as provided in the contract.

The plaintiff contended that:

(1) An injunction of the United States District Court for the Southern District of New York, enjoining this plaintiff from proceeding to act under the arbitration clause of the contract, constituted vis major which relieved the plaintiff from complying with Such provision of the contract before instituting the action.
(2) The defendant had waived its right to require plaintiff to comply with the condition, and that the defendant, by its conduct, re-, lieved the plaintiff from submitting the controversy to arbitration.
(3) The condition could not be complied with, because the boards to which the matter was to be submitted for arbitration had ceased to function.

The court below held with the defendant’s contention, sustaining the demurrer and striking out plaintiff’s bill of particulars, and it is from this action that this appeal is prosecuted.

The United States brought suit in the District Court of the United States for the Southern District of New York, attacking the contract in question or a similar one on the ground that it was in violation of the Sherman Anti-Trust Act (15 USCA §§ 1-7, 15). In an able opinion, Judge Thacher of that court held the arbitration clause of the contract to be unlawful as being in violation of the Sherman Anti-Trust Act [United States v. Paramount Famous Lasky Corporation, 34 F. (2d) 984], and entered a decree enjoining the Paramount Famous Lasky Corporation, plaintiff here, from acting under the arbitration clause in the contract sued on. The opinion and decree of the District Court was affirmed by the Supreme Court of the United States (Paramount Famous Lasky Corporation v. U. S., 282 U. S. 30, 51 S. Ct. 42, 75 L. Ed.-). In the decree, however, the court clearly shows that its action was directed at the arbitration clause alone, and was not intended to affeet the rest of the contract, and, among other things, the decree provided: “Nothing contained in this decree shall be construed as prohibiting any defendant * * * from performing and/or continuing to perform, or enforcing and/or continuing to enforce, by any lawful means, and contractual obligation, the performance or enforcement of which is consistent with the provisions of this, decree.”

The questions raised on this appeal are:

1. Is the plaintiff required by the contracts to submit the controversy here to arbitration before it can maintain the action] notwithstanding the injunction?
2. Does the injunction of the United States District Court for the Southern District of New York, enjoining the plaintiff from proceeding to act under the arbitration clause of the contracts, constitute vis major which relieves the plaintiff from complying with the provisions of the contract of arbitration, before instituting the action?
3. Has the defendant waived its right to rely on the failure of the plaintiff to propose arbitration before this action was brought?
4. Whether or not the contracts sued on are entire and indivisible.

The judge below sustained the demurrer on the ground that the arbitration provision was a condition precedent to the bringing of any suit on the contract, notwithstanding the injunction, which prevented arbitration, and based his opinion upon a number of authorities holding that, where the condition precedent to the bringing of suit was prevented from being carried out by some unlawful act of the parties seeking to set up the injunction as a reason for not carrying out the condition, the 'excuse or reason could not be availed of by the parties seeking to bring the action. An examination of the authorities relied upon by the court below shows that the act of the party making it impossible to carry out the condition precedent to suit was either a subsequent act or at least not the act itself of incorporating the unlawful condition in the contract sued upon. For instance, in 3 Williston on Contraéis, § 1939, quoted by the judge below, the statement of the author unquestionably refers to the failure of the party to pay a debt, the thing happening after the contract was entered into. In Patton & Shaver v. Elk River Navigation Co., 13 W. Va. 259, the .injunction was granted on account of the acts and default happening after the contract was entered into. In United States v. Van Fossen, 28 Fed. Cas. page 357, No. 16607, and a line of similar eases cited by the judge below (Taylor v. Taintor, 16 Wall. 366, 370, 21 L. Ed. 287, United States v. Martin [D. C.] 170 F. 476), it was the voluntary act of the man enlarged on bail in going into another jurisdiction where he was arrested, and his own fault, that prevented him from answering on his bond. These cases are easily to be distinguished from the instant case, where a clause of the very contract itself entered into by both parties has been declared unlawful and enjoined. Certainly, it cannot be said, especially in view of the clause in the decree above quoted, exempting the rest of the contract from the taint of unlawfulness, that the whole contract is void, and that in ease of breach by either party no remedy could be had.

The. record also shows that, because of the injunction secured by the United States government, the machinery for arbitration set up in the contract had ceased to exist, and the rule that an act of law, due to the -act ox default of one of the parties, cannot be relied upon as an excuse for his nonperformance of the contract, has no application to the facts in this case. People v. Globe Mutual Life Ins. Co., 91 N. Y. 174; Kansas Union Life Ins. Co. v. Burman (C. C. A.) 141 F. 835, 848; Moller v. Herring (C. C. A.) 255 F. 670, 3 A. L. R. 624. See, also, 3 Williston on Contracts, p. 3295.

It would, therefore, seem, in view of the eases herein cited, that the proper rule of law is that, where the obligation itself is unlawful and cannot be performed, such performance should be excused, provided the contract is divisible and the remainder of the contract is lawful. It is certainly an anomalous situation in which this plaintiff finds itself under the ruling of the court 'below. It is enjoined from performing a condition precedent, but no relief is accorded it,- because it does not perform the condition.

Again we think that the learned judge below was in error for another reason, and that is that the contract, as far as it related to the lawful and unlawful parts, was divisible. That this was the opinion of Judge Thaeher, in the case of United States v. Paramount Famous Lasky Corporation, supra, is shown by the excerpt from his decree. That such a provision, as the one in question here, is separable from the rest of the contract, is borne out by a number of decisions. Western Union Telegraph Co. v. Pennsylvania Co. (C. C. A.) 129 F. 849, 68 L. R. A. 968; Atlanten Case (D. C.) 232 F. 403; United States Asphalt Co. v. Trinidad Lake Petroleum Co. (D. C.) 222 F. 1006; The Eros Case (C. C. A.) 251 F. 45. As to the arbitration clause, see The Fredensbro (D. C.) 18 F.(2d) 983; Danielsen v. Entre Rios Rys. Co. (D. C.) 22 F.(2d) 326.

The authoritative rule as to separable on divisible contracts is laid down by Lord Mansfield, in Boone v. Eyme, 6 Term Reports 573, as follows: “Where mutual covenants go to the whole of the consideration on both sides, they are mutual covenants; but where the covenants go only to a part and where a recompense may be had in damages, it is a different thing.”

It has been expressly held that, where agreements in restraint of trade were unlawful in part, they were enforceable as to the parts that were not unlawful, and this holding ' runs back to the earliest authorities. Mallen et al. v. May, 11 M. & W. 653, 12 L. J. Ex. 376; Price v. Green, 16 M. & W. 346, 16 L. J. Ex. 108. See, also, Daniels v. Tearney, 102 U. S. 415, 26 L. Ed. 187; Chicago, etc., Co. v. Pullman, etc., Co., 139 U. S. 79, 11 S. Ct. 490, 35 L. Ed. 97; McCullough v. Virginia, 172 U. S. 102, 19 S. Ct. 134, 43 L. Ed. 382.

In view of our conclusion on these points, it is not necessary to discuss the question raised as to whether the defendant had waived its right to rely on the failure of the plaintiff to propose arbitration. The action of the court below in sustaining the demurrer was erroneous, and the judgment is accordingly reversed.


source: Caselaw Access Project

author: PARKER, Circuit Judge.

license: Public Domain

text:
    GEORGIA POWER CO. v. HUDSON et al.
    No. 3117.
    • Circuit Court of Appeals, Fourth Circuit.
    April 13, 1931.

      H. J. Haynsworth, of Greenville, S. C. (Walter T. Colquitt, of Atlanta, Ga., C. F. Haynsworth, of Greenville, S. C., and W. C. Hughs, of Walhalla, S. C., on the brief), for appellant.
    E. L. Herndon and R. T. Jaynes, both of Walhalla, S. C. (Broadus Thompson, of Walhalla, S. C., on the brief), for appellees.
    Before PARKER and NORTHCOTT, Circuit Judges, and WEBB, District Judge.
   PARKER, Circuit Judge.

This was a suit instituted in the court below to enjoin the prosecution by defendants of a number of actions for damages instituted by them against complainant. The jurisdiction of the federal court was invoked on the ground of diversity of citizenship; plaintiff being a Georgia corporation and defendants being residents of the state of South Carolina. Jurisdiction in equity was asserted on the ground that the bill was filed to avoid a multiplicity of suits. On motion of defendants, the suit was dismissed on the ground that as to no defendant did it involve the jurisdictional amount, that the amounts of their various claims could not be aggregated for the purpose of conferring jurisdiction, and that jurisdiction in equity to avoid a multiplicity of suits did not extend to the enjoining of the prosecution at law of actions for damages, such as had been instituted by defendants.

From the bill of complaint it appears that complainant is a public service corporation maintaining a power dam on the Túgalo river. The defendants own lands lying along the river below the dam. Complainant impounds water above its dam and releases it from time to time as the necessities of its business require, releasing a much greater volume at certain hours of the day than at others. Defendants have instituted in the state courts of South Carolina actions for damages, claiming that complainant, by interfering with the natural flow of the river so as to diminish the’flow for a part of the time and increase it for the remainder, has damaged their lands and crops as a result of overflowing bottom lands, filling up drains, and deadening the current in creeks and ditches, thereby causing their -lands to become saturated with water and unproductive.

It is not alleged that any of the defendants asks as much as $3,000 damages, and it is admitted thatmone of the actions which complainant seeks to enjoin is for as much as this amount. It is alleged that defendants have “combined and confederated together” for the purpose of prosecuting their various suits, have employed the same counsel, and have agreed to render advice and assistance and furnish testimony to each other. There is no allegation of any fraudulent conspiracy between them, however, and no facts alleged upon which a charge of fraud or conspiracy could be based. Complainant alleges that it has a right to operate its dam as it is being operated, that the defense of the damage suits would involve great inconvenience and expense, and that it is entitled to have its rights determined in one suit and to an injunction for- . bidding defendants to further prosecute the actions which they have instituted.

We agree with the learned judge below that a sufficient ground for the dismissal of the bill is to be found in the fact that none of the claims -of defendants amounts to as much as $3,000, and that only by aggregating them can the requisite jurisdictional amount be obtained. Complainant argues that the value of the right which it seeks to protect by injunction measures the amount in controversy, and that this right is the .right to maintain its dam. The defendants, however, do not question the right of plaintiff, as a public service corporation, to maintain the dam. They seek merely to recover damages occasioned by its maintenance, for which they have not been compensated; and, as to each defendant, the only matter involved in his suit is the amount of damages sued for. Their claims are entirely separate and distinct from each other; and, as stated, there is no allegation of fraudulent conspiracy, such as was held to justify considering such claims in the aggregate for the purposes of jurisdiction in Woodmen of the World v. O’Neill, 266 U. S. 292, 45 S. Ct. 49, 69 L. Ed. 293, and McDaniel v. Traylor, 196 U. S. 415, 427, 25 S. Ct. 369, 49 L. Ed. 533. The case presented was clearly one for the, application of “the settled general rule, frequently applied by this Court in tax cases, that in a suit based on diversity of citizenship brought against several defendants to enjoin the collection of claims against the plaintiff which are separate and distinct—although depending for their validity upon a common origin—the test of jurisdiction is the amount of each separate claim, and not their aggregate amount.” Sanford, J., in Woodmen of the World v. O’Neill, supra, at page 295 of 266 U. S., 45 S. Ct. 49, 50; Wheless v. St. Louis, 180 U. S. 379, 21 S. Ct. 402, 45 L. Ed. 583; Citizens' Bank v. Cannon, 164 U. S. 319, 322, 17 S. Ct. 89, 41 L. Ed. 451; Walter v. Northeastern R. Co., 147 U. S. 370, 13 S. Ct. 348, 37 L. Ed. 206; Eaton v. Hoge (C. C. A. 8th) 141 E. 64, 5 Ann. Cas. 487, and note and cases there cited; Hagge v. Kansas City S. Ry. Co. (C. C.) 104 E. 391.

And, without regard to the jurisdictional amount, we do not think that a suit like •this to enjoin the prosecution in the state courts of actions at law for damages can be maintained for two reasons(1) Because the federal courts are expressly forbidden by statute to enjoin such proceedings in state courts; and (2) because a federal court of equity has no jurisdiction, for the purpose of avoiding a multiplicity of suits, to enjoin the prosecution of such actions, irrespective of the court in which they are pending.

On the first question the statute, 28 USCA § 379, provides: “The writ of injunction shall not be granted by any court of the United States to stay proceedings in any court of a State, except in cases where such injunction may be authorized by any law relating to proceedings in bankruptcy.”

There can he no question, we think, but that this statute forbids the granting of such an injunction as was sought by the bill here. Riehle v. Margolies, 279 U. S. 218, 49 S. Ct. 310, 73 L. Ed. 669; Hull v. Burr, 234 U. S. 712, 34 S. Ct. 892, 58 L. Ed. 1557; U. S. v. Parkhurst-Davis Co., 176 U. S. 317, 20 S. Ct. 423, 44 L. Ed. 485; Dial v. Reynolds, 96 U. S. 340, 24 L. Ed. 644; Haines et al. v. Carpenter, 91 U. S. 254, 257, 23 L. Ed. 345. The ease last cited is directly in point. There three suits had been instituted in the state court, and the jurisdiction of the federal court of equity to enjoin them was invoked for the purpose of preventing a multiplicity of suits. In affirming the dismissal of the bill, the court, speaking through Mr. Justice Bradley, said: “In the first place, the great object of the suit is to enjoin and stop litigation in the State courts, and to bring all the litigated questions before the Circuit Court. This is one of the things which the Federal courts are expressly prohibited from doing. By the act of March 2, 1793, it was declared that a writ of injunction shall not be granted to stay proceedings in a State court. This prohibition is repeated in sec. 720 of the Revised Statutes, and extends to all cases except where otherwise provided by the Bankrupt Law. This objection alone is sufficient ground for sustaining the demurrer to the bill.”

And we think it equally clear that there was no jurisdiction in equity to enjoin the prosecution of these actions at law on the ground of avoiding a multiplicity of suits. Defendants in the actions instituted were asking damages at law; and, under the Seventh Amendment to the Constitution of the United States, were entitled to have their cases tried at law and before a jury, if they were tried in the federal courts. Is it thinkable that this constitutional right can be defeated by reason of the fact that a number of persons have brought suits of a similar character? Does the fact that a tort injures a number of persons who sue for damages entitle the tort-feasor, by filing a bill to prevent a multiplicity of suits,, to deprive the injured persons of the jury trial guaranteed them by the Constitution? We do not think so,

We have carefully examined the eases bearing upon the right of a court of equity to enjoin the prosecution of actions at law for the purpose of avoiding a multiplicity of suits; and we think the correct rule, and the one sustained by the weight of authority, is that community of interest among the several parties in the questions of law and fact involved is not sufficient to confer jurisdiction upon the court to enjoin the prosecution of such actions, though they be brought against the same defendant and involve the same state of facts. As a basis for such jurisdiction in equity, there must be some recognized ground of equitable interference, or some community of interest in the subject-matter of controversy, or a common right or title involved, or some common purpose in pursuit of a common adversary. None of these exists in the ease of actions for damages brought by numerous plaintiffs, although all may arise out of the same wrongful act and involve the same principles of law. For a full discussion of the matter, see' Tribette v. Illinois Central R. Co., 70 Miss. 182, 12 So. 32, 19 L. R. A. 660, 35 Am. St. Rep. 642; Southern Steel Co. v. Hopkins, 174 Ala. 465, 57 So. 11, 40 L. R. A. (N. S.) 464, Ann. Cas. 1914B, 692; Roanoke Guano Co. v. Saunders, 173 Ala. 347, 56 So. 198, 35 L. R. A. (N. S.) 491; National Tube Co. v. Smith, 57 W. Va. 210, 50 S. E. 717, 1 L. R. A. (N. S.) 195, 110 Am. St. Rep. 771; Illinois Steel Co. v. Schroeder, 133 Wis. 561, 113 N. W. 51, 14 L. R. A. (N. S.) 239, 126 Am. St. Rep. 977; Duektown Sulphur, Copper & I. Co. v. Fain, 109 Tenn. 56, 70 S. W. 813; Lehigh Valley R. Co. v. McFarlan, 31 N. J. Eq. 730; St. Louis, etc., R. Co. v. McKnight, 244 U. S. 368, 37 S. Ct. 611, 61 L. Ed. 1200; Kansas City Sou. R. Co. v. Quigley (C. C.) 181 F. 190; Barston v. Mingo Drainage Dist. (D. C.) 264 F. 224.

After an examination of .the conflicting authorities, the rule followed by the majority of the courts of this country, and the only rule which it is permissible for the federal courts to follow in view of the constitutional guaranty of trial by jury in actions at law, is thus stated in 10 R. C. L. 284:

“Despite the reasoning of the authorities cited in the preceding paragraph, the larger number of eases and especially the more repent ones seem to incline toward confining the jurisdiction of equity within a narrower field, in order to conserve and preserve in its full integrity the right of trial by jury. Thus, in some it is said to be a fundamental proposition that a person who seeks to come into equity must himself have an equity, and that jurisdiction on the ground of preventing multiplicity of suits should not be entertained merely to lessen the labors of the court appealed to, or of other courts; and the wholly fortuitous, accidental, and collateral fact that numerous other persons have like, but entirely independent and disconnected, legal rights, estates, or defenses cannot, on any conceivable principle, invest him with any right, legal or equitable, and his rights, whatever they may be, are precisely the same as if no other person had similar rights. Consequently the trend of the authorities is to the effect that there must be at least some well recognized ground of equitable interference, or some community of interest in the subject-matter of the controversy, or a common right or title on which all the separate claims and the questions at issue depend, or there must be some common purpose in pursuit of a common adversary where each may resort to equity in order to invoke its aid to adjudicate in one suit the rights of numerous different parties whose claims are separate and distinct; and the mere fact that their separate rights will require the application of the same principle of law, and that their right originally sprang from the same source, is not-sufficient. Thus, a defendant who has committed a tort by which he injured one or a hundred persons has no equity to prevent each and every one of them from maintaining an action against him to recover damages. If there had been a combination or conspiracy between such numerous parties to vex and harass the complainant by numerous suits, then he would have an equity to enjoin their prosecution; but the fact that his tort has injured a hundred persons, and that it will save him and the court time and lessen the expenses of the litigation, does not give him any equity to go into a court of chancery to enjoin or prevent a multiplicity of suits.”

See, also, 14 R. C. L. 352.

The ease of International Organization, etc., v. Red Jacket Coal & Coke Co. (C. C. A. 4th) 18 F.(2d) 839, has no application to the ease here. The question there involved was the right of joinder in the ease of suits of which there was unquestionably jurisdiction in equity. Here the question is the right of equity to take jurisdiction because of the joinder, where no other ground of equitable jurisdiction is shown to exist. The distinction is obvious.

There was no error, and the order dismissing the bill for lack of jurisdiction will be affirmed.

Affirmed.


author: VAN VALKENBURGH, Circuit Judge.

text:
    FIRST NAT. BANK OF OMAHA v. COMMISSIONER OF INTERNAL REVENUE.
    No. 8982.
    Circuit Court of Appeals, Eighth Circuit.
    April 13, 1931.
    Edward R. Burke, of Omaha, Neb. (Kenneth S. Finlayson, of Omaha, Neb., on the brief),, for petitioner.
    William 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 R. N. Shaw, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., on the brief), for appellee.
    Before KENYON and VAN VALKEN-BTJRGH, Circuit Judges, and DAVIS, District Judge.
   VAN VALKENBURGH, Circuit Judge.

This is a petition to review a decision of the Board of Tax Appeals. But two questions are involved. The first relates to the determination of a deficiency in tax for 1921, and the second to the determination of a deficiency for 1923.

The Revenue Act of 1921 (42 Stat. 227, 254, 255) provided as follows:

“Sec, 234. (a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:
“(1) All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, in-eluding a reasonable allowance for salaries or other compensation for perspnal services actually rendered, and including rentals or other payments required to be made as a condition to the continued use or possession of property to which the corporation has not taken or is not taking title, or in which it has no equity. * * *
“(5) De^ts ascertained to be worthless and charged off within the taxable year (or in the discretion of the Commissioner, a reasonable addition to a reserve for bad debts) ; and when satisfied that a debt is recoverable only in part, the Commissioner may allow such debt to be charged off in part.
* « * yy

December 21, 1921, the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, promulgated Treasury Decision 3262, whieh in part provides: “Taxpayers who have, prior to 1921, maintained reserve accounts for bad debts may deduct a reasonable addition to such reserves in lieu of a deduction for specific bad debt items. Taxpayers who have not heretofore maintained such reserve accounts may now elect to do so, and in such ease shall proceed to determine the amount of the reserve that should reasonably have been set up as at December 31,1920 (whieh shall not be deducted in computing .net income) and, in respect of 1921 and subsequent years, may add a reasonable addition to such reserve and deduct the amount in computing taxable net income.” This Treasury Decision was incorporated as part of article 155 of Treasury Regulation 62. That article contains additional language as follows: “0 0 * Where a reserve account is maintained, debts ascertained after December0 31, 1920, to be worthless in whole or in part, (a) if sueh debts were outstanding at December 31,1920, should be charged against the reserve and may be deducted from income, in accordance with article 151; (b) if such debts arose after December 31, 1920, should be charged against the reserve, and not deducted from income. What constitutes a reasonable addition to a reserve for bad debts must be determined in the light of the facts, and will vary' as between classes of business and with conditions of business prosperity.”

Prior to the issue of Treasury Decision 3262, supra, it had been the practice of petitioner to charge to prpfit and loss debts ascertained to be worthless during the year. Accordingly, in December 1921, it had charged in this manner bad debts aggregating $51,993.85. After the issue of this Treasury Decision it decided to change to the reserve method. December 29,1921, it set up a reserve for bad debts in the sum of $110,000, whieh represented an additional “estimate of lost and doubtful paper” shown in its bills receivable account for that current year. As its counsel say in their brief, “there was some uncertainty as to the exact procedure to be followed” in making this change of method.. The Board of Tax Appeals found that “in its-income-tax return for 1921, petitioner deducted from gross income for debts ascertained to be worthless and for the addition to a reserve for bad debts $161,993.85.” The Commissioner allowed the deduction of $51,-993.85 charged to profit and loss, and disallowed the deduction of $110,000 sought to be set up as a reserve for bad debts.

Upon appeal the Board of Tax Appeals held that the taxpayer was entitled to deduct from gross income a reasonable addition to a reserve for bad debts, reversing the order of the Commissioner in that respect. The Board further held that the taxpayer could not, in the same taxable year, avail itself of both prescribed methods of receiving credit in its income tax return for debts ascertained to be worthless. However, it found that .petitioner was entitled to an increase in the amount sought to be set up as an addition to a reserve for bad debts for 1921. In making this increase it had resort to a part of the $51,933.-85 previously charged to profit and loss. It said: “Subsequent events showed that the reserve set up was not large enough to cover the amounts determined to be worthless in 1922. The evidence therefore amply supports the contention of the respondent that the $110,000 item was a reasonable amount to set up as a reserve at the close of 1921, We are of the opinion, however, that the evidence warrants an increase in that amount for the purpose of determining a reasonable addition to a reserve for bad debts for 1921. The petitioner charged to undivided profits in 1921 $51,993.85 for debts ascertained to be worthless during that year. Of this amount only $49,466.61 represented amounts included in its bills receivable at December 31, 1920. The balance of $2,527.24 represented bills receivable taken in 1921 whieh were determined to be worthless prior to the close of the year. Even if the petitioner had set up a proper reserve for bad debts at the close of 1920, it can not be assumed that the petitioner would have foreseen that $2,527.24 of notes received in 1921 would be worthless in that year. If the petitioner had consistently charged debts ascertained to be worthless to a reserve it would have had to add to the reserve in 1921 the $2,527.24. We therefore conclude that a reasonable addition to the reserve to bad debts for 1921 wás the amount of $112,527.24. This determination is as we understand it consonant with the decision of the Circuit Court of Appeals in Rhode Island Hospital Trust Co. v. Commissioner, 29 F.(2d) 339; Cf. Turl Iron & Car Co. v. Commissioner of Internal Revenue, 9 B. T. A. 740.”

The situation presented, then, is this: The Commissioner found that the item of $51,993.85 was properly deducted as a charge to profit and loss for debts ascertained to be worthless and charged off during the year. He disallowed the $110,000 item upon a ground which the Board, we think rightly, declared to be untenable. The Board allowed this $110,000 and increased it by $2,527.24 taken from the $51,993.85. The balance of $49,466.61 was inferentially disallowed, not, it would seem, because it had already been charged off as a specific bad debt item, for the Board was expressly seeking to follow the Circuit Court of Appeals for the First Circuit in Rhode Island Hospital Trust Co. v. Commissioner, 29 F.(2d) 339, 341. An inspection of its quoted language, supra, discloses that its action was taken because it appeared that this balance of $49,466.61 represented amounts included in petitioner’s bills receivable on December 31, 1920, while the $2,527.24 allowed represented bills receivable taken in 1921. We are unable to perceive any legal basis for the distinction made. It is beyond dispute that the petitioner was reasonably entitled to credit upon its income tax return for bad debts and lost or doubtful paper of $161,993.85, out of a bills receivable account amounting, December 31, 1921, to $10,681,182.60. The taxpayer insists that, having attempted to change to a reserve for bad debt basis in harmony with the law and Treasury regulations as they were understood to exist at that time, it should be allowed to deduct this sum of $161,993.85 in its income tax return for 1921 on that theory; otherwise, that it should be allowed to take as a deduction all debts ascertained to be worthless in that year whether the same were charged off or not. We think the case falls directly within the reasoning and language of the First Circuit in Rhode Island Hospital Trust Co. v. Commissioner, supra, in which we fully concur: “As already stated, it is now conceded that the tax authorities were correct in ruling that the trust company was not entitled both to deduct the $87,500 above referred to as a bad debt, and also to make an addition of $200,000 to its reserve; but it does not follow that the tax authorities should not have added the $87,500 to the proposed addition to the reserve. Taxpayers’ rights are not, under the conditions here involved, to be determined on merely technical grounds. The provision for this reserve first appeared in this act of 1921. The trust company’s real rights were not to be destroyed because of its initial failure to put its elaim on the technically proper ground, under this new provision.” If $51,993.85 be substituted for $87,-500, and $110,000 for $200,000, the language quoted applies literally to the case at bar.

The only argument addressed to this conclusion by counsel for appellee is this: “The determination of the Board of Tax Ap- . peals that the petitioner was not entitled to a greater deduction from income than $112,-527.24 as a reasonable addition to a reserve for bad debts for 1921 is not reviewable on this appeal.”

It is not our purpose to depart from the well-established rule that, where the Board of Tax Appeals has exercised its discretion on legal and reasonable grounds, we may not and should not substitute our discretionary judgment for that of the tax authorities. But here the inconsistency of the distinction made by the Board appears 'as a legal conclusion from the facts found. It is not sufficient merely to declare a conclusion reasonable. There must be in the facts support for that conclusion. This order of redetermination must be reversed.

Concerning the second question involved in this review the Board of Tax Appeals in its opinion said

“The remaining issue relates to the deductibility in the year 1923 of an item of $94,-807.73, representing an amount paid to the Nebraska National Bank of Omaha. In that year the petitioner took over certain assets and liabilities of the Nebraska National Bank of Omaha and paid to the latter bank the amount in dispute as a bonus. The petitioner contends that the amount is deductible as an expense of the year in which it was paid. It is argued that the expenditure did not result in the acquirement of any capital asset that the petitioner could set up in its books and should therefore be allowed as a deduction; that it might properly be classified as an advertising expense.
“In computing the taxable income of any year a taxpayer is permitted to take only the deductions specified by the statute. The expenditure in question does not come within any of such deductions. Clearly it was not an ordinary and necessary expense of the year 1923. It was paid out in connection with a capital transaction, the purchase of assets and liabilities. The petitioner itself designated the amount as a 'bonus’ paid toi the liquidated bank. The benefit, if any, re-suiting to the petitioner was certainly of a capital nature. The fact that the banking laws prohibited the petitioner from including the assets in its capital does not change its character. The disallowance of the deduction by the respondent was not in error.”

The allowance of the deduction claimed can be made, if at all, under the provisions of section 234 (a) (1) of the Revenue Act of 1921 above quoted. It appears that in 1923, petitioner, in effect, purchased the business of the Nebraska National Bank of Omaha, Neb., and assumed certain of its liabilities. It allowed to the Nebraska National Bank, which was about to liquidate, a so-called bonus of $94,807.73, for the purpose, it asserts, of-securing “favorable contact with the depositors of the liquidating bank.” This payment was obviously not an ordinary and necessary expense ’ incurred in carrying on the business of petitioner within the meaning of section 234 of the Revenue Act of 1921. We think the order of the Board with respect to this item should be sustained. The order of redetermination for deficiency in tax for the year 1923 is affirmed; that for the year 1921 is vacated and the ease is'remanded to the Board of Tax Appeals for further proceedings not inconsistent with this opinion.


author: HUTCHESON, District Judge.

text:
    STANDARD ACC. INS. CO. v. PENNSYLVANIA CAR CO. et al.
    No. 5992
    Circuit Court of Appeals, Fifth Circuit.
    April 18, 1931.
    Rehearing Denied May 27, 1931.

      J. Cleo Thompson, H. J. Yarborough, and John White, all of Dallas, Tex., for appellant.
    W. T. Henry and Prank W. Wozencraft, both of Dallas, Tex., for appellees.
    Before BRYAN and POSTER, Circuit Judges, and HUTCHESON, District Judge.
   HUTCHESON, District Judge.

Appellant an insurance company, plaintiff below, sued to enforce its right of subrogation under section 6a, art. 8307, of the Workmen’s Compensation Act of the state of Texas, R. S. 1925.

The petition alleged, in substance, that, under a workmen’s compensation policy of insurance issued by it to Henger & Chambers Company, as general contractors for the erection of the Dallas National Bank building, it had paid compensation to the representatives of Zaek Smith, deceased,, an employee of Henger & Chambers Company, on account of the death of Zaek Smith, caused by the wrongful act of the Pennsylvania Car Company, a person other than the subscriber legally liable for the death of deceased ; that Henger & Chambers Company, having a contract with the owner of the premises for the construction and erection of the entire building, said contract not providing that the owner-might dictate the details as to the construction and erection of the building, but only providing in this regard that the said Henger & Chambers Company should be responsible to the owner as to the final results of such erection and construction,, let to appellee Pennsylvania Car Company the construction and erection of the steel for said building under a contract not providing that Henger & Chambers Company might dictate the details as to the construction and erection of the steel, but only providing in this respect that the car company should be responsible to Henger & Chambers Company for the final construction,,and erection of the steel.

As to the car company, it was alleged, in substance, that the said defendant Pennsylvania Car Company, an independent contractor having many laborers, mechanics, artisans, agents, etc., aiding and assisting in the construction and erection of the structural steel, all of whom were under its control and management, and having the duty to furnish and erect complete as independent contractor the structural steel upon said building, and having, in addition to the general duty imposed upon it by law for the safety of those working on floors below where its employees were working, a specific duty assumed in and as part of its contract with Henger & Chambers Company to put down protective flooring on the floors where it was working so as to protect laborers working below, had failed and refused to .do so, and had carelessly and negligently permitted a heavy object, to wit, a pieee-of timber, in its complete possession and control, to fall upon and kill Zaek Smith, one of the employees of Henger & Chambers Company.

To this petition defendant leveled general and special demurrers, all of which‘were sustained, and, plaintiff declining to amend, judgment was entered dismissing the cause, and from that judgment this appeal is taken.

What grounds were urged in support of the demurrer in the court below, or upon what theory the ruling of the court was based, does not definitely appear. Prom an inspection of the briefs it would appear that appellant is of one opinion and appellees of another, for appellant devotes its brief entirely to supporting the claim that the petition adequately .alleges negligence on the part of the defendant, while appellees in effect conceding, as indeed they must, that negligence was sufficiently alleged [Standard Insurance Co. v. Pennsylvania Car Co. (Tex. Civ. App.) 15 S.W.(2d) 1081; City of Beaumont v. Dougherty (Tex. Com. App.) 9 S.W.(2d) 1030],'devote their brief to establishing that within the meaning of section 3, art. 8306, R. S. 1925, providing that “the employees of a subscriber * * * shall have no right of action against their employer or against any agent, servant, or employee of said employer, for damages for personal injuries,” the car company was an agent, servant, or employee of Henger & Chambers Company, deceased’s employer, and therefore the action will not lie.

The applicable portion of section 6a, art. 8307, invoked by appellant, is as follows : “Where the injury for which compensation is payable under this law was caused under circumstances creating a legal liabil ity in some person other than the subscriber to pay damages in respect thereof, the employee may at his option proceed either at •law against that person to recover damages or against the association for compensation under this law, but not against both, and if he elects to proceed at law against the person other than the subscriber, then he shall not be entitled to compensation under this law. If compensation be claimed under this law by the injured employee or his legal beneficiaries, then the association shall be subrogated to the rights of the injured employee in so far as may be necessary and may enforce in the name of the injured employee or of his legal beneficiaries or in its name and for the joint use and benefit of said employee or beneficiaries and the association the liability of said other person, and in case the association recovers a sum. greater than that paid or assumed by the association to the employee or his legal beneficiaries, together with a reasonable cost of enforcing such liability, which shall be determined by the court trying the case, then out of the sum so recovered the association shall reimburse itself and pay said cost and the excess so recovered shall be paid to the injured employee or his beneficiaries.”

It is settled law in Texas that this provision effects a subrogation .of the insurance carrier to the rights of the representatives of deceased employees against all persons causing the injury under such circumstances as to create a legal liability, and that the statute should be given a liberal construction to effect the purpose designed. Consolidated Underwriters v. Kirby (Tex. Com. App.) 267 S. W. 703.

It is also clearly settled, both generally and in Texas, that the words “servant or employee” as used in employers’ liability and compensation acts are used in their natural sense, and describe the conventional relation of employer and employee [Hull v. Philadelphia & R. R. Co., 252 U. S. 475, 40 S. Ct. 358, 64 L. Ed. 670; Southern Surety Co. v. Shoemake (Tex. Com. App.) 24 S.W.(2d) 7; Shannon v. Western Indem. Co. (Tex. Com. App.) 257 S. W. 522], and that one who contracts to do a specific piece of work, has the right to adopt his own means and methods, is not controlled as to details by the employer, but is wholly independent except as to final results, is not an employee, but an independent contractor [3 Words and Phrases, Third Series, 204; Gailey v. State Workmen’s Ins. Fund, 286 Pa. 311, 133 A. 498; Rawson v. Jones-Winifrede Coal Co., 100 W. Va. 263, 130 S. E. 492, 43 A. L. R. 330; Kelley’s Dependents v. Hoosac Lumber Co., 95 Vt. 50, 113 A. 818; Maryland Casualty Co. v. Kent (Tex. Civ. App.) 271 S. W. 929; Id. (Tex. Com. App.) 3 S.W.(2d) 414; Taylor v. Haynes (Tex. Civ. App.) 19 S.W(2d) 850; Haynes v. Taylor (Tex. Com. App.) 35 S.W.(2d) 104].

Appellees, conceding that this is the general rule, contend that, since the injury flowed from the failure of defendant to perform a nondelegable duty owing by the general contractor to deceased, appellee ear company, though ordinarily to be classed as an independent contractor and not as a “servant, agent or employee,” must hete, because in law it would be considered an agent or servant for whose act its employer is liable, be held to be an agent, servant, or employee within the meaning of section 3, art. 8306, against whom the deceased could have no cause of action.

This position confuses and seeks to blend two legal theories—one that upon which by general law the liability of both general contractor and subcontractor to third persons is. preserved despite the independent subletting; the other the right primarily of the-employee of a subscriber, who has protected' his liability by insurance, and of the insurance carrier by subrogation under section 6a,, art. 8307, to sue a third person.

Appellees in support of their position cite cases from other states decided under varying statutes, ranging from that of the state of Washington, which has abolished common-law liability, and made compensation an exclusive substitute; of Maryland and Massachusetts, making a general contractor in effect a statutory insurer. State v. Benjamin Bennett (Md.) 140 A. 52; White v. Maccomber, 244 Mass. 195, 138 N. E. 239; of Kentucky, making provision for the protection of all persons “engaged upon the subject-matter of the contract,” when “the injury occurred on, in, or about the premises on which the principal contractor has undertaken to execute work,” McEvilly v. Myers, 211 Ky. 31, 276 S. W. 1068, 1071; and of other states with their particular differences and variations, for which see full notes and authorities cited in Pittsburgh, C., C. & St. L. R. Co. v. Parker, 191 Ind. 686, 132 N. E. 372, 134 N. E. 890,19 A. L. R. 756; O’Brien v. Chicago City R. Co., 305 Ill. 244, 137 N. E. 214, 27 A. L. R. 493; Reutenik v. Gibson Packing Co., 132 Wash. 108, 231 P. 773, 37 A. L. R. 838; Foster v. Congress Square Hotel Co., 128 Me. 50, 145 A. 400, 67 A. L. R. 249.

It would be a sufficient answer to these citations, had the particular question here presented not been already decided in Texas, to point to the difference between the statutes construed in those eases and the Texas Statute, and to show that in principle they do not apply. This is made unnecessary, however, by the fact that the precise question raised here has been already fully discussed and decided adversely to appellees in the case of Taylor v. Haynes (Tex. Civ. App.) 19 S.W.(2d) 850, same ease Haynes v. Taylor (Tex. Com. App.) 35 S.W.(2d) 104, 107, in which upon full consideration it was decided that one who, while performing work for a subscriber, causes injury to an employee of that subscriber, was liable to the injured employee under section 6a, art. 8307, if he was in fact an independent contractor, “one whom the employer has no right to control as to the manner in which the work is to be done, or the means with which-it is accomplished.” Cunningham v. I. R. R., 51 Tex. 503, 32 Am. Rep. 632; Wallace v. Southern Cotton Oil Co., 91 Tex. 18, 40 S. W. 399. While if on the other hand he was not such independent contractor, but a mere employee, section 3, art. 8306, would prevent any right of action against him.

The pleading in this case not only alleges over and over in express words that the appellee car company was an independent contractor, but it alleges the facts which if true, make it such.

Since appellant’s petition stated a cause of action against the defendant on which it was entitled to go to the jury, and the action of the court below in sustaining exceptions to it was error, the judgment is reversed, and the cause remanded for further proceedings not inconsistent with this opinion.


author: SIBLEY, Circuit Judge.

text:
    PUGH et al. v. COMMISSIONER OF INTERNAL REVENUE.

    No. 5987.
    Circuit Court of Appeals, Fifth Circuit.
    April 20, 1931.

      Yandell Boatner, of Shreveport, La., and Rush L. Holland and George E. Strong, both of Washington, D. C., for petitioners.
    G. A. Youngquist, Asst. Atty. Gen., Se-wall Key, Sp. Asst, to Atty. Gen., and C. M. Charest, Gen. Counsel, Bureau Internal Revenue and E. Riley Campbell, Sp. Atty. Bureau Internal Revenue, both of Washington, D. C. (Wm. Cutler Thompson, Sp. Asst, to Atty. Gen., on the brief), for respondent.
    Before ' BRYAN, SIBLEY, and HUTCHESON, Circuit Judges.

      Rehearing denied June 11, 1931.

   SIBLEY, Circuit Judge.

The petition seeks to review the redetermination by the Board of Tax Appeals of certain income taxes for the years 1920 and 1921. During 1919 a Louisiana plantation, controlled as community property by J. C. Pugh, was put under an oil lease, and oil was discovered. Several wells were brought in and operated during 1920 and 1921. Their operation during 1920 impregnated the land 'surface with oil and salt water, and made it unfit for cultivation, and permanently impaired the value of the plantation for agricultural purposes. The fair market value of the surface rights as distinguished from mineral rights was found by the Board to be reduced by $50,000 during 1920. This loss, of value was claimed as ■ a deductible loss, but the claim was denied by the Board. A deduction from gross income can be claimed only as authorized by the statute. The authority relied on is section 214(a) of the Revenue Act of 1918, 40 Stat. 1066: “That in computing net income there shall be allowed as deductions: * * * (4) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in trade or business.” The loss in value of the land for agricultural purposes was evidently incurred by its use in the business of oil production, but it was not sustained during the taxable year within the meaning of the statute. There has been no sale, which is ordinarily neeessary to define and realize a loss arising from a fluctuation of value. The land has simply been turned from its former, agricultural use to another use which it was believed would be more profitable. The injury to its agricultural value was a probable if not inevitable result, and was expected to be offset, and was no doubt much more than offset, by. the increase in its mineral value. There was no physical destruction of a house or an orchard or a vineyard or other addition to the land of whose cost there could be a definite measure, and about whose disappearance there could be no doubt. There is only an attempted mental subdivision of elements of value in the land, and an estimated depreciation in one element without any actual sale or other conversion by the owner, either of that element or of the land as a whole. A loss is not sustained during the taxable year within the meaning of the statute unless ascertained and realized more definitely than by an opinion of changed market value.

The oil lease is not in the record, but it appears to be the ordinary arrangement to last so long as oil is produced, in paying quantities, with a reserved royalty of one-eighth of the oil produced. Under the laws of Louisiana oil or gas in the ground is not capable of ownership separate from the land in which it is found; but the right to have a part of that produced, whether the right resides in a so-called lessee or in the lessor as a royalty, is an interest in the land which can be fully conveyed by its owner in whole or in part. Frost-Johnson Lumber Co. v. Salling’s Heirs, 150 La. 756, 91 So. 207; United States v. Looney (C. C. A.) 29 F. (2d) 884. The taxpayer, J. C. Pugh, on August 1, 1919, conveyed a half interest in his royalty right upon terms hereafter stated, under which he claimed to he entitled to a depletion allowance for the years 1920 and 1921, on account of the oil taken out, not only in respect of the half of the royalty right which he did not convey, but also the half that he did convey. The denial of this claim presents the next question. The allowance for depletion, like that for exhaustion, represents an effort to recognize year by year gradual losses of capital whose aggregate will he definitely and certainly ascertained only at a later date. In the ease of exhaustion the loss ís due to aging, to wear, to deterioration by natural causes, and the like. In the case of depletion, there is an actual severance and disposal of part of the capital. In allowing for each there is the effort to deduct from apparent income what is really a loss or a-conversion of capital. Both thus relate to the capital which is actually shrinking at the time of the allowance, and the allowance ought to go to the then owner of that capital. Accordingly, in Lynch v. Allworth-Stephens Co., 267 U. S. 364, 45 S. Ct. 274, 69 L. Ed. 660, depletion was held allowable on the interest of both lessor and lessee, since each was suffering a loss; but in Weiss v. Weiner, 279 U. S. 333, 49 S. Ct. 337, 73 L. Ed. 720, a lessee without investment and suffering no actual loss was denied exhaustion. The question here is whose was the ownership in 1920 and 1921 of the transferred half of the royalty, and that depends upon the legal effect of the instrument which conveyed it. Omitting formal and descriptive parts, and italieizing significant words, the language is: “J. C. Pugh has this day sold to J. M. Eastham * * * one-half of his one-eighth royalty on - the following described property, * * * This sale1 and transfer is made for the price and sum of $250,000.00; $50,000.00 of which is paid ip cash and the balance of $200,000.00 to be paid out of the one-half royalty herein conveyed to the said Eastham, the said Pugh to receive the entire royalty of one-eighth until the said unpaid balance of $200,000.00 has been paid out of the said half belonging to said Eastham., and thereafter the said one-half shall be paid to the said J. M. Eastham or his assigns. It is further agreed and understood that the said J. M. Eastham in no way binds or obligates himself personally to pay the said balance of $200,000.00, and if one-half of the royalty from the said property is not sufficient to pay said sum, then the vendor in no way looks to the said Eastham personally for the payment thereof. The sale to be operative from the first day of August, 1919, and all oil in tanks now on hand shall go exclusively to said Pugh.” The instrument is dated August 1, 1919, attested as a deed, and filed and reeorded as such. We construe this to be a eonveyanee,. operative from its date, of a half interest in the royalty right for a total eonsideration of $250,000, $50,000 being paid in cash, and a special arrangement being made for the payment of the remainder. The arrangement did not involve Eastham in personal liability, hut appropriated the proceeds of his royalty oil to the payment until the $200,000- should be paid. It is specially referred to as the half belonging to said East-ham. As the oil was produced, that due to this half of the royalty right was Eastham’s oil. The risk of market price was his. When the proceeds were paid over to Pugh they were paid, not because the oil was Pugh’s but because it was pledged to Pugh. The -money went to discharge the price due on Eastham’s purchase, and to pay for the right which he had bought “operative from August 1st, 1919.” After that date it was Eastham’s royalty right that was being depleted by the removal of oil, and he, and not Pugh, was entitled to the depletion allowance, although Pugh was to get and did get the proceeds of the oil when sold. The same principle was applied in Waller v. Commissioner (C. C. A.) 40 F.(2d) 892, and Herold v. Commissioner (C. C. A.) 42 F.(2d) 942, in which a lease interest was transferred instead of a royalty. Our decision in United States v. Looney, 29 F.(2d) 884, is cited as to the contrary, but that case did not directly involve-any question of depletion. The question was to whom certain royalties belonged as income. Nor did it really involve any sale of a royalty, for the parties were claiming under adverse-titles, and made a compromise agreement which effected a division of the disputed royalty.

Parol evidence was offered before the Board from the scrivener and the parties to the above conveyance to show that it was explicitly agreed among them that the depletion allowance on the oil necessary to pay the $200,000 should go to Pugh, and that Eastham had not claimed it in his tax return. The objection that parol evidence was inadmissible to add to or vary the writing both under general law and under article 2276 of the Civil Code of Louisiana was met with the statement that it was offered, “not for the purpose of changing the terms of the written agreement, but for the purpose of explaining the meaning and intention of the parties, and to clarify the agreement expressed in the contract.” The parties are thus presented as content with the terms of their conveyance, claiming no mistake or error or omission in them, and certainly seeking no reformation. The proposal is to give this recorded instrument an effect according to the wish of the parties rather than that attributable to it by law, and thus to control as against the United States the application of the tax laws. While it is sometimes broadly stated that the parol evidence rule has no application to any save parties to the instrument and their privies, In re Shields Brothers, 134 Iowa, 559, 111 N. W. 963, 10 L. R. A. (N. S.) 1061; O’Shea v. N. Y. R. R. Co. (C. C. A.) 105 F. 559; Blake v. Hall, 19 La. Ann. 49, yet when an instrument is executed as the final embodiment of an agreement, and becomes the act of the parties, and where the parol evidence is offered merely to vary the legal effect of its terms, the role operates to protect all whose rights depend upon the instrument though not parties to it. Allen v. Ruland, 79 Conn. 405, 65 A. 138, 118 Am. St. Rep. 146, 8 Ann. Cas. and note, page 347; 10 E. C. L. § 213; 5 Wigmore on Evidence, §§ 2425, 2446; 2 Williston on Contracts, § 647. Especially are recorded muniments of title not to be altered by parol evidence except on orderly procedure for their reformation. Blum v. Allen, 145 La. 71, 81 So. 760. That by some other form of instrument the rights of the United States would have been different is beside the question. The parties abide by this instrument as they made it. The law, and not their wish or understanding, must control its legal effect on the incidence of taxation. The Board did not err in disregarding the parol evidence.

Petition denied. -


author: WALKER, Circuit Judge.

text:
    MILLER, Collector of Internal Revenue, v. STANDARD NUT MARGARINE CO. OF FLORIDA.
    No. 6049.
    Circuit Court of Appeals, Fifth Circuit.
    April 22, 1931.

      S.ee, also, 49 F.(2d) 85.
    Harrison F. McConnell, Sp. Atty., Bureau of Internal Revenue, of Washington, D. G., Raymond F. Brown, Sp. Atty.,' Bureau of Internal Revenue, of Miami, Fla., and W. P. Hughes, U. S. Atty., of Jacksonville, Fla. (Harrison F. McConnell, Sp-. Atty., Bureau of Internal Revenue, of Washington, D. C., Raymond F. Brown, Sp, Atty., Bureau of Internal Revenue, of Miami, Fla., W. P. Hughes, U. S. Atty., of Jacksonville, Fla., and C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, of Washington, D. C., on the brief), for appellant.
    George N. Murdock, of Chicago, 111., A. Y. Milam and Robt. R. Milam, both of Jacksonville, Fla., and E. T. Mellvaine, of Miami, Fla. (Geo. N. Murdock, of Chicago, 111., A. Y. Milam and Robt. R. Milam, both of Jacksonville, Fla., and E. T. Mellvaine, of Miami, Fla., on the brief), for appellee.
    Before FOSTER, HUTCHESON, and WALKER, Circuit Judges.
   WALKER, Circuit Judge.

This' is an appeal from a final decree rendered in a suit brought by the appellee, the Standard Nut Margarine Company of Florida, a corporation, against the appellant, individually and as collector of internal revenue for the district of Florida, under which the appellant was perpetually restrained and enjoined “from collecting or attempting to collect, directly or indirectly, from the plaintiff (the appellee), or any dealer selling plaintiff’s product Southern Nut Product, any pretended tax or imposition purporting to be levied or assessed against the plaintiff or said dealers under the Oleomargarine Act of August 2,1886, as amended (26 USCA §§ 194, 207, 541 et seq.), on account of the manufacture and sale of the said Southern Nut Product referred to in the petition herein and manufactured by plaintiff.” The allegations of appellee’s petition or bill filed December 26, 1926, show as follows, the parties being herein referred to by their designation in the court below: Plaintiff is engaged, and has been engaged for more than, two years, in the manufacture and sale in interstate commerce of a nut product known as “Southern Nut Product,” manufactured and sold under its own distinctive name, said name not being in imitation of the distinctive name of any other product; said name is accompanied on the same label and brand with the name of the place where it is manufactured or produced; and said product contains no added poisonous or deleterious ingredients. Southern Nut Product is a mixture or compound consisting of eoeoanut oil, peanut oil, salt, water, and harmless coloring matter, manufactured and sold for cooking, baking, and seasoning purposes. Southern Nut Product is packed and sold only in one-pound cartons, a sample of which was attached to the bill, and plaintiff sells and ships it to a great number of firms and persons located in many states of the United States outside of the state of Florida. Prior to plaintiff engaging in the manufacture and sale of said Southern Nut Product, an action at law had been brought against one Page, as collector of internal revenue for the district of Rhode Island, for the purpose of recovering from said collector the amount of taxes paid under protest by the Higgins Manufacturing Company on a product manufactured and sold by that company known as Nut-Z-All, which product was manufactured in the same way and of "the same ingredients as Southern Nut Product is manufactured by plaintiff. After hearing the evidence submitted on behalf of both the plaintiff and the defendant in that case, it was held by the court that said product Nut-Z-All was not made in imitation or semblance of butter or intended to be sold as butter or for butter, and hence under the law was not oleomargarine and not taxable as oleomargarine. As a result of that decision the then Commissioner of Internal Revenue, with the approval of the then Secretary of the Treasury of the United States, published and promulgated Treasury Decision 3590, which was the text of the above-mentioned decision, and further informed all concerned that Nut-Z-All had been held by the court not to be oleomargarine and not taxable as oleomargarine. On August 20, 1924, the then Deputy Commissioner of Internal Revenue, in the reply to an inquiry made to the then Commissioner of Internal Revenue by the Institute of Margarine Manufacturers, an association of oleomargarine manufacturers, as to the taxability of said product Nut-Z-All, stated: “The product ‘Nut-Z-All’ was held by this office taxable as oleomargarine, but the decision was contested in the ease of Higgins Manufacturing Co. v. Page (D. C.) 297 F. 644, wherein this product was held by the cou»*: to be not made in imitation or semblance of butter and not taxable as oleomargarine. The court, having held the product to be not taxable as oleomargarine, the fact that retailers advertise and sell it as butter, or as a substitute for butter, would not render them or the manufacturers liable under the internal revenue law.” Notwithstanding the above-mentioned decision in the case of Higgins Manufacturing Co. v. Page, the issuance of Treasury Decision 3590 based thereon, and the above-quoted statement contained in the reply to the inquiry of the Institute of Margarine Manufacturers, all of which were given extensive publicity throughout the trade, the then Commissioner of Internal Revenue, with the approval of the then Secretary of the Treasury, endeavored by Treasury Decision 4006, dated April 1, 1927, again to declare products similar to Nut-Z-All taxable as oleomargarine, if colored to look like butter.

In July, 1927, the said Higgins Manufacturing Company filed in the District Court of the United States for the District of Rhode Island a petition for a temporary injunction against Frank A. Page, as collector of internal revenue for the district of Rhode Island, asking the court to restrain the said collector of internal revenue from collecting a tax on Nut-Z-All and similar products as on oleomargarine. The injunction so prayed for was granted on July 18,1927, and at the time of granting said injunction the court rendered an opinion which is reported in Higgins Manufacturing Co. v. Page (D. C.) 20 F.(2d) 948. In July, 1927, the Baltimore Butterine Company, of Baltimore, Md., petitioned the Supreme Court of the District of Columbia for a temporary and permanent injunction against the then Commissioner and Deputy Commissioner of Internal Revenue to restrain them from endeavoring to enforce said Treasury Decision 4006 against its nut product Nu-ine, which was identical in content and appearance with plaintiff’s Southern Nut Product, and which was in content and appearance identical with Nut-Z-All. After hearing and due consideration, that court granted a temporary injunction and rendered an unreported opinion, which stated:

“I agree with the reasoning of the decision of Judge Lowell of the District Court of Rhode Island in Higgins Manufacturing Co. v. Page; that is one of the eases to which the Supreme Court referred in Dodge v. Brady, 240 U. S. 122, 36 S. Ct. 277, 60 L. Ed. 560, of extraordinary and exceptional circumstances.
“The bill alleges that the substance ‘Nuine’ involved in this case is the same as ‘Nut-Z-All’ which Judge Brown of the District Court held not subject to taxation under the oleomargarine act. Yet in spite of this judicial holding the defendant has attempted by a regulation to make all substances like to that involved in this suit taxable under the act. It is clear that the defendant by means óf a mere regulation cannot enlarge the provisions of the act, and such a regulation cannot be enforced. There would be no end to litigation if the defendant should persist in levying a tax after the courts have held the tax invalid,, and the injury to the plaintiff would be irreparable and the amount inascertainable.”

On December 16, 1927, that court made said injunction permanent. In December, 1927, the United States District Court for the District of Rhode Island made permanent the temporary injunction theretofore granted against said Page as collector of internal revenue for the district of Rhode Island. No appeals were taken from any of the above-mentioned decrees. The plaintiff engaged in the manufacture of its product, Southern Nut Product, after the above-mentioned decisions had been rendered. Before engaging in the manufacture of its said product, plaintiff made inquiry of the defendant and in reply to that inquiry received from the defendant a letter which contained the following : “The Standard Nut Margarine Company has the same privilege of making a compound of the kind in question without taxpaying same as oleomargarine as is being enjoyed by those manufacturers who obtained favorable decisions from the courts.”

Prior to the institution of this suit, the defendant threatened to collect a tax of 10 cents per pound upon plaintiff’s Southern Nut Product, as upon the manufacture of artificially colored oleomargarine. In doing so, he acted in pursuance of a letter addressed to him by R. M. Estes, Deputy Commissioner of Internal Revenue, which, after stating that plaintiff “manufactures a so-called colored cooking compound under the name of ‘Southern Nut Product’ which is held to be taxable as colored oleomargarine,” and that plaintiff had been assessed the sum of $5,000, which covers the tax on 50,000 pounds of Southern Nut Product estimated to have been produced during the month of January, 1929, stated: “All wholesale and retail dealers in ‘Southern Nut Produets’ and other so-called cooking compounds found on the market in your district should be reported for assessment on subsequent lists unless they hold special tax stamps permitting them to sell colored oleomargarine.” In the manufacture and sale by plaintiff of Southern Nut Product, the net profit derived is approximately 3 cents per pound, and unless immediate relief shall be granted, the levy and collection of 10 cents per pound tax upon said product heretofore and now being manufactured by plaintiff will render plaintiff insolvent, and in addition make it liable to severe criminal penalties and the forfeiture of its factory and plant in whieh said product is made, together with all raw materials and manufactured product on hand. The enforcement of the above-mentioned demand of the Deputy Commissioner of Internal Revenue will render hundreds of wholesalers and thousands of retailers who have been and are now handling and selling plaintiff’s product liable to said special tax, additional penalties, and severe criminal liabilities. The decree appealed from, whieh was rendered March 4,1930, embodied a finding by the court that “the complainant has established the material allegations of the bill of complaint.” The transcript contains a statement of evidence, whieh purports to contain the substance of the evidence introduced in the trial of the cause; but documents which were introduced in evidence and were made exhibits, and apparently being material parts of the evidence, are not set out in the transcript. The record is consistent with the conclusion that the evidence established the' material allegations of the bill of complaint.

The following facts, of which we take judicial notice [Jacobs v. United States (C. C. A.) 45 F.(2d) 34], and of whieh the court below may have taken judicial notice, though no reference to them is found in the record on appeal, have a bearing on questions raised by the record: While this suit was pending in the court below; a bill to amend the definition of oleomargarine contained in the Oleomargarine Act as amended' (26 USCA §§ 541, 546) was pending in Congress. The report of the Committee on Agriculture of the House of Representatives on that bill stated:

“The purpose of the amendment, in addition to clarifying the language of the act and including the fish oils and fats, as above briefly mentioned, is to bring a third class of fat compounds, in addition to the two specifically enumerated in the existing law, within the definition of oleomargarine, and therefore ■within the taxing and regulating power of the Bureau of Internal Revenue. * * *
“These so-called cooking compounds, made in this manner, are not clearly within the definition of oleomargarine as it is stated in the present law, and as this law is interpreted by the courts. * * •
“The evidence before the committee shows that the definition of oleomargarine in the present law is not sufficiently comprehensive to cover the fat and oil compounds that can and are being made to be so nearly like oleomargarine as to mislead the buying public.”

Cong. Ree. Feby. 1, 1930. H. R. p. 2996 et seq.

A member of the House, in advocating the passage of that bill, said: “Since the passage of the oleomargarine act there has come into existence in the country a new butter substitute branded as a cooking compound, but whieh to all intents and purposes is intended to be and is sold as butter. These new cooking compounds, whieh we seek to bring within the purview of the oleomargarine law and under its provisions, are made principally of coconut oü, perhaps 80 per cent coconut oil, and the balance peanut oil, salt, and water.” Cong. Rec. H. R. Jan. 31,1930, p. 2907.

On January 10, 1930, Commissioner of Internal Revenue Lucas wrote a letter to' Congress recommending the passage of such a bill, in whieh he said:

“In view of the injunction granted the Higgins Manufacturing Company of Providence, R. I., by the District Court of Rhode Island, enjoining the collector from collecting tax on their product manufactured from vegetable oils, salt, water and artificial coloring, no attempt has been made to assess stamp tax on Higgins Nut Product or to require the payment of special tax by dealers selling the same.
“The Standard Nut Margarine Co., of Jacksonville, Fla., was recently granted a temporary injunction by the United States District Court at Jacksonville, Fla., restraining the collector of internal revenue for this district from the collection of stamp tax upon the manufacture of the plaintiff’s Southern Nut Product and from special tax upon its sale at wholesale and retail. It is understood that this case has been- set for trial under date of February 24,1930.
“In all probability numerous other injunction proceedings will be instituted restraining the collection of stamp and special taxes upon the manufacture and sale of these so-called colored cooking compounds, and while the bureau is of the opinion that they are unquestionably made in imitation 'or semblance of butter arid should be subject to the tax imposed under the oleomargarine law, the only satisfactory solution of the problem appears to be through legislation, such as the passage of H. R. 10958, Seventieth 'Congress, first session, whieh specifically brings such products within the classification of oleomargarine.”

Cong. Rec. H. R. Feby. 1, 1930, p. 2999.

A letter of the same official to a Senator as to a then pending bill on the subject contained the statement: “Bill H. R. 6 was drafted to bring these so-called cooking compounds within the definition of oleomargarine as provided in the act of August 2, 1886, as amended by the act of May 9, 1902, and thus avoid the multiplicity of law suits and conflicting court decisions with which the Government was threatened in every attempt made to hold sueh products subject to the oleomargarine law.” Cóng. Ree. Senate. May'26, 1930, p. 9930. That bill was passed, being approved July 10,1930. 46 Stat. 1022 (26 USCA § 541 and § 541 note). It provided: “This Act shall take effect one year after the date of its enactment.”

In May, 1929, the United States District Court for the Southern District of Georgia decided thát plaintiff’s product, Southern Nut Product, is not an imitation of butter. Baltimore Butterine Co. v. Talmadge (D. C.) 32 F.(2d) 904. That decision was affirmed by this court prior to the rendition of the decree now under review. Talmadge v. Baltimore Butterine Co. (C. C. A.) 37 F.(2d) 1014.

The grounds principally relied on in behalf of the defendant to support the contention that the decree under review was erroneous and should be reversed are:

1. That the finding evidenced by the above-mentioned letter addressed to defendant by R. M. Estes, Deputy Commissioner of Internal Revenue, which stated that plaintiff’s product, Southern Nut Product, was held to be taxable as colored oleomargarine, and that plaintiff had been assessed the sum of $5,000 on that product, was made final and not subject to judicial review by the following provision of section 14 of the Oleomargarine Act, as amended (26 USCA § 582): “And such commissioner is authorized to decide what substances, extracts, mixtures, or compounds which may be submitted for his inspection in contested cases are to be taxed under this Act; and his decision in matters of taxation under this Act shall be final.” 24 Stat. 212.
2. That the maintenance of this suit is forbidden by the statute which provides that, “No suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court.” 26 USCA § 154.
3. That this suit is not maintainable because the government is an indispensable party to sueh a suit, and is not a party, or subject to be made a party, thereto.

1. As above indicated, the allegations of-the bill and supporting evidence showed the following: The so-called finding, evidenced by the above mentioned letter of the Deputy Commissioner of Internal Revenue, to the effect that plaintiff’s product, Southern Nut Product, is colored oleomargarine, and taxable as such, was made when there was before the official who made that finding no contested ease involving the question whether that product was or was not taxable under the law then in force. The way in which that action appears to have been taken persuasively indicates that it was based on an ex parte investigation, without any hearing of which plaintiff was notified, without plaintiff being given an opportunity to present evidence, and without the introduction or consideration of any evidence having a tendency to prove that plaintiff’s product is such a one as was covered by the statute then in force. Before that action was taken several courts, as above stated, had decided in contested eases, to which the Commissioner of Internal Revenue, or his subordinate, was a party, that a nut product in content and appearance identical with appellee’s product, Southern Nut Product, was not oleomargarine within the meaning of the statute then in force (21 USCA § 25) and was not taxable under that statute, and none of those decisions had been brought into question by an appeal therefrom. Before the action of the Commissioner of Internal Revenue in holding Southern Nut Product to be taxable as colored oleomargarine was proved in the court below in the trial which resulted in the decree now under review, this court had affirmed a decision to the effect that that product is not an imitation of butter. At the time of the admission in the court below of evidence of that action of the Commissioner of Internal Revenue, the Congress had before it for consideration a recommendation of that official that the then existing láw be so amended as to bring such products within the classification of oleomargarine, the document containing that recommendation showing that that official was of opinion, not that sueh products were subject to the tax imposed by the law then in existence, but that they should be subject to sueh tax. At that time pending proceedings in Congress indicated that that body recognized that a change of the then existing law was required to make such products as plaintiff’s Southern Nut Product subject to the tax imposed by the Oleomargarine Act. The evidence persuasively indicated that the action under consideration, whereby plaintiff’s product, Southern Nut Product, was held to be taxable as colored oleomargarine, was unsupported by any evidence tending to prove that that product differed in any material respect from products which repeatedly had been judicially determined not to be subject to the tax imposed by the Oleomargarine Act, or that that product in any respeet was other than the one in the manufacture of which plaintiff engaged after having been informed by the defendant to the effect that it was not subject to that tax. It appeared from the evidence that that action was taken in such circumstance that the basis of it was so unsubstantial as to be frivolous, that it was taken in contemptuous disregard of unappealed from court decisions to the effect that the then existing law imposed no tax on such a product, and amounted to an administrative attempt to coerce the payment of money the exaction of which the official who took that action thought ought to be authorized by law, but which he did not really believe was authorized by the then existing statute as uniformly construed by the courts. The basis of the claim that plaintiff’s product was taxable as colored oleomargarine was so unsubstantial as to be frivolous, and the holding that it was so taxable was so' arbitrary and capricious that it amounted to a mere administrative fiat, which, in effect, was no decision at all. Binderup v. Pathe Exchange, 263 U. S. 291, 306, 44 S. Ct. 96, 68 L. Ed. 308; Silberschein v. United States, 266 U. S. 221, 225, 45 S. Ct. 69, 69 L. Ed. 256; Interstate Com. Comm. v. Louisville & Nashville R. Co., 227 U. S. 88, 91, 33 S. Ct. 185, 57 L. Ed. 431. We' conclude that the official action now in question, which purported to hold that plaintiff’s product, Southern Nut Produet, was taxable as colored oleomargarine, and whereby a so-called tax in the sum of $5,000 was attempted to be assessed, was not a decision within the meaning of the above set out statutory provision, and had no binding or conclusive effect.

2. In several cases in which the Supreme Court of the United States had under consideration the above set out statute forbidding, the maintenance of any suit for the purpose of restraining the assessment or collection of any tax, that court explicitly recognized that that statute does not prevent an injunction in a ease apparently within its terms in which some extraordinary and entirely. exceptional circumstances make -its provisions inapplicable. Hill v. Wallace, 259 U. S. 44, 62, 42 S. Ct. 453, 66 L. Ed. 822; Bailey v. George, 259 U. S. 16, 42 S. Ct. 419, 66 L. Ed. 816; Dodge v. Brady, 240 U. S. 122, 126, 36 S. Ct. 277, 60 L. Ed. 560. Though the court’s statements to that effect were not necessary for the decision of any of the cases in which they were made, those statements plainly indicate a deliberate conclusion of that court as to the meaning and scope of that statute. In view of that court’s expressed conclusion, certainly we would not be warranted in attributing to that statute the meaning or effect of preventing the interference by a eourt with the enforcement of any attempted exaction by a tax official under the guise of an assessed tax, however extraordinary and entirely exceptional the circumstances may be. That above-mentioned circumstances attending the attempted imposition of the purported tax the enforcement of which was enjoined by the decree appealed were extraordinary and entirely exceptional cannot fairly be denied. The product which was the subject of that threatened exaction —a mixture or compound consisting of cocoanut oil, peanut oil, salt, water, and harmless coloring matter—was not in existence until long after the enactment of the Oleomargarine Act. It was not made in imitation or semblance of butter, and was not a mixture or compound described in section 2 of that act (26 USCA § 541), which covered no mixture or compound containing any vegetable ingredient other than “vegetable oil annatto,” which is a dyeing or coloring material used for coloring butter, cheese, etc. Nothing in that statute indicated an intention to tax such a mixture or compound as plaintiff’s Southern Nut Product, or that the lawmakers, in enaeting that statute, contemplated the possibility of such a mixture or compound being devised and coming into' competition with butter. Before the so-called tax was attempted to be assessed several courts, in cases to which the Commissioner of Internal Revenue or his subordinate was a party, had decided that products identical in content and appearance with plaintiff’s were not subject to the tax attempted to be imposed. The failure to appeal from any of those decisions amounted to an admission by the Commissioner of Internal Revenue that an attempt to impose that tax on such products as plaintiff’s Southern Nut Product is not legally sustainable. The claim .of the defendant that he was legally authorized to coerce the payment of the so-called tax, when that claim was attempted ,to be sustained in the trial which resulted in the decree appealed from, was made in such circumstances as to be merely colorable, in effect a frivolous pretense that his action in that regard was in compliance with an official duty imposed by law, that claim then being made after it had been judicially determined several times, in suits to which defendant’s official superior or the latter’s subordinate was a party, that the statute relied on imposed no tax on products of identically the same kind as plaintiff’s Southern Nut Product; after the defendant had influenced the plaintiff to engage in the manufacture of that product by informing him that it was not taxable under the Oleomargarine Act; after the defendant’s official superior, by failing to have any of the just mentioned decisions appealed from and by recommending to Congress the enactment of a statute imposing a tax on such products, had in effect admitted that those products were not taxable under the then existing law as that law was construed by the courts; and after the lawmakers, by taking steps to impose a tax on those products, had recognized that a change of law was required to make them subject to be taxed. We think it would be a manifest perversion of the statute in question to permit it to be made the means of enabling a tax official to obtain exemption from being restrained from enforcing an exaction which no legislation purports to provide for, and whieh, in suits to whieh that official or his official superior was a party, have been judicially determined not to be authorized by law. We conclude that the court, in awarding the injunction complained of, did not, within the meaning of the statute now under consideration, restrain the assessment or collection of any tax. The continued prosecution of the appeal in this case in the circumstances disclosed amounts to an attempt by a tax official to enforce the collection of a tax before, under the law whieh provides for it, authority to assess or collect that tax is conferred on any one.

3. The United States is not a necessary party to this suit, the object of whieh is to restrain threatened illegal conduct of a federal official violative of rights of the plaintiff. The exemption of the United States from suits does not protect its officers from pei’sonal liability to persons whose rights of property they have wrongfully invaded or threatened to invade. Philadelphia Co. v. Stimson, 223 U. S. 605, 619, 32 S. Ct. 340, 56 L. Ed. 570.

We conclude that on no ground urged is the decree under review erroneous or subject to be reversed.

That decree is affirmed.


text:
    STANDARD NUT MARGARINE COMPANY OF FLORIDA, Appellant, v. Josiah T. ROSE, Collector of Internal Revenue for the District of Georgia, Appellee.
    No. 6065.
    Circuit Court of Appeals, Fifth Circuit.
    April 22, 1931.

    James C. Davis and George N. Murdock, both of Chicago, 111., for appellant.
    C. P. Goree, Asst. U. S. Atty., of Atlanta, Ga., and Harrison F. McConnell, Sp. Atty., Bureau of Internal Revenue, of Washington, D. C. (Clint W. Hager, U. S. Atty., and C. P. Goree, Asst. U. S. Atty., both of Atlanta, Ga., and Harrison P. McConnell, Sp. Atty., Bureau of Internal Revenue, and C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, both of Washington, D. C., on the brief), for appellee.
    Before FOSTER, HUTCHESON, and WALKER, Circuit Judges.
   WALKER, Circuit Judge.

This is an appeal from a decree sustaining a motion to dismiss a bill in equity filed by the appellant against the appellee, the collector of internal revenue for the district of Georgia. The appellant is the same corporation which was the plaintiff in the ease of Miller, Collector of Internal Revenue, v. Standard Nut Margarine Co. (Circuit Court of Appeals, Fifth Circuit) 49 F.(2d) 79. The two cases are substantially alike, except that in the instant ease the appellant, which is not a manufacturer or dealer in Georgia, seeks protection of its interest in an established business by restraining the enforcement against jobbers and retail dealers in-Georgia in appellant’s product, Southern Nut Product, of penalties imposed, or threatened to be imposed, on such jobbers or retailers for alleged violations 'of the Oleomargarine Act (26 USCA §§ 543, 544) by selling appel1 ant’s product without complying with requirements of that act; while in the cited case appellant sought injunctive relief against the threatened enforcement of a tax attempted to be assessed against itself under that act.

It appears from the opinion rendered by the District Judge that he concluded that appellant, though not directly proceeded against in Georgia, may complain of threatened proceedings against jobbers and retail dealers in that state who handle appellant’s product, and that appellant had no adequate legal remedy for the redress of the'alleged wrongs complained of; but that he concluded that, though the allegations of appellant’s bill showed a state of facts substantially like that disclosed by the allegations and proofs in the cited case, with the exception above mentioned, the statute providing that “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court” (26 USCA § 154) has the effect of forbidding the maintenance of this suit. The last-mentioned conclusion is at variance with a conclusion reached by this court in the above-cited case. For reasons stated in the opinion rendered in that case, we conclude that the above-mentioned ruling’ in the instant ease was erroneous. Because of that error the decree appealed from is reversed, and the cause is remanded for further proceedings not inconsistent with this opinion.

Reversed.


author: THOMSON, District Judge.

text:
    EVANS v. FIDELITY & DEPOSIT CO. OF MARYLAND.
    No. 4540.
    Circuit Court of Appeals, Third Circuit.
    April 17, 1931.
    Thos. R. White and White, Parry, Sehnader & Maris, all of Philadelphia, Pa., for appellant.
    John Murdoch Clarke and Francis B. Bracken, both of Philadelphia, Pa. (Morgan, Lewis & Bockius, of Philadelphia, Pa., of counsel), for appellee.
    Before BUFFINGTON and DAVIS, Circuit Judges, and THOMSON, District Judge.
   THOMSON, District Judge.

This appeal of Powell Evans raises the question whether the court below correctly construed the opinion of this court rendered on the prior appeal [42 F.(2d) 15], in entering a decree pursuant thereto, against defendants Powell Evans and the Schuylkill Railway Company. The appellant contends that the decree should have been entered against the railway company alohe. The facts of the case were so fully stated in the former opinion of this court as to render unnecessary any lengthy restatement of them here.

The bill was against Leib, Evans, and the railway company for the discovery by Evans and the railway company of all moneys received by them under a certain agreement for the payment to the plaintiff of the sum of $5,000. Leib, the general manager of the railway company, gave the company his bond, in the sum of $5000, with the plaintiff as surety, for the faithful performance of his duties. Leib became a defaulter by forging and discounting notes and a check, aggregating $17,500, given to him by the railway company, for the payment of taxes. As a result of the defalcation, the surety company paid to the railway company, the full amount of the bond, on condition that the railway company would prosecute its claims on the forged notes and check against the banks, and, in case of recovery from- the banks, or from Leib, of a sum more than enough, with the amount paid on the bond, to fully compensate the railway company for its loss, the latter would pay over such excess to reimburse the plaintiff for the $5,-000 paid on the bond. For this purpose, suits were commenced and prosecuted against the banks. Leib also owed Evans a personal indebtedness of $1,500, for which he had delivered to the latter certain securities. These were afterwards sold by Evans and purchased by him for an inadequate price.

During the pendency of the first suit, Evans, who was clearly acting for himself and the railway company, of which he was president and principal stockholder, entered into a written agreement with Leib. The consideration was $20,333, in which Evans agreed to do three things:

First. To secure releases from the railway company discharging Leib and the banks from all claims upon the notes, and to release Leib from Evans’ individual claim.
Second. To apply $2,000 of the first payment under the agreement to release the Franklin National Bank suit, which was then pending, Leib thereafter to have the right to indicate which claims of the railway company, against the banks the money should be applied to, so! as to release the banks as funds were furnished.
Third. To sell and transfer to Leib the securities which Evans held, and which were bought in at the sale above referred to.

The amount specified in the agreement was paid by Leib in full to Evans, and, in addition thereto, Leib paid $2,950, expenses incurred by the railway company against the banks. The contract was intended to provide for payment by Leib of all sums claimed by the railway, as well as the payment to Evans of his personal indebtedness. The money being paid by Leib to Evans, the banks were released from all liability. While the railway company was not a nominal' party to the agreement, it was the duty of Evans, who was acting for the railway company, to pay the latter the full amount of its claims, and the plaintiff was entitled to hold Evans and the railway company for the proper application of the payment, so that Leib would be relieved from his liability to reimburse the plaintiff for the $5,000, which it had paid.

Under the circumstances, payment to Evans was payment to the railway. It is perfectly plain that the purpose of the agreement was to effect a settlement of the claims of the railway company against the banks and Leib. The settlement was participated in by the president, vice president, and counsel of the railway company, and by Leib and his counsel. The amount of the consideration was exactly the aggregate of the claims on the notes and cheek and the personal indebtedness due to Evans. The settlement was clearly one between all three parties concerned, in which Leib made payment in full. If, by some arrangement between the railway and Evans, the former did not receive its share in full, this is not important, as the company must be presumed to have waived its right to demand the full amount paid to Evans for its account. Such waiver can in no manner affect the obligation it owed to reimburse the plaintiff for its loss on the bond. We see no reason why the decree should not run against both Evans and the railway company, under the pleadings and evidence in the case. The bill for an accounting was against both Evans and the railway company. The agreement under which the liability arose, was entered into by Evans. The liability of the railway arose under the contract notwithstanding the company was not a party to it, but because Evans was acting for the company as well as for himself. The moneys were paid to him, which were received from Leib, and he was responsible as between him and the plaintiff for its proper distribution.

We are of opinion that the court below properly interpreted the opinion of this court in entering a decree against both Evans and the railway company.

The decree as entered is affirmed.