author: HOLLZER, District Judge.

text:
    In re PURKETT, DOUGLAS & CO.
    No. 16277-H.
    District Court, S. D. California, Central Division.
    March 30, 1931.
    Hiram E. Casey, of Los Angeles, Cal., for Wm. H. Moore, Jr., receiver.
    Guy Richards Crump, of Los Angeles, Cal., for petitioner.
    McAdoo, Neblett & Clagett and William H. Neblett, all of Los Angeles, Cal. (Hubert P. Laugham, of Los Angeles, Cal., of counsel), for respondent.
   HOLLZER, District Judge.

On March 11, 1931, Purkett, Douglas & Company, hereinafter referred to as petitioner, filed a voluntary petition in bankruptcy herein and was adjudged a bankrupt on said date. Practically at the same time, petitioner filed a verified petition wherein it was charged that on December 18, 1930, petitioner had executed and delivered to William H. Neblett, hereinafter referred to as respondent, a note in the sum of $50,000 with interest at 6 per cent, per annum, payable sixty days thereafter, and as security for the payment of said note had pledged with respondent bonds of the Dollar Oil Corporation, Limited, of the par value of $85,000, and in addition thereto had transferred to respondent other bonds of the Dollar Oil Corporation, Limited, of the par value of $25,-000 and also 150,000 shares of the capital stock of said last-named corporation of the par value of $1 per share, as a bonus to respondent on said loan. The said petition further charged that the transfer of said last-mentioned bonds and shares of stock to respondent was a usurious payment of interest on account of said loan, also that respondent had caused notice to bo given of intention to sell, on March 11, 1931, the bonds pledged with him as aforesaid; that unless restrained from so doing, respondent would cause said bonds to be sold for a sum of money grossly disproportionate to the true value thereof and thereby would cause irreparable loss to the estate of petitioner and great injury to the creditors of petitioner.

. In accordance with the prayer of said petition an order was issued by this court, restraining respondent until the further order of the court from proceeding further with any sale as pledgee of said bonds pledged as aforesaid.

On March 14, 1931, two affidavits were filed by and on behalf of respondent, one bang made by respondent and the other by R, E. Powell. The denials and statements hereinafter referred to will be found contained in one or both of said affidavits. Respondent denies that any bonds or stoek were received by him as a usurious payment of interest on account of said loan, or that unless restrained by this court he will cause said bonds or any of them to be sold for a sum disproportionate to the true value thereof, or that a sale thereof will cause great or irreparable loss to the bankrupt estate or any injury to the creditors of the bankrupt. In addition, it is alleged in substance that the $25,000 par value of bonds, and the 150,000 shares of stock, were transferred to the law firm of which respondent is a member in payment of services rendered by said firm in connection with the organization and the financing of the bond issue of said Dollar Oil Corporation, Limited, and in consideration of respondent going on the board of directors of said last-named • corporation; also, that neither the $25,000 in bonds nor said shares of stoek at any time had any market value on the open market and that a reasonable value of said bonds was between 25 per cent, and 50 per cent, of their face value and that said stock was worthless. It is further alleged that the petitioner is not insolvent and that it has concealed or disposed of $40,000 in bonds and 600,000 shares of stoek in contemplation of bankruptcy.

Upon these affidavits an order was granted requiring the petitioner to show cause why the temporary restraining order issued herein should not be dissolved.

At the hearing upon said order to show cause, it was conceded that the customary practice was being followed herein with respect to the calling of a meeting of the creditors before the referee for the purpose of electing a trustee.

It is contended.by respondent that this court had no jurisdiction to grant said restraining order, and hence that the same should be dissolved.

In support of this contention, respondent cites the cases of In re Rathman (C. C. A.) 183 F. 913, 915; Taubel-Scott-Kitzmiller Co. v. Fox, 264 U. S. 426, 44 S. Ct. 396, 398, 68 L. Ed. 770; and Weidhorn v. Levy, 253 U. S. 268, 40 S. Ct. 534, 64 L. Ed. 898.

In the case first eited the question presented for determination as declared in the opinion-of the court was: “Has the United States District Court sitting in bankruptcy jurisdiction against the objection of a respondent who is in possession of real and personal property under a sale pursuant to a decree of a state court of foreclosure of mortgages that were made by the mortgagor more than four months before the petition in bankruptcy against him was filed, to adjudicate summarily on an order to show cause, the claim of the trustee in bankruptcy that the mortgages, the decree, and the sale were void, that the trustee recover of the respondent the value of the personal property which he purchased under the decree, and that the trustee be permitted to redeem the real estate from the mortgage and the foreclosure sale by paying the amount which the respondent paid for it at the sale less the amount which the mortgagor realized from the sale of a portion of the mortgaged property before the foreclosure sale of the' balance to the respondent?”

In deciding the foregoing question in the negative, the Circuit Court of Appeals, in the course of its opinion, pointed out that the filing of a petition in bankruptcy creates no lien against parties who claim a lien upon or a title to the property of the bankrupt, “and that until the bankruptcy court by some aet of one of its officers takes actual possession of the property, or makes such claimants parties to the proceeding by some order or process, or notice of the proceeding comes to them, their liens, titles, and remedies are unaffected thereby, and they are strangers to the proceeding. * * * In cases in which the bankruptcy court finds it absolutely necessary so to do for the preservation of the estate, it may by summary proceedings take possession of the property claimed to belong to the bankrupt as his property, in whosoever’s hands it may be, upon the filing of the petition in bankruptcy and before a trustee is appointed, under clause 3 of section 2 of the bankruptcy law [11 USCA § 11 (3)].”

After reviewing several decisions of the United States Supreme Court in which the rule had been announced that actual possession by the bankruptcy court is the indispensable condition óf its exclusive and of its summary jurisdiction in cases of this character, the opinion proceeded as follows: “Here is the touchstone of the exclusive and of the summary jurisdiction of the bankruptcy court to determine the merits of adverse claims to liens upon and titles to property claimed to belong to the bankrupt. It is the taking possession of the property, as the property of the bankrupt, by the act of some officer of the bankruptcy court, such as a referee, a receiver or a trustee. * * * Conceding, however, but neither deciding nor admitting, that the bankruptcy court might have enjoined the suit in the state court, might have taken the mortgaged property from the receiver of that court and have administered it, the fact remains that it did not do so, and that it and the creditors who were parties to that proceeding must have known from the bankrupt’s inventory of this property of the possession and the continuing ■sales of this mortgaged property by the as-signee and the receiver of the state court.”

In Taubel-Scott-Kitzmiller Co. v. Fox, supra, the trustees in bankruptcy, by a summary proceeding before the referee, sought to have the execution lien of a certain judgment creditor declared void and to obtain possession of the property involved. Thereupon the judgment creditor appeared before the District Court, challenged the jurisdiction of the referee and the bankruptcy court, furnished substantial support for its claims, and insisted that, since the bankrupt did not have, and the bankruptcy court did not acquire, possession of the property, the execution lien and the right to possession under the levy could not be assailed by the trustees except by a plenary suit in the appropriate forum. The District Court sustained the contention of the judgment creditor and stayed the proceeding before the referee. The latter order in turn was reversed by the Circuit Court of Appeals. 286 F. 351. On a writ of certiorari the judgment rendered by the latter tribunal was reversed by the United States Supreme Court. In the course of his opinion, Mr. Justice Brandéis declared:

“Wherever the bankruptcy court had possession, it could, under the Act of 1898, as originally enacted, and can now, determine in a summary proceeding controversies involving substantial adverse claims of title under subdivision ‘e’ of section 67 [11 USCA § 107(e)] under subdivision ‘b’ of section 60 and under subdivision V of section 70 [11 USCA § 96(b) and § 110(e)], But in no case where it lacked possession, could the bankruptcy court, under the law as originally enacted, nor can it now (without consent) adjudicate in a summary proceeding the validity of a substantial adverse claim.”
« * • * jn ^his“ ease, the sheriff had, before the filing of the petition in bankruptcy, taken exclusive possession and control of the property, and he had retained such possession and control after adjudication and the appointment of the trustees. The bankruptcy court, therefore, did not have actual possession of the res. * * * The bankruptcy court, therefore did not acquire jurisdiction over the controversy in summary proceedings. Nor did it otherwise.”

In Weidhorn v. Levy, supra, the trustee in bankruptcy filed with the referee a bill in equity against certain third parties to set aside certain conveyances claimed to have been made in fraud of creditors. The grantees of these conveyances objected to the jurisdiction of the referee, but the objection was overruled. On review the District Court dismissed the bill upon the ground that the referee had exceeded his powers. 243 F. 756. Thereafter the Circuit Court of Appeals reversed the ruling of the District Court. 253 F. 28. Upon certiorari the United States Supreme Court reversed the decree of the Circuit Court of Appeals and affirmed that of the District Court. Mr. Justice Pitney, delivering the opinion of the United States Supreme Court, said in part (page 272 et seq. of 253 U. S., 40 S. Ct. 534, 536): “But in the present instance the controversy related to property not in possession or control of the court or of the bankrupt or any one representing him at the time of petition filed, and not in the court’s custody at the time of the controversy, but in the actual possession of the bankrupt’s brother under an adverse claim of ownership based upon conveyances made more than four months before the institution of the proceedings in bankruptcy. In order to set aside these conveyances and subject the property to the administration of the court of bankruptcy a plenary suit was necessary (Babbitt v. Dutcher, 216 U. S. 102, 113, 30 S. Ct. 372, 54 L. Ed. 402, 17 Ann. Cas. 96), and such was the nature of the one that was instituted. * * • By Act June 25, 1910, c. 412, § 7, 36 Stat. 838, 840, section 23b was further, amended so as to confer jurisdiction upon the courts of bankruptcy without consent of the proposed defendant in suits for the recovery of property under section 70e. The present suit, being of this nature, might have been brought in the District Court, or it might have been brought in a state court having concurrent jurisdiction under section 70e as amended [11 USCA § 110(e)].

We find nothing in the provisions of the Bankruptcy Act that makes it necessary or reasonable to extend the authority and jurisdiction of the referee beyond the ordinary administrative proceedings in bankruptcy and such controversial matters as arise therein and are in effect a part thereof, or to extend the authority of the referee under the general reference so as to include jurisdiction over an independent and plenary suit such as the one under consideration.”

From an examination of the foregoing decisions, it will be seen that the primary question involved in each instance was the right of either the bankruptcy court, or the referee, to determine by summary proceeding an adverse claim of title to or lien upon property alleged to belong to the bankrupt estate, but which had not come into the possession of the court. In deciding this question, the United States Supreme Court, in the last two cases cited, and the Circuit Court of Appeals in the remaining ease, held, in effect, that such a claim could not be disposed of through a summary proceeding before the referee or the bankruptcy comet, without the consent of the adverse party, but, on the contrary, could be adjudicated only through a plenary aetion in the appropriate forum, where the general rules of pleading and practice governing the prosecution and trial of civil causes would apply.

In the ease at bar, however, no such question is before us. No one is here seeking by summary proceeding to determine the claim of respondent to the securities pledged with him, or his right to sell or otherwise dispose of the same. What is here sought, and what this court has undertaken to accomplish, is to restrain the sale of said securities by respondent until the adverse claims of the respective parties can be adjudicated in a plenary suit before the appropriate forum.

It is conceded that the bonds pledged,with respondent constitute part of the property or assets of the petitioner. Respondent has the possession thereof and claims the right to dispose of the same merely as a pledgee holding the bonds as security for the payment of the balance alleged to be due. him upon a certain note. Likewise it cannot be ¿disputed that, if the allegations made by the petitioner be true, it would be the duty of any trustee who may hereafter be elected for the bankrupt estate to institute a plenary suit to determine the adverse claims of the respective parties, and otherwise take all necessary steps to conserve and protect the bankrupt's property and prevent any equity therein from being dissipated or greatly reduced. Any other course would subject such trustee to severe criticism and might cause the general.ereditors serious loss..

In the instant case, by the issuance of its restraining order the court has undertaken, pending the election of a trustee, to preserve the status quo. Obviously, except for the restraining order, the respondent would at once proceed to sell the securities. In the latter event, there would be nothing for the trustee to seek to, adjudicate, and the interests of the general creditors might be seriously damaged, if not wholly lost.

The right of the court to enjoin, pending administration in bankruptcy, the sale of property belonging to the bankrupt and claimed by a creditor as security for a debt owing to him, has long been recognized.

“It is plain that the judge of a court of bankruptcy may lawfully grant such restraining order, operative on and binding litigants in the state court, although strangers to the bankruptcy proceedings, as may be necessary for the enforcement of the provisions of the bankrupt act. This court has no hesitation in holding that express power is given by the act of Congress to courts of bankruptcy to enjoin all persons within its jurisdiction, whether litigants in a state court or elsewhere, from doing any act that will interfere with or prevent the due administration of the bankruptcy act. If this is not true, how frail and worthless is the law.” In re Hornstein (D. C.) 122 F. 266, 271.

“It is claimed that such aetion [purchaser at a sale of judgment creditor] should proceed to judgment, and a sale of the property attached be permitted; the distribution of the proceeds only being enjoined. There is no reason or necessity for such a course. If Goldberg is adjudged a bankrupt, the trustee will take and dispose of the property. If not so adjudged, these attaching creditors will proceed with their action. The right to the injunction sought in this ease is plain. * " * Indeed, the act itself suggests this as the proper remedy in such a ease. Bankr. Act, § 11a [11 USCA § 29(a)]; section 67f [§ 107 (f)]; section 2 (15) [§ 11 (15)].”' In re Goldberg (D. C.) 117 F. 692, 695.

“The filing of a petition in bankruptcy is in substance and effect an attachment and an injunction, and it places the property of the bankrupt constructively in the custody of the-court of bankruptcy. Loveland on Bankruptcy, § 150; In re Weinger, Bergman & Co. (D. C.) 126 F. 875. ■ * * It is true that the bankruptcy act provides that liens such as the lienholders had under the-trust deeds in this ease shall not be affected by bankruptcy, but that is far from saying that such lienholders may, after the commencement of proceedings in bankruptcy against the debtor, proceed to enforce their liens or contracts in the manner prescribed in the instruments which create them; and this is true whether such lien is an ordinary mortgage, or a deed of trust with provision for a strict foreclosure by a“ notice and sale. The provision of the bankruptcy aet that such a lien shall not be affected by the bankruptcy proceedings has reference only to the validity of the lienholder’s contract. It does not have reference to his remedy to enforce his right. The remedy may be altered without impairing the obligation of his contract, so long as an equally efficient and adequate remedy is substituted. Every one who takes a mortgage, or deed of trust intended as a mortgage, takes it subject to the contingency that proceedings in bankruptcy against his mortgagor may deprive him of the specific remedy which is provided for in his contract. * * * The decision in Re Browne [104 F. 762] may be accepted as authority for the proposition that a District Court will not interfere with a sale by a pledgee of the thing pledged, under the power of sale given by the terms of his contract, when there is no claim that such power is exercised m a fraudulent 1 or oppressive manner. (Emphasis ours.) In re Jersey Island Packing Co. (C. C. A.) 138 F. 625, 627, 628, 2 L. R. A. (N. S.) 560.

“Secured creditors may be enjoined from selling out their securities even though by the. terms of the agreement of pledge they might have such remedy, although, where sale by the pledgee is authorized by the terms of the agreement of pledge, injunction would be granted only in cases of oppression or fraud.” Remington on Bankruptcy (2nd Ed.) vol. 1, § 365.

“The Court will interfere with or declare void any oppressive or unfair or fraudulent exercise of the power of sale given by the terms of an agreement under which security has been pledged.” Remington on Bankruptcy (2d Ed.) vol. 1, § 761.

During the course of the argument counsel for. respondent asserted that the bankruptcy proceeding instituted herein was filed in bad faith, in order to embarrass and otherwise unreasonably delay the respondent in collecting indebtedness owing to him, that an effort will be made to delay the election of a trustee, and that said bankruptcy proceeding will not be prosecuted with due diligence.

In the light of the record before us, particularly the brief period of time which has elapsed since the entry of the order adjudicating petitioner a bankrupt, these charges must be held to be unfounded as well as premature. On the other hand, this court recognizes the right of respondent to bring to its attention any matter which may hereafter occur which indicate that its process is being abused.

For the foregoing reasons, the order to show cause is discharged.


source: Caselaw Access Project

author: KERRIGAN, District Judge.

license: Public Domain

text:
    THE DOYLESTOWN. RIDEOUT v. CHARLES NELSON CO.
    No. 20323-K.
    District Court, N. D. California, S. D.
    March 3, 1931.
    Resleure & Hill, of San Francisco, Cal., for libelant.
    Irving H. Frank, and Nathan H. Frank & Irving H. Frank, all of San Francisco, Cal., for respondents.
   KERRIGAN, District Judge.

In this case the steamer Doylestown about midnight on July 7, 1930, in attempting to proceed alongside the Sperry wharf at Vallejo, collided with the tug Haleyon and the barge Rideout No. 5, which were moored to the dock. The collision drove the Haleyon onto the barge, causing considerable damage. The dock is about 700 feet long, with its face lying north and south. Barge No. 5 was moored toward the south end, and at the north end were moored another barge (Rideout No. 6) and tug, also belonging to libelant. Each of the barges was about 100 feet long, and each, with its tug, extended out from the dock about 50 feet. The Doyles-town is about 300 feet long, over all.

It was a moonlight night, and both the tugs and barges carried proper lights. The wind was from the northwest, and the tide was setting in the same direction, i. e., toward the dock. In the afternoon of the same day, July 7th, before leaving San Francisco, the master of the Doylestown hacT arranged with the Sperry Flour Company to dock at the wharf in question about 12 o^clock midnight, and that the dock should be free of vessels at that time. Barge No. 6 was loaded early in the evening, and, notwithstanding that its master or operator was told twice thereafter by the wharf watchman that the Doylestown would arrive about 12 o’clock, and ordered to leave so that the dock would be clear at that time, the barge was not moved. It was waiting for an ebb tide to facilitate its crossing to San Francisco, but its crew went to sleep, and nothing was done to move it until after the tide commenced to ebb, and indeed until after the arrival of the Doylestown at the time announced. Barge No. 5 arrived at the dock at about 10 o’clock the same night, and its master was then told that the face of the dock must be kept clear in order that the Doyles-town might safely dock at midnight. The tide was such that both of these barges could have tied up around the ends of the wharf and thus have left it clear.

The steamer approached the dock through a narrow channel shortly after 12 o’clock and gave a timely landing signal. Her officers seasonably saw barge No. 6, but, as they testified, on account of the condition of the shore lights, barge.No. 5 appeared to be alongside the end of the dock instead of on the face of the dock, until the vessel was about 300 feet south and 125 feet west of where the barge was lying. The master of the Doylestown then realized that he would have to dock between the two barges, with both the tide and wind setting him toward the dock. Owing to the slow speed at which he felt required to move, and the prevailing weather conditions, the vessel could not be expected to, and in fact did not, respond to heajhelm. A liné was passed to the dock and made fast, the engines were stopped, and the master attempted to let the steamer drift into a position between the barges. The maneuver was not a success, and barge No. 5 was squeezed and received the injuries for which libelant séeks to recover.

If the barg-es had been docked around the end of the wharf, or if barge No. 5 had been tied up alongside of barge No. 6, there would have been ample space for the maneuver and the accident would have been avoided. It was the presence of libelant’s barges which caused all the trouble. These barges were so placed upon the face of the dock that they left a space of about 480 feet in which to dock a 300-foot steamer at midnight with an adverse wind and tide. The master was in an awkward position. He had to act quickly. He did well, I think, under all the circumstances. I further believe that respondents have overcome the presumption of negligence cast upon a moving vessel which collides with one at rest.

It is true that it is probable that if, when the master of the steamer first realized the situation facing him, he had dropped his port anchor and gone full speed astern, he might have avoided the collision, for then the tendency of the propeller would have been to hold the stem up against the wind and tide. But it is one thing now, with the facts all before us, to calmly suggest how the situation could have been met, and quite another to be on the bridge at night, facing a difficult problem requiring instant action. It is conceded -that the space within which the steamer was compelled to dock was greatly reduced by the presence of the barges and tugs, and there is also evidence that the available space was sufficient to warrant attempting the maneuver, and I think that, under all the circumstances, there was reasonable expectation that it could be accomplished in safety.

I find the Doylestown free from fault. Let a decree be entered for respondents, accordingly, with costs.

In view of this opinion, I believe that no . purpose will be served by requiring the preparation of further, formal findings of fact and conclusions of law. This opinion will stand as my findings in this case. Therefore let the decree be entered forthwith.


author: PETERS, District Judge.

text:
    In re AMERICAN BOND & MORTGAGE CO., Inc.
    District Court, D. Maine, S. D.
    May 26, 1931.
    Verrill, Hale, Booth & Ives, of Portland, Me., and Defrees, Buckingham, Jones & Hoffman, of Chicago, Ill., for bankrupt.
    Skillin, Dyer & Payson, of Portland, Me. (Selden Bacon and Saul S. Myers, both of New York City, of counsel), for petitioner.
    Cook, Hutchinson, Pierce & Connell, of Portland, Me., and Cassels, Potter & Bentley, of Chicago, Ill., for committee of debenture bondholders.
   PETERS, District Judge.

On May 25th an involuntary petition in bankruptcy was filed in this district against the American Bond & Mortgage Company, Simultaneously there was filed a petition by a creditor for the appointment of receivers The alleged bankrupt, although having a domicile in Maine by reason of its incorporation here, appears to have no assets or business in the state, so that the actual duties of a receiver appointed by this court would be nominal; but, as it was expected that any appointment here would be immediately followed by applications for ancillary receiver-ships in other jurisdictions, and as a receivership here under the circumstances would be merely opening a door to active receiverships elsewhere, the matter is considered from the standpoint of the necessity for receiverships in these other jurisdictions.

The receivership asked for is a temporary receivership pending adjudication, which is a different matter from a receivership after adjudication. To take possession of the property of an individual who has not been, and may never be, adjudged a bankrupt, is a drastic and arbitrary proceeding, which requires the exercise of great caution. The law gives authority for such a step only when imperatively required for the immediate preservation of assets and to prevent a possible loss to creditors which can be prevented in no other reasonable way. The boundary of the authority is very definite. Section 2 (3) of the Bankruptcy Act (11 USCA § 11 (3), says that the court may “appoint receivers or the marshals, upon application of parties in interest, in case the courts shall find it absolutely necessary, for the preservation of estates, to take charge of the property of bankrupts after the filing of the petition and until it is dismissed or the trustee is qualified.”

After adjudication, the property coming within the authority of the court for distribution among creditors can properly be the subject of administration through a receiver. Before adjudication, a receiver is primarily a custodian appointed in very special cases to save assets from dissipation. It is not necessary to make an elaborate compendium of authorities, which are numerous and well known. In re Oakland Lumber Co., 174 F. 634, 636 (C. C. A. N. Y.); In re Hine-Watt Mfg. Co. (C. C. A.) 290 F. 902; Clark v. Huckaby (C. C. A.) 28 F.(2d) 154, 67 A. L. R. 1456.

“The power to take from a man his property, without giving him an opportunity to be heard, is both arbitrary and drastie and. should not be exercised except in the clearest cases. Congress recognized the necessity for caution by limiting the appointment of receivers to cases where it is ‘absolutely necessary’ for the preservation of the estate. In other words the reason for such an interference with the rights of property must be clear, positive and certain. Of course cases frequently arise where this remedy may be necessary — eases where there is reason- to believe that the property may be stolen or se-. ereted or turned over to favored creditors. But fraud cannot be presumed, neither can danger to the property be predicated of acts which are honest and lawful. It cannot be presumed that an assignee under a state law intends to plunder the fund he is appointed to administer. Unless something be shown to the contrary the presumption is persuasive that during the interval between the filing of the petition and the appointment of a trustee, the property will be entirely safe in the hands of the assignee especially if he be enjoined from disposing of it pendente lite.” In re Oakland Lumber Co., supra.

“A temporary receiver of a bankrupt is merely a custodian of the estate, with authority to inventory and receive and retain all of the bankrupt’s assets; the purpose of his appointment being only to protect the property from dissipation and loss until it is ascertained that there is a bankrupt’s estate to be administered.”

The above is a headnote followed by many citations in the United States Code, title 11, § 11, p. 123.

“Even consent of the bankrupt to the appointment of a receiver would not authorize the court to do so in the absence of a situation clearly described by the Statute.” Faulk & Co. v. Steiner (C. C. A.) 165 F. 861.

“A receiver appointed for the preservation of a bankrupt’s estate under authority of Paragraph 2 (3) becomes a mere custodian until the question of bankruptcy is adjudicated. He may take custody of whatever is plainly the property of the bankrupt and against-which no third party makes any claim with color of title. He takes no title to the property. After adjudication the receiver is no longer a mere custodian of property which may be returned to the alleged bankrupt, but of property which is then in the course of administration.” Gilbert’s Collier on Bankruptcy, page 50.

At the hearing on the petition, the alleged bankrupt appeared by attorney and objected. Attorneys for a committee of debenture bondholders representing, as was stated, 85 per cent, of an issue of about $5,-000,000' — which, apparently, is unsecured indebtedness, and which appears to be a large part of the total unsecured indebtedness— also appeared and objected to the appointment of a’receiver.

The petition is extremely voluminous, and goes largely into the history of the transactions of the alleged bankrupt in recent years, which have been quite extensive. Its principal business was the negotiation of mortgage bonds or other securities based on real property owned by other corporations or individuals. Bond issues of millions of dollars were underwritten and floated by the company. Overvaluation of real estate or depreciation thereof, coupled perhaps with the inclination of investors to purchase common stocks in 1929, resulted in embarrassment to the companies issuing these securities and to the American Bond & Mortgage Company which had tried to postpone the disclosure of a default of various bond issues by taking up bonds as they came due. At any rate, in the fall of 1929 the situation apparently demanded action by creditors, and a committee was appointed to protect their interests. It is unnecessary to go into details of specific transactions in which this company became' involved, beyond summarizing some of the situations set forth in the petition, which are alleged to constitute reasons and to show the absolute necessity for the appointment of a temporary receiver before adjudication.

It is alleged that a bond issue of $1,500,-000 on the Libby Hotel in New York, which was floated by the alleged bankrupt in 1924, defaulted in part in 1927, and as bonds became due the alleged bankrupt (which will be hereafter referred to as the company) took up some of them, and afterwards sold such bonds as it had bought to another corporation called American Mortgage Loan Company, which was probably affiliated with the American Bond & Mortgage Company, and all of the stock of which, as stated in the petition, “was presumed to be owned by said American Bond.”

This company was unable to prevent further default in the bonds of the hotel company, and eventually the trustee under the bond issue obtained a foreclosure judgment, the property was sold under foreclosure in Hew York in 1929, and bid in by a person who is alleged in the petition to have been assistant secretary of the American Mortgage Loan Company. The amount of the bid on the foreclosure sale was $75,000.

It is alleged that the purchaser at this sale caused the deed to be made in the name of another person, a woman alleged to be a clerk in the office of attorneys for the company, who still holds the title, subject to the bond issue.

It is further alleged that, after this property was sold under foreclosure, on account of default in a part of the issue of $1,500,-000 bonds covering it, it was taken under eminent domain proceedings by Hew York City, and that a judge of the Supreme Cburt of New York awarded the owners of the property, as damages, the sum of $2,850,000, of which amount approximately $1,500,000 would be due the first mortgage bondholders, leaving a balance of something like $1,000,-000, after payment of taxes and expenses, to go to the owner of the equity of redemption.

The petitioner further states the belief “that the City of New York is about to pay out the award under the said condemnation proceedings and that unless a receiver is immediately put in possession of the assets of this estate, the money will be collected by the said Mary J. Lyons and payment thereof directly to the American Bond treasury may not be reasonably looked for; but the same having been already so concealed is in danger of being improperly distributed.”

The very statement of the situation, coupled with a consideration of the purpose and function of a temporary receiver before adjudication in bankruptcy, shows that the statute does not authorize the appointment of a receiver in such circumstances. The property in question appears to be about $1,000,-000 in the treasury of the City of New York, payable on the face of it to a person who had title to the real estate condemned. Obviously the city of New York will not pay this to a third party, a receiver of the American Bond & Mortgage Company, until the conclusion of proceedings showing his right thereto. It is not the function of a custodian receiver before adjudication to bring such proceedings, nor would the court order it except, perhaps, in a case of imperative necessity not here present. It appears from other documents brought to my attention by counsel for the petitioner that an appeal has been taken from the judgment of the court making the award of damages in the case of the Libby Hotel — so there is apparently no immediate danger of the, city’s paying over this large sum of money to the wrong person, as feared by the petitioner. If on final decision later this money becomes payable, and if a trustee, or receiver, after adjudication, should be appointed in this ease, it would be his duty to take proper proceedings to protect the interest of the estate, if any, in this fund. The allegations in the petition are rather vague as to the interest of the American Bond & Mortgage Company in the fund, being based on the language used above wherein the petition says it is “presumed” that the alleged bankrupt owns the control of the hotel company. However that may be, if it is a fact, other evidence could be obtained. The point is, that the allegations are only sufficient to lay the foundation for further proceedings at the proper time.

It should be noted here that the affairs of this company are now being managed by a committee with whom has been deposited the stock of the corporation, and who have control of it in the interest of creditors. This committee has at least One of its members, in New York City, and the committee as a whole is thus described by Chief Justice Pattangall, of Maine, before whom was brought a petition for an equity receivership of this same corporation, and who, after a hearing lasting several weeks, postponed consideration of the matter in the hope that the committee would be able to perfect some reorganization. He uses this language: “The personnel of these committees is beyond criticism. The reorganization has proceeded far enough to place the control and executive management of the corporation in the hands of men of unquestioned ability and integrity. Until they have had a fair opportunity to work out the problems which confront them, and their ability or inability to solve these problems has been demonstrated, it would be manifestly unwise to interrupt their work. * ® * Arrangements have also been made So that counsel agreeable to all of the parties concerned and approved by the Court will participate in the work of the voting trustees, which at present controls the corporation.”

The committee, or committees, referred to, consisted, according to the testimony before Judge Pattangall, of business men and bankers of the highest standing, of whom it would be impossible to believe that $1,000,-000 belonging to the corporation, in the hands of the city of New York, would be permitted to go astray and not reach its proper destination, without taking all measures that a receiver could take to protect the interests of the corporation. In addition to this, it appears that receivers of this alleged bankrupt in an equity proceeding in Illinois, appointed by United States District .Judge Wilkerson, have applied in New York for an ancillary appointment in order to conserve the assets of the company in New York. I am advised that this ancillary appointment will probably be made, in which case the assets will receive still further protection.

Also, while this opinion was being prepared, evidence in the form of a telegram has been presented to me through counsel to the effect that the woman in whose name title to the equity of redemption of the Libby Hotel stands — who would on the face of it be entitled to the money paid by the- condemnation proceedings — more than a year ago executed a written assignment of the award of damages to the American Bond & Mortgage Company, which assignment is how in the possession of the attorney for that company in New York.

The fear of the petitioner that the alleged bankrupt will be deprived of its interest in this fund, unless a receiver is appointed by this court forthwith, now appears to be without foundation. At any rate, there is no warrant of authority for the appointment of a custodian receiver under the circumstances, and nothing for him to do if he were appointed, especially in view of the fact that evidence of the equitable interest of the alleged bankrupt in the condemnation fund is now available.- It is not to be assumed that the money will be paid to persons not entitled to it or that the competent persons now in charge of the affairs of the company in the interest of creditors will fail in their duty or lack diligence in protecting its interests.

As another reason for the immediate appointment of a receiver, it is urged that the Mayflower Hotel in Washington, subject to heavy mortgages securing bonds which the alleged bankrupt has floated, and which is owned by one corporation and managed by another, stock in both of which is owned by the American Bond & Mortgage Company, is in a'bad way financially, and is under the control of the former president of the company, and that a history of the financing of this property “shows that not only have the best interests of the bondholders not been advanced, but also that the interests of the American Bond have likewise been discriminated against, to the personal benefit of the Moores and their associates”; and also “that the equitable ownership of this property, subject to the bonds, was seriously affected by default in the second mortgage bond issue and that in the event of a foreclosure under 'said mortgage the equity will be entirely wiped out.” It is also alleged that the principal receivers of this corporation, appointed in the equity proceeding before Judge Wilkerson of Chicago, have threatened to take possession of the Mayflower Hotel.

It is apparent that in this situation a temporary receiver appointed by the court could do nothing in the way of taking possession of the assets involved, nor would he have any right to do so at the present time, as the hotel itself is owned by a corporation, a stock interest only in which is among the assets of the alleged bankrupt.

The numerous other situations, unfortunate from a financial point of view, presented in detail in the petition, present in general a similar situation, but not one authorizing or justifyng the appointment of a temporary receiver at this time.

Another consideration of controlling importance has not been mentioned. Prior to the involuntary petition in bankruptcy filed in Maine, an involuntary petition was filed in Chicago, and is pending there. There is also pending there an application for the appointment of a temporary receiver. As previously mentioned, there is also pending the equity receivership in which receivers were appointed. As to whether the final administration of this estate shall be in Maine, the domicile of the alleged bankrupt, or in Chicago, where it is alleged to have been doing business, is a matter for later and separate determination, and which involves considerations foreign to this matter of receivership. To appoint a temporary receiver here, with an application for one pending in Chicago, and receivers actually appointed and acting under the equity proceedings in Chicago, would simply be adding to the confusion and complications of this unfortunate case, and would’be entirely unjustified.

The commendable desire of the petitioner to preserve the assets of the estate, in case of adjudication, has led it in its zeal to seek protection with unnecessary measures at the present time. It is quite obvious that the assets of the company are under the management and in the hands either of reliable committees representing creditors, or of agencies responsible to other courts, or are in such a situation that there is no immediate danger of dissipation. If any other sitúation develops showing danger of irreparable loss, application can be made to this or some other court interested in the proceedings to remedy the situation, and a receiver, or other custodian, if necessary, could be appointed. At the moment, however, it is clear that the situation called for by the statute is not present, and that this court at the present time cannot properly appoint a receiver, although the matter has been urged with great earnestness and ability by counsel representing the petitioner.

The petition must be dismissed without prejudice to a renewal of the application at a later date in case it is deemed necessary.


author: McCORMICK, District Judge.

text:
    SWANFELDT v. WALDMAN.
    District Court, S. D. California, C. D.
    April 30, 1931.
    Stick, Moerdyke & Gibson, of Los An-geles, Cal., for plaintiff.
    Westall & Wallace, of Los Angeles, Cal., for defendant.
   McCORMICK, District Judge.

This is a suit in equity for alleged infringement of three patents, Nos. 68,354, 68,355, and 68,356, respectively, granted to Andrew Swanfeldt for designs for textile fabrics, and of patent, No. 1,625,690, granted to Andrew Swanfeldt for ornamental awning fabric and method of making the same. The bill of complaint attempts to set up an additional ground of equitable relief for unfair competition.

The defenses to the three design patents are: First, noninfringement; second, anticipation and invalidity in view of the pri- or state of .the art; and third, defenses of invalidity because of triple patenting by plaintiff for substantially the same design. The defenses' interposed against the method or process patent for ornamental awning fabric and making the same are; First, invalidity; and, second, noninfringement.

Upon the alleged grounds of suit for unfair competition, it is sufficient to state that this court is without jurisdiction in such matters because of insufficiency of fact in the bill of complaint. It appears therefrom that both plaintiff and defendant are and were during all material time citizens and residents of the state of California. There is no diversity of citizenship present, and there is no federal question involved as far as unfair competition is concerned. A federal court is without jurisdiction of a cause of action for unfair competition where there is no diversity of citizenship between the parties, although joined with a cause of action for infringement of patent. In Burns Co. v. Automatic Recording Safe Co. (C. C. A. 7) 241 F. 472, 486, which involved a similar proposition, the court said: “In so far as unfair competition is relied upon as a separate and distinct cause of action, the court was without jurisdiction * * * as there was no diversity of citizenship.” It is to be observed, however, that, inasmuch as this court finds infringement by defendant of the process or method patent No. 1,625,690, and further finds from the evidence that defendant has engaged in unfair and deceptive competition with plaintiff as 'appears particularly by the testimony of the witnesses Jeffries and Harris, that in the accounting herein ordered, it will be proper to receive evidence upon the question of aggravated damages, if any, by reason of such unfair and deceptive competition. Burns Co. v. Automatic Recording Safe Co., supra.

From inspection and examination of the exhibits, and particularly Exhibits 19A, 19B, 19C, 19D, and 19E, I am of the opinion that each of the three design patents is valid, and' that none of them have been infringed by the defendant. Each of these patents contains but one brief claim as follows: “The ornamental design for a textile fabric as shown.” The only further specification or description of the design patented is a pietorialization of the design, except that it is stated in the patent that it is “a new,'original, and ornamental Design for Textile Fabrics.” In the light of the leading ease of Gorham Mfg. Co. v. White, 14 Wall. 511-531, 20 L. Ed. 731, the Circuit Court of Appeals of the Second Circuit in American Fabrics Co. v. Richmond Lace Works, 24 F.(2d) 365, 367, discussing design patents, said: “The test of infringement is whether the two designs have substantially the same effeet upon the eye — not the eye of an expert, but the eye of the ordinary observer, giving such attention to the matter as purchasers usually give. [Citing cases.] The defendant’s patent coneededly has all the elements of the plaintiff’s design, and in identical arrangement, except that it has reduced the petals of the central rayed figure from sixteen to eight, changing somewhat their shape, and reducing the size and appearance of the hub at the center of this figure. These changes were made after the defendant had desisted from producing an exact copy, and while the trade demand for plaintiff’s design was at its height. Such circumstances invite close scrutiny of the claim of noninfringement. On the other hand, the plaintiff’s patent, which contains no written description of his design, must be construed as limited to substantially the pattern shown in his drawing [citing cases], although servile imitation is not required for infringement, even for a design patent without written description [citing cases]. But if defendants’ changes result in producing a substantially different effeet upon the eye, so that the two patterns are reasonably distinguishable, infringement will be avoided.” The nearest approach to similarity of appearance is defendant’s Exhibit 190, but even that design does not invade the narrow and limited claim of the design patents. See also, Ashley v. Tatum Co. (C. C. A.) 186 F. 339.

As to patent No. 1,625,690, for ornamental fabric and method of making the same, I find an entirely different situation. The patent is presumed valid by reason of its issuance and upon proof that it had been granted, which is undisputed; the plaintiff has made out a prima facie ease, if the evidence shows the defendant to have manufactured and sold awnings that come within the proper scope of the claims of the patent. These requirements, I think have been sufficiently met by the evidence herein. The patent has but one claim, which reads as follows: “The method of ornamenting a.wning material which consists in covering the material with a composite design embodying a plurality of dissimilar characters of different colors arranged so as to produce a nonpattemed effeet.” There is not available to defendant any defense of anticipation because of his failure to properly plead matters by answer that would constitute anticipation. See 35 USCA § 69. The required notice was not given or proven in this suit, and under such circumstances all of the evidence in the record of alleged prior uses of methods or processes for decorating or ornamenting awning fabrics can be considered only to show the state of the art and to aid in the proper construction of the patent and its claim. It was shown that until Swanfeldt’s conception of ornamenting awning material, the field was limited to designs of a definite and discernible pattern arranged in “line” or “lanes” or unassoeiated “units.” Swanfeldt contributed to the art a method that had no such definiteness and uniformity of configuration, a method whereby the awning material presented a unique and pleasing appearance that was devoid of patterned regularity and straight-line characteristics. This progress in ornamenting awning material was recognized by the Patent Office and was considered invention over any existing state of the art. There has been evidence offered by defendant directed to show that for some years prior to plaintiff’s conception, awning material had been similarly decorated and com-mereially used. This evidence is produced by witnesses who relate memories of such activities, but there have not been produced any drawings, pictures, or other physical objects to corroborate such memories, and in such situations, it is dangerous to overthrow the presumption of invention that attaches to the grant of a patent. Moreover, the commercial utility and success of the patent is shown by evidence of sales of approximately 80,000 yards of ornamented awning material under the patent.

I find that plaintiff’s Exhibit 14 is an infringement of Patent No. 1,625,690. Exhibit 14 was manufactured and sold by the defendant in June, 1928. I think that the closing or obstruction of the straight lines, aisles, or lanes in Exhibit 14 is a clear appropriation of plaintiff’s invention in ornamenting awning material. I find no reason for introducing the diamonds or squares in the lanes, spaces, or aisles of Plaintiff’s Exhibit 14 except to simulate and appropriate the non-pattemed effect of ornamenting awning material with a composite design embodying a plurality of dissimilar characters of different colors in the claim of the patent in suit. The specifications and verbiage of the patent should be considered in ascertaining the scope and purview of the claim. Diamond Patent Co. v. Carr (C. C. A. 9) 217 F. 400. The language of the patent in suit, in lines 70 to 79, “It is important, however, that the arrangement of the different characters forming the composite design be such as to produce an effect which will be free from lanes or aisles which would separate the characters or groups of characters so as to avoid a patterned effect,” clearly brings defendant’s awning within the claim.

To summarize, it is held that the three design patents in suit are valid but narrowly limited as design patents and therefore not infringed by defendant and that patent No. 1,625,690, for improvement of ornamental awning fabrics and making the same, granted April 19, 1927, is valid and infringed by defendant.

Accordingly,, a decree is ordered for plaintiff, and this cause is referred to David B. Head, as special master pro hac vice, with plenary powers for an accounting and report to the court for further proceedings herein. Solicitors for complainant will accordingly prepare and present such decree pursuant to the rules of this court.


text:
    THE BERGEN.
    No. 21.
    District Court, S. D. California, S. D.
    April 16, 1931.
    Gibson, Dunn & Crutcher, of Los Ang-eles, Cal., for libelant.
    Gray, Cary, Ames & Driscoll, of San Diego, Cal., for respondent.
   McCORMICK, District Judge.

This libel has been under consideration for some time. At the hearing and until the libelant cited Morse Drydock & Repair Co. v. Northern Star, 271 U. S. 552, 46 S. Ct. 589, 70 L. Ed. 1082, there appeared to be no question as to the invalidity and unen-forceability of a maritime lien upon the vessel Bergen, in the light of the evidence and the provisions of the Ship Mortgage Act 1920 (46 USCA § 911 et seq.), and particularly subsection R of section 30 thereof (46 USCA § 973). The language used by Justice Holmes in the main opinion of the Northern Star, supra, has caused no little uncertainty as to the proper rule for this court to follow in the decision of this matter. Upon mature deliberation of the evidence and analysis of the Northern Star Case, as well as upon examination of all of the other decisions cited by proctors, I have concluded that the language of Justice Holmes that has caused the uncertainty is dicta and does not control this libel. The ruling in the Northern Star was that the mortgage under consideration lost its preferred status and its paramount feature over other liens because of the failure of the mortgagee to comply with the conditions specified in the Ship Mortgage Act. It was therefore unnecessary to the decision for the court to employ the language of Justice Holmes that affords the libelant herein the only refuge that it could possibly claim from the clear and unambiguous verbiage of the Ship Mortgage Act, and the explicit terms of the mortgage involved here. The separate opinion of Justice MeReynolds in the Northern Star is an indication that unanimity did not exist in the Supreme Court as to the ineffectiveness of the clear language of the Ship Mortgage Act to defeat liens such as that claimed by the libelant herein.

In the proceeding at bar, the mortgagor was the owner of the vessel Bergen, and the mortgage was given to secure the payment of the purchase price.of the ship. All of the formalities required by the Ship Mortgage Act were complied with, and everything required to be done to give the mortgage the preferred status was accomplished. In article III of the mortgage it is provided: “Neither the Mortgagor, nor the Master of the Vessel, shall have any right, power or authority to create, incur, or permit to be placed or imposed upon the property, subject or to become, subject to his mortgage, any lien whatsoever other than for crew’s wages, wages of stevedores, and salvage.” And in article VI of the mortgage, it is stated: “The Mortgagor shall comply with and satisfy all the provisions of the ‘Ship Mortgage Act, 1920,’ Vol. 41 U. S. Statutes at Large 1005,” which read as follows:

“Subsection P. Any person furnishing repairs, supplies, towage, use of dry dock or marine railway, or other necessaries, to any vessel, whether foreign or domestic, upon the order of the owner of such vessel, or of a person authorized by the owner, shall have a maritime lien on the vessel, which may be enforced by suit in rem, and it shall not be necessary to allege or prove that credit was given to the vessel.
“Subsection Q. The following persons shall be presumed to have 'authority from the owner to procure repairs, supplies, tow-' age, use of dry dock or marine railway, and other necessaries for the vessel: The man-, aging owner, ship’s husband, master, or any person to whom the management of the vessel at the port of supply is intrusted. No person tortiously or unlawfully in possession or charge of a vessel shall have authority to bind the vessel.
“Subsection R. The officers and agents of a vessel specified in subsection Q' shall be taken to include such officers and agents when appointed by a charterer, by an owner pro hac vice, or by an agreed purchaser in possession of the vessel; but nothing in this section shall be construed to confer a lien when the furnisher knew, or by exercise of reasonable diligence could have ascertained, that because of the terms of a charter party, agreement for sale of the vessel, or for any other person, the person ordering the repairs, supplies, or other necessaries was without authority to bind the vessel therefor.”

It is clear from the foregoing that, if libelant had exercised any diligence whatsoever it would have ascertained that the person ordering the supplies had by his own agreement in the documented ■ and recorded mortgage precluded himself from making purchases that would operate to attach a lien against the ship or that would be effective in pledging the credit of the ship for the supplies. Common prudence would prompt one supplying'merchandise to a ship in a transaction where it is sought to impose a maritime lien upon the vessel, to make some inquiry in the manner provided by statute to ascertain the ability of the person ordering the Supplies to pledge the credit of the ship therefor. In this matter there is no evidence that the required diligence or prudence was exercised by the libelant and under such circumstances to hold that it is entitled to a maritime lien would be to render wholly ineffectual and entirely meaningless, the applicable subsection R of Section 30 of the Ship Mortgage Act, 1920.

The libelant is not entitled to a lien against the vessel Bergen under the stipulation of facts and the law applicable thereto and it is accordingly ordered that a decree be entered herein for the claimant and that the libel herein be dismissed, with costs. Proctors for claimant will accordingly prepare and present such decree under the rules of this court.


author: DICKINSON, District Judge.

text:
    UNITED STATES ex rel. CUNNINGHAM v. FETTERS, United States Marshal.
    District Court, E. D. Pennsylvania.
    Dec. 23, 1930.
    Benjamin M.' Golder, of Philadelphia, Pa., for relator.
    Edward W. Wells, U. S. Atty., and Howard Benton Lewis, Asst. U. S. Atty., both of Philadelphia, Pa., for defendant.
   DICKINSON, District Judge.

There is danger that the final disposition of this cause may be delayed and its merits lost in a maze of procedural questions. A recapitulation may make clear the present record situation. The main question to be determined in this cause had been fully discussed in the closely akin case of U. S. v. Barry (D. C.) 25 F.(2d) 733.

The view taken of the first case had made the disposition of the second by this court almost perfunctory. To expedite a ruling, it was arranged that a warrant be applied for and issued and hearing given the defendant by a judge of this court, sitting as a committing magistrate, and the defendant discharged or held for trial as the judge might decide; if the defendant was held, a motion for a warrant of removal of the defendant to the District Court of the District of Columbia should be made and issued or refused by a judge of this court; if the warrant issued, the defendant should be taken into custody by the marshal, and should thereupon petition for a writ of habeas corpus to have the lawfulness of his detention determined; the relator being enlarged upon bail pending the ruling in the habeas corpus proceeding. The cause was heard upon a habeas corpus hearing on petition, return, 'traverse, and proofs. The only or main evidence upon which the defendant could be held was an indictment found in the District of Columbia District, charging the offense of a refusal to answer pertinent questions propounded by a committee of the Senate of the United States. The defendant in the main contended that the questions set forth in the indictment were not pertinent, and hence that no legal offense was charged. If this contention had been upheld, the relator had the right to his discharge on habeas corpus, because clearly no defendant should be sent into another district for trial when the act with the commission of which he was charged constituted no crime under the law. This court, however, held to the view that the question raised was a question to be determined by the trial court and not by the habeas corpus court. U. S. ex rel. v. Mathues (D. C.) 26 F.(2d) 272.

The relator was accordingly remanded to the custody of the marshal for removal. He thereupon exercised his right of appeal to the Circuit Court of Appeals of the Third Circuit, by which court -the judgment of this court was reversed. U. S. ex rel. v. Mathues, 33 F.(2d) 261.

Application for a certiorari was then made to the Supreme Court, before the hearing of which the marshal of this district, who was the defendant in the habeas corpus proceeding, went out of office, and was succeeded by the present marshal. No substitution of the now marshal having been made within the time prescribed by the act of Congress, the proceeding was, on suggestion of this fact, held to have abated, and a mandate was sent down to this court directing us to abate the writ before issued. This has accordingly been done. The defendant in the prosecution and the writ of removal has surrendered himself to the marshal in relief of his bail, and is now in the custody of the marshal. He has thereupon petitioned this court for a writ of habeas corpus, complaining of his detention under the original warrant of arrest and his commitment. The writ was allowed, and the marshal has made return that the relator is in his eustody under the warrant of removal. The hearing on the habeas corpus was agreed should be determined upon the evidence taken at the former hearing, which, by stipulation, is made the evidence in the present proceeding.

Discussion.

The relator attaches importance to the distinction indicated between detention under the warrant of removal and the commitment. We do not see that it has any. The relator is found to be in fact held by the marshal by authority of the original warrant of arrest, the commitment and the warrant of removal,’each and all. The only question to be determined by this court is whether we are at liberty to adhere to the judgment before reached that the relator should be remanded, or whether we are bound to accept and to follow the ruling of the Circuit Court of Appeals that he should be discharged without day.

In view of the almost certainty that this cause will have an appellate experience, the disposition we make of it is barely more than formal. The sole effect of it is to put on one party or the other the burden of appeal, and hence the expense of printing the larger paper book. The only question is, What is for this court the law of the case? It seems clear that it is what the Circuit Court of Appeals has declared it to be. U. S. ex rel. Cunningham v. Mathues, 33 F.(2d) 261.

The following of the ruling of the Circuit Court of Appeals calls for an order discharging the relator without day, and a formal order to this effect may be submitted.


author: DICKINSON, J.

text:
    GEORGE HAISS MFG. CO., Inc., v. LINK BELT CO.
    No. 3625.
    District Court, E. D. Pennsylvania.
    June 5, 1931.
    See, also, 27 F.(2d) 397.
    Robert M. Barr, of Philadelphia, Pa., for plaintiff.
    Howson & Howson, of Philadelphia,, Pa., for defendant.
   DICKINSON, J.

The master in this case was the late Cyrus N. Anderson, Esq. He well merited the very handsome tribute of respect paid to his memory by counsel who argued these exceptions at bar. In that tribute we wish to join. Indeed, we have that measure of appreciation of the painstaking care, industry and sound professional judgment of the master that if we differed with him on any conclusion he had reached, we would expect to be convinced that we were in error. None the less, we must follow the best judgment we can summon to our aid. The defendant has been convicted of a trespass upon the property rights of the plaintiff in that it has infringed the plaintiff’s reissued patent No. 15,515 for a wagon loader. The defendant, to do it justice, found itself in a difficult situation. The wagon loader of the plaintiff made an appeal to users which threatened the business of defendant unless it could give to those of its customers, who insisted upon having it, a wagon loader of this type. The defendant was advised, and easily persuaded, that it had the legal right to make and sell the wagon loader of the plaintiff. At all events it did so. It does a very large and important business, approaching $70,000,000 a year, of which the wagon loader part is a small percentage. The manufacture and sale of these wagon loaders is on the other hand the mainstay of the business of the plaintiff. The appropriation by the defendant of the plaintiff’s property thus partakes of the nature of the injury done by the taker of the “ewe lamb” in the parable of the prophet. Under such circumstances the defendant could hope to eseape being called to a strict account for the injury done only by proving its right to sell these wagon loaders. In this it failed and is now called upon to make compensation for the wrong done. There is no remedial branch of the law more exposed to just criticism than that with which we now have to do. Cases will readily be recalled by any Patent lawyer in which infringements which touched only one feature of the infringer’s business have been followed by accounting consequences which were ruinous. Many other instances might be cited in which a successful patentee has not been able to recover from infringers an adequate return even for the expense of sustaining the validity of his patent. How unsatisfactory all attempts to find “cost” is illustrated by the attempts to find it as a basis for price fixing in the case of public utilities. An award of damages in patent infringement cases was found to be an inadequate remedy. It was deemed unjust that an infringer who had received large gains as the fruit of his trespass should be permitted to retain them. Hence the resort to the fiction that he was a trustee ex male-ficio for the injured and must account for his illicit gains. The application of this doctrine has been far from satisfactory. The Science of Economics is by no means an exact science at its best and theoretical expectations are often far removed from actual results. In a manufacturing business, even when restricted to one output, the truth is profits cannot be determined or calculated with anything approaching accuracy. Many such a business has been wrecked on the rocks of a faulty system of cost sheets. Any attempt to apportion costs among a number of products is futile. The experiences of years and of many shops has helped some by suggesting certain conventional allowances in cost estimates but none of them even pretend to reflect actual costs of production and of marketing. When they do good it is by way of a guard against an underestimate of cost. When a patented thing is sold in competition with other things, patented or unpatented, it is utterly impossible, except by convention, to determine how much of what is received from its sale is attributable to the patented feature. There are many things which contribute to the sale of a product and the price at which sold. One is the genius of the maker as an inventor and as a constructor. This gives what are called the merits of the thing sold, and in one sense of the word its value. The value however which yields profit is not this kind of value, but commercial value. Eew things, however good, will sell themselves. Another thing which contributes to profitable sales aside from the merits of the thing sold is the genius of salesmanship. Under modem business methods and conditions salesmanship is probably the most productive of all the things which have contributed to a profitable sale of anything. These wagon loaders formed less than two per cent, of the whole output of the defendant’s plant. We venture the very confident statement that the real cost of producing them cannot be determined. The defendant made no attempt to keep the cost separated from the cost of other products. It is therefore in the position of a trustee who has mingled the business of his cestui que trustent with his own.

Although the profits, as we -have said, cannot be told, there are some guides to a fair estimate of them. Some of these guides we have in the instant ease. One of them is a royalty or license fee charge, which the patentee has fixed. Having fixed this himself, it is safe to accept it as fair to him. This plaintiff has not fixed any royalty charge for the right to make and sell its wagon loader, but we do have something very much like this guide. Another help is that, as the plaintiff makes only wagon loaders, we do know the cost to it of making them. It is not a rash conclusion that the defendant could manufacture as economically as the plaintiff. Another help to us is that the defendant keeps books of account of the whole business done by it and has found what its profits are. Again, it is not a rash conclusion that its profits on the wagon loaders at least equalled its average profits on all its products, and it cannot complain if its word is taken for what these profits are.

It would not be fair to find that the infringing profits were the average profits of all products, if we knew what the profits on the infringing product were, but when the infringer has so commingled its business that no separation can be made, it is not unfair to hold him to the profits on the whole. The master has found profits of $2,393.41 on the wagon loaders. If we follow the guides spoken of as fairly reliable, this sum would be increased to at least $40,000, and might be found to reach more than $50,000'. This difference is startling, and surely invites a close scrutiny of the defendant’s accounting figures. The scrutiny to which counsel for the plaintiffs have subjected the accounting figures of the master has raised the profits to over $70,000; counsel for defendant reduces the profits to less than nothing. We are almost persuaded that the figuring of one or the other is wrong, and perhaps both are wrong. The question before us is whether the master is in error. There was no need to trouble ourselves with those items in the accounting which both parties have accepted. We therefore attempted to go directly to the findings, which are the subject of exceptions. No one can go far in the quest of making up cost sheets on the manufacture of these wagon loaders without being convinced that sueh a quest is hopeless. The utter unreliability of any estimate of cost is shown by the accounting which the defendant has submitted. This accounting would show that in the manufacture and sale of ‘82 wagon loaders the defendant made not a profit, but a loss of over $62,500. That is to say, that there was a loss of over $750 on each one built. That the defendant would have been guilty of a trespass upon the rights of the plaintiff in order thereby to make a profit can be believed. That it would have persisted in the infringement at a loss of $62,500 is simply incredible. There is a bluntly phrased adage to the effect that figures have a reputation for veracity, which is not shared by figurers, but without questioning the good faith in which this account was made up its result is not acceptable. The account is said to be based upon an accounting system which, during a long course of years, has been found to be fairly accurate. As a basis for stating the cost at which a product was to be billed at a “cost plus” price, we would not question that the system followed would be a protection against an underestimate.' This, however, is not the kind of cost of which we are in search. The fact that the account submitted shows the result which it does show is proof positive that the cost system on which it is made up was not followed by the defendant, or, if it was, that the defendant thought it to be wrong, for otherwise the defendant would have stopped making wagon loaders at sueh a heavy loss. There is ample room for the finding that the defendant either does not know or does not care to disclose what the real cost was*

The master, with the patience which was characteristic of him, has attempted to state an account on the basis of the defendant’s system. This is to attempt the impossible, as an attempt to reach an actual cost result. To reach any result he was forced to take the total cost of labor, overhead expenses, and the like, and apportion a certain percentage to these wagon loaders. This is a sheer assumption. We think the master was thereby misled into a finding of an unduly low estimate of profits. We say this because the master’s finding of only $2,393.41 of profits does not gee with any of the very practical tests of which we have spoken. If any one attempts to revise the master’s figures a different result may easily be found, but there is no assurance that any result so found is either truth or even near truth.' This is because its real basis is an assumption which is no better than a guess and one guess is as good as another. Assumptions and presumptions are all right in their own way, and sometimes we are driven to act upon them.

If facts ean be found, to them presumptions must give way, but where there are no facts assumptions are our only guide. It is the part of wisdom, however, to make a choice among presumptions. If, for illustration, an account has been kept of the cost of what went into the manufacture of one of many products, the selling expenses and the sale price, we know what in fact the profit or loss was. There is no need to call upon, assumptions and presumptions. If, however, the fact is not known beyond the total cost of many products, we may be driven to assume the percentage of the total sum which pertains to a particular product. Fbr illustration, every manufacturing plant pays out for general administrative and other like expenditures a certain total sum which must be taken into account before the question of profit, or loss can be determined. This is a fact and neither an assumption nor a presumption. There is sueh a thing as “overhead” and deterioration, but at what money sum it should be figured for any given period is wholly a matter of estimate and more or less arbitrary. Whatever it is, it is a part of the real total cost of the total output of the plant, and no one could justly reject it, and, as it cannot be known, it must be estimated. If we wish to fix the cost of one of many products, we may resort to the expedient of assuming that a certain part of all of these general expenses pertains to the one product but this is little better than a guess. Getting at the cost of a product in this manner is one way of figuring the profit or loss result. Another way is to figure the percentage of profit or loss on the total output, and to assume that this is the profit or loss on a particular product. This, it is true, is based upon a mere assumption and must give way to the fact of the cost of the particular product, if known. If not known, all we can do is to assume something, and the latter assumption is at least as good as the former, and certainly a. trustee who, by keeping no trust account, hut commingling the trust affairs with his own, so that the trust profits made cannot he known, has no right to complain if the profits of the trust business are assumed to be the profits on the commingled business. We do not hold that the total profit on a number of products measures the profit on any one of them, but if the profit on one cannot bo found it may be assumed to be the profit on all.

We put our findings and conclusions in numbered form:

1. The defendant is answerable to the plaintiff for the profits made on the infringing wagon loaders.

2. The defendant kept no accounts from which the profits or loss on the infringing wagon loaders can he found, but did keep accounts from which the total profits on its total commingled products are known.

3. The master has found profits of $2,-393.51 on the sale of 82 infringing wagon loaders by including in the cost of manufacture an assumed part of expenditures applicable to all of defendant’s products, without proof of how much in fact did pertain to the infringing product.

4. The plaintiff has excepted as excessive to a number of the items of the cost of manufacture as allowed by the master, and the defendant has excepted to these and other allowances as inadequate.

5. We sustain the exceptions of the plaintiff so far as to increase the profit found by ■ the master from the sum of $2,393.51 to $40,-354.95 on the wagon loaders sold.

6. We dismiss the exceptions filed on behalf of the defendant.

We have reached our conclusions of the total profits being $50,709.83 on a proper account stated on the fact basis that the defendant’s profits on all its output was 13.3 per cent, of the selling price, and that the wagon loaders sold for $303,405.65. To this we have added the $10,354.88 of profits on repair parts. These figures, if wrong, may he corrected on a motion for a reargument. We have not gone through the form of reducing the allowances made by the master on particular items based upon an assumed sum applicable to the cost of these wagon loaders because it would he a mere formality. We do find the allowances made were too high, and as much too high as will increase the profits to the sum we have found the profits to be.

A decree in accordance herewith may be submitted.


text:
    In re HENRY et al.
    No. 14410.
    District Court, E. D. Pennsylvania.
    June 10, 1931.

      George S. Munson, Boyd Lee Spahr, Walter Biddle Saul, Maurice Bower Saul, and John Hampton Barnes, all of Philadelphia, Pa., for petitioners.
    J. Howard Reber and Roland S. Morris, both of Philadelphia, Pa., for receivers.
   DICKINSON, District Judge.

The discussion in this cause has taken a wide range. It is in truth limited to a very narrow question.' The bankrupt was the owner of so-called investment securities which he had pledged to different banks for loans. The pledge was accompanied with the usual form of collateral note. This gives the pledgee in effect the power to sell the pledge at will, to apply the proceeds to the repayment of the loan, and to turn over to the ^pledgor the surplus, if any. The order of the referee restrains the pledgees from exercising the power to dispose of what is termed the collateral. Otherwise there had been no interference with the rights of the pledgees. There is in consequence no need for the arguments addressed to us in support of the lawfulness of the pledge; the right of the pledgees to hold the pledge for the debt due or their right to the proceeds of any sale. The whole question is whether, after the assets of the debtor have passed into the custody and control of the bankruptcy court, any. one will be permitted without the consent of the bankruptcy court to interfere with such custody by a sale of the assets or otherwise.

We are not impressed with the objection to the exclusive control of the bankruptcy court on the ground that the control given to the pledgee was given by contract and hence any interference with it by the bankruptcy courts impairs the obligation of a contract. If a bankruptcy court has no lawful power to do anything which impairs the obligation of contracts, there is very little left which a bankruptcy court can do. We have nothing to do with the doctrine of the inviolability of contracts. The whdle question is embraced in these fact situation propositions. The loan for which the pledge was given must be paid; it cannot be paid without a sale of the pledge. The sole question is whether the bankruptcy court has exclusive jurisdiction to make the sale or whether in defiance of the bankruptcy court whether some other court or the pledgee himself can sell. It is admitted that the case of Isaacs, Trustee, v. Hobbs Tie & Timber Co., 282 U. S. 734, 51 S. Ct. 270, 75 L. Ed. 645, rules that another court cannot decree the sale of assets in the possession and under the control of the bankruptcy court without the leave of the latter court.

The ruling in the cited ease can be readily understood. Its propositions aré very clearly stated. The only differences of opinion are over the implications and whether the doctrine of that ease extends to another case in which the fact situation is different. The cited case was one of a pledge of land for the payment of a loan with the right to sell the land pledged through the processes of a court. After the land had become bankruptcy assets, the cited ease rules that it could not without the leave of the bankruptcy court be sold by another court under the pledge.

In the instant case, there is a like pledge, not of land but of personal property, and the pledgee has the right to sell not merely through the processes of a court but to sell himself without recourse to any court.

In the cited ease it was ruled that the pledgee could not sell the pledged land through an execution, but that it could be sold only by the bankruptcy court (or by its leave). Should a like ruling be made in the instant case? The learned referee thought that under the cited ease it should and so ordered. This is the order under review.

We are in full accord with the proposition that the possession of the pledge cannot be disturbed by any summary action of the bankruptcy court, but the right of the pledgee is open to attack only by plenary suit. This, however, is not the question before us. The question is the quite different one of the right of the pledgee to take the assets of the bankruptcy estate out of the control of the bankruptcy court by selling them. The power to stop such sales is exercised daily by bankruptcy courts. Mortgagees to whom seized lands have been conveyed are so restrained; likewise judgment creditors who have taken lands in execution; in like manner landlords who have distrained property for rent; plaintiffs in attachment in execution proceedings are also so restrained. No such pledgees are permitted to enforce their pledges by sales. Is the pledgee under so-called collateral loans an exception to the general rule? The only theory, so far as we can discover, on which his ease can he differentiated from that of other pledgees is that the collateral holder is not a pledgee in the lienholder sense hut is an owner. As he is such owner, the thing pledged is his and forms no part of the bankruptcy assets, or at the most the bankruptcy court does not have possession but only the right to possession which can be reduced to actual possession only by a plenary suit. This theory is provocative of a discussion which has no end. The property here is theoretically of the type known as choses in action. The pledgee of bonds or of stocks holds possession of nothing except the evidence of a debt due the pledgor or of his right to share in the assets of a corporation. A mortgagee is in form not a pledgee but the owner of the land described in his mortgage subject to a de-feasance. All which is left to the mortgagor owner is a right of redemption. None the less the now accepted view is that the mortgagee is a pledgee or lienholder. The ordinary form of corporate bonds and certificates of stock, it is true, have come to be regarded, not as evidences of debt or of a share in corporate assets, hut as in themselves property. Pledgees of bonds or stocks are none the less pledgees with a right of lien. This is the only real right they have. We see no difference in this respect between them and the pledgees of land. We are not unmindful of the difference between the possession of a power and the propriety of its exercise. A bankruptcy court is as much bound to have regard to the rights of pledgee creditors as of any other creditors and not to forget that the latter may have priority of right. A pledgee, because of this, should always be at liberty to apply to the court for leave to enforce his pledge.

As indicated, we think the order of the referee should be confirmed, but that it should be modified by the allowance of leave to any pledgee of the investments of the bankrupt to apply for leave to enforce the pledge by sale or otherwise. It can then be determined in each instance whether the pledgee should be permitted to sell or have terms imposed. Doubtless the learned referee thought the pledgee- would have this right anyhow, and hence did not incorporate it in the order entered. It would, however, be well to make it clear that the pledgees are not concluded by the order.

An appropriate order may be submitted.


author: ERVIN, District Judge.

text:
    UNITED STATES v. MURPHY et al.
    No. 7955.
    District Court, S. D. Alabama.
    May 12, 1931.

      Alex C. Birch, U. S. Atty., of Mobile, Ala., for the United States.
    Harry T. Smith & Caffey, of Mobile, Ala., for defendant John G. Murphy.
   ERVIN, District Judge.

This is an indictment charging Murphy, as the owner of the steamship Rose Murphy, with having conspired with the other defendants, who were members of the crew of sueh steamship, to have them cast her away. The indictment is drawn under section 37 of the Criminal Code, section 88, vol. 18, U. S. Code Annotated.

The indictment, after naming the defendants, charges that they “did unlawfully, knowingly, wilfully, corruptly and feloniously conspire, combine, confederate and agree together and with each other to commit an offense against the laws of the United States; that is to say the said defendants entered into an agreement whereby Salvador Martinez, alias Ben E. Martinez, George. H. Wonson, Oriee C. Roddy, alias O. C. Roddy and James. A. Eulford, alias J. A. Eulford, not being owners of the American Steamship ‘Rose Murphy’ but belonging thereto, would for the consideration of, to-wit $7500.00 (Seventy Five Hundred Dollars) to be paid them by' John G. Murphy alias J. G. Murphy, who was then and there the owner of the said American Steamship ‘Rose Murphy,’ wilfully and corruptly cast away and destroy the said Steamship ‘Rose Murphy’ upon the high seas.”

These are the only averments of fact contained in the. indictment.

The demurrer filed by Murphy to the indictment raises the question that no offense is charged against him; that he, being the owner of the vessel, had the right to east her away if he saw fit, and therefore he had the right to direct the members of the crew to east her away.

It will be noticed that there is'no averment in the indictment that the vessel was insured, or that she carried any freight, or that there were other owners. The offense against the United States, which it is charged the defendants conspired to commit, is found in section 301, Criminal Code, section 492, vol. 18, of the U. S. Code Annotated, and reads: “Whoever, not being an owner, upon the high seas or on any other waters'within the admiralty and maritime jurisdiction of the United States, willfully and corruptly easts away or otherwise destroys any vessel of the United States to which he belongs, or, ■willfully, with intent to destroy the same, sets fire to any such vessel, or otherwise attempts the destruction thereof, shall be imprisoned not more than ten years.”

This provision of the law was originally passed March 26, 1804, and is found in 2d Stat. 290. As. originally passed, the statute contained three sections; the section above being the first, and the second section of the ■act is now section 300, Criminal Code, section 491 of the U. S. Code Annotated, and reads as follows: “Whoever, upon-the high seas or on any other waters within the admiralty and maritime jurisdiction of the United States, willfully and corruptly easts away or otherwise destroys any vessel, of which he is owner, in whole or in part, with intent to prejudice any person that may underwrite any. policy of insurance thereon, or any merchant that may have goods thereon, or any other owner of such vessel, shall be imprisoned for life or for any term of years.”

This statute was first construed in U. S. v. Johns, Fed. Cas. No. 15,481, and later bj U. S. v. Vanranst, Fed. Cas. No. 16,608. In the latter case, the mate of the Lucy was prosecuted for easting her away on the high seas, and Washington, Circuit Justice, charged the jury as follows: “As to this point, the court is of opinion, that the ease of the defendant is within the first section of the law, if, in point of fact, he was concerned in the destruction of this vessel. The defendant is a person, not an owner, who (if he committed the act) wilfully cast away a vessel unto which he belonged, being the property of a citizen of the United States. But did he do it corruptly ? If no person but the owner was interested in the property, it was not; because the owner, might destroy his own property himself, or cause it to be done, without committing an offence against this, or any other law. But in this case, there were insurers on vessel and cargo, and a cargo on board, belonging in part to other persons than the owner. It was corruptly done as to those persons. Had the owner, in this ease, done it, he would have been guilty under the second section; only, that in that ease, the indictment must have stated that it was done to the prejudice of the underwriter on the vessel, or of a merchant that had loaded goods in the vessel. But this is not necessary under the first section, if it come out in the evidence.”

It is urged in support of the indictment that the allegation that the members of the crew would corruptly east her away was sufficient under this authority, even though the owner had the right himself to cast her away, because, it is said, in discussing the question whether the act was corruptly done by the mate: “But in this ease, there were insurers on vessel and cargo, and a cargo on board, belonging in part to other persons than the owner. It'was corruptly done as to those persons.”

We do not know what the indictment charged. I do not think Justice Washington’s language supports this argument, because, just after stating that there were insurers on the vessel and cargo and that the casting away was corruptly done as to those, he says: “Had the owner, in this ease, done it, he would have been guilty under the second section; only, that in that ease, the indictment must have stated that it was done to the prejudice of the underwriter on the vessel, or of a merchant that had loaded goods in the vessel.”

I think a proper construction of the indictment under the two sections would require, in order to make it charge an offense against the owner, that there was insurance on the vessel, or that there was freight on the vessel belonging to some one other than the owner, or that there were passengers on the boat, or some other fact showing that the owner had no right under these circumstances to have her cast away. I do not think the mere allegation that they agreed to corruptly cast her away takes the place of averring facts showing corruption. It is well recognized that, where statutes use expressions like this, it is not sufficient to use the statutory words, but the facts showing corruption must be averred just as the facts showing fraud must be averred when you charge that a thing was fraudulently done.

Taking the construction of the act by Justice Washington as being correct, and I agree with him in his construction, the act declares no penalty against the owner of the vessel unless he has the intention to prejudice a person that may underwrite a policy of insurance thereon, or a merchant that may have goods thereon, or any other owner of’ such vessel. For, as Justice Washington says, the owner might destroy his own property himself or cause it to be done without committing any offense against this or any other law.

If, therefore, the owner may cast away his vessel or may direct it to be done without committing an offense, how can an indictment make it an offense for the owner to direct another person to cast away such vessel unless the indictment contains the essentials found in the'statute?. If the doing of the act by the owner is not an offense against the law, how can an agreement between the owner and another person that the other should do the act for the owner constitute a criminal conspiracy?

The mere statement in the indictment that the agreement provided that the vessel should be willfully and corruptly cast away, in the absence of the averment of facts showing corruption, is insufficient.

It is urged that one may be guilty of a conspiracy where he agrees that another should do an act which he himself could not do. That may be true, but I do not think it possible that a man could be guilty of a conspiracy where he directs another to do an act which he himself might legally do. How could ha offend a statute if he has the right to do the act condemned by it?

Again, the very section 492 begins by saying “whoever, not being an owner,” so that by its express terms an owner is excepted from the class of persons who may be guilty of violating this section.

An order will be entered sustaining the demurrer.