author: LYNNE, District Judge:

text:
    KEYSTONE PLASTICS, INC., Plaintiff-Appellant-Cross Appellee, v. C & P PLASTICS, INC., et al., Defendants-Appellees-Cross Appellants.
    No. 72-3430.
    United States Court of Appeals, Fifth Circuit.
    Jan. 17, 1975.

      John Cyril Malloy, Miami, Fla., Howard C. Miskin, Rogers, Hoge & Hills, New York City, Moise W. Dennery, New Orleans, La., for plaintiff-appellant-cross appellee.
    John H. Oltman, Fort Lauderdale, Fla., Hiram P. Settle, Jr., Bernard J. Cantor, Detroit, Mich., for defendantsappellees-cross appellants.
    Before WISDOM and GOLDBERG, Circuit Judges, and LYNNE, District Judge.
   LYNNE, District Judge:

Tried by capable and diligent counsel, factual disputes pertaining to the manufacture of extruded polypropylene plastic bristles for use in mechanical street sweeper brushes produced a record of immense volume in the court below.

The resolution of such disputes and the legal questions arising therefrom by Judge King appear in his Findings of Fact and Conclusions of Law published in Keystone Plastics, Inc. v. C & P Plastics, Inc., 340 F.Supp. 55 (D.C.1972).

To avoid supererogation reference will be freely made to such published findings in addressing the issues formulated by appellant. Of preliminary concern is the admitted adoption by the trial court of the findings and conclusions prepared by counsel for appellees and entry thereof without prior notice to counsel for plaintiff.

This Court has consistently expressed its disapproval of the practice of unconditionally adopting findings submitted by one of the parties to the litigation. The reason should be self-evident. The reviewing court deserves the assurance that the trial court has come to grips with apparently irreconcilable conflicts in the evidence, such as appear in the case sub judice, and has distilled therefrom true facts in the crucible of his conscience.

Of course, in areas of highly specialized litigation the typical trial judge is apt to be unfamiliar with the nomenclature common to the art or science involved. In such cases he needs help in reducing his ultimate decision to accurate and understandable words.

As the organ of the court in Louis Dreyfus & Cie. v. Panama Canal Company, 298 F.2d 733, 738 (5th Cir. 1962), Judge Wisdom commented:

In analyzing the significance that should be attached to the adoption by the trial judge of findings drafted by one of the litigants, common sense may be a better guide than ideal decision-making. As an ideal matter it would be desirable for the trial judge to draft his own findings in every case. This would supply insurance, for the benefit of the appellate court, that the trial judge did indeed consider all the factual questions thoroughly and would guarantee that each word in the finding is impartially chosen. In the workaday world, however, it may often be necessary for a hardpressed district court to take assistance from counsel in articulating his decision. This assistance may be especially helpful in a case involving complex and technical subject matter, as in patent cases, where the aid of a specialist may be but a shade short of indispensable. In such cases it must be assumed that the trial judge considered the case from all angles and reached his decision independently before placing reliance on the proposed findings. The ultimate question that the judge must face is whether to enter judgment for plaintiff or defendant, and he must decide this question on his own before deciding which proposed findings to accept. [Emphasis added].

There is a technique utilized by trial judges which fairly accommodates this requirement of specialized assistance in the preparation of findings of fact in such cases to the imperative that such findings be his and his alone. Counsel for the party who is due to prevail in the tentative opinion of the court will be requested to submit proposed findings of fact and conclusions of law to the court and simultaneously to serve a copy thereof upon adverse counsel. Thereafter, at a hearing attended by counsel for all interested parties, the court will proceed to enter findings and conclusions as proposed or as appropriately modified.

But, contrary to the insistance of plaintiff, this Court is committed to the proposition that, even though the trial court has ignored this reiterated admonition and has uncritically accepted findings proposed by one of the parties, such findings must be tested by the standard of review mandated by Rule 52, F.R.Civ.P., 28 U.S.C.A.

In the seminal case of Zenith Corp. v. Hazeltine, 395 U.S. 100, 123, 89 S.Ct. 1562, 1576, 23 L.Ed.2d 129 (1969), that standard was clearly explicated:

In applying the clearly erroneous standard to the findings of a district court sitting without a jury, appellate courts must constantly have in mind that their function is not to decide factual issues de novo. The authority of an appellate court, when reviewing the findings of a judge as well as those of a jury, is circumscribed by the deference it must give to decisions of the trier of the fact, who is usually in a superior position to appraise and weigh the evidence. The question for the appellate court under Rule 52(a) is not whether it would have made the findings the trial court did, but whether “on the entire evidence [it] is left with the definite and firm conviction that a mistake has been committed.” [Citations omitted].

It would be a mistake to suppose that the “clearly erroneous” rule provides an escape valve for the reviewing court, for the key to its application is not the findings made by the court but the substantiality of the record evidence to support such findings. The frequently onerous task of canvassing the whole record when it is contended that certain findings are clearly erroneous is inescapable. In another context the Supreme Court has written:

[A] reviewing court is not barred from setting aside a decision when it cannot conscientiously find that the evidence supporting that decision is substantial, when reviewed in the light that the record in its entirety furnishes, including the body of evidence opposed to the [Court’s] view. Universal Camera Corp. v. Labor Bd., 340 U.S. 474, 488, 71 S.Ct. 456, 465, 95 L.Ed. 456 (1951).

Literally, hundreds of hours have been devoted to an analysis of the evidence admitted by the trial court in the case sub judice. It would unduly extend this opinion to discuss the evidence both supportive of and opposed to the critical Findings of Fact, numbered 12 through 76, entered by Judge King.

I. The Trade Secrets Claim.

Contending that the trial court erred in finding that none of its trade secrets were taken or used by defendants, plaintiff adduced evidence tending to paint a sordid picture of bribery and theft. It is accurately summarized in Judge King’s Findings of Fact numbered 9, through the third sentence of Finding 13.

No choice of laws problem is apprehended. Both the law of New Jersey, where the piracy is said to have occurred, and that of Florida, where its fruits were claimed to have been utilized, afford protection of trade secrets. Recently, in University Computing Co. v. Lykes-Youngstown, 504 F.2d 518 (5th Cir. 1974), this court has articulated legal standards on protection of trade secrets. It is reasonable to suppose that both New Jersey and Florida would apply these standards which were anticipated by the Supreme Court in Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 94 S.Ct. 1879, 40 L.Ed.2d 315 (1974), in holding that federal patent supremacy does not preempt state trade secret protection.

At trial, defendants adopted the strategy of compelling the witness, William Gould, in his oral testimony, to identify one by one the components of appellant’s extrusion line which he regarded as plaintiff’s trade secrets, and thereafter to demonstrate that all were commonly known and used in the art. Judge King dealt seriatim with the claims thus developed in his Findings of Fact, numbered 24 through 55.

The thrust of plaintiff’s argument here, and advanced in the court below, as recognized by Finding of Fact No. 48 is that the trade secret for which it claims protection and which it insists was misappropriated by defendants is its entire, integrated line comprised of its unique combination of steps and equipment, rather than the components thereof viewed in isolation. That the whole of a manufacturing process may be greater than the sum of its parts is not the paradox it seems at first blush.

However, the court explicitly found that “Defendants extrusion line differs in every material detail from the line of Keystone. ... In short, while there is a similarity in the general overall arrangement and processing, the two lines differ substantially in every material detail.” The court further found that “. . Keystone’s line and process were not a trade secret, the relevant information being known to the art, and furthermore, it was not used by C & P.” [Emphasis added].

In assessing the substantiality of the foregoing ultimate fact findings, due consideration has been given to the personal observation and inspection by the trial judge of the extrusion line processes and techniques utilized by defendants.

In United States v. Stewart, 201 F.2d 135, 137 (5th Cir. 1953), this Court stated:

The observations made by the court from its physical inspection of the premises were for all purposes matters of evidence that were not and could not be set out in the record..... In such a case, it is not within this court’s province to substitute its finding of fact for those of the trial court, particularly since they are supported by substantial evidence and are not clearly erroneous.

Thus, the judgment of the Court that defendants are not liable to plaintiff under plaintiff’s claim of misappropriation of trade secrets is firmly grounded upon dispositive findings of fact, supported by substantial evidence in the record, which are not clearly erroneous, and accordingly it is affirmed.

II. Patent No. 3,216,038 (“Treated Center”).

Severely capsulated, the teaching of plaintiff’s ’038 patent is that applying a compressive force or heat to the center of a plastic bristle will disorient the molecules in that portion so that the bristle may be easily bent but will not be weakened at that point.

Instructed by the landmark case of Graham v. John Deere Co., 383 U.S. 1, 17, 86 S.Ct. 684, 15 L.Ed.2d 545 (1966), the trial court made the required basic factual inquiries. The scope and content of the prior art were determined; differences between the prior art and claims 1, 2, 3 and 5 at issue were ascertained, and the level of ordinary skill in the pertinent art was resolved. Finally, the Court arrived at the critical finding of fact that the differences between the claims in issue and the pertinent prior art would have been obvious to a person reasonably skilled in that art. He thereafter concluded as a matter of law that the patent was invalid under the provisions of 35 U.S.C. § 103.

A careful review of the entire record confirms the presence of abundant, substantial evidence to support the foregoing pivotal finding of fact. Therefore, the Court properly concluded that the patent was invalid as a matter of law.

III. Patent No. 3,330,721 (Remelt Surface).

Patent No. ’721 teaches the forming of a homogeneous remelted surface upon the prior art fibrous linearly oriented polypropylene filament for the stated purpose of providing greater split and abrasive resistance.

Explicitly finding that defendants’ bristle brushes are annealed, not remelted, the Court proceeded to its ultimate finding that defendants do not utilize the claimed invention and therefore do not infringe the patent in suit. This finding is supported by substantial evidence and hence is not clearly erroneous. Indeed, at trial, the witness, William Gould, the patentee, admitted that, absent a remelt surface, there is no infringement, as demonstrated by the following question and answer:

Q. If I manufactured a bristle which did not have a remelted exterior casing, would I utilize the invention of Exhibit 4?
A. No.

IV. Exclusion of Expert Testimony.

Professor Blake King, a chemical engineer, a member of the faculty of the University of Miami, at plaintiff’s request, inspected, measured and analyzed the extrusion lines of the parties hereto. He was permitted to testify to facts related to heat, speed and space relationships, the physical layout of the apparatus and the physical properties of the products running through the lines. He was not permitted to express an opinion as to the similarities and relationship of the strands passing through such extrusion lines. Appellant insists that thereby the Court committed reversible error.

In Stancill v. McKenzie Tank Lines, Inc., 497 F.2d 529 (1974), this Court recognized:

[T]hat the admission or exclusion of expert testimony is a matter within the sound judicial discretion of the trial judge. Only if we determine that his decision is “manifestly erroneous” may we find that he has abused his discretion. . . . Salem v. United States Lines Co., 1962, 370 U.S. 31, 35, 82 S.Ct. 1119, 1122, 8 L.Ed.2d 313, 317; Scott v. Fancher, 5th Cir. 1966, 369 F.2d 842, 844.

Viewed in this perspective, the rejection of this opinion testimony clearly does not require reversal. By Professor King’s own admissions on the record, he is not an expert in the art of plastic production equipment, and he had had no prior experience in testing bristles or propylene plastics.

The Cross-Appeal

I. Failure of the Court to Pass Upon the Validity of Patent No. 3.

Contending that the trial court should have “followed the ‘better practice’ specified in Sinclair & Carroll Co. v. Interchemical Corp., 325 U.S. 327, 330 [65 S.Ct. 1143, 89 L.Ed. 1644] (1945), and declared plaintiff’s ’721 (Remelt Patent) invalid, as well as not infringed,” defendants request this Court to mandate invalidity of such patent at this level. That will not at all do.

It is unnecessary to re-examine in depth cases from this Court involving the appellate function when the trial court has adjudicated both the issue of validity vel non and that of infringement vel non of a patent upon supportive findings of fact and conclusions of law. In the case sub judice the lower court entered no findings of fact remotely related to the validity of the patent although they were prepared by counsel for cross-appellants. Nor did the trial judge pass upon this issue expressly or sub silentio.

In effect, defendants invite this court to try de novo the issue of validity, to distill from the record credible evidence which it regards as sufficient to overcome the presumption of validity attending the issuance of the patent, to conclude that the patent is evidently invalid and to enter a judgment which, in its opinion, the trial judge should have entered in the first instance. This incredible invitation is declined.

II. The Award of Attorneys’ Fees to Cross-Appellants.

Defendants appeal from the district court’s denial of their motion for an award of attorneys’ fees. This is a short horse soon curried. The following quotation from Williamson-Dickie Mfg. Co. v. Hortex, Inc., 504 F.2d 983 (5th Cir. 1974), by substituting Keystone Plastics, Inc. for Williamson-Dickie, fits this case like a glove.

Under 35 U.S.C. § 285, the court has discretion to award attorneys’ fees to the prevailing party in exceptional cases. In this case, the district court refused to hold that this was an exceptional case within § 285, and did not award attorneys’ fees. We, as an appellate court, cannot lightly overturn that decision. “The law placing, as it does, the discretion in the trial court to determine . . whether the case is an exceptional one so that attorneys’ fees should be allowed, appellate courts ought not to and will not interfere with the exercise of such discretion. Indeed, they may not do so unless there is such a clear abuse as to show that discretion was not exercised, or unless it is plain that the trial court’s decision is based on an erroneous concept of law.” Graham v. Jeoffroy Mfg., 5th Cir. 1958, 253 F.2d 72, 78 (Tuttle, J.).
It is our conclusion that the district court did not abuse its discretion in refusing to award attorneys’ fees. Our review of the record provides no indication that Williamson-Dickie has not proceeded in good faith in this litigation, or in its dealings with the Patent Office. Under these circumstances, the trial court properly refused to award attorneys’ fees. Garrett Corp. v. American Flight Systems, Inc., 5th Cir. 1974, 502 F.2d 9.

Affirmed on appeal and cross-appeal. Costs taxed to appellant.

      . The record was shipped to the Clerk of this Court in five tightly packed cartons, each measuring 15" x 10" x 12".

      . Hereinafter referred to as plaintiff, its role in the court below.

      . Hereinafter referred to as defendants.

      . It is noted that on March 27, 1972, plaintiff filed a motion to amend and supplement Findings of Fact and Conclusions of Law accompanied by a memorandum in support thereof.
      On April 12, 1972, defendants filed a brief and memorandum in opposition thereto.

        On July 6, 1972, after reciting that “Plaintiffs have [sic] moved to amend the final order in 38 particulars. The court having considered the aforesaid motion along with supporting and opposing memoranda of law, and having reconsidered the record in this cause,” the court partially granted plaintiff’s motion by entering an order amending in insubstantial particulars Findings of Fact Nos. 3(5), 70 and 74.
      This post judgment procedure is obviously an inadequate substitute for the technique suggested by the court.

      . Ag Pro. Inc. v. Sakraida, 474 F.2d 167 (5th Cir. 1973); Railex Corporation v. Speed Check Co., 457 F.2d 1040 (5th Cir. 1972).

      . 340 F.Supp. at 60 through 73.

      . 340 F.Supp. at 59, 60.

      . N.J.Rev.Stat., Sec. 2A:119-51; Sun Dial Corp. v. Rideout, 16 N.J. 252, 257, 108 A.2d 442, 446 (1954).

      . Pure Foods, Inc. v. Sir Sirloin, Inc., 84 So.2d 51 (Fla.Sup.Ct.1955); Renpak, Inc. v. Oppenheimer, 104 So.2d 642 (Fla.Dist.Ct. of App. 1958).

      . “A trade secret is protected against illegal appropriation and commercial use by a competitor. The development of this area of the law has been progressive, and most jurisdictions have developed similar standards. What Georgia law exists in this area seems to follow the Restatement, Torts § 757. We so held in Water Services, Inc. v. Tesco Chemicals, Inc., 410 F.2d 163 (5th Cir. 1969).
      “Under the Restatement § 757 formulation, a trade secret is defined as:
      Any formula, pattern, device or compilation of information which is used in one’s business and which gives him an opportunity to obtain an advantage over competitors who do not know or use it.
      In large measure the requirements simply are that ‘the parties view the process or device as a secret and that the secret be revealed in confidence . . . ’ Water Services, supra, 410 F.2d at 172.
      “Liability attaches under the Restatement of one 'who discloses or uses another’s trade secrets without a privilege to do so .
      (a) . . discovered the secret by improper means or
      (b) his disclosure or use constitutes a breach of confidence reposed in him by the (owner of the secret) in disclosing the secret to him, or
      (c) he learned from a third person with notice of the facts that it was a secret and that the third person’s disclosure of it was otherwise a breach of his duty to the (owner of the secret)

      . 340 F.Supp. at 64 through 69.

      . 340 F.Supp. at 67.

      . Finding of Fact 21(c), 340 F.Supp. at 63.

      . Finding of Fact 51, 340 F.Supp. at 68.

      . The Court further concluded that the claims in suit of plaintiffs ’038 patent are invalid for lack of novelty and for prior public use (35 U.S.C. § 102). Affirmance of the judgment of the trial court that such claims are invalid for “obviousness” under 35 U.S.C. § 103 eliminates the necessity of reviewing other grounds of invalidity and the facts upon which they are premised. No opinion is intimated with respect thereto.

      . Alternatively, the trial court found that defendants had not infringed the patent. At trial it was admitted that their loose bristle does not infringe, having no center treatment. But it was strenuously urged that their mats do infringe. Agreement with the conclusion that the claims of the patent in suit are invalid obviates the necessity of reviewing the conclusion of the Court that such claims were not infringed and the findings of fact upon which it was posited. The silence of this opinion in this respect carries no implication of approval of the legal principles applied by the Court in arriving at its holding of noninfringement.

      . Findings of Fact Nos. 74 and 76, 340 F.Supp. at 73.

      . Brose v. Sears, Roebuck and Company, 455 F.2d 769 (5th Cir. 1972). (The district court held the patent in suit invalid and hot infringed); Marvin Glass & Associates v. Sears, Roebuck and Company, 448 F.2d 60 (5th Cir. 1971). (The district court held the patent in suit valid but not infringed); Fraser v. City of San Antonio, Texas, 430 F.2d 1218 (5th Cir. 1970). (The district court held the patent in suit invalid and not infringed); Beckman Instruments, Inc. v. Chemtronics, Inc., 428 F.2d 555 (5th Cir. 1970). (The district court held the patent valid but not infringed).

      . 35 U.S.C. § 282; Beckman Instruments, Inc. v. Chemtronics, 428 F.2d 555, 557 (5th Cir. 1970).

      . If, as the patent bar seems to read them, the cases cited in Note 18, supra, stand for the proposition that once the trial court finds that the patent in suit was not infringed it is free to ignore the issue of validity unless such patent is “evidently invalid,” cryptic guidance is afforded the district courts in this circuit.
      The interplay of Sinclair & Carroll Co. v. Interchemical Corp., 325 U.S. 327, 330, 65 S.Ct. 1143, 1145, 89 L.Ed. 1644 (1945), and Harries v. Air King Products Co., 183 F.2d 158, 163 (2d Cir. 1950), provides a felicitous guideline for trial courts.
      In Sinclair & Carroll Co., supra, there is an admonition implicit in the statement: “[T]he District Court in this case followed what will usually be the better practice by inquiring fully into the validity of this patent.”
      In Harries v. Air King Products Co., supra, Judge Learned Hand expressed his understanding of the practical implementation of such admonition as follows: “We hold that it is open to a court to proceed as is most convenient, subject to the exception that, though the defendant has not infringed, claims may be so evidently invalid that the court should so declare.”
      To determine the issue of infringement inevitably the trial court must construe the claims of the patent in suit against the teaching of the prior art. If it is clear at that point that such patent is invalid, the court should so declare it. It should then proceed to determine the issue of infringement so that the litigation may come to an end at the appellate level.
      If, however, as was the posture of the case relating to plaintiff’s ’721 patent, it is crystal clear that the patent in suit was not infringed, and defendant has not produced sufficient evidence to overcome the presumption of validity, it would be an exercise in futility for the trial court to labor such issue.


source: Caselaw Access Project

author: GEWIN, Circuit Judge:

license: Public Domain

text:
    Fred A. REECE, Plaintiff-Appellee, v. W. C. SCOGGINS, Individually and d/b/a SPKZ Company, Defendant-Appellant.
    No. 73-3508.
    United States Court of Appeals, Fifth Circuit.
    Jan. 17, 1975.

      Scott P. Crampton, Asst. Atty. Gen., William D. M. Holmes, Trial Atty., Meyer Rothwacks, Chief, App. Sec., Tax Div., Dept, of Justice, Washington, D. C., for Tax Div.
    John W. Stokes, Jr., U. S. Atty., William D. Mallard, Jr., Asst. U. S. Atty., Atlanta, Ga., for IRS.
    Charles D. Read, Jr., Decatur, Ga., for Scoggins.
    A. Orville Bracey, III, Joe T. Taylor, William Robert Mellen, Atlanta, Ga., for plaintiff-appellee.
    Before RIVES, GEWIN and GOLDBERG, Circuit Judges.
   GEWIN, Circuit Judge:

A taxpayer brought this action in the district court claiming that the Internal Revenue Service (IRS) did not comply with clear Congressional mandates in selling his land to satisfy a tax deficiency. The district court ruled that the IRS had indeed conducted the sale in an improper manner and ordered that the purchaser of the land release the property in return for a refund of the purchase price. The purchaser appeals from that decision. The IRS, a named defendant before the district court, has subsequently withdrawn from the case. Because we conclude that the IRS failed to meet a threshold procedural requirement of the statutory provision controlling tax sales, we affirm the decision of the district court.

The appellee Reece was the owner of a parcel of land which the IRS, acting pursuant to 26 U.S.C. § 6335, sold to the appellants Scoggins and the SPKZ Company to satisfy Reece’s income tax liability of $33,763.93. The property in question, located in Butts County, Georgia, consists of approximately 130 acres of land divided by a highway; approximately 100 acres are north of the highway and 30 acres are south of it. At the time of the sale, the revenue agent concluded that the property, which was subject to a $22,000 mortgage, was worth $60,000, while an independent real estate appraiser determined that the land had a fair market value of $1,500 per acre which would give it a total value of well over $150,000.

On October 14, 1971, an IRS agent served notice on Reece that the IRS had seized the property in question because of his failure to pay certain income taxes. During the next two weeks, the agent twice visited Reece’s home to give him notice of a public auction sale of the land but found no one at home and departed without leaving any written notice at the residence. The agent published notice of the sale in a newspaper circulated in Butts County and posted similar notices at the courthouse and various locations in the county. On November 2, the advertised date of sale, a certified letter containing notice of sale was delivered to Reece’s residence but was later returned to the local IRS office marked “No response — left notice, dated 11-02-71.” A similar letter was sent by regular mail but was not returned.

Reece admitted that he learned of the sale prior to November 2 although he denied receiving written notice. The record also contains evidence that Reece requested the IRS to postpone the sale.

On November 2, 1971 the IRS agent attempted to sell the property at public auction at the county courthouse, but the highest bid received was only $25,000 — • well short of the deficiency amount. The agent, without declaring the land to be purchased by the United States, announced that the sale was adjourned for one week. While the notices posted at various locations in the county were changed to reflect the new auction date, no notice of the second sale was published in the county newspaper. Again, Reece may have been aware of the revised sale plans but received no written notice of the adjournment or the rescheduled sale.

At the November 9 auction, Scoggins offered the pre-established minimum bid price of $36,793.87. The IRS agent conducting the sale declared Scoggins the purchaser of the land, but did not require that Scoggins pay at that time or even make a downpayment. The IRS’s notices of the sale had specifically provided that “full payment [is] required upon acceptance of highest bid.” Three days later, on November 12, the IRS received a cashier’s check for the proper amount from the SPKZ Company and immediately issued a certificate of sale to that party.

Reece contacted Scoggins in February and early March of 1972 and informed him of his intent to redeem the property pursuant to 26 U.S.C. § 6337. No formal action was taken until March 11, 1972 at which time Reece presented a cashier’s check, payable to himself, to Scoggins in the amount of the purchase price plus interest. Reece claimed that in a telephone conversation the previous day Scoggins had told him to bring a cashier’s check without specifying who was to be payee; Scoggins claims that he had requested that the check be made payable to him, Scoggins. In any event, Scoggins refused to accept the check and release the land claiming that the 120 day statutory grace period for redemption had expired. Reece countered that this grace period was still operative since it had commenced on November 12, 1971, the date of payment, rather than on November 9, the date of sale.

In defending the judgment of the district court, Reece asserts that the IRS failed to comply with 26 U.S.C. §§ 6335 and 6337 in the following respects: (1) no notice of sale was given to the taxpayer and no written notice was left at his home as required by § 6335(b); (2) the property in question was divisible, and under § 6335(c) should not have been sold in its entirety; (3) the IRS had no authority to “adjourn” the November 2 auction when insufficient bids were made, but should have declared the property purchased by the United States pursuant to § 6335(e)(1); (4) the IRS failed to notify the taxpayer of the “adjournment” or the subsequent sale on November 9; (5) the IRS failed to restore Reece’s property to him after he effected a valid redemption under § 6337.

The facts surrounding this transaction suggest that the IRS handled this sale of land in a somewhat casual fashion. Each step of this tax sale seems to raise a different issue of statutory compliance. Because we determine, however, that the taxpayer never received the statutory notice of sale, we need not consider assertions of subsequent laxity. The sale was voidable ab initio.

We proceed from the proposition that § 6335 permitting the sale at public auction of a taxpayer’s land to satisfy a tax deficiency must be strictly construed. Johnson v. Gartlan, 334 F.Supp. 438 (E.D.Va.1971), rev’d on other grounds, 470 F.2d 1104 (4th Cir. 1973), cert. denied, 414 U.S. 865, 94 S.Ct. 122, 38 L.Ed.2d 85 (1973). The concept of a citizen’s right, absent unusual circumstances, to the unobstructed control of his own land, free from arbitrary governmental interference, has long been a fundamental principle in our country’s jurisprudence. As Mr. Chief Justice Marshall noted in 1821,

[t]hat no individual or public officer can sell, and convey a good title to, the land of another, unless authorized so to do by express law, is one of those self-evident propositions to which the mind assents, without hesitation; and that the person invested with such a power must pursue with the precision the course prescribed by law, or his act is invalid, is a principle which has been repeatedly recognized in this court.

Thatcher v. Powell, 6 Wheat. 119, 125, 5 L.Ed. 221, 222.

The reason for this notion of the inviolability of private ownership is indeed self-evident. Governmental seizure and sale of land is one of the most potent weapons in the government’s tax collection arsenal. The consequences of seizure and sale are often staggering and irreversible; this action not only deprives a taxpayer of a sometimes significant capital investment but also denies him a source of additional income. Seizure and sale are therefore generally available only as a last resort. In recognition of the Damoclean nature of this ultimate weapon, Congress has imposed precise strictures on the seizure and sale of property to satisfy legitimate tax deficiencies. The § 6335 notice requirements are designed to protect the taxpayer by giving him an opportunity to be present at the tax sale and bid on the property. United States v. Conry, Civ. No. C-73-2041 (N.D.Calif, Dec. 28, 1973); 74-1 U.S. Tax Cas. ¶ 9187; Bartell v. Riddell, 202 F.Supp. 70 (S.D.Calif.1962). Cf. McAndrews v. Belknap, 141 F.2d 111, 114 (6th Cir. 1944). The language of this section is clear and mandatory; absent literal compliance with its provisions, the government sale of land cannot stand. Johnson v. Gartlan, supra; Margiotta v. District Director of Internal Revenue, 214 F.2d 518 (2d Cir. 1954). See also Bartell v. Riddell, supra; 9 Mertens, Law of Federal Income Taxation, § 49.-193, chap. 49, p. 340.

In this case, the government did not give the landowner the notice required by § 6335(b). This provision explicitly requires that the IRS must give notice in writing of an intended sale of seized land. This written notice is to be delivered to the landowner personally, or if he is not home, it may be left at his usual place of abode or business if located within the same internal revenue district as the seized land. If the landowner cannot be located, or if such abode or place of business does not exist, the written notice may be mailed to the taxpayer’s last known address. I.R.S. Reg. § 301.6335-1(b)(1). In this case, the landowner never received written notice of the sale by any of the specified methods. While the IRS agent went to Reece’s home, he did not deliver written notice or leave it at the taxpayer’s home or place of business. The mailing of notice, even if done in a timely fashion, satisfies the statute only if the taxpayer has no dwelling or place of business within the revenue district. The IRS thus failed completely to comply with the notice provisions of the Code section governing tax sales of land. In these circumstances, we conclude that the district court was correct in vacating the purported tax sale and voiding the certificate of sale issued to the SPKZ Company.

We, of course, express no opinion as to the legitimacy of the IRS’s deficiency assessment in this case, and we do not condone a taxpayer’s failure to pay income taxes required by law. We merely conclude that when the government seeks to enforce the laws, it must follow the steps which Congress has specified.

The judgment of the district court is affirmed.

      . 26 U.S.C. § 6335 provides in pertinent part:
      (a) Notice of seizure — As soon as practicable after seizure of property, notice in writing shall be given by the Secretary or his delegate to the owner of the property or shall be left at his usual place of abode or business if he has such within the internal revenue district where the seizure is made. If the owner cannot be readily located, or has no dwelling or place of business within such district, the notice may be mailed to his last known address. Such notice shall specify the sum demanded and shall contain, ... in the case of real property, a description with reasonable certainty of the property seized.
      (b) Notice of sale — The Secretary or his delegate shall as soon as practicable after the seizure of the property give notice to the owner, in the manner prescribed in subsection (a), and shall cause a notification to be published in some newspaper published or generally circulated within the county wherein such seizure is made, or if there be

        no newspaper published or generally circulated in such county, shall post such notice at the post office nearest the place where the seizure is made, and in not less than two other public places. Such notice shall specify the property to be sold, and the time, place, manner, and conditions of the sale thereof.
      (c) Sale of indivisible property — If any property liable to levy is not divisible, so as to enable the Secretary or his delegate by sale of a part thereof to raise the whole amount of the tax and expenses, the whole of such property shall be sold.
      ******
      (e) Manner and conditions of sale—
      (1) Minimum price — Before the sale the Secretary or his delegate shall determine a minimum price for which the property shall be sold, and if no person offers for such property at the sale the amount of the minimum price, the property shall be declared to be purchased at such price for the United States; otherwise the property shall be declared to be sold to the highest bidder. In determining the minimum price, the Secretary or his delegate shall take into account the expense of making the levy and sale.
      (2) Additional rules applicable to sale.— The Secretary or his delegate shall by regulations prescribe the manner and other conditions of the sale of property seized by levy. If one or more alternative methods or conditions are permitted by regulations, the Secretary or his delegate shall select the alternatives applicable to the sale. Such regulations shall provide:
      ******
      (D) Whether payment in full shall be required at the time of acceptance of a bid, or whether a part of such payment may be deferred for such period (not to exceed 1 month) as may be determined by the Secretary or his delegate to be appropriate.
      ******
      (F) Under what circumstances the Secretary or his delegate may adjourn the sale from time to time (but such adjournments shall not be for a period to exceed in all 1 month).
      (3) Payment of amount bid — If payment in full is required at the time of acceptance of a bid and is not then and there paid, the Secretary or his delegate shall proceed to again sell the property in the manner provided in this subsection. If the conditions of the sale permit part of the payment to be deferred, and if such part is not paid within the prescribed period, suit may be instituted against the purchaser for the purchase price or such part thereof as has not been paid, together with interest . . .; or, in the discretion of the Secretary or his delegate, the sale may be declared null and void for failure to make full payment of the purchase price and the property may again be advertised and sold as provided in subsections (b) and (c) and this subsection.

      . The relevant portion of 26 U.S.C. § 6337 provides:
      (b) Redemption of real estate after sale.—
      (1) Period. — The owners of any real property sold as provided in section 6335, shall be permitted to redeem the property sold, or any particular tract of such property, at any time within 120 days after the sale thereof.
      (2) Price. — Such property or tract of property shall be permitted to be redeemed upon payment to the purchaser the amount paid by such purchaser and interest thereon at the rate of 20 percent per annum.

      . The district court invalidated the sale because of the government’s failure to give the statutorily required notice. It thus found it unnecessary to evaluate Reece’s contentions that related statutory provisions were also violated.


author: BELL, Circuit Judge:

text:
    Clayton E. GREENFIELD and Carmen F. Greenfield, Petitioners-Appellants Cross Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee Cross Appellant. Fred S. BUGG and Pauline C. Bugg, Petitioners-Appellants Cross Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee Cross Appellant.
    No. 74-1102.
    United States Court of Appeals, Fifth Circuit.
    Jan. 17, 1975.

      Scott P. Crampton, Asst. Atty. Gen., Meyer Rothwacks, Chief, Appellate Sec., Tax Div., Dept, of Justice, Washington, D. C., Meade Whitaker, Chief Counsel, Bobby D. Burns, Internal Revenue Service, Washington, D. C., Gary R. Allen, Atty., Robert G. Burt, Atty., Tax Div., Dept, of Justice, Washington, D. C., for respondent-appellee cross appellant.
    Eugene C. Heiman, Miami, Fla., for petitioners-appellants cross appellees.
    Before BELL, AINSWORTH and RO-NEY, Circuit Judges.
   BELL, Circuit Judge:

This suit arose after appellants Greenfield and Bugg were assessed $34,594.56 and $43,264 for claimed deficiencies with respect to 1964 income tax. The Commissioner grounded these assessments on two 1964 transactions which involved appellants and their wholly-owned corporations, Carline Electric Corporation [“Domestic”] and Carline, Ltd., [“Offshore”]. The Tax Court sustained the Commissioner’s contention that the two transactions involved investments by a controlled foreign corporation in United states property resulting in pro rata inclusion in the gross incomes of the corporation’s stockholders under Section 951(a) of the Internal Revenue Code of 1954. As to one of the pertinent transactions, however, appellants were adjudged deficient in an amount less than that assessed.

This appeal is from the Tax Court’s determination of deficiency. The Commissioner cross-appeals as to the difference between the assessment and the deficiency found by the Tax Court. We affirm as to the appeal and cross-appeal.

Appellants each owned fifty per cent of the capital stock in Domestic, a Florida corporation, and Offshore, a controlled foreign corporation as defined in Section 957(a) of the Internal Revenue Code. During the five-year period prior to 1964, the two corporations had a continuing business relationship. An open account was maintained on the books of each company as a record of intercompany transactions.

In 1964, Domestic was successful in its bid on an electrical contracting job at Key West, Florida. Pursuant to its bid, Domestic was required to obtain a performance bond, which it sought from the Travelers Insurance Company. Before issuing the bond, Travelers required that Domestic increase its paid-in capital by $100,000, and that $100,000 of the open account indebtedness currently owed by Domestic to Offshore be subordinated to Travelers’ bond.

Domestic complied with the first requirement by authorizing the issuance of $50,000 worth of stock to each appellant [“Transaction I”]. To pay for the stock, $100,000 was funnelled from Offshore through appellants to Domestic. The Tax Court determined upon stipulation of the parties that this transaction was a direct loan from Offshore to Domestic. The Commissioner had contended that this transaction was, in substance, either a constructive dividend paid by Offshore to appellants or an “increase in earnings invested in United States property” by Offshore in 1964, and thus includible in appellants’ gross incomes under IRC § 951(a)(1)(B). The Court sustained the Commissioner in the latter of these alternative arguments, and felt it unnecessary to resolve the former argument.

Appellants accomplished the subordination requirement of Travelers by, in effect, having Offshore subordinate the open account due it by Domestic [“Transaction II”]. This was done in a loose fashion. A note containing a subordination clause was prepared but never executed. The Tax Court apparently treated it as a memorandum of the subordination transaction, and as such, it explained the entries on the books of the respective corporations which were made in furtherance of the subordination.

The cross-appeal arises by virtue of the debt from Domestic to Offshore being only $94,129.53 on the date of the subordination, July 31, 1964, while Travelers required, and appellants provided, a subordination in the amount of $100,000. It is important at this point to note that (1) the tax involved in Transaction II is not imposed upon the subordination agreement but upon the open account previously due Offshore by Domestic and (2) the $100,000 subordination was a sum selected to approximate the open account balance due Offshore at the time. This balance fluctuated, and the parties to the bond transaction elected the $100,000 figure as a convenience.

Despite these facts, the Commissioner urges that a tax should be imposed according to the balance due on the open account, as was done, plus the overage between the open account due and the $100,000 subordination. The Tax Court rejected this contention and we agree. This position is based wholly on form, rather than substance. Substance, and not form must be relied upon in determining the taxable significance of a transaction. Commissioner v. Court Holding Co., 1945, 324 U.S. 331, 334, 65 S.Ct. 707, 89 L.Ed. 981, 985; Gregory v. Helvering, 1935, 293 U.S. 465, 470, 55 S.Ct. 266, 79 L.Ed. 596, 599; Holbrook v. Commissioner, 5 Cir., 1971, 450 F.2d 134, 141. The overage in question ($5,986) was a mere paper figure lacking reality.

We turn now to Transactions I and II from the standpoint of appellants’ position as distinguished from the cross-appeal. The central issue before the Tax Court was whether these transactions constituted investments in “United States property” as defined in Section 956 of the Internal Revenue Code and accompanying Treasury Regulations. Section 956(b) (1)(C) defines “United States property” to include “an obligation of a United States person.” The court determined that both transactions fell within the obligation category of United States property, and that the three relevant exceptions within this category were inapplicable to the two transactions.

The Tax Court’s findings that these transactions were investments in obligations of a United States person, and that the three pertinent exceptions were inapplicable to both transactions, are essentially findings of fact, and are consequently not reversible unless clearly erroneous. See Commissioner v. Duberstein, 1960, 363 U.S. 278, 291, 80 S.Ct. 1190, 4 L.Ed.2d 1218, 1228; Estate of Broadhead v. Commissioner, 5 Cir., 1968, 391 F.2d 841, 843. Under this standard, and after a thorough review of the record, we are of the view that the result reached by the Tax Court is correct and that the cause is otherwise without prejudicial error.

Affirmed on the appeal and cross-appeal.

      . Sec. 951. Amounts Included In Gross Income Of United States Shareholders.

      (a) Amounts Included.—
      (1) In General. — If a foreign corporation is a controlled foreign corporation for an uninterrupted period of 30 days or more during any taxable year beginning after December 31, 1962, every person who is a United States shareholder (as defined in subsection (b)) of such corporation and who owns (within the meaning of section 958(a)) stock in such corporation on the last day, in such year, on which such corporation is a controlled foreign corporation shall include in his gross income, for his taxable year in which or with which such taxable year of the corporation ends—
      »****»
      (B) his pro rata share (determined under section 956(a)(2)) of the corporation’s increase in earnings invested in United States property for such year (but only to the extent not excluded from gross income under section 959(a)(2)).
      ******

      . Clayton E. Greenfield, 1973, 60 T.C. 425.

      . Sec. 957. Controlled Foreign Corporations; United States Persons.

      (a) General Rule. — For purposes of this subpart, the term “controlled foreign corporation” means any foreign corporation of which more than 50 percent of the total combined voting power of all classes of stock entitled to vote is owned (within the meaning of section 958(a)), or is considered as owned by applying the rules of ownership of section 958(b), by United States shareholders on any day during the taxable year of such foreign corporation.

      . IRC § 951(a)(1)(B) imposes a tax on the increase m investment m United States pm¡. city by the controlled ioreigu eoiporation during the taxable year. IRC § 956(b)(1) limits 'United States property” to exclude property acquired prior to December 31, 1962. The Tax Court found, and the Commissioner does not dispute, that the open account reflected a balance of $64,056 in favor of Offshore on December 31, 1962. The Court subtracted this amount from $94,014 to compute Offshore’s increase in investment during 1964.

      . Sec. 956. Investment Of Earnings In United State- Properly.

      ***¥*•*
      (b) United States Property Defined.—
      (1) In General. — For purposes of subsection (a), the term “United States property” means any property acquired after December 31, 1962, which is—
      (A) tangible property located in the United States;
      (B) stock of a domestic corporation;
      (C) an obligation of a United States person; or

        (D) any right to the use in the United States of—
      (i) a patent or copyright,
      (ii) an invention, model, or design (whether or not patented),
      (iii) a secret formula or process, or
      (iv) any other similar property right, which is acquired or developed by the controlled foreign corporation for use in the United States.
      (2) Exceptions. — For purposes of subsection (a), the term “United States property” does not include—
      (A) obligations of the United States, money, or deposits with persons carrying on the banking business;
      (B) property located in the United States which is purchased in the United States for export to, or use in, foreign countries;
      (C) any obligation of a United States person arising in connection with the sale or processing of property if the amount of such obligation outstanding at no time during the taxable year exceeds the amount which would be ordinary and necessary to carry on the trade or business of both the other party to the sale or processing transaction and the United States person had the sale or processing transaction been made between unrelated persons;
      (D) any aircraft, railroad rolling stock, vessel, motor vehicle, or container used in the transportation of persons or property in foreign commerce and used predominantly outside the United States;
      (E) an amount of assets of an insurance company equivalent to the uñearned premiums or reserves ordinary and necessary for the proper conduct of its insurance business attributable to contracts which are not contracts described in section 953(a)(1); and
      (F) an amount of assets of the controlled foreign corporation equal to the earnings and profits accumulated after December 31, 1962, and excluded from subpart F income under section 952(b). # * * * * #

      . One exception to the term “obligation” that the Tax Court found inapplicable to these transactions is in IRC § 956(b)(2), which states that United States property does not include:
      (C) any obligation of a United States person arising in connection with the sale or processing of property if the amount of such obligation outstanding at no time during the taxable year exceeds the amount which would be ordinary and necessary to carry on the trade or business of both the other party to the sale or processing transaction and the United States person had the sale or processing transaction been made between unrelated persons;
      The other two inapplicable exceptions are located in Treasury Regulation § 1.956-2(d)(2)(ii), which excludes from the general definition of obligation any indebtedness which
      (a) Is collected within one year from the time it is incurred, or
      (b) Matures within one year from the time it is incurred but is not collected within such period solely by reason of the inability or unwillingness of the debtor to make payment within such period.


author: LEWIS R. MORGAN, Circuit Judge:

text:
    Bobby S. BROWN, Plaintiff-Appellant, v. STATE FARM MUTUAL AUTOMOBILE CASUALTY INSURANCE COMPANY, Defendant-Appellee.
    No. 74-1865.
    United States Court of Appeals, Fifth Circuit.
    Jan. 17, 1975.
    Albert W. Copeland, Richard H. Gill, Montgomery, Ala., for plain tiff-appellant.
    Robert C. Black, Montgomery, Ala., for defendant-appellee.

      Before GODBOLD and MORGAN, Circuit Judges, and BOOTLE, District Judge.
   LEWIS R. MORGAN, Circuit Judge:

Bobby S. Brown, plaintiff in a suit against State Farm Mutual Automobile Casualty Insurance Company for breach of contract for failing or refusing to defend him under an insurance policy, appeals from a grant of summary judgment in favor of the company. We reverse and remand.

I

Cast in a light most favorable to the plaintiff, the facts are these. Brown, who had been insured by State Farm continuously since the age of 21, was involved in an automobile accident on July 17, 1967, in which one “Melton” was injured. Brown promptly gave notice of the accident to the company whose adjustor took his statement and contacted Melton’s lawyer. The adjustor, Jackson, represented to Brown that the company would “handle the injury claim” and would do “whatever was necessary.” A period of negotiation between the claims adjustor and Melton’s attorney ensued, but no settlement was reached. Brown took no part in the settlement effort. Melton’s attorney filed suit on January 15, 1968, two days before the statute of limitations would have run.

Brown was served with the complaint but thought it was merely notification that Melton was going to file suit. His testimony indicates that he felt State Farm would know of the suit or receive a copy of the papers because they had been working with Melton’s attorney in an attempt to settle the case and had told the appellant not to deal with Melton. At any rate, Brown misplaced the complaint in the process of moving and subsequently could not find it even after a diligent search; he never notified State Farm of the suit papers. Default judgment was entered against Brown in the amount of $10,000 on August 23, 1968, and execution was entered on September 7, 1968.

Jackson checked with the office of the clerk of the Circuit Court of Montgomery County, Alabama, shortly after the one year statute of limitations had run and was informed that no suit had been filed against Brown. The State Farm district manager subsequently learned from Melton’s attorney that suit had been filed. Jackson was again dispatched to check the records and learned of the suit and the default judgment. Jackson then contacted Brown on September 5, 1968, and obtained a tape-recorded statement documenting that the suit papers had not been forwarded by the appellant to the company. Jackson admits that he told Brown that he would try to settle the case but said he would have to “check with Birmingham.” Appellant claims that he was told the appellee would continue to represent him. Moreover, he asserts that he was not told by Jackson of the entry of default judgment against him nor was he told to procure his own counsel. At Jackson’s insistence, Brown signed a “non-waiver,” allowing the company to continue to make efforts on the appellant’s behalf without waiving any of its rights under the insurance contract.

No effort was ever made by the insurer to have the default judgment set aside, although undisputed evidence in the record indicates that default judgments in non-liquidated damage cases in the Circuit Court of Montgomery County may routinely be set aside within 30 days following the entry of such judgment upon mere application by the defaulting party to the court. On October 18, 1968, after this initial 30-day period had expired, the company sent a letter to the appellant advising him that the appellee would not defend him.

On October 31, 1968, Melton filed a garnishment against State Farm, a copy of which was served on Brown. After default was taken and garnishment was filed, State Farm tried to settle the case with Melton’s attorney, but offered far less than Melton was asking. At the garnishment trial neither Melton nor Brown appeared; Melton’s attorney withdrew, and the court discharged State Farm from garnishment. A second garnishment by Melton proved successful and Brown filed this action on August 1, 1973, to recover for damages proximately caused by the company’s breach of its duties under the insurance contract.

The company answered Brown’s complaint by asserting that the insurance policy required that the insured immediately notify the company and forward to the company every summons or other process received by him. The policy also provided “no action shall lie against the company . . . unless as a condition precedent thereto there shall have been full compliance with all terms of the policy.” The district court entered summary judgment for State Farm, finding that since it was undisputed that Brown did not send the summons to the insurer and could offer no excuse, the insurer breached the condition precedent of the policy as a matter of law and the company’s duty to defend never arose. Brown appeals.

II

In this Circuit the sufficiency of evidence for jury submission is measured by federal standards even in diversity cases. Prassel Enterprises, Inc. v. Allstate Insurance Company, 405 F.2d 616 (5th Cir. 1968); Cater v. Gordon Transport, Inc., 390 F.2d 44 (5th Cir. 1968); Planters Manufacturing Company v. Protection Mutual Insurance Company, 380 F.2d 869, 871 (5th Cir. 1967), cert. denied, 389 U.S. 930, 88 S.Ct. 293, 19 L.Ed.2d 282 (1967). Under federal law, if the evidence is of such a character that reasonable men exercising impartial judgment may differ in their conclusion, then the case should be submitted to the jury. Prassel Enterprises, Inc. v. Allstate Insurance Co., supra; Cater v. Gordon Transport, Inc., supra; Helene Curtis Industries, Inc. and Cosmair, Inc. v. Pruitt, 385 F.2d 841 (5th Cir. 1967).

The law in Alabama is that where forwarding of any demand or other process is specifically made a condition precedent to any action against the insurer, the failure to give reasonably timely notice of the receipt of such documents will release the insurer from the obligations imposed by the contract. See American Fire and Casualty Company v. Tankersley, 270 Ala. 126, 130, 116 So.2d 579 (1959). However, it is also the law in Alabama that a requirement in a policy of prompt or immediate notice generally means that the notice must be given within a reasonable time in view of all the facts and circumstances of the case. Allstate Insurance Co. v. Fogg, 293 Ala. 155, 300 So.2d 819 (1974); Pan American Fire and Casualty Co. v. DeKalb-Cherokee Counties Gas Dist., 289 Ala. 206, 266 So.2d 763 (1972).

Here the record reveals that Brown, ignorant of the workings of the legal system, was told by the insurance adjustor that the company would handle the case. Brown was directed not to become involved, and he relied upon the company’s declarations. Moreover, although the suit papers were never forwarded to the company, Brown gave notice of his receipt of the papers on September 5, 1968, when Jackson recorded his statement. The purpose of the provision that the insured immediately forward legal process to the insurer is to afford the insurer an opportunity to control the litigation. M.F.A. Mutual Insurance Company v. White, 232 Ark. 28, 334 S.W.2d 686 (1960); Wendel v. Swanberg, 384 Mich. 468, 185 N.W.2d 348 (1971). Since the company was involved in settlement negotiations with Melton’s lawyer and had been informed that the suit would be filed, Brown’s statement could easily have enabled the insurer to locate the appropriate court and have the default judgment set aside well within the 30-day period.

At any rate, a recent Alabama case compels us to reverse the district court. In Allstate Insurance Company v. Fogg, 293 Ala. 155, 300 So.2d 819 (1974), the insurance company appealed from a declaratory judgment requiring it to defend its insured in wrongful death actions filed against him. There, as here, the insurance policy required immediate forwarding of suit papers and prompt notice to the insurer. In neither this case nor Fogg did the insured comply with the notice and forwarding requirements of his policy. Both plaintiffs gave oral notice to their respective companies. In Fogg, the insured readily admitted that he did not notify the company until a month and a half after he was served with the suit papers; here the delay was approximately 50 days.

In the Fogg case the Supreme Court of Alabama concluded: “We are unwilling to hold, under the facts of this case, that Fogg failed to comply with the notice provisions of the policy, as a matter of law.” Id. at 822. Adhering to their decision, we are similarly reluctant to decide the reasonableness of Brown’s notice as a matter of law, in a case which so closely resembles Fogg.

Moreover, even if the notice of suit given by Brown were deemed unreasonable as a matter of law, the conduct of the company after gaining knowledge of the breach condition was sufficient to constitute a triable issue as to estoppel. Of course, the insured must usually be prejudiced by delay in disclaimer for estoppel to take effect. 16A J. Appleman, Insurance Law and Practice 208 (1968).

Not only did Jackson fail to mention the default judgment to Brown, but the company made no effort to notify Brown as to the denial of liability until after the initial 30-day period had run. In fact, Jackson did not even warn Brown as to his alleged breach. Once the company learned of the breached condition, it was required to act within a reasonable time to disclaim liability or be estopped to assert it. See Hartford Fire Ins. Co. v. Aaron, 226 Ala. 430, 147 So. 628 (1933); Bouchard v. Travelers Indemnity Company, 28 Conn.Supp. 122, 253 A.2d 497, 498 (Super.Ct.1969). During the 40-day delay between Brown’s notification to the company and the subsequent denial of liability, the appellant did nothing to protect himself, for he was relying on Jackson’s representations. Hence the company’s delay coupled with Brown’s detrimental reliance would appear to constitute a triable issue with respect to estoppel.

Finally, appellee argues that the judgment in Melton’s garnishment proceeding against Brown discharging State Farm from garnishment is a bar to Brown’s recovery in a separate suit for the same debt. We first note that the trial judge did not decide the garnishment issue in his order from which this appeal is taken. In any case, the law is settled that a garnishee’s successful denial of liability in a garnishment proceeding is generally held not to constitute a bar to action against him by the principal defendant. See, e. g., Wise v. Falkner, 45 Ala. 471 (1871).

For reasons set forth above the decision of the district court is reversed and the case is remanded for further proceedings not inconsistent with this opinion.

      . There is also support for the notion that State Farm’s failure to notify Brown of the default judgment within the 30-day period constituted a breach of its duty to exercise reasonable care and good faith in defending its insured. See Travelers Indemnity Company v. Rosedale Passenger Lines, Inc., 450 F.2d 975, 978 (4th Cir. 1971).


author: CUMMINGS, Circuit Judge.

text:
    Vicki R. CHAMPAGNE and Sandra L. Stout, Plaintiffs-Appellants, v. James R. SCHLESINGER, Secretary of Defense, et al., Defendants-Appellees.
    No. 73-1933.
    United States Court of Appeals, Seventh Circuit.
    Heard Oct. 4, 1974.
    Decided Dec. 9, 1974.

      Linda R. Hirshman, Harold C. Hirshman, Chicago, 111., for plaintiffs-appellants.
    James R. Thompson, U. S. Atty., Gary L. Starkman and Ann C. Tighe, Asst. U. S. Attys., Chicago, 111., for defendantsappellees.
    Before CUMMINGS, STEVENS and TONE, Circuit Judges.
   CUMMINGS, Circuit Judge.

Plaintiffs were seamen apprentices in the United States Navy and were stationed at the Naval Hospital Corps School in Great Lakes, Illinois. According to their amended complaint, they enlisted in the Navy for three years commencing August 11, 1972, and allegedly discharged their naval duties in a satisfactory manner. After basic training in Orlando, Florida, they were assigned to the Great Lakes Naval Hospital Corps School for further training'and their enlistment contracts were extended for another year.

On November 30, 1972, plaintiffs were interrogated about off-base homosexual conduct that occurred on leave at the Holiday Inn in Kenosha, Wisconsin, on November 24, 1972. On February 28, 1973, plaintiffs appeared before a Great Lakes Field Board convened to consider their dismissal from service. Each testified that she was a homosexual. The Navy’s proof was limited to evidence of apparently consensual homosexual activity during off-duty hours away from naval property. One exhibit reported that the plaintiffs were “going” together; they shared an off-base apartment. On March 14, 1973, the Field Board recommended that plaintiffs be discharged from the Navy by reason of unfitness. 'Instead of honorable discharges, the Board recommended that the separations be “under honorable conditions — general discharge or as warranted by Service Record.” One of the three Board members dissented on the ground that plaintiffs “have demonstrated their ability to perform in a military environment without conflict from their private sexual beliefs.”

The Naval Bureau of Personnel subsequently accepted the recommendation of the Field Board and ordered that plaintiffs be discharged from the Navy pursuant to its findings. On May 18, 1973, after the district court refused to issue an order delaying their discharges, the plaintiffs received general discharges under honorable conditions.

Plaintiffs based this suit on the Declaratory Judgment Act (28 U.S.C. §§ 2201 and 2202). Their amended complaint sought a declaration that the Field Board’s recommendations for discharge and any discharges based thereon were void and a declaration that Bureau of Naval Personnel Manual Section 3420220 (reproduced infra) “as it relates to private consensual homosexual conduct between adults is void and of no effect because it is in violation of the United States Constitution.” Appropriate injunctive relief was also sought.

Plaintiffs moved for a preliminary injunction to reinstate them in the Navy pending the outcome of this suit. Thereafter, the Government moved the district court to deny plaintiffs’ motion for preliminary injunction and to dismiss the complaint on the ground that plaintiffs failed to exhaust their administrative remedies before the Board for Correction of Naval Records (“BCNR”) and failed to state a claim upon which relief could be granted.

In a June 15, 1973, minute order, the district court denied defendants’ motion to dismiss “for want of primary jurisdiction,” and also denied plaintiffs’ motion for issuance of a preliminary injunction. Thereafter the respective parties filed motions for summary judgment. On September 6, 1973, pursuant to an unreported memorandum and order, the district court granted the Government’s motion for summary judgment and simultaneously denied plaintiffs’ motion for summary judgment.

In its memorandum opinion, the trial court weighed an individual’s right of privacy against “the countervailing right on behalf of the military to demand the highest standards of discipline, obedience and personal conduct.” After stating that the Secretary of the Navy had declared homosexual conduct intolerable in that branch of the Armed Forces, the court ruled “that a limited inquiry by the military into the personal conduct of those of its members pursuant to lawful authority does not constitute an unlawful invasion into the plaintiffs’ constitutional rights to privacy.” After summary judgment was entered for defendants, this appeal followed.

The pertinent regulations appear in Section 3420220 of the Bureau of Naval Personnel Manual (32 CFR § 730.12 (1973)) and the pertinent implementation policy is in Secretary of the Navy Instruction (“SECNAVINST”) 1900.9A. The relevant provisions of Section 3.420220 follow:

“2. Members may be separated by reason of unfitness with an undesirable discharge or with a more creditable type discharge when it is warranted by the particular circumstances in a given case. A discharge by reason of unfitness, regardless of the attendant circumstances, shall be effected only when directed by or authorized by the Chief of Naval Personnel.
“3. Members may be recommended for discharge by reason of unfitness for:
* * * * * ■¥
“e. Homosexual acts. Processing for discharge is mandatory. (See SECNAVINST 1900.9 series for controlling policy and additional action required in cases involving homosexuality.)”

The policy instruction prescribed in said SECNAVINST 1900.9A provides:

“4. Policy. The following policy is prescribed: \
“a. General. Members involved in homosexuality are military liablities who cannot be tolerated in a military organization. In developing and documenting cases involving homosexual conduct, commanding officers should be keenly aware that members involved in homosexual acts are security and reliablity risks who discredit themselves and the naval service by their homosexual conduct. Their prompt separation is essential. At the same time, every safeguard must be taken to insure against unjust action that will stigmatize an innocent person.”

As an alternative to affirmance of the judgment below, defendants ask this Court to remand the case with directions to dismiss the complaint for failure to exhaust administrative remedies. Plaintiffs counter by arguing that this option is unavailable to the Court because defendants did not cross-appeal from the denial of their motion to dismiss. If plaintiffs’ contention is upheld it may be unnecessary to discuss exhaustion; therefore, we must deal first with the threshold issue whether this Court may consider dismissing for failure to exhaust in the circumstances of this case in the absence of a cross-appeal by defendants.

We follow the precedents which hold that since exhaustion is a quasi-jurisdictional problem and one of judicial administration, it is within the discretion of this Court to consider it sua sponte, and we find it appropriate to do so here. Hodges v. Callaway, 499 F.2d 417, 419 (5th Cir. 1974); Bolger v. Marshall, 90 U.S.App.D.C. 30, 193 F.2d 37, 39 (1951). Therefore, we do not accept plaintiffs’ contention that defendants’ failure to take a cross-appeal precludes them from arguing exhaustion on appeal. The parties have briefed the exhaustion issue both here and below, so that we have the benefit of their arguments.

Defendants assert that plaintiffs must seek review with the BCNR before being entitled to judicial relief. The BCNR was established pursuant to 10 U.S.C. § 1552 and is composed of civilian members. Its authority, function and procedures are set forth in 32 CFR § 723. Our study of the applicable regulations satisfies us that the BCNR is empowered to consider the validity of plaintiffs’ discharges and to recommend to the Secretary of the Navy appropriate relief, in-eluding reinstatement and back pay. Although the BCNR only recommends, it appears that its recommendations may be rejected only if the Secretary of the Navy states explicit policy reasons for so doing. Arbitrary rejection can result in judicial reversal of the Secretary’s decision. Furthermore, under 32 CFR § 723.3(b), the plaintiffs have 3 years “after discovery of the alleged error or injustice” to apply to the BCNR for correction of their records. Therefore, plaintiffs will not have lost their right to seek review before the BCNR by prosecuting this suit.

We agree with the Fifth Circuit that ordinarily “a plaintiff challenging an administrative military discharge will find the doors of the federal courthouse closed pending exhaustion of available administrative remedies.” Hodges v. Callaway, supra 499 F.2d at 420. Indeed plaintiffs concede that if discharge for active homosexuality is not mandatory under the regulations, then they must exhaust their right to appear before the BCNR before seeking judicial relief in the federal courts. We agree.

Plaintiffs maintain, however, that the regulations, coupled with the Secretary of the Navy’s Instruction on homosexuals, require the discharge of active homosexuals like plaintiffs. They argue that in the face of such a clear-cut policy this Court should not forestall an adjudication of the important constitutional questions by ordering an administrative appeal, the result of which is allegedly preordained by Navy policy. If plaintiffs are correct about the fruitlessness of an appeal to the BCNR, there is ample authority to support their contention that exhaustion is improper. See Hodges v. Callaway, supra 499 F.2d at 420; Scott v. Schlesinger, 498 F.2d 1093, 1098 (5th Cir. 1974); Dooley v. Ploger, 491 F.2d 608 (4th Cir. 1974); L. Jaffe, Judicial Control of Administrative Action, 426—432 (1965); and Lunding, Judicial Review of Military Administrative Discharges, 83 Yale L.J. 33, 70—71 (1973). The defendants, on the other hand, assert that an order to exhaust would not merely be a useless gesture because there is room under the regulations for the use of discretion in individual cases of homosexual conduct.

Both sides present arguments to support their positions. Plaintiffs rely principally on the allegedly mandatory language of SECNAVINST 1900.9A as incorporated into Regulation 3420220. (See full texts thereof, supra.) Specifically, plaintiffs point to the regulation’s parenthetical reference to Instruction 1900.9A for “controlling policy and additional action required” (emphasis added). The policy thus referred to contains the following allegedly mandatory language:

“Members involved in homosexuality are military liabilities who cannot be tolerated in a military organization. * * * [Commanding officers should be keenly aware that members involved in homosexual acts are security and reliability risks who discredit themselves and the naval service by their homosexual conduct. Their prompt separation is essential’ (emphasis added).

Plaintiffs also argue that since the BCNR can only recommend action to the Secretary of the Navy and since the Secretary of the Navy’s own Instruction clearly defines his view, further intraservice appeal is useless.

The defendants take the position throughout their brief and argument that the regulation does not require mandatory discharge of homosexuals. Defendants also rely on Regulation 3420220 in support of their position. Of course, defendants emphasize different language than plaintiffs rely upon. They note that the regulation states that “Members may be recommended for discharge * * * ” (emphasis added) and not “must” or “shall” be so recommended. They assert that the Secretary of the Navy’s Instruction, while strongly worded, does not have the force of a regulation. The fact that one member of the Field Board recommended retention of plaintiffs is also asserted as proof that discharge is non-mandatory.

Plaintiffs have already been discharged, so that they cannot be spared this trauma even by an immediate favorable decision on the merits by this Court. If plaintiffs resort to the BCNR and if the BCNR decides in plaintiffs’ favor and the Secretary of the Navy follows the BCNR’s recommendation, plaintiffs can be fully reinstated and awarded back pay. Should plaintiffs be unsuccessful before the BCNR, they can return to the federal courts to have their claim adjudicated. Ashe v. McNamara, 355 F.2d 277, 281 (1st Cir. 1965). The harm that would be caused by a decision of this Court ordering exhaustion is, therefore, minimal.

Requiring exhaustion would also give the Navy an opportunity to adopt a narrowing construction of its regulation. This is appropriate even if the meaning of the regulation appears reasonably clear to us, since the Secretary of Defense, who is a party to this proceeding, has represented to the Court, through his counsel, that the regulation does not mandate discharge whenever homosexuality is proved. As the Third Circuit has observed, “ * * * the primary authority for the interpretation of such regulations lies within the Navy’s own appellate system.” Nelson v. Miller, 373 F.2d 474, 480 (3d Cir. 1967). The possibility that a narrow construction is approrpiate is supported by a comment of the senior member of the Field Board when he was being examined on voir dire by counsel for the plaintiffs and also by the fact that another member of the panel actually voted against discharge in this case. The report of the Field Board is of little aid in discerning the Navy’s position. The BCNR has the power to develop further the record in this case and to explore the position of the Navy regarding the discharge of homosexuals (32 CFR § 723.6(a)(2)). Finally, we are mindful of the well-established and sound policy in the federal courts which seeks to avoid premature decisions of constitutional questions such as those raised in plaintiffs’ complaint.

In view of all of these factors, while we sympathize with the plight of the district court faced with the exhaustion issue in these difficult circumstances, we believe that this suit should have been dismissed without prejudice pending the exhaustion of plaintiffs’ appeal to the BCNR. Beard v. Stahr, 370 U.S. 41, 82 S.Ct. 1105, 8 L.Ed.2d 321 (per curiam). Of course, in so ordering we express no opinion on the merits of plaintiffs’ claim nor do we hold that the regulations regarding the discharge of active homosexuals are necessarily non-mandatory.

Vacated and remanded with instructions to dismiss the amended complaint without prejudice.

      . For a short explanation of the difference between an honorable discharge and a general discharge under honorable conditions, including the harmful effects of the latter that are carried over into civilian life, see Everett, “Military Administrative Discharges — The Pendulum Swings,” 1966 Duke L.J. 41, 43-45 (1966) and authorities cited therein.

      . On May 1, 1973, the district court denied plaintiffs’ application for a temporary restraining order. That court subsequently refused to stay the discharges pending appeal to this Court of its decision denying the temporary restraining order. On May 2, 1973, this Court denied plaintiffs’ motion for an injunction pending appeal and on June 18, after they had been discharged, plaintiffs were granted leave to dismiss their original appeal.

      . For a recent study of the cross-appeal problem, see Stern, “When to Cross-Appeal or Cross-Petition — Certainty or Confusion?”, 87 Harv.L.Rev. 763 (1974), where the author argues persuasively that appeals need only be taken from portions of the court’s order which a litigant seeks to change, not from parts of an opinion with which the litigant disagrees. Ibid, at 774. See also United States v. Finn, 502 F.2d 938, 940 (7th Cir. 1974); 9 Moore’s Federal Practice (2d ed.) ¶ 204.11 [3], pp. 934-935. Since the defendants prevailed below, it is immaterial that they won a summary judgment on the merits rather than a dismissal for failure to exhaust administrative remedies, which was their primary point of attack. Of course, the order denying the Government’s motion to dismiss for failure to exhaust administrative remedies was non-final and hence not appealable. 9 Moore’s Federal Practice (2d ed.) ¶ 110.08 [1], p. 113.

      . See McCurdy v. Zuchert, 359 F.2d 491, 494 (5th Cir. 1966), certiorari denied, 385 U.S. 903, 87 S.ct. 212, 17 L.Ed.2d 133; Note, Federal Court Review of Decisions of Military Tribunals, 40 U.Cincinnati L.Rev. 569, 573-574 (1971).

      . See Hertzog v. United States, 167 Ct.Cl. 377 (1964); Eicks v. United States, 172 F.Supp. 445, 145 Ct.Cl. 522 (1959); and Everett, supra note 1, at 64-65.

      . See also Scott v. Schlesinger, 498 F.2d 1093, 1095-1099 (5th Cir. 1974); Dooley v. Ploger, 491 F.2d 608, 611-615 (4th Cir. 1974); Anderson v. MacKenzie, 306 F.2d 248, 250 (9th Cir. 1962); Reed v. Franke, 297 F.2d 17, 26-27 (4th Cir. 1961); Michaelson v. Herren, 242 F.2d 693, 696 (2d Cir. 1957); Bolger v. Marshall, 90 U.S.App.D.C. 30, 193 F.2d 37, 39 (1951); Benson v. Holloway, 312 F.Supp. 40 (D.Neb.1970). But see Sims v. Fox, 492 F.2d 1088 (5th Cir. 1974).

      . But see Hodges v. Callaway, 499 F.2d 417, 422-423 (5th Cir. 1974).

      . The attitudes of the senior member of the Field Board were explored in a lengthy colloquy between counsel for plaintiffs and the senior member at voir dire. The senior member indicated that under some circumstances he would not feel compelled to recommend discharge for commission of homosexual acts.

      . The “Report of Field Board Officers” in plaintiffs’ case contains under “Findings of the Board” only a check-mark in the blank signifying that plaintiffs “Committed homosexual acts.” Two other checks signify the Field Board’s recommendation that plaintiffs be discharged and that the discharge be a general one under honorable conditions. One Board member penned in her one-sentence dissent quoted supra.

      . See generally, Rescue Army v. Municipal Court of Los Angeles, 331 U.S. 549, 574-585, 67 S.Ct. 1409, 91 L.Ed. 1666; Alma Motor Co. v. Timken Detroit Axle Co., 329 U.S. 129, 136, 67 S.Ct. 231, 91 L.Ed. 128; and Aircraft and Diesel Equipment Corp. v. Hirsch, 331 U.S. 752, 763, 67 S.Ct. 1493, 91 L.Ed. 1796.