author: SAWTELLE, Circuit Judge.

text:
    UNITED STATES v. TUJUNGA WATER & POWER CO.
    No. 6294.
    Circuit Court of Appeals, Ninth Circuit.
    April 6, 1931.
    Rehearing Denied May 11, 1931.
    Samuel W. McNabb, U. S. Atty., and Ignatius F. Parker, Asst. U. S. Atty., both of Los Angeles, Cal., and H. P. Dechant, Asst. to the Solicitor, U. S. Department of Agriculture, of San Francisco, Cal.
    Donald M. Keith, of Los Angeles, Cal., for appellee.
    Before RUDKIN, WILBUR, and SAWTELLE, Circuit Judges.
   SAWTELLE, Circuit Judge.

This is an appeal from a decree in favor of the appellee, Tujunga Water & Power Company, denying forfeiture of a grant of right of way or easement on public lands comprised within the Angeles National Forest Reserve, county of Los Angeles, state of California.

As stated in the opinion of the trial judge (D, C.) 18 F.(2d) 120, 121, and the brief of the appellant: “In September, 1901, Samuel Merrills obtained approval of an application accompanied by a map of location covering a contemplated system of water conduits with a great number of storage reservoirs in the Tujunga Canyon. This contemplated system was of many miles in extent. One Wilcox, in 1905, obtained like approval of an application to construct a conduit line and reservoir, which application covered the final or lower section of the work indicated upon the prior map of Merrills. [The Los Angeles Mountain Water Co. also filed similar application.] On February 25,1916, this defendant, which had acquired by transfer the rights of the prior locators, filed a map of definite description, covering what was designated as reservoir No. 1, being at the same location indicated for similar work on the Wilcox and Merrills maps. There were other maps of location filed at different times, covering intended work described under the extensive plan indicated on the Merrills map, but there was no contention at the trial that any section of that work had ever been commenced” — and the decree of the District Court in that respect was in favor of the appellant here.

Said Los Angeles Mountain Water Com.pany also made application for the construction of .a ditch, tunnel, and conduit lines on part of the lands in question, which application was duly approved by the Secretary of the Interior on May 28, 1910. As above stated, appellee, Tujunga Water & Power Company, successor in interest to all prior locators or permittees, on Jime 10,1915, filed in the United States Land Office at Los Angeles a certain map on which appeared and was set forth a certain proposed reservoir site designated on the said map .as “Reservoir Site No. 1” on the same location designated for similar work on previous applications. On February 25, 1916, this map was duly approved by the Secretary of the Interior. The evidence shows that during the year 1911, approximately five years prior to the time the latter application was approved, appellee as the successor in interest to the prior locators began the construction of a dam .at dam site No. 1; that in the following year said dam was partially constructed to a height of 35 feet, whieh brought to the surface the waters of the underground stream above that point.

Appellee also purchased what is known as the Wilson tunnel for use in connection with said .dam. This tunnel had its mouth at a point back of the concrete dam, was 6 or 7 feet in dimension, and extended for a distance of about 600 feet through a mouhtain to a point below the dam where a conduit commenced. According to the testimony of one of the witnesses, “at certain seasons of the year temporary obstructions' were thrown across the top of the dam to height of several feet, thereby causing the back waters to enter the mouth of the Wilson Tunnel and flow through the tunnel into the ditch and conduit system below the dam. * * * The floor level of the tunnel is about two feet high from the top of the permanent dam, but the placing of temporary obstructions across the top of the dam raises the water sufficiently to force it to flow through the tunnel.”

There is no contention that appellee has added to the height of the dam since 1914 or 1915 when the water was actually diverted from the dam, and we think that it cannot fairly be said that the dam as constructed impounds any body of water, except to a very limited extent and then only the subterranean and.percolating waters. As a master of fact, “the stream continues to flow in its old course across the top of the dam,” and certainly no such reservoir as set forth on the map and contemplated by the appellee and appellant was ever created.

The trial court said: “The issue is narrowed, therefore, so as to require a decision only as to whether the defendant and its predecessors, by the work that they caused to be performed under the permission given by the Interior Department, upon reservoir No. 1 and the contemplated tunnel and conduit system leading therefrom, created a practical storage place for the gathering of water and a means to conduct the same across the public lands, as their application promised they would do” — and held that “if, within the general plan outlined by the maps of location, substantial improvements are made, which are of practical use to an irrigation company in its business of supplying water to the inhabitants of the particular territory, the requirements of the statute are satisfied and the rights obtained may not be disturbed.”

In our view of the ease, we think this holding was error. An agreement was entered into between the government and the Tujunga Water & Power Company, the nature of which is shown by the appellee’s map filed June 10,1915. It is designated as “map, showing definite location of reservoir for the Tujunga Water and Power Company, Los Angeles County, California.” The drawing shows a cross section of a dam with the caption “height of dam 115'.0.” There is indorsed on the map an affidavit of the engineer who was employed by appellee to make the survey of said reservoir the following: That the reservoir site covered 92.85 acres, and that the “survey of the said reservoir accurately represents a level line, which is the proposed water line of the said reservoir and * * * no lake or lake bed, stream or stream bed is used for the said reservoir, except as shown on this map.”

There is also indorsed thereon an affidavit of the president .and the secretary of said corporation to the effect that “the said reservoir as represented on this map and by said field notes was adopted by the company by resolution of its board of directors on the 10th day of June, 1915,” that the total area to be covered is 92.85 acres, “and that the map has been prepared to be filed for the approval of the Secretary of the Interior in order that the company may obtain the benefits of sections 18 to 21 inclusive of the Act of Congress approved March 3, 1891, entitled 'An Act to Repeal Timber Culture Laws and for Other Purposes,’ and section 2 of the act approved May 11, 1893, and I further certify that the right of way herein described is desired for the main purpose of irrigation.”

The map also bears, the approval of the Secretary of the Interior as of February 16, 1916.

. The submission of this map by the appellant company and the approval of the details thereon by the Secretary of the Interior created a binding contract. It went further than a mere continuance of the grants to the precedent companies and a recognition of the work that had been done; it constituted a new obligation, a new understanding between the parties. A reservoir is defined by the Standard Dictionary as “a place where anything -is kept i,n store; especially a place where water is collected and kept for use when wanted.”

One of the conditions of the contract between the government and the appellee was the formation of a reservoir of the size and extent indicated on the map. It is agreed that the present dam does not impound a reservoir, and that its sole effect is to stop the flow of the waters in the gravel between the stream bed and bed rock; to the end of creating a large reservoir that would effectually conserve large quantities of water at present lost, the existing dam is quite ineffectual. There is no provision made for collecting the water, no provision for keeping it so that it may be available whenever it may be required.

If two individuals had entered into an agreement whereby one was to receive certain rights over the property of the other, in return for which he agreed to build a dam 115 feet high and to create a reservoir covering 92.85 acres, and he did nothing to what had already been done and asserted merely that he had partially fulfilled his obligation by the fact that he could build sand piles on top of existing structures whenever he might think it necessary, no court of law or equity would hold that the obligation had been fulfilled and that the grantee had done what was required of him.

So to hold in the present case would be merely to state that, in any ease in which the government grants certain rights in return for certain specified work to be done, the grantee is made the sole judge of the terms of the contract and is able to do as much or as little as he desires. If the government is generous enough to allow certain privileges to its citizens, it has the right to expect something in return; and, when the government makes a grant or an easement with the understanding that certain specifically noted things will be done, then the government has the right to exact compliance with the strict terms of the agreement.

The language of the statute is explicit on that point. Sections 18 to 21, inclusive, of the Act of March 3,1891 (43 USCA §§ 946-949), in so far as material, are as follows:

“Section 18. The right of way through the public lands and reservations of the United States is hereby granted to any canal or ditch company * * * to the extent of the ground occupied by the water of the reservoir and of the canal and its laterals, and fifty feet on each side of the marginal limits thereof. * * *.
“Section 19. Any canal or diteh company desiring to secure the benefits of this act shall, within twelve months after the location of ten miles of its canal, if the same be upon surveyed lands, and if upon unsurveyed lands, within twelve months after the survey thereof by the United States, file with the register of the land office for the district where such land is located a map of its canal or diteh and reservoir; and upon the approval thereof by the Secretary of the Interior the same shall be noted upon the plats in said office, and thereafter all such lands over which such rights of way shall pass shall be disposed of subject to such right of way. * * •
“Section 20. * * * Provided, That if any section of said canal, or diteh, shall not be completed within five years after the location of said section, the rights therein granted shall be forfeited as to any uncompleted section of said canal, ditch, or reservoir, to the extent that the same is not completed at the date of the forfeiture.
“Section 21. Nothing in this act shall authorize such canal or ditch company to occupy such right of way except for the purpose of said canal or ditch, and then only so far as may be necessary for the construction, maintenance, and care of said canal or diteh.”

The words of the statute must be read into and are an integral part of the contract. There is nothing here about “substantial improvements,” nothing that says or implies that “it is not that the government is interested in having, constructed works, conduits, and storage reservoirs of the exact and particular kind contemplated by the parties who make location of government land,” but rather is there a clear statement that, “if any section of said canal, or diteh, shall not be completed” within the specified time allowed, the rights granted shall be forfeited.

The case of the Union Land & Stock Co. v. United States, 257 F. 635, 636 (C. C. A. 9th), was, as appears in the statement of the facts prepared by Judge Gilbert, “a suit in equity to declare forfeited a right of way and easement for the storage of water.” It was alleged in the bill that the appellant, under the provisions of the act of 1891, filed in the land office at Susanville, Cal., its application for an easement for a reservoir for irrigation purposes, describing the same in the map which was attached to the application as reservoir No. 1, and which covered certain portions of the public lands of the United States, that the application was duly approved by the Secretary of the Interior, and that no part of the reservoir had been completed since the approval of said right of way by the Secretary of the Interior. The prayer of the bill was that the easement be declared forfeited and canceled.

“It was stipulated in open court that in the. years 1894 and 1895 the appellant went on the ground at the point A, indicated on the map attached to the bill of complaint, and after November, 1895, constructed a dam which at that time was 35 feet high; that said dam remained at that height until the winter of 1897-98, when a portion of it was washed away; that in the fall of 1898 the dam was reconstructed to a height of 26 feet, but settled down to a height, at its lowest, of 23 feet, at which point it now remains. * * * 'It was also shown by competent evidence that the dam as constructed would not store water over more than 100 acres of the land in said reservoir, and that it did not have a capacity of more than 600 acre feet of water; that the dam was in a bad state of repair, but that it was strong enough to store water in the reservoir to a depth of 20 feet; that the base was not of sufficient width to build the dam to a height of 50 feet; and that said reservoir is one of a series of reservoirs, the others being known as dams Nos. 2 and 3, and that they are all used in connection with each other. * * * That said reservoir has been used to store water every year since its construction, with the exception of dry years, when there was no water to store.’ ”

Judge Gilbert, speaking for this court, said, among other things, that the grant of rights under the act of Congress of 1891 is a general one. “It opens the lands of the United States to the occupation of various and numerous applicants. By a general and permanent statute it provides the steps which they must take to acquire the rights contemplated by the grant, * * * [and] a failure to comply with the requirements of the statute of itself operated to divest the grantee of title and revest it in the government”— citing United States v. Whitney, 176 F. 593 (C. C. A. 9th).

The decree of the court declaring the easement forfeited was affirmed.

An analogous case of “substantial compliance” arises in the ease of United States v. Big Horn Land & Cattle Co., 17 F.(2d) 357. 365 (C. C. A. 8th). There the map approved by the Secretary of the Interior for a reservoir for irrigation purposes called for and represented construction work which would raise the waters of a certain lake 16 feet above their natural level. The facts of the ease show and the Circuit Court of Appeals concludes that the dam there in question would not raise the waters of the lake in excess of 2 feet above its natural level. In that case,’ as here, the lower court found that the defendant and its predecessors had partially performed their obligations to the government under the map and filings. This decree was reversed by the appellate court with the statement that they could not .agree with the finding of the trial court and its decree that “ 'the defendant and its predecessors in title, after they had made this application for right of way for a reservoir site and ditch, went out there .and attempted in good faith to make the construction contemplated, and did construct a dam in substantial compliance with the proposal.’ Indeed, we find no evidence of any attempt to comply with the proposal after the filing of the map with the Secretary of the Interior. They may have been in good faith when they made the survey and mapped the project, but as we read the Act of March 3, 1891, faith will only avail the applicants to the extent of their works.”

In that ease the appellate court considered the scope and meaning of the words “any section,” and stated: “We think the clear spirit and intent of the act applies to a failure to complete the reservoir as well as the canal or ditch proper; that in the particular clauses mentioned the words ‘canal or ditch’ were used in an inclusive sense, embracing the whole project.”

The unit to be considered must be the “section,” and not merely a certain part of a certain ditch or canal. The grant could not be made so that, in the ease of a project involving a dam and a system of canals, the government might seize one ditch or one 10-foot section of the dam that had not been constructed. So to construe the act would mean that, in a ease where a dam of a certain height had to be built to meet the needs of the surrounding community, if the dam were only half constructed, the government eould seize only the uncompleted upper portion. The holder of the fee would have the lower part of the dam and the government the unconstructed upper part, but no good would flow therefrom to either of the parties involved or to the public for whose protection the law is framed. The grant is allowed in the first place as a whole, with the idea that a certain unit of work is necessary and conducive to the best interests of the public. If the grantee is allowed to do his work by halves and then to retain control over the whole project, the desire of the government is thwarted and the puhlie generally must suffer. This is not desirable, nor does the law so read. In the instant case the unit to be considered is the dam and the reservoir that would, result if the dam were built. It is not enough to say that the existing dam is a substantial improvement over conditions as they were before 1910; the question is whether or not the unit of work indicated on appellee’s map of 1916 was completed, and it was the finding of the court below that the work was not done. Appellee admits that no work was done on other proposed sections of the project and that therefore they are subject to forfeiture by tbe government, but we are unable to distinguish wherein his failure to carry out his obligations with respect to the construction of the ditch and the conduits differs from his failure to carry out his obligations with regard to the construction of & dam.

Appellee asserts that courts of equity generally refuse to aid in the enforcement of the penalty of forfeiture, and insists that forfeiture should be enforced in equity consonant with the principles of right and justice and in a clear case. We think that the law on this point has been clearly stated in the case of Farnsworth v. Minn. & Pac. R. Co., 92 U. S. 49, 68, 23 L. Ed. 530, as follows : “But it is said that provisions for forfeiture are regarded with disfavor and construed with strictness, and that courts of equity will lean against their enforcement. This, as a general rule, is true when applied to eases of contract, and the forfeiture relates to a matter admitting of compensation or restoration; but there can be no leaning of the court against a forfeiture which is intended to secure the construction of a work, in which the public is interested, where compensation cannot be made for the default of the party, nor where the forfeiture is imposed by positive law. ‘Where any penalty or forfeiture,’ says Mr. Justice Story, ‘is imposed by statute upon the doing or omission of a certain act, there courts of equity will not interfere to mitigate the penalty or forfeiture, if incurred; for it would be in contravention of the direct expression of the legislative will.’ Story’s Eq. Jur., sec. 1326. The same doctrine is asserted in the ease of Peachy v. The Duke of Somerset, reported in 1st Strange, and in that of Keating v. Sparrow, reported in 1st Ball & Beatty. In the first case, Lord Macclesfield said that ‘cases of agreement and conditions of the party and of the laws are certainly to be distinguished. You can never say that the law has determined hardly; but you may that the party has made a hard bargain.’ In the second case, Lord Manners, referring to this language and taking the principle from it, said that ‘it is manifest, that, in cases of mere contract between parties, this court will relieve when compensation can be given; but against the provisions of a statute no relief can be given ’ ” — cited by this court in the case of Union Land & Stock Co. v. United States, supra.

The decree of the District Court is reversed, with directions to enter a decree for appellant in accordance with the prayer of the bUl.


source: Caselaw Access Project

author: MANTON, Circuit Judge.

license: Public Domain

text:
    In re NEVE DRUG STORES, Inc.
    No. 301.
    Circuit Court of Appeals, Second Circuit.
    April 13, 1931.

      Crichton Clarke, of New York City, for intervener Alfred J. Neve.
    Irving G. Warshaw, of New York City, for intervener Jules C. Klein.
    Sullivan & Cromwell, of New York City (David W. Peek and Alexander M. Grean, Jr., both of New York City, of counsel), for respondent.
    Before MANTON, SWAN, and AUGUSTUS N. HAND, Circuit Judges.
   MANTON, Circuit Judge.

The Neve Drug Stores, Incorporated, owned and operated a chain of drug stores in New York City and vieinity. Its stock was held largely by the United Retail Chemists Corporation. The United Cigar Stores Company of America, a petitioning creditor, operates a chain of cigar stores. It holds a substantial part of the voting stock, but not the majority, of the United Retail Chemists Corporation, and by a contract, dated December 7, 1928, came into control of the management of the Neve Drug Stores, Incorporated. It is a creditor of the bankrupt in the total sum of $600,000.

Appellant Neve, whose name was used for the bankrupt company, was general manager and president of the bankrupt. 'Appellant Klein owned a drug store in the borough of the Bronx and contracted to sell it to Suprenant & Co. for cash and 526 shares of stock of the Neve Drug Stores, Incorporated. This contract was later assigned by Suprenant & Co. to the Neve Drug Stores, Incorporated. Oh August 29, 1939, a petition in bankruptcy was filed, and the bankrupt admitted in writing its inability to pay its debts and expressed its willingness to be adjudicated a bankrupt. It appears that there had been a deficit in the management in the year 1928 of $720,000 and a loss in the year 1929 and the first half of 1930 of $775,000. A subpcena was issued returnable September 5, 1930. The petition alleged acts of bankruptcy, admitted by the bankrupt, including its inability to pay its debts. Am adjudication of bankruptcy was entered by the clerk of the court pursuant to general orders of the court in the Southern district of New York. Section 32(1).

On September 5, 1930, Klein intervened by petition and filed an answer, and on September 9th appellant Neve, as an alleged creditor, was allowed to intervene and filed an answer. Their petitions, in effect, alleged that they were creditors of the bankrupt and that the bankruptcy was the result of a collusive agreement between two of the petitioning creditors and the bankrupt for the purpose of securing to the petitioning creditors a preference. The allegations, however, were not amplified or specifically alleged, and, as we shall point out, they were not in point of fact creditors. On September 11th, the appellant Klein obtained an order directing the petitioning creditors to show cause why they should not be restrained from electing a trustee and why the adjudication should not be vacated. A motion was made to vacate this order to show cause on the ground that the answer of Klein was insufficient. Thereupon Klein, at his own request, submitted an amended answer on September 17th; after a hearing based upon affidavits, submitted by both sides, the District Judge vacated the order to show cause, denying the appellant’s motion to vacate the adjudication and to restrain the election of the trustee. Thereafter a notice of trial was served on the petitioning creditors and the eause placed on the calendar and stricken therefrom, resulting in the order of October 18th. The Irving Trust Company was named receiver, and as such receiver, it has liquidated all the assets of the bankrupt and is holding the proceeds.

Sections 18b and 18d of the Bankruptcy Act (11 USCA § 41 (b) and (d), provide:

“(b) The bankrupt, or any creditor, may appear and plead to the petition within five days after the return day, or within such further time as the court may allow. * * * (d) If the bankrupt, or any of his creditors, shall appear, within the time limited, and controvert the facts alleged in the petition, the judge shall determine, as soon as may be, the issues presented by the pleadings, without the-intervention of a jury, except in eases where a jury trial is given by the provisions of this title.”

The contention of the appellants is that this statute gave five days after the return ■day in whieh to appear and plead to the petition, that the adjudication entered before the expiration of that period is void, and that upon mere intervention, without considering tho sufficiency of the answers filed, the court should have set aside the adjudication and ordered a trial to determine the issues raised by their answers, and that therefore the orders app ealed from were unlawfully entered. This contention is answered by the claim that the appellants are not creditors entitled to intervene but strangers to the 'proceedings, and that their answers, as filed, were insufficient and raised no issues. An adjudication entered, as at bar, is binding on the bankrupt and on all creditors who do not intervene. It is not void as to creditors who intervene within the five days of the return day. The consent of the bankrupt cannot deprive bona fide creditors of their statutory right to intervention, and ho such contention is made by the appellees. The appellees’ contention is that such an adjudication may be made by a. ■court of competent jurisdiction and cannot be ■set aside by an alleged creditor until he has shown that he is in fact a. creditor, entitled to the advantage of the statute, and answers raising issues which are entitled to a judicial determination. There is support for this view. In re Columbia Real Estate Co., 101 F. 965 (D. C. Dist. Ind.) affirmed 112 P. 643 (C. C. A. 7); In re Davis, 217 P. 113 (D. C. Dist. N. J.); B. R. Electric & Telephone Mfg. Co. v. Ætna Life Ins. Co., 206 P. 885 (C. C. A. 8); Ewing V. Forrester Nace Box Co., 12 F.(2d) 864 (C. C. A. 8). The cases referred to by the appellants are not to the contrary. In Day v. Beck & Gregg Hardware Co., 114 P. 834 (C. C. A. 5), an involuntary petition in bankruptcy was filed against Day. On the last day for the bankrupt and creditors to answer, the bankrupt’s unverified answer was stricken out and an adjudication entered. On appeal, the adjudication was set aside; the court holding that> the bankrupt could have filed a sufficient answer the last day and that the adjudication was premature until that day had elapsed. In re L. Humbert Co., 100 P. 439, a District Court case, an involuntary petition was filed, and the bankrupt, a corporation, appeared and answered, consenting to adjudication. The clerk of the court asked for instruction as to whether an adjudication should be made forthwith. The District Court instructed; the clerk not to enter an adjudication until the period given to creditors who-intervened had elapsed. This ease seems to have passed off on the principle that, at the time, prior to the 1910 amendment, a corporation could not become a voluntary bankrupt. In re Western Investment Co., 170 P. 677 (D. C. E. D. Okl.), is not contrary to the conclusions we here announce.

But it is argued by the appellants that the adjudication was entered by the clerk “on his own motion in violation of law and without the authority of the Statute or the direction of the District Court.” There is authority to be found for the entry of such an adjudication in the general orders of the District Court. By section 32, subd. 1, all adjudications axe entered by the District Court clerk. The petition in bankruptcy sufficiently stated the statutory acts of bankruptcy, and there is an appearance and an answer by the bankrupt, and an admission of the allegations of the petition.

While bona fide intervening creditors might file an answer within the time prescribed by the statute, an adjudication as entered here was not a nullity. The challenge made to the appellants as bona fide creditors filing sufficient answers was raised fairly for determination by the District Court. Their right to intervention depended upon section 18 of the Bankruptcy Act (11 USCA § 41). The court, to determine the allegations of the answer, need not set aside the adjudication unless justiciable issues were raised by the answers filed. They did not do this. A creditor is one having a provable claim against the bankrupt. Bankruptcy Act, § 1 (9), 11 US CA § 1 (9). Interveners must first show that they are in fact creditors. In re New York Tunnel Co., 166 F. 284 (C. C. A. 2); In re Columbia Real Estate Co., supra. And they must file answers which are sufficient to raise issues which are more than mere charges and generalities. Neve’s claim as a creditor is really one for damages against the Neve Company for breach of an alleged contract obligation due him. The contract which he refers to in his answer is dated December 7, 1928, and is with the United Cigar Stores Company and the bankrupt, but the obligations under that contract are the United Company’s obligations, not those of the bankrupt, and the breaches complained of are the breaches of the United Company. No contract obligation of the bankrupt is mentioned. The obligation undertaken by the bankrupt under this contract was to pay to the United 1 per cent, of all purchases it made for the bankrupt. It is apparent from appellant Neve’s answer that he is not a creditor of the bankrupt, having a provable claim. The only claim he has set forth might possibly be one against the United Company. Klein says he is a creditor of the bankrupt, having a provable claim in the sum of $52,600 in excess of securities held by him. He says the nature of his claim is for damages against the bankrupt arising out of false and fraudulent representations and acts of the bankrupt, which are tort elaims, and its officers and directors inducing the sale by the petitioner to the bankrupt of his drug store. But, in the answer which he filed, he in effect says that these fraudulent acts and misrepresentations are on the part of the bankrupt, the United Cigar Stores, and others. What the fraudulent acts or misrepresentations are, are not stated. He is neither a merchandise nor a contract creditor, and at most his claim is one for fraud and deceit, or a tort action against the United Company and others. He has no claim provable in bankruptcy. Schall v. Camors, 251 U. S. 239, 40 S. Ct. 135, 64 L. Ed. 247. In re N. Y. Tunnel Co., supra; Remington on Bankruptcy, § 766.

The answers filed do not raise issues. It is not enough for the creditor merely to deny the act of bankruptcy. E. L. Welsh Co. v. Blakstad, 290 F.194 (C. C. A. 8). And, as we have said, the bankrupt admitted the acts of bankruptcy by answering the petition. Nor is it sufficient merely to charge fraud and collusion, attempted to be supported only by pointing out that the United Cigar Stores Company, through its stock ownership of the United Retail Chemists Corporation, in turn owned the majority of the common stock of the bankrupt and therefore controlled its officers. It is not asserted that any course of conduct between the United Cigar Stores Company and the bankrupt was improper. Their relationship was expressed in the contract of December 7, 1928. There are no allegations that that contract was in any way breached, or that the contract itself was fraudulent or overreaching. Indeed, it has been held that an officer of the corporation may admit bankruptcy of his corporation even though he be an officer of a corporation which is one of the petitioning creditors. Regal Cleaners & Dyers v. Merlis, 274 F. 915 (C. C. A. 2); Home Powder Co. v. Geis, 204 F. 568 (C. C. A. 8).

There are allegations that the petitioning creditors caused the bankrupt to purchase, at excessive prices, merchandise for its use. This may be of interest to a trustee if true, but it seems to be no justification for the claim of fraud in instituting the bankruptcy proceedings and does not bear upon the question of setting aside the adjudication. We have examined the other allegations of the answers, but none raises an issue which could possibly result in setting aside the adjudication. Moreover, since the appellants are not creditors within the Bankruptcy Act, they have no standing. Their petitions were therefore properly dismissed.

The order of October 18, 1930, striking the ease from the calendar, was proper in view of the conclusions reached that the appellants were not creditors and had no standing as such to set aside the adjudication.

Orders affirmed.


author: AUGUSTUS N. HAND, Circuit Judge.

text:
    MITCHELL v. COMMISSIONER OF INTERNAL REVENUE.
    No. 223.
    Circuit Court of Appeals, Second Circuit.
    April 13, 1931.

      Simpson, Thacher & Bartlett, of New York City (Whitney North Seymour and Courtland Kelsey, both of New York City, of counsel), for appellant.
    G. A. Youngquist, Asst. Atty. Gen., Sewall Key and Hayner Larson, Sp. Assts. to Atty. Gen. (C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, and William E. Davis, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., of counsel), for appellee.
    Before MANTON, SWAN, and AUGUSTUS N. HAND, Circuit Judges.
   AUGUSTUS N. HAND, Circuit Judge.

The petitioner-appellant in his income tax return sought to take a loss upon certain securities purchased in 1911. These securities consisted of option warrants whereby the holder had the right within ten years from August 1, 1911, to purchase common stock of the American Power & Light Company. .He never exercised this option, which expired on August 1, 1921, and thereby became valueless. In the taxpayer’s return for 1921 he deducted a loss on the warrants based on a valuation as of March 1, 1913, but the Commissioner assessed the loss on the basis of the cost of the warrants in 1911, when they were worth less than on March 1, 1913, and determined a tax deficiency for the difference accordingly. The Board of Tax Appeals affirmed the Commissioner. They found that the value of the warrants at cost' was $5.94 each, while the bid price for them on March 1, 1913, was $13 each. The question before us is whether the loss should be figured on the basis of cost or of value on March 1, 1913.

The provisions of the Revenue Act of 1921 which must be considered are the following :

«See. 202 * * *
«(b) The basis for ascertaining the * * * loss sustained from the sale or other disposition of property, real, personal, or mixed, acquired before March 1, 1913, shall be the same as that provided by subdivision (a). * * *”

The basis provided by subdivision (a) was «the cost of such property.”

«See. 214. (a) That in computing net income there shall be allowed as deductions ¡ * * *

“(4) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in trade or business;
«(5) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in any transaction, entered into for profit, though not connected with the trade or business. * * *
“(6) Losses sustained during the taxable year of property not connected with the trade or business * * * if arising from fires, storms, shipwreck, or other casualty, or from theft, and if not compensated for by insurance or otherwise. Losses allowed under paragraphs (4), (5), and (6) of this subdivision shall be deducted as of the taxable year in which sustained unless, in order to clearly reflect the income, the loss should, in the opinion of the Commissioner, be accounted for as of a different period. In ease of losses arising from destruction of or damage to property, where the property so destroyed or damaged was acquired before March 1, 1913,. the deduction shall be computed upon the basis of its fair market price or value as of March 1, 1913.” 42 Stat. 239.

It was held by the Board of Tax Appeals that, when the warrants expired on August 1, 1921, there was a “disposition” of them within the meaning of section 202 (a), supra. Undoubtedly if this were so the basis for the determination of the loss would be cost, for section 202(a) in so many words makes “the cost of such property” the basis. But the expiration of the warrants was not in our opinion a “disposition” of them. The words “sale or disposition” would seem to relate to a voluntary sale or transfer by the taxpayer and perhaps also to a sale or transfer imposed upon him, but not to a mere depreciation in or cessation of value. The loss here was not one incurred in a “sale or other disposition of property” under section 202(b), but in a “transaction entered into for profit, though not connected with 's r * trade or business” such as is described in section 214 (а) (5). It is, however, said that, if the ease falls within section 214 (a) (5), no basis is found in that section for determining the amount, and that the word “loss” must therefore be taken to describe the difference between what the property cost the taxpayer and what it finally yielded to him.

Section 214 (a) (6) provides that, “in case of losses arising from destruction of or damage to property” acquired before March 1, 1913, “the deduction shall be computed upon the basis of its fair market price or value” as of that date. We must first determine whether the. lapse of the warrants which rendered them valueless on August 1, 1921, can be regarded as a loss “arising from destruction or damage to property.”

It may be said that the only losses which are properly described by the words “arising from destruction or damage to property” are those occurring through “fires, storms, shipwreck, or other casualty” mentioned in section 214 (a) (6). But certainly losses arising from “theft” which are grouped in (б) in the same clause with those arising from “fires, storms, shipwreck or other casualty” must be computed under the provisions of 214 (a) (6), although “theft” no more involves a destruction of property in a physical sense than does the lapse of an option to subscribe for stock. The second clause of section 214 (a) (6) deals with paragraphs (4) and (5) as well as (6) in respect to the year in which deductions shall be taken, and is therefore to that extent applicable to the other classes of deductions for losses covered by the section. If we treat the last clause of (6) as relating only to a physical “destruction,” we are not only leaving all the items of loss in (4) and (5) as well as losses arising from “theft” mentioned in (6) without any specified basis for computation, but we are making an irrational distinction between the methods to be used in computing losses of different kinds. The basis for computation specified in section 214(a) is the “fair market price or value as of March 1, 1913.” Subdivision (6) of section 214(a) consists of a single paragraph which deals in its second clause with the deductions allowed for losses under (4) and (5) as well as (6), and prescribes the basis’for computation in all three subdivisions. The word “destruction,” in our opinion, ineludes not only physical destruction, but losses from the other causes enumerated.

Because section 214 (a) (6) provided that “losses arising from destruction of * * * property * * * shall be computed upon the basis of its fair market price or value as of March 1, 1913,” the taxpayer says that the Board of Tax Appeals ought to have allowed a deduction of $13 per warrant, seeing that $13 was the bid price for the warrants on March 1, 1913. But this contention overlooks the fact that the Supreme Court has repeatedly construed clauses of the income tax statutes providing that gains or losses shall be computed on the basis of the value as of March 1,1913, in a different way.

While section 214(a), subdivisions (4), (5), and (6), of the Revenue Act of 1921 (42 Stat. 239, 240), has not been dealt with by the courts, the clause in (6) setting forth the basis on which losses are to be computed is substantially identical with section 202 (a) of the Act of 1918 (40 Stat. 1060). The Act of 1918, section 202(a), provided that, for the purpose of ascertaining the loss sustained from the sale or other disposition of property acquired .before March 1, 1913, the basis should be the value of such property on that date, while section 214(a) of the Act of 1918, contained no separate provisions for the basis to be used in determining the losses under that section. But the Act of 1921 was changed in this respect by substituting as a basis for ascertaining the loss in case of sales- the cost of the property and by carrying into section 214 (a) (6) the clause of section 202(a) of the Act of 1918 that made the value on March 1, 1913, the basis. The clause in section 202(a) of the Act of 1918 was construed by the Supreme Court in United States v. Flannery, 268 U. S. 98, 45 S. Ct. 420, 69 L. Ed. 865; McCaughn v. Ludington, 268 U. S. 106, 45 S. Ct. 423, 69 L. Ed. 868, and Heiner v. Tindle, 276 U. S. 582, 48 S. Ct. 326, 72 L. Ed. 714. In all three decisions that clause was held to allow no more than actual loss to the taxpayer as a deduction. Justice Sanford said, in the Flannery Case, at page 103 of 268 U. S., 45 S. Ct. 420, 422, that:

“* • • provision in reference to the market value on March 1, 1913, was applicable only where there was such an actual gain or loss, that is * * * this provision was merely a limitation upon the amount of the actual gain or loss that would otherwise have been taxable or deductible.”

In other words, the value on March 1, 1913, is only taken as a basis for computing losses where the cost has been greater than the value on that date. In such ease the loss is computed with reference to the value on March 1, 1913. The statute has been interpreted in a similar way in computing taxable gains. Where the cost has been less than the value on March 1, 1913, the gain has been measured by the March 1 value. Where it has been greater, the gain has been measured by original cost. Goodrich v. Edwards, 255 U. S. 527, 41 S. Ct. 390, 65 L. Ed. 758; Walsh v. Brewster, 255 U. S. 536, 41 S. Ct. 392, 65 L. Ed. 762; Lucas v. Alexander, 279 U. S. 573, 49 S. Ct. 426, 73 L. Ed. 851, 61 A. L. R. 906. Revenue Acts have never attempted to tax gains accrued prior to March 1, 1913, even if the imposition of such a tax may be thought constitutional. Lucas v. Alexander, 279 U. S. 573, 49 S. Ct. 426, 73 L. Ed 851, 61 A. L. R. 906. These rules as to gains and losses on sales were carried into the Act of 1921 by section 202 (a) (b) 1, 2, and 3.

The allowance of .anything beyond an actual loss would be most unlikely in the absence of a clear legislative mandate. The provision in section 214 (a) (6) that losses are to be computed upon the basis of the “fair market price or value as of March 1, 1913,” should be construed, like other similar clauses, as merely a limitation upon losses that would otherwise have been deductible. While Congress can, of course, allow such deductions as it pleases and limit them as it will, it cannot reasonably be thought to have intended in any case to have allowed more than actual losses. Nichols v. Smith (C. C. A.) 35 F.(2d) 938; Lock, Moore & Co., Ltd., 7 B. T. A. 1008; Appeal of Jackson County State Bank, 2 B. T. A. 1100.

Inasmuch as the value of the warrants on March 1, 1913, was equal to or exceeded cost, cost under the decisions we have referred to must be taken as the basis for computing losses. So it is immaterial in the particular circumstances whether section 202(b) or section 214(,a), subdivision (6), be taken as defining the basis for computation, for in either event cost must furnish the basis. The value on March 1, 1913, is only important to set a limit to the deductible loss, if cost exceeded the value on that' date.

The Commissioner and the Board of Tax Appeals fixed cost at $5.94 per warrant. As cost is the basis for computation, it only remains for us to determine whether the finding that cost was $5.94 was justified by the evidence. The taxpayer made some sales of warrants in 1911 at $5 and $6, but they were made to persons in whom he was particularly interested. He testified that he knew “there were sales being made at higher prices” and that in making sales “he was not actuated by a desire to make a gain or suffer any loss.” He likewise produced a witness who testified that the witness had made inquiries of a number of brokers and of Electric Bond & Share Company which was interested in the American Power & Light Company, and had been unable to ascertain anything authoritative regarding any actual sales of or quotations for the warrants during the period between 1911 and March 1, 1913. This witness .also testified that there were no quotations for the warrants in the Commercial and Financial Chronicle prior to the latter date. On March 1, 1913, there was a market for the warrants with a quotation of $13 bid and $15 asked. The stock of the American Power & Light Company, to subscribe for which the warrants were issued, was quoted during the last five months of 1911, and the quotations were very close to the quotation for that stock on March 1, 1913, and at times were higher. From this fact, it is argued that the rights to subscribe for the stock, which ordinarily follow in a general way the rise and fall of the stock itself, must have been worth as much when issued to the taxpayer in August, 1911, as on March 1, 1913; i. e., $13 bid, $15 asked.

The taxpayer’s privilege consisted of the right to take and pay for units, each consisting of a $100 par value of ten-year 6 per cent, noto of the American Power & Light Company and an option warrant entitling the holder within ten years from August 1,1911, to purchase one share of common stock of that company at par. After paying $100 each for these units, he sold a number of the notes in September and November, 1911, and in January, 1912, to Electric Bond & Share Company, at prices from $94.70 to $96.50. It is clear that the value of the warrants to subscribe for the stock cannot be determined by deducting the average _price received for the notes from the $100 paid for the units. Such a method would ignore the fact that the taxpayer was securing as a stockholder an option to subscribe for stock which would ordinarily be worth considerably more than the cost, else there would be little inducement to the stockholders to exercise their privileges. While the price at which he sold the warrants to friends is an unsatisfactory criterion of value, yet it is worth something as evidence of value particularly when the taxpayer, though testifying that he knew “sales were being made at higher prices,” neither disclosed the prices nor explained why he was unable to do this.

The fact that the market for the stock was about the same in 1911 as in 1913 throws some doubt on the finding of the Commissioner that the warrants for which $13 was bid in 1913 were only worth $5.94 in 1911. Yet in 1913 speculation in eheap securities, or other causes, may have occasioned a large relative increase in the price of these warrants as compared with a stock which paid no dividend and cost five times as much as the warrants even at $13.

In view of the failure of the taxpayer to prove any of the 1911 sales which he says were made at higher prices than his own, or to produce witnesses to testify as to “over the counter” sales which may have taken place during that period, we do not feel justified in finding that the value of the warrants when issued must have equaled their value on March 1, 1913, or in holding that the Board had no basis for fixing a cost of $5.94 per warrant.

The order of the Board of Tax Appeals is affirmed.


author: AUGUSTUS N. HAND, Circuit Judge. L. HAND, Circuit Judge

text:
    CORBY v. RAMSDELL et al.
    No. 262.
    Circuit Court of Appeals, Second Circuit.
    April 13, 1931.

      L. HAND, Circuit Judge, dissenting.
    Duncan & Mount, of New York City (Russell T. Mount, of New York City, of counsel), for appellants.
    Macklin, Brown, Lenahan & Speer, of New York City (Horace L. Cheyney, of New York City, of counsel), for appellee.
    Before L. HAND, SWAN, and AUGUSTUS N. HAND, Circuit Judges.
   AUGUSTUS N. HAND, Circuit Judge.

The question before us is whether the respondents, owners of land under water on the easterly side of the Hudson river, should be held liable for damages sustained by libel-ant’s yacht Robaliss III as a result of her striking a submerged rock or roeks off Dennings Point while she was proceeding from New York City to Beacon.

The rocks were a part of an old stone abutment constructed by a railroad company on water lots which.it acquired from the state of New York prior to 1870. A series of these abutments extended out from the eastern shore of the Hudson connected by stringers. A pier w.as to be built over the abutments for the purpose of running cars down to car floats on the river and thus transferring them to various terminals in New York City. But the pier was never completed, and the enterprise proved a failure. In 1872 a mortgage covering the property was foreclosed and the uncompleted pier was sold on foreclosure to Homer Ramsdell, to whose rights the respondents succeeded in 1894, as trustees under his will. The cribs holding the roeks which.formed the abutments that originally stood about four feet above the level of the water at high tide fell into decay from the action of the elements, and the rocks lay in the bottom of the river and some of them were just visible above the surface of the water at low tide. The abutment farthest from the shore lay about twenty-five feet inside the channel as marked on the government chart. The trustees who held the title to the land under water and the dilapidated abutments never used them in any way and never repaired or marked them.

Libelant’s yacht was about 70 feet long and drew 4 feet of water. She was in charge of a master who had never been up the Hudson but twice, the last time about ten years before the accident. He testified that he was steering by landmarks and not by compass and he was not using a chart in the unfamiliar waters, though he claimed that there was one on board. He said that he was running 20 miles an hour at the time of the accident and that his vessel had a speed of 24 miles. But he doubtless was going faster, for in the two hours before he hit the obstruction. he had run 52 miles, and he was going at such a speed when he struck that in spite of the collision he went on 150 yards before the yacht finally came to a stop.

We think there can be little doubt that, when the rekpondent-trustees allowed the crib which held the stone abutments to fall into decay so that the roeks were scattered on the bottom of the river, they were maintaining a public nuisance. Of the existence of this nuisance they must be regarded as having had notice, for the testimony shows that the trustee, Henry P. Ramsdell, saw the abutments built by the railroad; that they originally stood about four feet above high water mark and that finally, by the action of the elements, they had become submerged. In such circumstances, the respondents were liable for obstructing a navigable stream and maintaining a nuisance therein to any person who suffered injury thereby. The fact that the railroad had obtained a grant to construct a pier did not permit it, or its successors, to maintain the-pier in a dilapidated condition, unmarked and a danger to navigation. One who maintains a public nuisance on his land, of the existence of which he has notice, or should have notice, is liable for resulting damages to the public. Klepper v. Seymour House Corp., 246 N. Y. 85, 158 N. E. 29, 62 A. L. R. 955; Kilmer v. White, 254 N. Y. 64, 171 N. E. 908; Ahern v. Steele, 115 N. Y. 203, 22 N. E. 193, 5 L. R. A. 449, 12 Am. St. Rep. 778; Edwards Ltd. v. Birmingham Navigations, [1924] 1 K. B. 341; Barker v. Herbert, [1911] 2 K. B. 633; Leahan v. Cochran, 178 Mass. 566, 60 N. E. 382, 53 L. R. A. 891, 86 Am. St. Rep. 506; Hynes v. Brewer, 194 Mass. 435, 80 N. E. 503, 9 L. R. A. (N. S.) 598; Puller v. Andrew, 230 Mass. 139, at page 146, 119 N. E. 694; Bixby v. Thurber, 80 N. H. 411, 118 A. 99, 29 A. L. R. 175; Arpin v. Bowman, 83 Wis. 54, 53 N. W. 151; City of Newport v. Schmit, 191 Ky. 585, 231 S. W. 54.

It is contended that the respondents ought not to be held liable for damages arising out of the obstruction existing on their land under water because they never received any request to abate the nuisance. This theory of the law of nuisances arose after the decision in Penruddock’s Case, 5 Coke, 205, and was based upon the idea that a successor in title could not know that structures found upon his land when he purchased it which encroached upon his neighbor’s land were not there because of a grant by or, in any event, with the acquiescence of his neighbor. Accordingly it has been held that the grantee of one who has set up a nuisance is only liable in ease he has adopted it for his own use or has been requested to remove it and failed to take action. Various decisions have confused this rule, really applicable only to private nuisances, with the law relating to public nuisances. Wenzlick v. McCotter, 87 N. Y. 122, 41 Am. Rep. 358; Dodge v. Stacy, 39 Vt. 558; Pillsbury v. Moore, 44 Me. 154, 69 Am. Dec. 91; Philadelphia & R. R. Co. v. Smith (C. C. A.) 64 P. 679, 27 L. R. A. 131; Grigsby v. Clear Lake Water Co., 40 Cal. 396; Edwards v. Atchison, Topeka & Santa Fe (C. C. A.) 15 F.(2d) 37. But no one can acquire a right to maintain a public nuisance either by grant or by prescription, and a landowner who maintains one is liable for damages caused thereby if he has had notice of its existence in time to abate it or to warn the public. Casement v. Brown, 148 U. S. 615,13 S. Ct. 672, 37 L. Ed. 582; Atlee v. Packet Co., 21 Wall. 389, 22 L. Ed. 619; Philadelphia, Wil. & Balt. R. Co. v. Phil. & Havre de Grace Steam Towboat Co., 23 How. 209, 16 L. Ed. 433; Williams v. Edward Gillen, etc., Co. (C. C. A.) 258 P. 591; Harrison v. Hughes (C. C. A.) 125 P. 860.

Even in the ease of a private nuisance, notice to a landowner has been held sufficient to charge him with liability, though there has been no request to abate. Caldwell v. Gale, 11 Mich. 77; Martin v. Chicago, R. I. & P. Ry. Co., 81 Kan. 344,105 P. 451, 27 L. R. A. (N. S.) 164.

The master of the Robaliss III testified that on the day after the accident he found a heap of small stones about one foot in diameter when examining the place where his boat seemed to have struck. Prom the survey of damage it is evident that the keel of the yacht struck the stones about amidships and that there was a sufficient depth of water even then so that she passed over them and ran under her own power 150 yards beyond. Though the obstruction was unlawful and the respondents were liable for allowing it to remain in public waters without any mark to warn navigators, yet the libelant can only recover half damages if the negligence of his master contributed to the catastrophe. • The fact that the respondents were permitting a nuisance to remain on their property would not prevent them from availing themselves of the defense of contributory negligence. McFarlane v. City of Niagara Falls, 247 N. Y. 340, 160 N. E. 391, 57 A. L. R. 1.

The libelant was entitled to the whole stretch of navigable water for the operations of his yacht, and the consideration that he was outside the channel, as surveyed by the government, would not in itself excuse the respondents for allowing the waters to be incumbered by a broken-down pier or for neglecting to mark the obstruction in such a way as to give warning to navigators. Red Star Towing & Transportation Co. v. Snare & Triest Co. (C. C. A.) 194 P. 672; Red Star Towing & Transp. Co. v. Woodburn (C. C. A.) 18 F.(2d) 77.

But if the master of the Robaliss III had looked at the chart he would have seen that the waters in which he was navigating had a depth of only from 3 to 8 feet at low tide and that there was something resembling a pier running out into the river westwardly from Dennings Point. It is true that, if he saw nothing above the water, he might reasonably have assumed that the pier had been removed. But, if he had been a prudent navigator, he would not have felt assurance that all the stones in the foundation had been eradicated and that it was safe to proceed at 26 miles an hour over a bottom so shallow that at low tide a vessel drawing 4 feet of water could not pass over it at all. Casement v. Brown, 148 U. S. 615,13 S. Ct. 672, 37 L. Ed. 582, relied on by appellee, does not preclude a finding of contributory negligence in the present case. In that case there was nothing to show the person who suffered damage that he was navigating in a dangerous place. Here there was the unexamined chart showing the shallow water and the pier.

The accident happened about 4:30 o’clock in the afternoon, some two hours before the tide would be at the flood, and the difference between low and high tide at Dennings Point was only 3 feet. The bow of the yacht, speeding along at 26 miles, would be up in the water, while her keel aft of midships would be well down. It is hard to see how the Robaliss III could traverse the flats at all under such circumstances, and it was negligent for her master to go rushing along through waters with which he had no real familiarity. If he had taken pains to look at a chart and observe the depth of the water in the vicinity, it is incredible that he would have chosen the course that he took instead of keeping out in the deep channel where navigation was perfectly safe. In such cases a court of admiralty will divide the damages (Atlee v. Packet Co., 21 Wall. 389, 22 L. Ed. 619), while . a court of law will deny any recovery because of contributory negligence (Steiner v. Mississippi River Power Co., 194 Iowa, 647, 190 N. W. 9, 25 A. L. R. 1551).

The evidence shows that the broken-down pier was a well-known danger. Very likely the master of the Robaliss III was not chargeable with such a knowledge of the location of rocks and obstructions as the pilot of a commercial vessel would be. Atlee v. Packet Co., supra. The S. W. Morris (D. C.) 59 F. 616. But we hold that he was chargeable with such knowledge as the examination of a government chart would have given him, and that, in the light of the information that he might readily have obtained, he was not justified in going outside of the channel and running at a high rate of speed through very shallow water where the slight-est obstruction was likely to wreck his vessel.

The decree is modified, and the cause remanded, with direction to grant a decree td the libelant for half damages.

L. HAND, Circuit Judge

(dissenting).

The libelant accepted the risk of striking chance stones upon the flats when he drove his boat over the flats. He did not accept the risk of striking an abandoned abutment, for he had no reason to' suspect its presence, not being chargeable with local knowledge of those waters. The effect of my brothers’ decision is to extend his acceptance to a different risk, and that in effect is to impose a penalty upon him. One may disapprove the driving of such craft in such places at such speeds, but I submit that' in a civil suit that disapproval is immaterial. The question is whether he had any cause to expect such an obstacle, not obstacles of other sorts. It seems to me that the decree below was right.


text:
    In re WATERSON, BERLIN & SNYDER CO. FAIN et al. v. IRVING TRUST CO.
    No. 27.
    Circuit Court of Appeals, Second Circuit.
    April 13, 1931.

      Wise, Whitney & Parker, of New York City (John Dashiel Myers, of Philadelphia, Pa., and Frank C. Welles, of New York City, of counsel), for appellant.
    Nathan Burkan, of New York City, for appellees.
    Before MANTON, AUGUSTUS N. HAND, and CHASE, Circuit Judges.
   AUGUSTUS N. HAND, Circuit Judge.

The bankrupt was a music publisher. Prior to bankruptcy it had purchased from the petitioner Fain, and others, musical compositions, including words and music, under agreements all of which were identical except as to royalty rates and advance royalties. There were agreements made with twenty-two such composers.

The provisions of the royalty contracts important for consideration are illustrated by the following taken from the contract with one of the composers:

“For the Consideration of the sum of One dollar, in hand paid to Jimmie Monaco, party of the first part, by Waterson, Berlin & Snyder Co., party of the second part, the receipt whereof is hereby acknowledged, the said party of the first part does hereby sell, set over and transfer unto the said party of the second part, its successors and assigns, a certain song or musical composition, including the words and music thereof, bearing the title ‘You Went Away Too Far and Stayed Away Too Dong’ or any other title, name or style the said party of the second part may at any time give to said composition, together with the right to take out a copyright for or upon the same, and each and every part thereof, including the words and music, to the full extent, in all respects as the party of the first part could or might be able to do if these presents had not been executed.

“And The Said Party of the second part hereby covenants and agrees in the event of the publication by it of the said song or musical composition, to pay to the party of the first part 14 cents upon each and every ordinary printed pianoforte copy sold and paid for of the said song or. musical composition hereafter sold by the party of the second part in the United States, except as hereinafter mentioned or specified, such payment to be made only upon a full and complete compliance with all and singular the terms and conditions herein contained on the part of the party of the first part. And it is hereby expressly agreed that out of the first royalties to which the party of the first part may be entitled by or under the terms of this agreement the sum of $500.00 dollars, paid as advance Royalty, shall be deducted. • • •

“And The Party of the first part hereby. covenants and represents to Waterson, Berlin & Snyder Co., for the purpose of inducing it to accept an assignment of said song and musical composition, and to enter into and execute this agreement and make the payment above mentioned, that he has not heretofore sold, mortgaged, hypothecated, or otherwise disposed of or incumbered any right, title or interest in or to said song or musical composition or any part thereof, and has not made or entered into an agreement with any person, firm or corporation in any wise affecting the said song, words or musical composition, and that he is the author and composer and absolute owner thereof, and has the full right, power and authority to make this assignment and agreement.

“We agree to pay 33%% jointly of all revenue received from Mechanical reproductions less any expense incurred.

“Settlement On This Agreement shall be made semi-annually within thirty (30) days after the first days of January and July, .respectively, during the whole term in existence of the copyright of said song and musical composition, according to such correct and proper statements of account as may be available on such days. Any such payment when made and accepted shall operate as a release to the said party of the second part, his successors or assigns, from any further claim or liability for any royalty up to the date thereof.”

On September 20, 1929, and after the adjudication in bankruptcy which occurred late in August or early in September, 1929, the Irving Trust Company, which had been appointed receiver of Waterson, Berlin & Snyder Company, sent a circular to various persons in the music trade inviting bids before October 1, 1929, for all of the right, title, and interest of the bankrupt estate in the copyrights for the songs free from royalty claims. The circular stated that on October 1, 1929, the receiver proposed to submit the bids for individual songs, including rights to mechanical royalties, to the court for acceptance.

Thereupon Fain and the other composers filed a petition, in the District Court alleging that in entering into .their contracts they had relied on-the reputation and organization of Waterson, Berlin & Snyder Company as leading musical publishers to popularize their publications and to increase sales of the songs, that the bankruptcy of the publishers had disabled them from further performance of the contracts to publish, and that, if the receiver was permitted to sell the compositions and copyrights free from royalty claims, purchasers would publish them without obligation to pay further royalties to the composers, who would thus be deprived of all revenue from their productions. The petitioners prayed for an order directing the receiver or trustee in bankruptcy to reassign the copyrights to them, or, in the alternative, not to sell without provision for the payment of future royalties to the composers, and for other and further relief.

The District Judge, though finding that each agreement involves “a transfer, absolute on its face, in exchange for a covenant by the publisher for the payment of certain agreed royalties,” held that the “royalty contracts * * * involve such personal elements of trust and confidence that they are not assignable without the consent of the parties,” and that they may “be rescinded by the composers when the publisher, as here, is unable or definitely refuses to fulfill his obligations thereunder.” He therefore granted the petition and ordered that the royalty contracts be rescinded and that the trustee in bankruptcy should reassign each copyright to the composer upon the return to the bankrupt estate of any unearned advance royalties paid thereon to such composer.

The trustee has taken this appeal, which raises the questions (1) whether the trustee has a right to sell the copyrights 'at all; (2) whether, if he has a right to sell them at all, he may sell them free and clear of royalties.

The questions involved are interesting, and few precedents can be found in the American courts that throw direct light on the problems involved. We find difficulty in taking the view adopted by the District Judge, in spite of his interesting and informing opinion, because it disregards the unqualified grant to the publisher, and because it appears to give no weight to the labor, skill, and capital which a publisher expends in putting a song on the market. The expense of maintaining an organization, of building up a business and making it available to the composers of songs, as well as the more direct cost of making plates, advertising, and distributing the songs so as to give them popularity, largely go for nought if a rescission of the contracts be ordered on the sole condition that the composers return unearned advance royalties. Such a disposition seems specially inequitable where in the ease of some, if not many, of the songs there are no unearned advances whatever.

In attempting to allow the composers any relief, we are confronted by certain decisions holding that an agreement to pay royalties in exchange for a transfer of title is nothing but an executory contract to pay, enforceable only at law. Bigham, J., in Re Grant Richards, [1907] 2 Q. B. 33, held that the trustee in bankruptcy of a publisher, who had purchased the copyright of a book and agreed to pay royalties to the author upon sales, could sell the copyright and was not even liable for royalties upon sales of the publication -made by him as trustee. In other words, the relation was held to be that of debtor and creditor and the author was allowed no more than the right to prove his claim against the bankrupt estate. The foregoing decision of Bigham, J., is referred to with approval by Scrutton, L. J., in the Court of Appeal in Barker v. Stiekney, [1919] K. B. 121, where an author who had sold his copyright under an agreement with the purchaser to pay royalties was held to have no lien upon the copyright in the hands of a subvendee who took title with notice of the original agreement. It was said (page 132) that “a person acquiring a chose in action is not bound by mere notice of a personal covenant by his predecessor in title.”

The foregoing decisions would indicate that the assignor of a copyright has only the right to recover at law for the breach of an agreement to pay royalties, and would have no control over the use of the copyright by his vendee or a subvendee. This rigorous doctrine, attributed to the English courts, is certainly far less satisfactory than that adopted by the court below, for, in case of bankruptcy or insolvency of the purchaser of the copyright, it deprives the author of any substantial remedy, though the consideration he was to receive for parting with his compositions was to depend on royalties accruing from a business during a long period of years. Under such a doctrine rescission could not be had even in the event of a complete failure to publish the songs.

But In re Grant Richards and Barker v. Stiekney do not represent the sole current of English authority regarding the rights of a person in the position of the trustee in the present case.

In Werderman v. Society Generale d’Electricite, 19 Ch. D. 246, a patentee had assigned letters patent to A and B, who covenanted with him that they and their assigns would use their best endeavors to introduce the invention by granting licenses or working the patent or by selling it, and that the patentee should be entitled 'to 5 per cent, of all net profits received by A and B, their executors or assigns, whether arising from royalties, sales, or otherwise, and that an account of profits should be rendered yearly to the patentee and his share of the profits paid to him by A and B and their executors or assigns, with a proviso that, after a sale had been made of the patent, the interest of the patentee in the profits should cease and a final account be come to. A and B had taken the assignment with a view to forming a company to work the patent. The company was formed and the patent made over to them. The patentee sued the company for an account of profits. The company demurred on the ground that there was no privity between it and the plaintiff and that the plaintiff’s right, if any, was against A and B only. The Court of Appeal held that the plaintiff could sue the company for an account of profits because the stipulations of the assignment to A and B amounted to a covenant that the owners of the patent for the time being should account for and pay to the plaintiff a share of profits unless a sale within the meaning of the deed was effected, and that no person taking the patent with notice of this contract could'refuse to give effect to it. The argument was made that the plaintiff had acquired nothing but the personal obligation of A and B, but Jessel, M. R., said;

“It is a part of the bargain that the patent shall be worked in a particular way and the profits be disposed of in a particular way, and no one taking with notice of that bargain can avoid the liability.”

Lindley, L. J., said that the assignment was “subject to the obligation to account to the plaintiff for his royalty.” A difference between the agreement in that case and the contract in the ease at bar is that royalties were here to be paid on sales of the songs at so many cents a copy, while in- the English contract the royalties were to be based on 5 per cent, of' the net profits. It may accordingly be argued that that decision turned on the covenant to pay a percentage of the net profits and that such a covenant gave the plaintiff an interest in the patent such aa Justice Holmes recognized in Pratt v. Tuttle, 136 Mass. 233.

But most of the decisions do not regard an agreement to pay a royalty based upon a certain percentage of the profits as creating an equitable ownership in a patent or copyright. Rude v. Westcott, 130 U. S. 152, 9 S. Ct. 463, 32 L. Ed. 888; Ehrlich v. Mills, Inc., 215 App. Div. 116, 213 N. Y. S. 395; Moore v. Coyne, 113 App. Div. 52, 98 N. Y. S. 892; Henderson v. Dougherty, 95 App. Div. 346, 88 N. Y. S. 665; Langdell Survey of Equity Jurisdiction (2d Ed.) p. 93. The gist of the decision in the Werderman Case and in the prior ease of De Mattos v. Gibson, 4 De G. & J. 276, on which that decision largely rested, was that one who takes property with notice that it is to be used in a particular way receives it subject to something resembling an equitable servitude.

In the case at bar there was an agreement to p.ay “33%% * * * of all revenue received from Mechanical reproductions less any expenses incurred,” as well as to pay one cent upon each copy of the songs sold. Such a provision involved an implied covenant to work the copyright so far as was reasonable under all the circumstances. Under the doctrine of the Werderman Case, any purchaser of the copyrights who took with notice of such a covenant would take them subject to it, and, we believe, also subject to payment of royalties, without which the obligation to work the copyright would be futile.

We realize that the Werderman Case has been criticised and was distinguished in Barker v. Stickney, on the supposed ground that the Werderman decision depended on an agreement which created a specific charge. Indeed, it was said by Serutton, L. J., in Barker v. Stickney, that the Werderman decision would not be supported on the theory that mere notice of a contract relating to the use of personal property will bind a purchaser who is not a party. But in Lord Strathcona Steamship Co. v. Dominion Coal Co., [1926] A. C. 108, the purchaser of a ship who had notice of a charter party entered into for its employment was enjoined at the suit of the charterer from using the vessel in any way inconsistent with the charter party. The doctrine on which the decision largely depended was laid down by Knight Bruce, L. J., in De Mattos v. Gibson, 4 De G. & J. 276, and was relied on by Jessel, M. R., in the Werderman Case, and was expressly adhered to in the Lord Strathcona decision. Lord Shaw said at page 125 of the Lord Strathcona:

“If a man acquires from another rights in a ship which is already under charter, with notice of rights which required the ship to be used for a particular purpose, and not inconsistently with it, then he appears to be plainly in the position of a constructive trustee with obligations which a court of equity will not permit him to violate. It does not matter that this court cannot enforce specific performance. It can proceed, if there is expressed or clearly implied, a negative stipulation.”

Professor Wade, in his article entitled “Restrictions on User” in The Law Quarterly Review, vol. XLIV, discussed the Lord Strathcona and other English eases, and said (at page 65) that “it should now be recognized as both good law and good sense that the claim of a covenantee under a restrictive condition as to user depends solely on the validity and priority of a charge thereby created.”

See) also, opinion of Romer, L. J., in Bagot Pneumatic Tyre Co. v. Clipper Pneumatic Tyre Co., [1902] 1 Ch. at page 162; MacDonald v. Eyles, [1921] 1 Ch. 634; Falcke v. Gray, 4 Drew. 651; “Equitable Liabilities of Strangers” in Columbia Law Review, vol. XVIII, p. 291, by Harlan F. Stone; “Equitable Servitudes on Chattels” in Harvard Law Review, vol. XLI, p. 945, by Zechariah Chaffee.

The English courts have been embarrassed by the supposed analogy of restrictive covenants relating to land, which in England required the existence of a dominant and servient tenement, and by their traditional inalfity to enforce most affirmative covenants as well as by their rule never to rescind conveyances except for fraud. The American decisions have permitted somewhat broader relief in certain circumstances.

Courts in the United States have enforced rights resembling an equitable servitude binding on a third party who has acquired personal property from one who is under a contract to use it for a particular purpose or in a particular way. Murphy v. Christian Press Ass’n Pub. Co., 38 App. Div. 426, 56 N. Y. S. 597; New York B.-N. Co. v. Hamilton, etc., Co., 83 Hun, 593, 31 N. Y. S. 1060; Great Lakes & St. Lawrence Trans. Co. v. Scranton Coal Co. (C. C. A.) 239 F. 603; Lorillard Co. v. Weingarden (D. C.) 280 F. 238; Montgomery Enterprises v. Empire Theatre Co., 204 Ala. 566, 86 So. 880,19 A. L. R. 987; Rider, Petitioner, 16 R. I. 271,15 A. 72. See Lord Strathcona Steamship Co. v. Dominion Coal Co., and the Werderman Case already diseussed.

In both countries, where there has been a conveyance upon an agreement to pay the grantor sums of money based upon the earnings of property transferred, the courts have implied a covenant to render the subject-matter of the contract productive — if the property was a mine, a covenant to mine, quarry, or drill; if it consisted of a patent or copyright, a covenant to work the patent or copyright. Telegraph Dispatch & Intelligence Co. v. McLean, 8 Ch. App. 658; McIntyre v. Belcher, 14 C. B. (N. S.) 655; Brewster v. Lanyon Zinc Co. (C. C. A.) 140 F. 801; Neenan v. Otis Elevator Co. (C. C. A.) 194 F. 414; Pritchard v. McLeod (C. C. A.) 205 F. 24; Oscar Barnett Foundry Co. v. Crowe (C. C. A.) 219 F. 450; Great Lakes & St. Lawrence Transp. Co. v. Scranton Coal Co. (C. C. A.) 239 F. 603; Diamond Alkali Co. v. P. C. Tomson & Co. (C. C. A.) 35 F.(2d) 117; Wood v. Lady Duff-Gordon, 222 N. Y. 88, 118 N. E. 214; Ellis v. Swan, 38 R. I. 534, 96 A. 840; Dow v. Harkin, 67 N. H. 383, 29 A. 846; Gillette v. Metzgar Register Co., 243 Mich. 48, 219 N. W. 644; Stoddard v. Illinois, etc., Co., 275 Ill. 199, 113 N. E. 913; Breckenridge Asphalt Co. v. Richardson, 147 Ky. 834, 146 S. W. 437; Conrad v. Morehead, 89 N. C. 31.

The difference between the English and American decisions lies in the fact that our courts have allowed rescission where there has been a failure on the part of the grantee or assignee to act in accordance with his obligation to render the property conveyed productive, while the English courts have refused to allow it except for fraud.

In Neenan v. Otis Elevator Co. (C. C. A.) 194 F. 414, there was an assignment to the Otis Elevator Company, “its successors and assigns,” of “the entire right, title and interest” of the owner of certain patents, with an agreement that that company should “proceed with reasonable diligence to test the apparatus * * * and if such test results satisfactorily, within such further reasonable time as is convenient, to put said apparatus into practical use,” and should in such event pay royalties thereon. The test proved satisfactory, but the Otis Elevator Company failed to make any practical use of the invention for five years. The trial court (180 F. 997), in spite of the absolute conveyance of the patents, held that there should be a rescission of the contract, saying as to the parties to the contract (page 417 of 194 F.) :

“While they were not formally in a fiduciary relation * * * the scope of their obligation is fairly to be interpreted with an eye upon the fact that his profits would come from their use of the property he had conveyed. At least he had a commercial interest in the property. * * *”

Judge Coxe, writing for this court, affirmed the decree, holding that “no rational rule of damages can be formulated upon the facts as shown” and that there was no adequate remedy at law.

To allow rescission, the default must be such that it “destroys the essential objects of the contract,” Rosenwasser v. Blyn Shoes, Inc., 246 N. Y. at page 346, 159 N. E. 84, 85, or it-“must be so fundamental and pervasive as to result in substantial frustration.” Buffalo Builders’ Supply Co. v. Reeb, 247 N. Y. at page 175, 159 N. E. 899, 90L

In our opinion a rescission could only be decreed in the case at bar if there had been a gross failure to work the copyrights, which has nowhere been indicated. Moreover, such a drastic remedy as rescission has often been withheld, and an equitable lien upon the subject-matter involved has been substituted even where rescission might have been allowed. This- is illustrated in various cases where conveyances of land have been made in consideration of maintenance and support. Rescission. has sometimes been granted because of a fundamental breach of the contract on the part of the grantee. Russell v. Carver, 208 Ala. 219, 94 So. 128; Russell v. Robbins, 247 Ill. 510, 93 N. E. 324,139 Am. St. Rep. 342; Maddox v. Maddox, 135 Ky. 403, 122 S. W. 201; Grant v. Bell, 26 R. I. 288, 58 A. 951; Sweeny v. Patton, 134 Va. 117, 113 S. E. 715. But in other eases the relief afforded has been through the imposition of an equitable lien upon the property conveyed, enforceable at the suit of the grantor. Stephens v. Daly, 49 App. D. C. 389, 266 F. 1009; Chase v. Peck, 21 N. Y. 581; Stehle v. Stehle, 39 App. Div. 440, 57 N. Y. S. 201; Webster v. Cadwallader, 133 Ky. 500, 118 S. W. 327, 134 Am. St. Rep. 470; Simmons v. Shafer, 98 Kan. 725, 160 P. 199; Patton v. Nixon, 33 Or. 159, 52 P. 1048; Abbott v. Sanders, 80 Vt. 179, 66 A. 1032, 13 L. R. A. (N. S.) 725, 130 Am. St. Rep. 974, 12 Ann. Cas. 898; Morgan v. Loomis, 78 Wis. 594, 48 N. W. 109. The Court of Appeals of Virginia said in Keister v. Cubine, 101 Va. 768, 45 S. E. 285, 286, when imposing a lien, instead of ordering a rescission and decreeing a reconveyance:

“The power of a court of equity in a proper case to rescind the contract and restore the property to the grantor would certainly include the power to afford a less drastie relief, if the facts pointed to the latter as more consonant with justice.”

In the ease at bar, within a month after August 1, 1929, which was the date when royalty payments became due under the contract, and only about three weeks after the adjudication, the receiver called for bids and attempted to sell the copyrights. Any default in working the copyrights had not been long enough in itself to justify a rescission and the proposed sale cannot be said to have been an act that would “result in substantial frustration” of the composer’s rights upon the record before us. We can see no justification for decreeing rescission unless the transfer of title to the bankrupt, “its successors and assigns,” though absolute in form, be held as naught.

It may be that the songs, or some of them, are worth much more than when they were copyrighted, and it is not unlikely that a large part of their value is due to the labor and expense laid out upon them by the bankrupt as entrepreneur. The trustee in bankruptcy ought to be able to retain for the creditors these contributions to the copyrighted songs, as well as any fortuitous increment, if the right of the composers to receive royalties from working the copyrights can be reasonably safeguarded.

Whether or not the copyrights may have become burdened with equities in favor of the composers, their title is in the bankrupt estate. The assignments were absolute, and Waterson, Berlin & Snyder Company would have had no right to take out the copyrights had it not been the “proprietor” within the meaning of the Copyright Act. Public Ledger v. New York Times (D. C.) 275 F. 562.

In our opinion there is a middle course between the extreme doctrine of In re Grant Richards and Barker v. Stiekney, supra, and the eases which have allowed rescission for failure to work a patent, which we should take in the circumstances here. In view of the absolute terms of the transfer, the presence of the word “assigns” in the instrument of conveyance,- and the statutory requirement that one who takes out a copyright must be the “proprietor,” we see no reason to imply a covenant that Waterson, Berlin & Snyder Company must itself publish the songs. The composers cannot object if the trustee sells -.the copyrights. In re Howley-Dresser Co. (D. C.) 132 F. 1002.

But it is a different matter to say that the sale of the copyrights should be free from all- equities on behalf of the composers. In ordinary circumstances, and between the original parties, it may be that the only remedy of the composers would be an action at law for breach of the promise to pay royalties. Even between the original parties, rescission would be granted at the suit of the composers, if the publisher failed to work the copyrights in good faith, so that they might so far as possible yield royalties and thus afford the measure of compensation agreed upon. But, even where the publisher failed to work the copyrights, it could not be said that there would be actually no remedy at law, for the courts allow actions at law because of failure to observe such implied covenants. McIntyre v. Belcher, 14 C. B. (N. S.) 655. The damages for the breach of such a covenant, however, would necessarily be determined by estimates that at best could be no more than speculative substitutes for the definite royalties prescribed by the contracts. Accordingly a court of equity would decree a rescission where the breach was so-fundamental as to amount to frustration, because the remedy at law would be inadequate. Neenan v. Otis Elevator Co., supra. A restrictive covenant affecting the use is imposed in such eases, and rescission is granted for failure to observe it.

It is true that the royalties on the songs are definitely provided to be paid only “in the event of the publication” by Waterson, Berlin & Snyder Company, but, where the words of assignment of the musical compositions are absolute, it is unreasonable to suppose that there may be no exploitation of the songs, except by Waterson, Berlin & Snyder Company. It seems to us equally unreasonable to suppose that the trustee may sell them free from all rights of the composers and thus deprive the latter of the only means of fixing the royalties which they have been promised. In our opinion, while the copyrights may be sold by the trustee, they should be sold subject to the right of the composers to have them worked in their behalf and to be paid royalties according to the terms of the contracts. This is in accordance with the analogy of such decisions as Lord Strathcona Steamship Co. v. Dominion Coal Co., [1926] A. C. 108; Werderman v. Societe Generale d’Electricite, 19 Ch. D. 246; Murphy v. Christian Press Ass’n Pub. Co., 38 App. Div. 426, 56 N. Y. S. 597; New York B.-N. Co. v. Hamilton, etc., Co., 83 Hun, 593, 31 N. Y. S. 1060; Great Lakes & St. Lawrence Trans. Co. v. Scranton Coal Co. (C. C. A.) 239 F. 603; Montgomery Enterprises v. Empire Theatre Co., 204 Ala. 566, 86 So. 880, 19 A. L. R. 987; Rider, Petitioner, 16 R. I. 271, 15 A. 72.

We can discover no justification for decreeing a rescission, as was done in De Bekker v. Stokes, 168 App. Div. 452, 153 N. Y. S. 1066, affirmed 219 N. Y. 573, 114 N. E. 1064, because the facts here do not warrant a remedy so extreme and so disastrous to the bankrupt estate. If the purchaser at the trustee’s sale should fail to work any copyright that he purchased, when it was reasonably practicable to do so, rescission doubtless might be granted at the instance of the composer in some future suit. If the trustee shall be unable within a reasonable time to obtain a purchaser who will take title subject to the terms mentioned, the District Court should direct a reassignment of any copyright thus affected upon repayment of any unearned advance royalties upon .such copyright. Rescission ought to be allowed only where there is manifestly no purpose to render the copyright productive to the composer. In the circumstances, the rights of the composers are satisfied by a sale subject to the obligation to work any copyright that may be sold, so far as may be reasonably practicable, and subject to the lien of any royalties accruing after the sale by the trustee and to the obligation to pay such royalties as provided in the royalty contract.

If a right to rescind the contract may he granted because of a fundamental breach of the implied obligation to work the copyrights, surely a lien may be imposed for royalties accruing through the use of the copyright by a subvendee, for in no other way can the right of a composer to receive royalties be preserved in a ease where the publisher has parted with title. To impose a lien, rather than to deprive the estate of the bankrupt of all interest in the copyrights, follows the analogy of the support and maintenance eases whieh have imposed a lien instead of decreeing a rescission in situations where the more drastic remedy did not seem to be warranted. Stephens v. Daly, 49 App. D. C. 389, 266 E. 1009; Chase v. Peck, 21 N. Y. 581; Stehle v. Stehle, 39 App. Div. 440, 57 N. Y. S. 201; Keister v. Cubine, 101 Va. 769, 45 S. E. 285. Such relief is also within the analogy of numerous other decisions we have referred to. The obligation to pay royalties accruing under the contract after a sale by the trustee is justified by the opinion of Jessel, M. R., in the Werderman Case.

The order of the District Court is reversed, and the proceeding is remanded, with directions to enter an order in accordance with the views expressed in this opinion.