author: J. JOSEPH SMITH, Circuit Judge:

text:
    MADISON SQUARE GARDEN CORPORATION (formerly Graham-Paige Corporation), Petitioner-Appellant/Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant/Appellee.
    Nos. 858, 1099, Dockets 73-2160, 73-2407.
    United States Court of Appeals, Second Circuit.
    Argued May 23, 1974.
    Decided July 30, 1974.
    David G. Sacks, New York City (Simpson, Thacher & Bartlett, Michael H. Simonson, Margaret Ann Murdich, New York City, of counsel), for petitioner-appellant/appellee.
    Carolyn R. Just, Atty. Tax Div. (Scott P. Crampton, Asst. Atty. Gen., MJeyer Rothwacks, Ernest J. Brown, Attys., Tax Div., Dept, of Justice, Washington, D. C., of counsel), for respondent-appellant/appellee.
    Before SMITH and TIMBERS, Circuit Judges, and TYLER, District Judge.

       United States District Judge for the Southern District of New York, sitting by designation.

   J. JOSEPH SMITH, Circuit Judge:

These are cross-appeals from a decision by the Tax Court, 58 T.C. 619 (1972), Irene F. Scott, Judge, holding (1) that the taxpayer, Madison Square Garden Corporation (MSG), was entitled under 26 U.S.C. § 334(b)(2) to a stepped-up basis for assets acquired through a merger-liquidation of a controlled corporation, but (2) that it was limited in this step-up to 80.22% of the assets received since it controlled only that percentage of the acquired corporation’s stock at the time of the liquidation. We affirm on the Commissioner’s appeal of the first holding, but reverse and remand on the taxpayer’s appeal of the second.

The facts have been stipulated. In the year prior to the merger-liquidation, MSG acquired approximately 52% of the stock of the old Madison Square Garden Corporation (Old Garden). However due to the fact that during this acquisition period Old Garden redeemed 36% of its own stock, MSG’s interest rose from the 52% to just over the 80% required for a stepped-up basis under § 334(b)(2). Pursuant to the merger-liquidation agreement, MSG with its 80.-22% interest, received 100% of Old Garden’s assets, while the minority shareholders — who held the remaining 19.78% interest — received therefor an appropriate amount of preferred stock in MSG.

I.

The Commissioner contends that this merger-liquidation failed the 80% control rule of § 332 and the corresponding basis provisions of § 334(b)(2) in that MSG did not “purchase” the required 80% interest in Old Garden, but rather sat by and watched as the 52% it had acquired blossomed into 80% due to the redemption of the Old Garden shares. The Commissioner advances this rather mechanical interpretaton of § 334(b)(2) without benefit of any direct authority save the word “purchase” in the Code itself.

But as § 334(b)(3) makes clear, that term is not to be so narrowly construed:

Purchase defined. — For purposes of [334(b)(2)], the term “purchase” means any acquisition of stock

To be sure, here there was technically no “acquisition” of 80% of the shares outstanding at the start of the acquisition period. But neither was the redemption a fortuitous accident. Rather the reduction in the number of outstanding shares was obviously part of a general plan by which MSG would acquire the assets of a somewhat smaller Old Garden. And as the parties agree, Congress’ explicit intent in enacting § 334 was to codify the rule of Kimbell-Diamond v. Commissioner of Internal Revenue, 14 T.C. 74 (1950), aff’d 187 F.2d 718 (5th Cir.), cert. denied, 342 U.S. 827, 72 S.Ct. 50, 96 L.Ed. 626 (1951), that such an integrated transaction should be treated as the purchase of assets that in substance it is. See, S.Rep.No. 1622, 83rd Cong., 2d Sess., 3 U.S. Code Cong. & Admin.News 4621, 4679, 4894-4895 (1954); Cabax Mills v. Commissioner of Internal Revenue, 59 T.C. 401, 408-409 (1972).

Given this clear intent, we believe the Tax Court was quite correct in holding that § 334 is not limited to the case where a corporation acquires the requisite 80% control solely through purchases, rather than through purchase and redemption. Clearly the underlying goal of purchasing assets and the degree of control immediately prior to the liquidation are the same in either case. To accept the Commissioner’s contrary contention that the measurement of control must be made according to the number of shares outstanding at the start of the acquisition period would be to raise an irrational bar in any case where the statutory purpose was in all other respects met, but the acquired corporation, for whatever reason, found it necessary or desirable to retire a portion of its stock.

In short, we believe the Tax Court was correct in holding that the measurement of control is to be made on the date the liquidation plan is adopted and the assets distributed. Here the requisite control was present.

II.

Turning then to the question of the proper basis for the assets acquired, we find that the issue was largely overlooked in the stipulation of facts: Thus while the parties have provided us with such helpful information as the useful lives of the athletes owned by the Garden, neither side has introduced the actual liquidation agreement. We must, therefore, infer from other facts the precise nature of the liability MSG assumed vis-a-vis the minority shareholders. That difficulty noted, it seems clear — and neither the Commissioner nor the Tax Court seriously disputes — that MSG immediately bought out the minority as an integral part of the entire transaction.

Nevertheless, the Tax Court found that the taxpayer had failed to establish that it held a 100% interest in Old Garden prior to the liquidation and distribution of the assets. In holding that the taxpayer was therefore entitled to a stepped-up basis on only 80.22% of the assets it received, the court reasoned:

The transaction here was a statutory merger which is treated as a liquidation for tax purposes. As part of the plan of merger, the holders of the 19.78 percent of Garden’s stock which petitioner [MSG] had not purchased were entitled to receive in exchange therefor preferred shares of petitioner. Since petitioner received all of the assets of Garden in distribution, we are in effect asked by petitioner to infer that it owned 100 percent of Garden’s stock at the time of the distribution. On the record before us petitioner has failed to establish a basis for such an inference. Petitioner in its allegation refers to the 19.78 percent of Garden’s stock that “was not held” by it on April 20, 1960. We have no evidence that petitioner did in fact hold the remaining 19.78 percent of Garden’s stock prior to the distribution of Garden’s assets.

58 T.C. 619, 627 (1972).

We believe, however, that since the stipulation clearly establishes that on the date of the merger-liquidation the taxpayer was obligated to the minority shareholders for 160,085 shares of the taxpayer’s preferred stock, and that, as even the Tax Court concedes, MSG thus acquired 100% of the Old Garden assets, the stepped-up basis should apply to that 100% rather than to the lesser percentage owned prior to the actual distribution.

In reaching its contrary conclusion, the Tax Court looked solely to § 334(b)(2) and its attendant regulations. The statute states:

[T]he basis of the property in the hands of the distributee shall be the adjusted basis of the stock with respect to which the distribution was made.

26U.S.C. § 334(b)(2)(B).

And the regulations add:
Property received with reference to stock owned immediately before the liquidation by the parent corporation is the only property to which section 334(b) (2) is applicable. The section is not applicable to property received with respect to debt or other claims. The basis of the stock used in determining the basis of the assets is the total basis of all stock held by the parent corporation.

§ 1.334-l(e) (1).

While neither of these sections directly applies where the acquiring corporation has not only purchased the requisite 80% control but has also bought out the minority shareholders in order to acquire a 100% interest in the distributed assets, the Service, in 1959, adopted a revenue ruling which controls just this case:

Advice has been requested whether payments made by a parent corporation to minority shareholders of a subsidiary corporation, after a cancellation of stock and a distribution of assets of the subsidiary corporation, can be considered in payment for stock of the subsidiary corporation in computing the over-all basis of the assets received by the parent corporation within the meaning of section 334(b) (2) of the Internal Revenue Code of 1954.
M corporation contracted to purchase, at fair market value (45a: dollars per share), 99 percent of the shares of N corporation. Immediately after such purchase, N was merged into the parent corporation M in a liquidation to which section 332 of the Code applied. Under the merger agreement, all of the shares of N were cancelled and all of its assets were distributed to M corporation, subject to the interests of the minority shareholders. As to the minority interest of one percent, the agreement provided that, if all of the stock of N corporation was not acquired prior to the liquidation and merger, the parent corporation would be obligated to pay upon the surrender of the certificates, 45a: dollars per share for all shares not previously acquired. The minority interests were purchased subsequent to the liquidation and merger.
* -X- * -X- -X- X-
Section 334(b) (2) of the Code, in pertinent part, unequivocally provides that “the basis of the property in the hands of the distributee shall be the adjusted basis of the stock with respect to which the distribution was made.” Section 1.334-l(c)(1) of the Income Tax Regulations can only be deemed to be explanatory of and in conformity with this definite statutory command. In substance, section 1.-334-l(c)(l) of the regulations provides that property received with respect to stock owned immediately before the liquidation is the only property to which section 334(b) (2) of the Code applies. It does not apply to property received with respect to debts or other claims. In view of the statute, this section must be interpreted to mean that the basis provisions of section 334(b)(2) of the Code apply to all stock held with respect to which distribution is made in liquidation. That is to say, all stock purchases, irrespective of when made, are includible in determining basis so long as such stock is held at the time of distribution. However, if property is received for some other reason, such as in payment of a liability assumed, with respect thereto, the basis of such property is not determined under section 334(b)(2) of the Code, but rather under other applicable basis provisions of the law.
Under the facts presented, in effect, what M corporation did was to assume an obligation of the liquidated corporation to its minority shareholders. Accordingly, the subsequent payments should be treated as the release of a liability of N corporation assumed by M corporation. Thus, the taxpayer is entitled to have a basis attach to the assets to the extent the liability was assumed and paid.

Rev.Rul. 59-41^ 1959-2 Cum.BulI. 108. [Emphasis added.]

Here the Service has ignored this ruling both below and on appeal. Yet in at least two other cases decided after this one, the Service has taken the position that the ruling applies to the type of transaction at issue here — and the Tax Court has agreed.

In May B. Kass v. Commissioner of Internal Revenue, 60 T.C. 218, 225 (1973), aff’d without opinion, 491 F.2d 749 (3d Cir. 1974) the Tax Court noted this inconsistency on the part of the Commissioner:

In the present case, with essentially the same facts [as in Madison Square Garden] but the minority shareholder as petitioner, respondent [the Commissioner] argues that the statutory merger is a nonqualifying reorganization, thus a sale, thus taxable at the shareholder level. Although technically he need not mention the corporate basis aspects nor sections 334(b)(2) and 332, respondent frankly admits that at the corporate level he would allow the assets received with reference to the stock belonging to the minority shareholders a stepped-up basis. This admission by the respondent unavoidably conflicts with the result argued for and achieved in Madison Square Garden.

In accepting the Commissioner’s change of heart in Kass, the Tax Court sought to avoid a similar charge of inconsistency by distinguishing its opinion in Madison Square Garden on procedural grounds:

The result reached in Madison Square Garden Corp. is, at first blush, inconsistent with the result reached in this case. The apparent inconsistency is due to the manner in which Madison Square Garden was argued and the way its issues were framed by the parties.
. The taxpayer, the acquiring parent corporation, claimed that it was entitled to a step up in the basis of the assets received with reference to the stock that it had purchased and a step up in the basis of the assets received in the statutory merger, though the stock to which those assets were “attached” belonged to minority shareholders. The latter portion of the claim conflicted with the position taken on its return. It is important to note that in Madison Square Garden, as in the instant case, there was a section 334(b)(2) “purchase” followed by a statutory merger and that the two steps were obviously part of an integrated plan. On this secondary issue, the Commissioner argued that section 334(b)(2) gives a stepped-up or cost-of-stock basis only to “property received with reference to stock owned immediately before the liquidation [or statutory merger treated as a liquidation for s.ection 332 purposes].” Since Madison Square Garden owned only 80.22 percent of the stock immediately before the merger, it should be limited in a step up in basis to only 80.22 percent of the assets received. Thus the Commissioner took a very narrow view of the applicable law basing his arguments on section 334(b)(2) and the regulations thereunder. Likewise, Madison Square Garden argued solely in terms of section 334(b)(2). Neither party mentioned the possibility that the minority shareholders, who were not parties to the proceeding, might recognize gain (because the two-step transaction was integrated and thus there was no continuity-of-interest) and therefore the corporation should get a step up in basis to reflect the tax at the shareholder level, on the theory that a nonqualifying reorganization is simply a purchase or sale. Confronted with these arguments and the narrowly framed issue, this Court held that Madison Square Garden, the acquiring parent, was not entitled to a step up in basis under section 334(b)(2) as to part of the property.

60 T.C. 218, 223-224 (1973).

Where Kass the only authority inconsistent with the Tax Court’s conclusion below, we might be willing to accept this distinction. But we believe the result in Kass is itself compelled by Rev.Rul. 59-412 as discussed above, the more general rule that basis should equal the cost, to the taxpayer, and the principle that substance should prevail over mere form. See also Mertens, Code Commentary § 334(b) (2) :7 for a general discussion of upward basis adjustments where there has been an assumption of liability by the acquiring corporation. In short, we believe the Tax Court should have applied these broader principles even if the taxpayer did not raise the question as effectively as it might have.

Moreover since Kass the Tax Court has again held that the situation here calls for a stepped-up basis on all the acquired assets. In Yoc Heating v. Commissioner of Internal Revenue, 61 T.C. 168, 179 (1973), the court formulated the applicable rule as follows:

Clearly, the total basis should include the amounts paid by [the taxpayer] . . . both for the shares which were the subject of the initial acquisition, and for additional shares . . . acquired prior to the . . . acquisition ... of the assets and liabilities of [the former corporation].
. With respect to the shares of common stock . . . acquired after the transfer of [the] assets, the situation is less clear. Under the agreement of sale, [taxpayer] was required to pay minority shareholders either $40 a share or stock; in point of fact, it paid cash in all such cases. ... To the extent that such payments were made in satisfaction of the rights (of the minority shareholders to the fair value of their interest in the assets . . . the amounts paid will be a proper addition to the total basis of the assets.

Here it is clear that MSG was so obligated to the minority shareholders and that this obligation was immediately met by the transfer of the MSG preferred. Again Yoc Heating recognizes that it is inconsistent with the decision below in this case and attempts to avoid the problem by making the same procedural distinction offered in Kass. But as indicated above, we think the state of the pleadings and the stipulated evidence here do not justify reaching a result so plainly inconsistent with not only Kass and Yoc Heating — with which we agree —but also with the Service’s own ruling and the fundamental principle that in such integrated transactions substance, and not mere form, should control.

We therefore affirm on the Commissioner’s appeal, but reverse and remand on the taxpayer’s appeal for application of the stepped-up basis to 100% of the assets received.

      . Exception. — If property is received by a corporation in a distribution in complete liquidation of another corporation (within the meaning of section 332(b)), and if—
      * * * H: H=
      (B) stock of the distributing corporation possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote, and at least 80 percent of the total number of shares of all other classes of stock (except nonvoting stock which is limited and preferred as to dividends), was acquired by the distributee by purchase (as defined in paragraph (3)) during a 12-month period beginning with the . . .
      (i) the date of the first acquisition by purchase of such stock . . .
      then the basis of the property in the hands of the distributee shall be the adjusted basis of the stock with respect to which the distribution was made.
      [Emphasis added.]

      . We trust that the stipulation to the effect that the useful life of a Knicks or Rangers player is seven years reflects but an accounting judgment.

      . Madison Square Garden Corporation (“Garden”) was a corporation organized under the laws of the State of New York and was merged into its parent Graham-Paige Corporation on April 20, 1960.
      *k ?k -k *1*
      Pursuant to the agreement of merger between Petitioner and Garden, the holders of 71,149 shares of Garden’s capital stock which were not owned by Petitioner were entitled to receive in exchange therefor 160,085 shares of Petitioner’s $.60 cumulative preferred stock. As of April 20, 1960, the fair market value of such shares were as follows: Garden’s capital stock— $19.375 per share and Petitioner’s $.60 cumulative preferred stock was $8.75.
      Stipulation of Pacts ¶¶ 2, 16.

      . We do not read Madison Square Garden Corp., 58 T.C. 619, 627 (1972), on appeal (C.A.2, Aug. 1973), as requiring a different conclusion. That case turned on the state ' of the pleadings and the evidence. See May B. Kass v. Commissioner of Internal Revenue, 60 T.C. 218, 223-225 (1973). 61 T.C. 168, 179 n. 17 (1973).


source: Caselaw Access Project

author: WEICK, Circuit Judge.

license: Public Domain

text:
    CITY OF KINGSPORT, TENNESSEE, et al., Plaintiffs, SCM Corporation et al., Defendants-Plaintiff by Counterclaim, Plaintiff by Cross-Claim-Appellant, v. STEEL AND ROOF STRUCTURE, INC., et al., Defendants by Counterclaim-Appellees.
    No. 74-1056.
    United States Court of Appeals, Sixth Circuit.
    Argued June 5, 1974.
    Decided Aug. 5, 1974.
    See also D. C., 352 F.Supp. 291.

      Arthur G. Seymour, Knoxville, Tenn., for appellant; F. Allan Kelly, Kings-port, Tenn., on brief.
    N. R. Coleman, Jr., Greeneville, Tenn., and James E. Brading, Johnson City, Tenn., for appellees; John A. Armstrong, Greeneville, Tenn., Herbert E. Barnard, St. Louis, Mo., and J. Paul Coleman, Johnson City, Tenn., on briefs.
    Before WEICK, PECK and MILLER, Circuit Judges.

       Judge Miller did not participate in the decision.

   WEICK, Circuit Judge.

SCM Corporation (SCM) has appealed from a summary judgment entered against it dismissing its counterclaim and cross claim for contribution and indemnity.

The controversy grew out of the construction of a high school building in Kingsport, Tennessee. The City of Kingsport was the owner of the property and had entered into a contract with Cassel Brothers, Inc. (Cassel), a general contractor, for the construction of the building.

After the building had been completed the City, the general contractor Cassel, and J ohnson-Hilliard, Inc., the roofing subcontractor under Cassel, sued SCM and Special Coatings, Inc., (Special Coatings) for $350,000' damages, claiming that SCM had furnished defective roofing materials causing the roof on the building to leak.

SCM had sold the roof coatings to a distributor, who sold them to John A. Berggren Co., Inc. (Berggren) and Special Coatings. Berggren was a subcontractor whose job was to apply the SCM coatings. Before completion of the job Berggren was adjudicated bankrupt. Special Coatings then completed the application of the SCM coatings.

Plaintiffs sought recovery of damages from SCM and Special Coatings under a number of theories: (1) breach of express contract; (2) strict liability in tort; (3) misrepresentation; (4) breach of express and implied warranties; and (5) breach of a supplemental contract to provide a leak-free roof in consideration of refraining from suing on the original contract.

In its answer SCM pleaded that the plaintiffs’ claim was barred by various Tennessee statutes of limitation. After answering, SCM filed a counterclaim for contribution and indemnity against Cas-sel, J ohnson-Hilliard, and against additional defendants, Steel and Roof Structure, Inc. (Roof Structure), Bristol Pre-Stressed Concrete, Inc. (Bristol), and the architects, William Hamilton Wallace and J. Larry Poole, and a cross claim against its co-defendant, Special Coatings, and against St. Paul Fire and Marine Insurance Company, surety on Berggren’s bond. Special Coatings filed a cross claim for contribution and indemnity against the architects Poole and Wallace.

Bristol was a subcontractor under Cassel. Its responsibility was to manufacture and install pre-stressed concrete in the roof structure on which the SCM roof coatings were placed. Roof Structure was also a subcontractor under Cas-sel, whose job was to install a dome structure over the gymnasium (the portion of the structure with the worst leakage problem).

SCM in its counterclaim, and Special Coatings in its cross claim, alleged that the defendants thereto performed their duties negligently and that they should share responsibility for loss occasioned by any defects in the roof.

The Court ordered that the contribution and indemnity issues be heard only after a determination of the principal case. A jury was impaneled to determine factual issues with respect to the statute of limitations defense.

The City had occupied the building since September, 1967; suit was not filed until early in 1971. The District Court ruled that the Tennessee three-year statute of limitations applied. T. C.A. § 28-305. However, there was a question of whether SCM had induced plaintiffs to forbear bringing timely suit by making certain promises. This factual issue of forbearance and waiver by SCM of its defense under the statute of limitations was to be tried by the jury.

After two days of testimony on this issue the plaintiffs and defendants reached a settlement of the plaintiffs’ claims. SCM agreed to pay the three plaintiffs $300,000. Special Coatings agreed to pay $15,000, and St. Paul Fire and Marine Insurance Company, surety on Berggren’s bond, agreed to pay $35,000. By these payments the plaintiffs recovered the full amount prayed for in their complaint.

The plaintiffs’ complaint was dismissed with prejudice, and the counterclaims and cross claim of SCM and Special Coatings for indemnification and contribution against Wallace, Poole, Bristol and Roof Structure, remained for determination.

These defendants filed motions to dismiss "the counterclaims and cross claim, or for summary judgment. The District Court granted summary judgment on the ground that SCM and Special Coatings had pleaded in their answers to the complaint that plaintiffs’ action was barred by the Tennessee statute of limitations, and held:

SCM and Coatings are now estopped to deny that the original claim is barred by the limiting statute.
[TJhere is accordingly no basis for respective claims for indemnification or contribution. (Memo. Opin., Sept. 7, 1973).

SCM appealed to this Court; Special Coatings did not appeal. We reverse.

The decision of the District Court was based primarily on the substantive Tennessee law of estoppel. The Court also relied on Rule 11 of the Federal Rulés of Civil Procedure.

We are of the opinion that the issue in this case relates to the type of pleading that may be permitted under the Federal Rules of Civil Procedure. Specifically, the question is whether. Rule 8(e)(2) of the Federal Rules of Civil Procedure, which allows the pleading of inconsistent claims and defenses, permits SCM to plead as it did, and whether Rule 11 prevents such pleading. The law to be applied is federal procedural law. Hanna v. Plumer, 380 U.S. 460, 85 S.Ct. 1136, 14 L.Ed.2d 8 (1965).

Rule 8(e)(2) of the Federal Rules of Civil Procedure provides:

(2) A party may set forth two or more statements of a claim or defense alternately or hypothetically, either in one count or defense or in separate counts or defenses. When two or more statements are made in the alternative and one of them if made independently would be sufficient, the pleading is not made insufficient by the insufficiency of one or more of the alternative statements. A party may also state as many separate claims or defenses as he has regardless of consistency and whether based on legal, equitable, or maritime grounds. All statements shall be made subject to the obligations set forth in Rule 11.

What SCM did in its pleading was to interpose the defense of the statute of limitations against the plaintiffs, and to ask for indemnification and contribution against Wallace, Poole, Bristol, and Roof Structure (appellees herein) should SCM be compelled to pay damages in the main suit.

This is certainly a form of pleading allowed specifically by Rule 8(e)(2) and inferentially permitted by the very concept of indemnity and contribution. There is nothing really even contradictory or inconsistent with the defenses pleaded. SCM sought indemnification only should their defenses fail.

The District Court held that by signing the original answer which raised the statute of limitations defense, Rule 11 now estopped SCM from denying that the original claim was barred by the relevant statute of limitations. In relevant part Rule 11 provides:

The signature of an attorney constitutes a certificate by him that he has read the pleading; that to the best of his knowledge, information, and belief there is good ground to support it; and that it is not interposed for delay.

In our opinion SCM’s pleading was not in violation of Rule 11. The isues of the statute of limitation and forbearance were largely factual issues for the jury to determine. Lawyers for SCM could well have had a “belief there is good ground to support” a statute of limitation defense; and at the same time they may have had a similar good faith belief that they well might lose on their affirmative defense, in which event they would want to seek contribution or indemnity from those who they felt were responsible for their client’s loss.

Federal cases where an estoppel has been found to bar a party from asserting a position contrary to that relied on in an earlier action, are cases where the party was successful in its initial reliance and tried to change positions in subsequent litigation. See Bishop & Babcock Mfg. Co. v. Sears, Roebuck & Co., 125 F.Supp. 528 (N.D.Ohio 1954), aff’d, 232 F.2d 116 (6th Cir. 1956); Ja-mison v. Garrett, 92 U.S.App.D.C. 232, 205 F.2d 15 (1953); Scarano v. Central Ry. of N.J., 203 F.2d 510 (3d Cir. 1953).

In the case at bar, because of the settlement of plaintiffs’ ease, the defense of the bar of the statute of limitations was never decided, and therefore no estoppel can possibly exist.

If allowed to stand, the decision of the District Court would place an unjustified and unwise limitation on both third party practice and indemnity and contribution actions.

The appellees assert additional grounds for affirmance of the judgment of the District Court; however, none of these other grounds advanced on appeal have been considered by the District Court, and it would be inappropriate for us to affirm a summary judgment on grounds not considered by the District Court.

The order granting summary judgment against SCM is reversed, and the ease is remanded for further proceedings consistent with this opinion.


author: GOLDBERG, Circuit Judge:

text:
    Arthur F. McCORMICK, Individually, and as Trustee of the A. F. & T. R. McCormick Trust, Plaintiffs-Appellants, v. James V. ESPOSITO et al., Defendants-Appellees.
    No. 73-3118.
    United States Court of Appeals, Fifth Circuit.
    Sept. 13, 1974.

      Arthur F. McCormick, Jr., Miami, Fla., for McCormick, Sr.
    James W. Crabtree, Samuel C. Ullman, Miami, Fla., for defendants-appellees.
    Before GEWIN, GOLDBERG and CLARK, Circuit Judges.
   GOLDBERG, Circuit Judge:

This dispute between a stock brokerage house and its stock-broken customer propels us into the esoteric Wall Street world of Margin Accounts and Special Miscellaneous Accounts. Plaintiff customer, who proved to be unjustifiably bullish in the arena of stock exchange securities, now seeks the judicial security of the federal courthouse and asks for damages for defendants’ alleged violations of securities regulations and New York Stock Exchange Rules. We decline, however, to take a bearish view of defendants’ margin accounting practices, and we therefore affirm the judgment of the district court dismissing plaintiff’s action.

I. FACTS

Plaintiff Arthur F. McCormick and his wife, T. R. McCormick, opened a joint account with defendant Goodbody & Co. [Goodbody], a limited partnership, in June of 1964, and maintained that account until T. R. McCormick died in November 1966. On January 13, 1967, plaintiff opened a general margin account with Goodbody and continued to do business with defendant until February 1970. At that time, in accordance with the “Customer’s Agreement” signed by McCormick (Record, Vol. V, p. 1793), Goodbody liquidated the securities held in the account in order to satisfy McCormick’s then existing obligation to Goodbody. Goodbody alleged that, following the liquidation, $5729.76 of the obligation remained unfulfilled.

McCormick commenced the present suit in July 1971, individually and as trustee of the “A. F. & T. R. McCormick Trust,” seeking damages for nine allegedly illegal extensions of credit not permitted by Regulation T, 12 C.F.R. § 220.1 et seq., and for violations of New York Stock Exchange Rules 431 and 432 relating to maintenance margin requirements. The alleged Regulation T infractions, which occurred between July 10, 1968 and January 24, 1969, involved seven trades initiated by McCormick and two payments to McCormick by check drawn on Goodbody. The alleged Rule 431 and 432 violations involved the status of McCormick’s account from November 18, 1969 to November 28, 1969. The case was considered below on extensive pretrial stipulations and a stipulated record; both the Regulation T and the Rule 431 and 432 issues were decided adversely to plaintiff, and plaintiff appeals.

II. REGULATION T AND THE S.M. A. DEFENSE

McCormick brought his Regulation T action under section 27 of the Securities Exchange Act of 1934, 15 U.S.C. § 78aa, which vests exclusive jurisdiction of violations of the Act and “rules and regulations thereunder” in the federal courts. The district court apparently assumed that Goodbody was subject to civil liability to its customer for violation of initial margin requirements, and Goodbody does not question that assumption. In Pearlstein v. Scudder & German, 2 Cir. 1970, 429 F.2d 1136, cert. denied, 1971, 401 U.S. 1013, 91 S.Ct. 1250, 28 L.Ed.2d 550, the Second Circuit held that the customer had a right of action against the brokerage house under section 27 for its violation of section 7 margin requirements, 15 U. S.C. & 78g. The Court reasoned that,

[a]lthough the congressional committee report which recommended the enactment of Section 7 indicates that the protection of individual investors was a purpose only incidental to the protection of the overall economy from excessive speculation, it has been recognized in numerous cases since that time that private actions by market investors are a highly effective means of protecting the economy as a whole from margin violations by brokers and dealers.

429 F.2d at 1140. We agree with the Second Circuit’s analysis as it relates, to regulations promulgated under section 7, and conclude that the court below correctly decided to determine the claim on its merits.

The parties brought the Regulation T issue into sharp focus before the district court. In paragraph 9(f) of their Pretrial Stipulation the parties provided that the court must determine “[w]hether excessive credit was extended to Plaintiffs by GOODBODY & CO., a limited partnership, in violation of Regulation T.” They then gave the following explanation:

The parties agree that in order to resolve this issue of law, the Court must necessarily' determine the legality of the account maintained by [Good-body], which was labeled by [Good-body] as a Special Miscellaneous Account. Specifically, the Court must determine whether said Special Miscellaneous Account was authorized by Regulation T and whether it was maintained by [Goodbody] pursuant to Regulation T. If the Court should determine that [Goodbody] was permitted by Regulation T to maintain a Special Miscellaneous Account, that the account labeled by [Goodbody] as a Special Miscellaneous Account was the type of account authorized by Regulation T, Section 4(f)(6), that the entries which were made in the S. M.A. ledgers which [Goodbody] maintained were made in a manner authorized by Regulation T, and that the effect of the accounting procedures so employed was to eliminate what would otherwise be an excessive extension of credit, then the Defendants did not violate Regulation T. However, if the Court should find that Regulation T, Section 4(f)(6) does not authorize the maintenance of a Special Miscellaneous Account which [Goodbody] maintained or that said Special Miscellaneous Account was not maintained for Plaintiffs by [Goodbody] in a manner consistent with Regulation T, then there would have been excessive extensions of credit. (Pretrial Stipulation ¶ 9(f), Vol. IV, pp. 1504-05).

The “Special Miscellaneous Account” (S.M.A.) is an accounting procedure first adopted by members of the New York Stock Exchange in 1942. Prior to the advent of the S.M.A. the practice among brokerage firms was to permit the customer to deposit the proceeds of a sale in a cash account; the customer could then use the cash to purchase additional securities in his margin account, or he could withdraw the cash at any time. The S.M.A. procedure consists of bookkeeping notations which enable a customer to preserve his right to use the proceeds of a sale without necessitating the opening or maintaining of a separate cash account. This type of account is maintained for the customer in conjunction with his general margin account, and the customer — including McCormick in the present ease — is so notified on each monthly statement sent to him by the broker. The available credit balance in the S.M.A. in a “restricted” margin account (such as McCormick’s) consists of: (1) that part of the difference between the sale price and the 70% “retention requirement” that the customer has not withdrawn in cash; (2) any cash deposited by the customer; (3) dividends on securities held by the broker for the customer’s account; and (4) certain appreciations in market value of the securities held in the account. In other words, the S.M.A. reflects those sums which the customer could have withdrawn following transactions and changes in his general margin account, but did not.

The substance of plaintiff’s S:M.A. complaint is that credit in an S.M.A. cannot properly be employed as “buying power” to legitimize extensions of credit that would otherwise be in violation of Regulation T. Plaintiff also contends that even if use of an S.M.A. may sometimes be valid, Goodbody has failed to establish the authenticity of its records of McCormick’s account.

We find no merit in McCormick’s secondary contention. The district court found that the recitation of the nine disputed transactions in the Pretrial Stipulation and in the Summary of Plaintiff’s Account attached to the Pretrial Stipulation — both of which incorporated Goodbody’s S.M.A. notations • — “accurately set forth the nine transactions in question.” (Findings of Fact ¶ 9, Record, Vol. VI, pp. 2093-94). Good-body kept its S.M.A. records in the regular course of business; the evidence indicates that the records of McCormick’s account were maintained in the usual manner; all computations appear to be mathematically sound. McCormick stresses that Goodbody has the burden of proving the authenticity of its S.M.A. notations. In the complete absence of any indication to the contrary, we are satisfied that Goodbody met that burden. The district court’s finding is not clearly erroneous.

McCormick’s primary argument, that an S.M.A. cannot be used as purchasing power to meet Regulation T initial margin requirements, has been addressed in some depth by Judge Pollack for the United States District Court for the Southern District of New York. Manevich v. duPont, S.D.N.Y., 338 F.Supp. 1124, aff’d mem., 2 Cir. 1972, 465 F.2d 1398. We agree with Judge Pollack that the use of S.M.A. notations to meet initial margin requirements is consistent with Regulation T. Section 4(f) (6) of Regulation T, 12 C.F.R. § 220.4(f)(6), provides:

§ 220.4 Special accounts.
(f) Special miscellaneous account. In a special miscellaneous account, a creditor may:
(6) Effect for any customer the collection or exchange (other than by sale or purchase) of securities deposited by the customer specifically for such purposes, and (subject to any other applicable provisions of law) received from or for any customer, and pay out or deliver to or for any customer, any money or securities, (emphasis added).

Judge Pollack reasoned that,

[i]f a broker can “pay out” to a customer “any money” the customer has in his SMA, then the broker can “pay out” that value to any other account of the customer, including a margin account, instead of simply handing over the cash.

338 F.Supp. .at 1128. Thus, “[t]here can be no question that credit for dividends and cash advanced by the customer represents valid buying power.” Id. This conclusion is obvious so long as it is remembered that the S.M.A. consists only of credit for sums which the customer could have withdrawn, but did not withdraw.

We are not persuaded by McCormick’s argument that there is no proof that the margin securities in his account had a loan value, and thus no basis to conclude that he could have withdrawn cash from his account upon the sale of such securities. McCormick stipulated that the loan value of the securities in his account was 20% of the current market value of those securities. (Supplement to Pretrial Stipulation ¶ 8, Record, Vol. IV, p. 1562; see footnote 7, supra). McCormick’s insistence that defendants must prove that the sales which yielded S.M.A. notations involved securities held in his account since March 11, 1968, in order to show compliance with Regulation T is without foundation. The March 11, 1968, requirement applies to registered “nonequity securities” and to “exempted securities,” 12 C.F.R. §§ 220.3(b)(2)(i), 220.-3(b) (2) (v), 220.3(c)(2), 220.8(a); the securities in McCormick’s account were margin “equity securities.” 15 U.S.C. § 78c(10)-(12). Regulation T expressly distinguishes between a margin equity security and a nonequity or exempted security, and provides that a margin equity security in a general account does have a loan value. 12 C.F.R. §§ 220.-3(c)(2), 220.8(a)(1).

The Special Miscellaneous Account involves complex, and at times perplexing, accounting procedures. We are satisfied, however, that at least as it was used in the present case, the S.M.A. did not involve any sleight of hand for escaping the initial margin requirements of Regulation T. McCormick’s misfortune lay not with the form of his margin account but with its contents — he was the victim, not of grisly market practices, but of a grizzly market. Absent any wrongdoing on the part of the broker we are unable to provide any judicial remedy.

III. NEW YORK STOCK EXCHANGE RULES 431 AND 432 .

McCormick contends that, over a substantial period of time, Goodbody violated Rules 431 and 432 of the New York Stock Exchange by the manner in which it maintained McCormick’s account. Specifically, McCormick cites violations of Rule 431(b), which provides, in pertinent part:

Maintenance margin rule, (b) The margin which must be maintained in margin accounts of customers . shall be as follows:
(1) 25% of the market value of all securities “long” in the account.

In their Amendment to Pretrial Stipulation the parties included a series of documents which they agreed accurately reflect the status of McCormick’s account for the period November 18, 1969, to November 28, 1969, as to the market value of the securities in the account and the equity and debit existing in the account for each business day. Those records clearly show that the margin in McCormick’s account was below 25% fqr each day during the November 18-28 period. The issue presented to us on this appeal is whether, having established a violation of New York Stock Exchange Rule 431(b), McCormick as a customer of Goodbody has a private cause of action against Goodbody under the Securities Exchange Act of 1934, 15 U.S.C. § 78aa.

The district court concluded that “the violation of Rules 431 and 432 of the New York Stock Exchange does not create a cause of action cognizable in a federal court.” (Conclusions of Law ¶ 4, Record, Vol. VI, p. 2095). Although we are not now prepared to endorse such a universal proposition, we affirm the district court’s denial of relief on the facts of this case. In this respect our decision is substantially controlled by the recent opinion in Gordon v. duPont Glore Forgan, Inc., 5 Cir. 1973, 487 F.2d 1260, 1263, cert. denied, 1974, 417 U.S. 946, 94 S.Ct. 3071, 41 L.Ed.2d 666, in which we held “that under Rules 431 and 432 there is no right of action that will allow a recovery to investors who know their accounts are inadvertently undermargined, maintain their silence for a substantial period of time, and take no corrective action.”

■ McCormick’s account was undermargined for a period of some eleven days, not because of new transactions completed for him by Goodbody, but because of daily declines in the market value of the securities in his account. Goodbody’s failure to discover the undermargining of McCormick’s account or to require that McCormick provide additional margin might be considered less excusable than the oversight involved in the Gordon case. Nevertheless, the record contains no evidence that Goodbody intentionally ignored New York Stock Exchange rules or sought to mislead McCormick in any way. As we have noted, McCormick received a monthly statement of his account and was aware of the varying equity-debit status of his account. He certainly had reason to know when his account was undermargined, for as the district court found, “Mr. McCormick is a lawyer, has -been in and out of the securities market place since 1929, personally maintained full control over his account, and was at all times completely informed as to the securities position of his account.” (Findings of Fact ¶ 7, Record, Vol. VI, p. 2093). McCormick did not complain of Goodbody’s maintenance margin practices or take any corrective action before Goodbody liquidated his account in February, 1970; and he continued his silence until Good-body brought its state court action against him in January, 1971.

Judge Thornberry, writing for the Court in Gordon, explained the inequity of permitting the customer to recover under such circumstances:

The broker’s error . . . allowed Gordon to avoid bothersome margin calls while his equity dwindled. He could gamble that his stock would appreciate in value without having to bolster his margin account with resources he could employ elsewhere. And when his stock fell so low that his margin account had a deficit instead of equity he had no incentive at all to put up more margin, for he could simply let the broker sell him out and let duPont take part of the loss.

487 F.2d at 1263. McCormick seemed perfectly content to let Goodbody assume part of his loss until Goodbody took legal steps to have the debt satisfied. In the absence of any evidence of a broker’s intentional violation of Exchange rules misleading of its customer, and in the presence of a customer who knew or should have known that his account was undermargined but took no corrective steps for so long as he stood to benefit from such undermargining, we decline to depart from the rule in Gordon.

In denying customer relief in this case we do not deprive good faith investors of protection from unscrupulous or overbearing brokerage practices. On the record before us we simply have not detected any such practices. The Special Miscellaneous Account when properly used is not a treacherous tool for evading Regulation T margin requirements; rather it is a proper means of preserving earned purchasing power within the spirit as well as the letter of Regulation T. Finally, while we do not foreclose the use of New York Stock Exchange Rules 431 and 432 as a protective cloak for investors if circumstances warrant, we will not permit their use here by a knowing beneficiary as a dagger against his perhaps too lenient broker.

Affirmed.

      . James V. Esposito and the other named defendants were partners of Goodbody at the time the suit was filed.

      . In a margin account the customer is permitted to pay the broker less than the market value of the securities purchased; the customer then owes the broker the difference between the market, value of the securities at the time of purchase and the amount paid the broker. The extension of credit by brokers is governed by Regulation T of tbe Board of Governors of the Federal Reserve System, 12 O.F.R. § 220.1 et seq., promulgated pursuant to sections 7 and 8(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78g, 78h(a).

      . Goodbody filed an action for debt against McCormick in Florida state court in January, 1971, to recover the amount allegedly due. McCormick filed an answer and a counter-claim for damages for violations of initial margin requirements under the Securities Exchange Act of 1934. The state court dismissed the counter-claim for lack of subject matter jurisdiction.

      . The district court also determined that “the claim of the A. F. & T. R. McCormick Trust is that of an ordinary trust and as such may not be asserted under the Securities Exchange Act of 1934, as amended.” (Conclusions of Law ¶ 2, Record, Vol. VI, pp. 2094-95). That conclusion was apparently based on the court’s finding that the trust was an “ordinary, simple trust” as opposed to a “business trust” and thus was not entitled to assert a claim as a “person,” which the Act. defines as “an individual, a corporation, a partnership, an association, a joint-stock company, a business trust, or an unincorporated organization.” 35 U.S.C. § 78e(a)(9). We need not review that determination here, since all claims that McCormick raised in bis capacity as trustee he also raised in his individual capacity. Even assuming that the trust, could assert a claim under the Act, its cause of action would fail for the same reasons that McCormick’s individual claims must fail.
      Neither do we reacli the thorny problems surrounding Goodbody’s belated assertion of a statute of limitations defense. Under paragraph 8(b) of their Pretrial Stipulation (Record, Vol. IV, p. 1502), the parties agreed that at least eight of the nine transactions challenged under Regulation T were not barred by any statute of limitations. In its subsequent trial brief Goodbody requested leave to amend paragraph 8(b) of the Pretrial Stipulation to provide that all nine transactions were “barred by statute of limitations contained in Florida Statutes § 517.-21” (Record, Vol. V, p. 1648) ; McCormick neither agreed nor explicitly objected to that request. The district court granted leave to add the affirmative defense and then held that McCormick’s claims with respect to all nine transactions were barred by the section 517.21 statute of limitations. Because we affirm the district court’s decision upholding Goodbody’s Regulation T defense on the merits, we need not decide whether the court properly permitted the unilateral amendment of the Pretrial Stipulation, and if such amendment was proper, whether the court applied the appropriate statute of limitations.

      . In Pearlstein the customer sought to recover from the broker the difference between the amounts he would have received for securities not paid for on time if the broker had sold those securities on the day payment was due and the amounts actually received when the securities were sold later. Although McCormick does not explicitly state in his brief or complaint the nature of his damages, his theory is presumably similar to Pearlstein’s.

      . In Gordon v. duPont Glore Forgan, Inc., 5 Cir. 1973, 487 F.2d 1260, cert. denied, 1974, 417 U.S. 946, 94 S.Ct. 3071, 41 L.Ed.2d 666, we declined to extend the Pearlstein analysis to New York Stock Exchange rules. See Part III, infra.

      . The operation of the S.M.A. has been described elsewhere in some depth. See, e. g., W. Rubin & A. Gambaro, Fundamentals of Margin Trading 46-67 (1969). We here provide only a brief note on initial margin requirements and retention requirements in order to illustrate the relationship between an S.M.A. and a general margin account.
      The parties stipulated that, at the times of all relevant transactions between them, the applicable initial margin requirement in effect under Regulation T was 80% — i. e., the customer was required to deposit 80% of the value of the securities to be purchased with the broker within five business days of the purchase. The broker was thus permitted to extend credit to the customer in an amount up to 20% of the value of the purchased securities.
      Regulation T also limits the amount of cash a customer may withdraw from his account when “the adjusted debit balance of the account . . . would exceed the maximum loan value of the securities in such account after such withdrawal.” 12 C.F.R. § 220.3(b)(2). Because the debit balance in McCormick’s account exceeded the 20% maximum loan value (see Supplement to Pretrial Stipulation ¶ 8, Record, Vol. IV, p. 1562) of the securities in his account at the time of each of the transactions in question here, McCormick’s account was “restricted” by the provisions of 12 C.F.R. § 220.3(b)(2). Section 3(b) (2) (iv) of Regulation T, 12 C.F.R. § 220.3(b) (2) (iv), provides that, in a restricted account, “upon the sale ... of margin securities or securities having loan value in the general account, . . . there may be withdrawn in cash an amount equal to the difference between the current market value of the securities sold and the ‘retention requirement’ of such securities.” The parties stipulated that the applicable “retention requirement” under Regulation T, Supplement, was 70%. Thus, the customer could withdraw in cash 30% of the market value of the securities sold. If the customer had an S.M.A., however, the entire proceeds from the sale of securities could be applied to the customer’s debt to the broker, and the customer would retain in his S.M.A. the buying power of the 30% cash he could have withdrawn but did not.

      . The statements contained the following language :
      If this is a “general” account it is a combined statement of your general account and of a special miscellaneous account maintained for you under Section 4(f) (6) of Regulation T issued by the Board of Governors of the Federal Reserve System. The permanent record of the separate account as required by Regulation T is available for your inspection upon request.
      The district court found that McCormick had notice of the,. Special Miscellaneous Account maintained for him by Goodbody. (Findings of Fact ¶ 6, Record, Vol. VI, p. 2093).

      . See footnote 7, supra.

      . This principle and the operations described in footnote 7, supra, can be illustrated with an example froiq plaintiff’s account with Goodbody. On October 21, 1968, McCormick purchased 100 shares of Ford Motor Company stock at a total cost of $6019.98, and sold 100 shares of National Airlines stock yielding a net return of $3707.17. Assuming no S.M.A., McCormick would have been required to deposit with Goodbody within five business days of the October 21 transactions 80% of the difference between the cost of the Ford stock and the yield from the National Airlines stock. [80% ($6019.98 — $3707.17) =80% ($2312.-81) =$1850.24],
      Prior to the transactions effected on October 21, 1968, McCormick’s account was as follows:
      Market Value Equity Debit
      $343,052.50 . $179,634.84 $163,417.66
      Following the transactions of October 21, 1968, if Goodbody had demanded that McCormick meet the Regulation T initial margin requirement, McCormick’s account would have been as follows:
      Market Value Equity Debit
      $345,365.31 $131,485.08 $163,880.23
      McCormick’s account, however, did" not stand as described. The parties’ Pretrial Stipulation shows that, following the October 21 transactions, McCormick’s account, without respect to the S.M.A., was as follows (Pretrial Stipulation U 5(g). Record, Vol. IV, p. 1494) :
      Market Value Equity Debit
      $345,365.31 $179,634.84 $165,730.47
      As indicated in text above, the parties agree that the extension of credit represented by the foregoing figures would constitute a violation of Regulation T, if the S.M.A. is not considered.
      Goodbody did maintain an S.M.A. for McCormick, however, and it applied the alleged purchasing power in that account to meet the 80% margin requirement. Goodbody’s books reflected the status of McCormick’s account before and after the October 21, 1968 transactions as follows (Pretrial Stipulation $ 5(p). Record, Vol. IV, p. 1498):
      Market Value Equity Debit S.M.A.
      Before $343,052.50 $179,634.84 $163,417.66 $2,269.77
      After $345,365.31 $179,634.84 $165,730.47 $ 419.53
      As these figures demonstrate, because McCormick supplied no additional cash to complete the October 21 transáctions, his equity remained the same. His debt to Goodbody was increased by the full amount of the difference between the cost of the shares purchased and the yield from the shares sold ($2312.81); and the purchasing power in his S.M.A. was diminished by 80% of that difference — i. e., by the amount of the margin requirement ($1850.24).

      . McCormick asserts in his brief that Good-body admitted through pretrial stipulations that it was in violation of Rule 431(b) for a continuous seven month period. Our examination of the pretrial stipulations and other relevant portions of the record reveals no such admission and no such violation. In fact, for the seven month period apparently referred to, the margin maintained in McCormick’s account was near or above 50%.

      . In Gordon the brokerage firm set its own maintenance margin requirement at 30%, but granted the Gordons a special dispensation by lowering their requirement to 25%. The firm’s computer, which was programmed to give a warning when accounts fell below 30%, was not used for the Gordons’ account, and the broker “inadvertently miscalculated the Gordons’ margin.” 487 F.2d at 1263.


author: THORNBERRY, Circuit Judge:

text:
    John M. WATZ, Plaintiff, v. ZAPATA OFF-SHORE COMPANY, Defendant, v. EATON YALE & TOWNE, INC., Defendant Fourth-Party-Plaintiff-Appellee, v. CAMPBELL CHAIN COMPANY, Defendant Fourth-Party-Defendant-Appellant.
    No. 73-2162.
    United States Court of Appeals, Fifth Circuit.
    Sept. 16, 1974.

      John G. Tucker, Beaumont, Tex., for defendant fourth-party-defendant-appellant.
    James W. Mehaffy, Dewey J. Gonsou-lin, Beaumont, Tex., for defendant fourth-party-plaintiff-appellee.
    Before BELL, THORNBERRY and DYER, Circuit Judges.
   THORNBERRY, Circuit Judge:

Following an interlude of nearly four years we are called upon for renewed consideration of this admiralty dispute. Reference is made to this Court’s earlier opinion, Watz v. Zapata Off-Shore Co., 431 F.2d 100 (5th Cir. 1970), wherein a detailed factual summary and discussion of substantive issues may be found.

The sole question now before us is whether the district court properly rejected on remand the defense of laches asserted by fourth-party defendant Campbell Chain Company (Campbell). We conclude that the district court’s findings of fact are not clearly erroneous and that its judgment is correct. Therefore we affirm. The history of this litigation is lengthy, but the material events are now either at rest or free from serious dispute. We shall recite them only insofar as they are essential to an understanding of our decision.

During late 1956 or early 1957 Campbell manufactured a steel chain. In early 1957 Campbell sold this chain to Eaton Yale & Towne, Inc. (Eaton), who incorporated it into a chain hoist. Subsequently, Eaton sold the assembled hoist to Levingston Shipbuilding Company, plaintiff Watz’ employer. On October 12, 1959 Watz was using the hoist to lift pipe aboard a vessel owned by Zapata Off-Shore Company (Zapata). The chain failed and the load dropped, injuring Watz.

Having collected workmen’s compensation benefits, Watz did not sue until May 5, 1967, when he filed his original complaint against Zapata. On March 8, 1968 Zapata impleaded Eaton, and on May 3 Eaton impleaded Campbell. Watz quickly amended to name Eaton as a primary, as well as third-party, defendant.

The district court found the vessel un-seaworthy, found both Eaton and Campbell negligent, entered judgment for Watz against both Zapata and Eaton, awarded Zapata contribution against Eaton for fifty percent of the judgment, and awarded Eaton contribution against Campbell for one-half of this fifty percent. The liabilities of Eaton and Campbell derived, in pertinent part, from findings that Eaton negligently failed to discover- a defective chain weld before delivering the hoist and that Campbell negligently manufactured the chain.

A panel of this Court reversed as against Zapata on the ground that the vessel had been withdrawn from navigation. This left standing Watz’ judgment against Eaton, but now for the full amount. With respect to Eaton’s claim for contribution against Campbell, the chain company argued that the claim was barred by laches. We remanded for further factual development, findings, and legal conclusions concerning Campbell’s asserted defense. Thereafter Eaton paid the full amount of the judgment, a hearing was held, and the district court concluded that Campbell’s laches defense was not a valid one. Judgment was entered in Eaton’s favor for one-half of the sum paid to Watz, and Campbell now appeals.

In its brief Campbell raises a number of points that may be synthesized into two main contentions: First, Campbell argues that the district court’s findings against the existence of laches lack evidentiary support and are therefore clearly erroneous. Alternatively it maintains that those findings, even if supported . by minimal evidence, are tainted by the application of erroneous legal principles concerning timely notice to a potential collateral defendant and the allocation of the burden of proof incident to sustaining or defeating a lach-es defense. We turn first to the factual issues.

I.

Some of the challenged findings were made by the district court at the first trial, while the balance were made following this Court’s remand. At the first trial the district court found that Eaton received notice of the accident from Zapata’s insurance carrier on April 25, 1960. By August 1961 Eaton knew that a claim might be asserted against it and obtained the hoist for inspection. By the end of October Eaton had subjected the chain to certain strength tests; yet Eaton did not obtain the link that later proved defective until a week before trial. Since its tests revealed no defects, Eaton apparently assumed for some time that it had no liability. Nevertheless, the district court found on remand that as early as January 1962 Eaton requested its insurer to notify Campbell of the latter’s possible liability. Campbell’s agents testified that no notice was received, however, until April 1968. Similarly, the district court found no evidence indicating that the requested notification was ever given.

Campbell now contends that, in view of the gap of almost seven years between the notice to Eaton of possible liability and Eaton’s notice to Campbell, we must find Eaton’s claim for contribution barred by laches. Campbell seeks to advance its position with uncontradicted testimony that certain of its manufacturing and testing records dating back to 1956 and 1957 were destroyed in good faith during the interim when it was without notice. According to Campbell’s, evidence these records would have provided the name of the steel supplier, various testing procedures and results, and the name of the welder who fabricated the chain. Campbell asserts that the testing materials, had they been available at trial, would have disclosed whether or not quality control systems were in proper order at the time of manufacture. The welder’s testimony purportedly would have been relevant to these same issues. Finally, Campbell states that Eaton’s delay in giving notice of a possible claim deprived it of the opportunity to implead the steel supplier, or to defend on the theory that the chain was not even Campbell’s.

We find these contentions to be without merit. As the district court determined, and as this Court recognized on the prior appeal, Campbell’s liability flowed but from one variety of fault in a sequence of derivative negligence. We reiterate the earlier panel’s reasoning that while the testing materials might have permitted the district court to make specific findings on the number and adequacy of Campbell’s tests, the “[ejvidence did show and the district court did find . . . that the original weld on the link in question was defective.” 431 F.2d at 119. This Court noted that

once it was proved that a defective weld had occurred during the manufacture of the chain by Campbell, we believe that the district court sitting as a finder of fact could reasonably infer negligence from that circumstantial evidence.

Id.

In this case the district court so found, and the parties exhausted the issue on the prior appeal. On remand, moreover, Campbell’s plant manager, Mr. Gauntlett, testified from personal knowledge about the tests employed by Campbell. He stated that he knew the chain had been subjected to standard inspection procedures and that all strength requirements had been met or exceeded; otherwise, he testified, the chain would not have been sold. Eaton, however, presented expert testimony that other tests were feasible at the time of manufacture capable of discovering the particular defect in the link weld — the presence of foreign matter. From this evidence, which merely repeated the proof at the first trial, the district court might have found Campbell negligent in failing to perform these additional tests. That it chose not to do so in the absence of the original records is immaterial, for it is plain from the record that an effort by Campbell to shift its negligence liability — whether through test records, the identity of the steel supplier, or the welder’s testimony — would have been unavailing. Likewise unavailing is Campbell’s suggestion, raised now for the first time, that the records would have shown that Campbell did not manufacture the chain. In this respect it is sufficient to note that Campbell admitted manufacturing the chain in its answer to Eaton’s fourth-party complaint.

To the foregoing record the district court applied this Circuit’s oft-repeated criteria for determining the applicability of the doctrine of laches: a delay in asserting a right or claim; the issue whether or not the delay is excusable; and the question of undue prejudice to the party against whom the claim is asserted. Watz v. Zapata Off-Shore Company, 431 F.2d 100, 111 (5th Cir. 1970); McMahon v. Pan American World Airways, 297 F.2d 268, 270 (5th Cir. 1962). Although it made no specific findings concerning an excuse for Eaton’s failure to notify Campbell until shortly before the impleader, the district court did find that “Campbell Chain Company was not prejudiced by reason of any delay on the part of Eaton Yale & Towne in notifying Campbell Chain Company of the claim.” This finding was based on the court’s inference, drawn from the evidence, that even if Campbell’s records had been available at trial, “the trial court would have made the same findings that the defect in the chain occurred in the manufacturing process, rather than as a result of any imperfection in the steel itself as supplied to Campbell Chain Company.” We conclude that these findings of fact are solidly based on probative evidence, and we affirm them entirely.

II.

Yet despite the strength of the district court’s findings, Campbell would have us reverse on the basis of either of two proffered legal arguments. On one hand, Campbell asserts that the delayed notice gave rise to a presumption of prejudice, and that the district court improperly ignored the presumption by assigning to Campbell the burden of establishing the laches defense. Campbell states that this error is evident in'that the court rejected laches even though no evidence was presented and no findings were made on the issue of excuse. In the alternative, Campbell stresses the equitable characteristics of laches by contending that the doctrine affords a defense in a case in which there has been no delay in pressing a matured claim, but simply a delay in giving notice of a potential claim. For the reasons that follow, we again conclude that we cannot give effect to Campbell’s contentions.

In support of its argument that the district court incorrectly assigned the burden of proof, thereby giving Eaton the benefit of any theoretical “equal inferences,” Campbell extracts from the court’s findings of fact the statement that “[t]he only evidence by Campbell Chain Company as to any prejudice caused by the delay in being notified of the claim is that Campbell Chain Company would have had its records available to substantiate Mr. Gauntlett’s testimony had it been notified earlier.” It is Campbell’s contention that this statement, when taken together with the absence of findings on the issue of excuse, demonstrates that the district court failed to note that the analogous statute of limitations had run in Campbell’s favor. It is true, of course, that the court must look initially to the analogous statute in assigning the burden of proof on the question of laches. Flowers v. Savannah Machine & Foundry Co., 310 F.2d 135 (5th Cir. 1962). Campbell’s argument assumes, however, that in this case the statute would have begun to run against Eaton’s claim for contribution either at the time of the accident or upon Eaton’s receipt of notice, as opposed to the time at which Eaton ;was adjudged liable to Zapata or the date upon which Eaton paid the judgment. We need not decide which of these times must control, for we may assume that Campbell is correct in its contention that Eaton bore the burden to eliminate the elements of laches. Even so, it is clear from a review of the record in its entirety that Eaton dutifully undertook both the burden of producing evidence and the burden of persuasion. This is best illustrated by the fact that on remand Eaton opened and closed the testimony and aggressively elicited both from its own witness and from Campbell’s witnesses evidence supportive of its opposition to the defensive issue. Cognizant as we must be of the fact that the finer niceties of burden of proof are less easily misunderstood in nonjury trials, we simply cannot say from the evidence as a whole that we are “left with the definite and firm conviction that a mistake has been committed.” United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746 (1948); Lentz v. Metropolitan Life Ins. Co., 428 F.2d 36 (5th Cir. 1970).

Similarly, we find no merit in Campbell’s contention that it was incumbent upon Eaton to produce specific evidence of an-excuse for the delay. We need only repeat what the panel stated in its earlier opinion in regard to the fact that our recent decisions have relaxed the importance of proving excuse:

Since proof of either absence of prejudice or excuse for delay will repel a claim of laches, we conclude that the absence of prejudice in this case justifies the district court’s decision not to dismiss the suit for laches.

431 F.2d at 112 (emphasis in original). See Powell v. City of Key West, 434 F.2d 1075 (5th Cir. 1970); Crews v. Arundel Corp., 386 F.2d 528, 530 (5th Cir. 1967); Molnar v. Gulfcoast Transit, 371 F.2d 639, 642 (5th Cir. 1967); Akers v. State Marine Lines, Inc., 344 F.2d 217, 220 (5th Cir. 1965); Vega v. The Malula, 291 F.2d 415, 418 (5th Cir. 1961).

Our disposition of the previous issues renders it unnecessary to meet Campbell’s request for a definitive denomination of the point at which the risk of laches will attach in impleader situations. We recognize that because laches is a creature of equity the trial judge enjoys a wide area of discretion. Kelly v. Smith, 485 F.2d 520, 526 (5th Cir. 1973), cert. denied sub nom., Chicot Land Company, Inc. v. Kelly, 416 U.S. 969, 94 S.Ct. 1991, 40 L.Ed.2d 558 (1974); Powell v. City of Key West, supra. We also recognize that persuasive cases can be made for imposing on a knowledgeable defendant an early duty to alert a potential collateral tortfeasor, 6. g., Long Island RR v. The New York Central No. 25, 182 F.Supp. 100, 104-105 (S.D.N.Y.1960), even though that defendant’s right or claim does not technically arise until he pays a judgment or is at least held liable in his own account. See Boris v. Moore, 152 F.Supp. 602, 604 (E.D.Wis.1957), affirmed sub nom., Boris v. Hamilton Mfg. Co., 253 F.2d 526 (7th Cir. 1958); J. Moore, Federal Practice ¶ 14.09 (1974); C. Wright & A. Miller, Federal Practice and Procedure § 1447 (1971). At the same time, however, we feel that it would presently be unfair to announce for courts and litigants a rule that might have the unintended effect of rigidifying the sensitive business of loss distribution. We shall therefore reserve our opinion for a case in which the issue is squarely presented.

Affirmed.

      . One of these points — that the district court on remand overlooked the law of the case as established by the prior panel opinion — may be disposed of summarily. Campbell contends that “it was settled that laches by reason of delayed notice was a defense, that the trial court was bound by this ruling, and that the question was not subject to be re-litigated.” Brief of Appellant Campbell Chain Company, page 5. We simply note that we are unable to strain this construction from the Court’s opinion, which merely held that laches, as a question of fact, was a proper issue for determination on remand. See 431 F.2d at 118.

      . At the first trial and on the prior appeal Campbell argued that the timeliness of Eaton’s claim for contribution should be governed by state law. The Texas statute permits personal actions to be brought within two years following the accrual of the claim, Vernon’s Tex.Rev.Civ.Stat.Ann. art. 5526 (1958), whereas the federal Jones Act, 46 U.S.C. § 688 (1970), adopts for actions based on the death or injury of seamen the FELA limitation of three years. Because it found admiralty jurisdiction over AVatz’ claim against Zapata, the earlier panel concluded that laches was the appropriate standard governing that claim. It therefore followed that the burden -of proof on laches should be assigned with reference to the Jones Act period, although the decision to remand made it unnecessary to decide when that period began to run against Eaton. See 431 F.2d at 111. Rejecting Campbell’s assertion that Eaton’s claim was barred by state law, the panel simply stated that “[sjince we have found admiralty jurisdiction . . . laches is the applicable standard.” Id. at 118 n. 21. In view of our disposition of this appeal, we express no opinion on that statement’s accuracy to the extent that it may contain assumptions concerning the properly analogous statute of limitations with respect to third-party claims whose maritime connections are essentially incidental or fortuitous.

      . AYe construe the district court’s statement as nothing more than a comment on the weakness of Campbell’s evidence of prejudice, see part I supra,, rather than a misallo-cation of the burden of proof.
      Nor do we seriously concern ourselves with Campbell’s contention that the delay created an evidentiary presumption of prejudice. Such a presumption, in a true sense, would exist only in the absence of evidence to rebut the presumed fact. Foundation Co. v. Henderson, 264 F. 483 (5th Cir. 1920). Once rebuttal evidence came in, and we have indicated our opinion that such evidence was abundant, the risk would shift to Campbell to produce additional evidence to salvage its ease. Otherwise Campbell would be left to rely on the weak natural inferences from the evidence already introduced, and we think it highly doubtful that those inferences could have precluded findings in Eaton’s favor in any event. See generally C. McCormick, Evidence §§ 342, 345 (2d ed. 1972).


author: RIVES, Circuit Judge:

text:
    Jim L. NAPPER and wife, Jo Ann Napper, Plaintiffs-Appellants, v. ANDERSON, HENLEY, SHIELDS, BRADFORD & PRITCHARD, etc., Defendants-Appellees.
    No. 73-3746.
    United States Court of Appeals, Fifth Circuit.
    Sept. 16, 1974.

      Charles Ben Howell, H. Averil Sweitzer, Dallas, Tex., for plaintiffs-appellants.
    D. L. Case, Jack Pew, Jr., Dallas, Tex., for defendants-appellees.
    Before BROWN, Chief Judge, and RIVES and DYER, Circuit Judges.

      . “§ 1337. Commerce and anti-trust regulations

      “The district courts shall have original jurisdiction of any civil action or proceeding arising under any Act of Congress regulating commerce or protecting trade and commerce against restraints and monopolies.”

   RIVES, Circuit Judge:

This appeal is from a judgment of the district court dismissing the case for want of jurisdiction and without prejudice. We affirm.

The complaint seeks the recovery of damages from a Dallas, Texas, law partnership and the individual partners for alleged malpractice involving the validity and effect of a conveyance of the Napper’s home in Dallas. • The first action asserting this claim was filed by plaintiffs on June 9, 1971, in the Circuit Court of Pulaski County, Arkansas. The complaint alleged that the cause of action arose in Arkansas, and sought ,to have the Arkansas state court acquire “long-arm” jurisdiction over the Texas defendants (See Arkansas Statutes 27-2502).

On July 12, 1971, defendants filed a petition for removal to the Federal District Court for the Eastern District of Arkansas asserting diversity jurisdiction that the plaintiffs were citizens of Arkansas and the defendants were citizens of Texas. Defendants then filed in the federal district court to which the case had been removed a motion to quash the “long-arm” service of process.

The next month, on August 23, 1971, the plaintiffs filed in the United States District Court for the Northern District of Texas a complaint in the present case, identical, except for minor grammatical changes, to the complaint pending in the federal district court in Arkansas. This complaint stated:

“Plaintiffs are filing this suit as a precaution against having their cause dismissed after the running of the applicable limitations period. Plaintiffs requested that the Court withhold proceedings hereon pending a ruling by the federal courts of Arkansas upon the jurisdictional question.”

Plaintiffs based federal jurisdiction on diversity of citizenship, asserting that the defendants were all citizens of Texas and going into some detail as to their own citizenship:

“Notwithstanding the fact that plaintiffs, Jim L. Napper and wife, Jo Ann Napper, own homestead property in Texas, they have established sufficient residence in the State of Arkansas to entitle them to invoke the diversity jurisdiction of the United States District Court for the Northern District of Texas.”

The defendants on September 2, 1971, moved to dismiss plaintiffs’ complaint for lack of jurisdiction, alleging:

“It affirmatively appears on the face of Plaintiffs’ complaint that they are citizens and residents of Texas, as are the Defendants, so that no diversity of citizenship exists. In the alternative, if it does not affirmatively appear on the face of Plaintiffs’ complaint that they are citizens of the State of Texas, then Defendants affirmatively assert that they are citizens of such state, so that there is no diversity of citizenship, and the Court has no jurisdiction over the cause of action asserted by Plaintiffs.”

More than a year later, on November 21, 1972, the defendants filed in the federal district court in Arkansas a motion to dismiss for want of diversity jurisdiction, asserting plaintiffs to be citizens of the same state as were defendants, that is Texas. On May 9, 1973, a hearing was conducted on that motion to dismiss. The district judge found that the plaintiffs at the time of filing their complaint and since had the intention of going back to Texas. In part, the Judge said:

“The Court believes that his [Mr. Napper’s] intention when he came here was not to make Arkansas his home on an indefinite basis, that that is what is absent and, therefore, he remained domiciled in Texas and remained a Texas citizen, although residing in Arkansas.”

The case was accordingly remanded to the Circuit Court of Pulaski County, Arkansas. That state court never reached the merits, but ultimately sustained the defendants’ motion to quash the “long-arm” service of process.

On September 25, 1973, the plaintiffs filed in the present case an amended complaint reasserting the same claim based on diversity jurisdiction with the same allegations of citizenship. As an alternative claim, the plaintiffs sought to recover damages alleged to have resulted from violation by the defendants of the wire fraud act, 18 U.S.C. § 1343. The plaintiffs claim that violation of that criminal statute operates to create a federal cause action for damages against the defendants, and assert jurisdiction under 28 U.S.C. § 1337.

In Oppenheim v. Sterling, 1966, 368 F.2d 516, 518-519, the Tenth Circuit held that 18 U.S.C. §§ 1341, 1342, relating to mail fraud, are purely penal and rejected “the view that a violation of these penal statutes as such affords the court federal question jurisdiction in a civil case.” The wire fraud act, 18 U.S. C. § 1343, is closely analogous to the mail fraud statute, 18 U.S.C. § 1341, and likewise evidences no intent of Congress to grant additional federal question jurisdiction in civil cases. Reitmeister v. Reitmeister, 2 Cir. 1947, 162 F.2d 691, does not persuade us differently.

Estoppel by judgment precludes the plaintiffs from successfully asserting diversity jurisdiction. The distinction between res judicata and estoppel by judgment is discussed in Commissioner v. Sunnen, 1948, 333 U.S. 591, 597, 598, 68 S.Ct. 715, 92 L.Ed. 898. Estoppel by judgment will not permit matters actually litigated and determined between the same parties in one proceeding to be relitigated (333 U.S. at 598, 68 S.Ct. 715). We agree with the full and amply supported discussion in IB Moore’s Federal Practice fí 0.405 [5], that

“the underlying policy of res judicata is not restricted to a valid judgment that deals solely with the merits; it extends to and includes matters in abatement, such as jurisdiction of the subject matter, federal jurisdiction, jurisdiction over the res, jurisdiction over the defendant, venue, and related matters.” (Footnotes omitted.)

As between the two federal district courts, the inability to appeal from the order of remand does not permit the issue actually litigated and determined in the federal court in Arkansas to be relitigated in the second action. Johnson Company v. Wharton, 1894, 152 U.S. 252, 14 S.Ct. 608, 38 L.Ed. 429; see also the full discussion of and possible limitations to this rule in IB Moore’s Federal Practice ¶ 0.416 [5].

The federal district court in Arkansas held that as of July 12, 1971, the date of removal, it lacked jurisdiction because plaintiffs were on that date citizens of Texas. To sustain federal jurisdiction in the Texas district court, plaintiffs had the burden of proving that they had changed their citizenship between July 12 and August 23, 1971, when their complaint in the present case was filed. Though afforded ample opportunity to do so, the plaintiffs have never pleaded or proved any change of citizenship during that crucial period. The district court properly dismissed the case for want of jurisdiction, and its judgment is

Affirmed.

      . The conveyance is that described in Napper v. Johnson, Tex.Civ.App.1971, 464 S.W.2d 406.

      . “§ 1343. Fraud by wire, radio, or television

      “Whoever, having devised or intending to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises, transmits or causes to be transmitted by means of wire, radio, or television communication in interstate or foreign commerce, any writings, signs, signals, pictures, or sounds for the purpose of executing such scheme or artifice, shall be fined not more than $1,000 or imprisoned not more than five years, or both.”

      . The estoppel by judgment is accurately termed “direct estoppel” where the issue is actually litigated and determined in an action between the same parties based upon the same cause of action. See A.L.I. Restatement, Judgments § 45 comment d; Estevez v. Nabers, 5 Cir. 1955, 219 F.2d 321, 324; Myers v. Ampex, Inc., 5 Cir. 1974, 498 F.2d 1092 [1974]; 46 Am.Jur.2d § 397, p. 566 n. 7. That distinction between “direct estoppel” and “collateral estoppel” helps to make clear our conclusion that neither the standards of law applied by the federal district court in Arkansas nor its findings of fact may be relitigated.


author: BELLONI, District Judge:

text:
    UNITED STATES of America, Plaintiff-Appellant, v. BURLINGTON NORTHERN, INC., and John R. Solomon, Defendants-Appellees.
    No. 72-2971.
    United States Court of Appeals, Ninth Circuit.
    July 18, 1974.

      Glen R. Goodsell (argued), Lands Div., Dept, of Justice, Washington, D. C., for plaintiff-appellant.
    John Gavin (argued), Gavin, Robinson, Kendrick, Redman & Mays, Yakima, Wash., for defendants-appellees.
    Before CHOY and WALLACE, Circuit Judges, and BELLONI, District Judge.

       Honorable Robert C. Belloni, United States District Judge, District of Oregon, sitting by-designation.

   OPINION

BELLONI, District Judge:

Appellant, the United States, brought this action to recover the costs of suppressing a forest fire which occurred in August, 1967, on land owned by appellee Burlington Northern and upon which appellee Solomon’s logging operations took place. Appellant entered appel-lees’ land to put out the fire under authority of a cooperative agreement with the State of Washington whereby appellant agreed to provide fire fighting services for certain land, including ap-pellees’. In its first two counts, appellant sought recovery under two Washington statutes, Revised Code of Washington (RCW) 76.04.370 and 76.-04.380, which, as they were written at the time of the fire, gave the State of Washington or certain of its agents claims against the owners and users of land for fire suppression costs under certain circumstances. In its third count, appellant alleged negligence in the accumulation of debris or “slash” from appellee Solomon’s logging operations, such debris allegedly being responsible for the spreading of a portion of the fire. The trial court dismissed the first two counts and submitted the case to the jury on an ordinary negligence theory. The jury returned a verdict for appel-lees.

Appellant’s first assignment of error is the dismissal of counts one and two of its complaint. The second assignment is the refusal of the trial court to instruct the jury that violation of RCW 76.04.370 is negligence per se, so that a verdict could be returned for appellant merely upon a finding of causation between any accumulation of debris and the spread of the fire. At oral argument, appellant dropped its claim based on RCW 76.04.-380 because of failure to comply with the statute’s notice requirement. Therefore, presented to us now are claims that appellant may sue directly under RCW 76.04.370 and that the statute establishes a standard of care the violation of which is negligence per se as to appellant.

Addressing the first claim, we start by noting that the statute expressly grants a cause of action only to the State of Washington. Appellant asserts the right to sue in place of the State of Washington where appellant incurs fire suppression expenses under its cooperative agreement with the State. However, we perceive the rule in Washington, as well as the general rule, to be that when a statute creates a cause of action not recognized at common law, and when, as here, the statute expressly states who is entitled to bring the action, then that statute is to be read narrowly as to who may sue, and a plaintiff must bring itself within the terms of the statute. Dernac v. Pacific Coast Coal Co., 110 Wash. 138, 188 P. 15, 17 (1920); Whittlesey v. City of Seattle, 94 Wash. 645, 163 P. 193, 195 (1917); see Boeing Airplane Co. v. Perry, 322 F.2d 589, 591-592 (10th Cir. 1963) (dicta); Patterson v. Sears-Roebuck & Co., 196 F.2d 947, 949 (5th Cir. 1952); City & County of Denver v. Miller, 151 Colo. 444, 379 P.2d 169, 173 (1963); see also In re Tyler’s Estate, 140 Wash. 679, 250 P. 456 (1926); McDermott v. Kaczmarek, 2 Wash.App. 643, 469 P.2d 191, 194 (1970).

Appellant’s theory is that it has been subrogated to the State’s claim either by virtue of the cooperative agreement with Washington or by operation of law. We find nothing in the portions of the agreement before us to indicate an intent to subrogate appellant to Washington’s claim. Nor has appellant cited any authority whereby common law subrogation theory has been applied to permit one person or entity from suing in place of one to which a cause of action is expressly granted by statute. We know of no such authority. Seeing nothing to the contrary, the rule stated above governs this case. The United States may not sue under ROW 76.04.-370 as it was written in August, 1967.

The cases cited by appellant in support of its right to sue are inapposite in that they only go so far as to allow the United States to sue under statutes creating causes of action for a class which is described in general terms, e. g. “persons,” United States v. Boone, 476 F.2d 276, 277-278 (10th Cir. 1973); under statutes which do not specify who may sue, Chesapeake & O. Ry. Co. v. United States, 139 F.2d 632, 633 (4th Cir. 1944); United States v. Chesapeake & O. Ry. Co., 130 F.2d 308, 310 (4th Cir. 1942); or as an adjoining landowner for negligence established by violation of a criminal statute. Spokane Int. Ry. Co. v. United States, 72 F.2d 440, 442 (9th Cir. 1934). None of the statutes involved in those cases specified the party that could recover. Here, the statute specifies that the State of Washington may recover. The United States may not.

The second issue presented is the trial court’s failure to instruct the jury that violation of RCW 76.04.370 is negligence per se as to appellant. However, because appellant did not request instructions to that effect at trial, we hold that the issue has not been preserved on appeal.

In a civil action, failure to make timely request of instructions at trial precludes review on appeal of the trial court’s failure to so instruct. Hays v. United Fireworks Mfg. Co., 420 F.2d 836, 841 (9th Cir. 1969); Panther Oil & Grease Mfg. Co. v. Segerstrom, 224 F.2d 216, 218 (9th Cir. 1955); Bercut v. Park, Benziger & Co., 150 F.2d 731 (9th Cir. 1945); see Bertrand v. Southern Pacific Co., 282 F.2d 569, 572 (9th Cir. 1960). Here, appellant contended in the Pre-Trial Order, as it does before us, that violation of RCW 76.04.370 constitutes negligence per se. Yet, at trial appellant’s theory was absolute liability, and its requested instructions were framed in terms of absolute liability. Since appellant failed to request negligence per se instructions at trial, and since the mere refusal to give faulty instructions is not error, see Bertrand v. Southern Pacific Co., supra at 573, the failure to instruct on negligence per se is not before us.

At oral argument, appellant argued that for the purposes of this case absolute liability and negligence per se are the same, and that therefore, in substance, the trial court was presented with the issue now assigned as error here. We disagree.

Liability for damage without proof of fault or negligence is applied in Washington law to a number of situations, including transporting gasoline by truck along public highways and streets, Siegler v. Kuhlman, 81 Wash.2d 448, 502 P.2d 1181 (1972); blasting with explosives, Foster v. Preston Mill Co., 44 Wash.2d 440, 268 P.2d 645 (1954); placing on the market houses unfit for their intended use, House v. Thornton, 76 Wash.2d 428, 457 P.2d 199 (1969), and unreasonably dangerous products, Ulmer v. Ford Motor Co., 75 Wash.2d 522, 452 P.2d 729 (1969); and the knowing keeping of a dog with vicious or dangerous propensities. Johnston v. Ohls, 76 Wash.2d 398, 457 P.2d 194 (1969). One common element in all of these applications, whether the theory is labelled “absolute” or “strict” liability, is that recovery may be had without proof of negligence. Apparently, appellant’s argument is that application of the negligence per se doctrine in Washington law reaches the same result in this case since by tying liability to the violation of a statute the issue of negligence is eliminated. The argument is without merit.

In Wood v. Chicago, Mil., St. Paul & Pac. R. Co., 45 Wash.2d 601, 277 P.2d 345 (1954), aff’d on rehearing, 45 Wash.2d 601, 283 P.2d 688 (1955) (en banc), the Washington Supreme Court said:

This court has long been committed to the rule that violation of a positive statute constitutes negligence per se. But the rule has not been applied with relentless indifference to actual fault.
•X- •» -X- # * -X-
An analysis of the above cases indicates a reluctance by this court to impose liability by finding negligence per se; that is, negligence as a matter of law, where no negligence exists in fact. Such decisions are not intended to emasculate the doctrine of negligence per se, but rather to place it within rational judicial control. [Emphasis in text.]

Id. at 349-350. We do not read Wood to impose on plaintiffs the burden of proving common law negligence in addition to proving a violation of a statute. Such a reading would go far to “emasculate” the negligence per se doctrine. Rather, Wood stands for the proposition that when a prima facie case of negligence liability for violation of a statute has been made out, the defendant has an opportunity to explain the violation and to present an excuse in order to show that the violation occurred without negligence. Defendant may show the violation to be due to some cause beyond defendant’s control, Brotherton v. Day & Night Fuel Co., 192 Wash. 362, 73 P.2d 788, 791 (1937), or to an emergency, Burlie v. Stephens, 113 Wash. 182, 193 P. 684, 687 (1920), or that the violation was merely ‘technical”. Baldwin v. Washington Motor Coach Co., 196 Wash. 117, 82 P.2d 131, 134 (1938). This is a distinction between absolute liability and negligence per se in Washington law important to the case before us.

At trial, appellees raised the issue of excuse by pointing out their position at the time of the fire of having to violate either RCW 76.04.370, requiring disposal of slash, or RCW 76.04.170, prohibiting burning in the forest without a permit between April 15 and October 15. We believe the jury could have found that avoidance of the danger of introducing fire into the forest during the summer, as recognized in part by RCW 76.04.170, excused any violation of RCW 76.04.370 by appellees. See Restatement (Second) of Torts § 288A(2) (e).

The issue of excuse having been raised, there is a distinction between absolute liability and negligence per se which prevents appellant’s absolute liability instructions from being the functional equivalent of negligence per se instructions. The requested instructions failed to present to the jury either negligence or, the other side of the coin, excuse. Two instructions requested a verdict “without any requirement of a showing of negligence” or “regardless of whether or not it is reasonable for the condition to exist.” Others asked for a verdict upon merely a finding of a hazard and of causation.

Because the requested instructions effectively presented only an absolute liability theory, they were faulty and properly refused. We need not reach the issue of whether the trial court should have instructed the jury on the theory of negligence per se because the trial court was not requested to do so.

Affirmed.'

      . At the time of the fire which resulted in this action, ROW 76.04.370 read, in relevant part, as follows:

        Abatement of fire hazards — Recovery of cost. Any land in the state covered wholly or in part by inflammable debris created by logging or other forest operations, land clearing, or right of way clearing and which by reason of such condition is likely to further the spread of fire and thereby endanger life or property, shall constitute a fire hazard, and the owner thereof and the person responsible for its existence shall abate such hazard. If the state shall incur any expense from fire fighting made necessary by reason of such hazard, it may recover tlie cost thereof from the person responsible for the existence of such hazard or the owner of the land upon which such hazard existed, and the state shall have a lien upon the land therefor enforceable in the same manner and with the same effect as a mechanic’s lien. Nothing in this section shall apply to land for which a certificate of clearance has been issued.