author: NORCROSS, District Judge.

text:
    UNITED STATES v. KEOUGH.
    No. 8028.
    District Court, D. Nevada.
    Feb. 17, 1931.
    H. H. Atkinson, U. S. Atty., and George A. Whiteley, Asst. U. S. Atty., both of Reno, Rev., and George A. Montrose, Asst. U. S. Atty., of Carson City, Rev.
    Charles L. Richards, of Reno, Nev., for defendant.
   NORCROSS, District Judge.

This is a proceeding upon a complaint for removal of defendant to the District of Rew Jersey based upon a second indictment returned by the grand jury of that district on the 17th day of Rovember, 1930, charging the defendant Keough with others in count I with the erime of conspiracy to use the United States mails to defraud, and in counts II to XVII, inclusive, with so using the mails. Hearing was had upon objections presenting the question of probable cause for removal.

A similar complaint upon a prior indictment was considered upon objections raising the same question. Upon hearing, the objections were sustained, the court, however, reserving jurisdiction to further consider the question.

The indictments considered upon the present and former hearing relate to alleged use of the mails to defraud in connection with the sale of stock of the Rew Mexico Copper & Manganese Corporation, a Colorado corporation with principal office at the city of Denver. The company’s mining properties are in Rew Mexico.

The several persons named as defendants are James J. Wallace, George Clayton, Alfred Leonard, Charles Beadon, George C. Keough, George P. Goodier, Charles A. Duren, Warren R. Withington, Richard Schaeffer, and Murray Porter. The defendants other than defendants Keough and Goodier appear to be residents of the state of New Jersey, and in some way directly connected with the firm of Wallace & Company, a firm or association engaged in the sale of the stock of the said mining company, with offices at Jersey City. The defendant Goodier is president of the mining company and a resident of the city of Denver.

The indictment is lengthy, but the gist of the charge of conspiracy to use and the use of the mails to defraud may be briefly summarized as follows:

That the defendants should establish at Jersey City, N. J., an office or place of business under the name and style of Wallace & Company purporting to be for the legitimate dealing in stocks and other securities, and for the publishing and circulating of market letters and other literature containing information concerning stocks and securities under the general name and title of “The Tape & Ticker,” and particularly the circulating of what purported to be true and reliable information concerning the stocks and securities of the New Mexico Copper & Manganese Corporation. That the defendants should employ one James P. Kane at a stated salary with intent that it should be communicated to the victims that he was the person through whom sales of stock would be made. That an option should be given by the New Mexico Company to said Kane to purchase 1,000,000 shares of the treasury stock of the said mining company within one year, not less than 20,000 shares to be purchased monthly, at the price of 25 cents per share, the said Kane then to give a similar option to said Wallace & Company. That letters and communications were to be prepared and addressed to Wallace & Company over the name of the New Mexico Copper & Manganese Corporation containing extravagant and untrue statements regarding the property and operations of the said mining company, with intent that-the same should be published and communicated to said victims by Wallace & Company by means of letters and other writings and the medium of the said “The Tape & Ticker.” That the defendants should from time to time fraudulently order sold upon the Reno Stock Exchange, and purporting to be sold on account of and in the name of the said James P. Kane, various amounts of stock of said mining company at prices progressively increasing, artificially and arbitrarily fixed and determined in advance, and pretend that the same were open sales legitimately made on said exchange, and should thereupon communicate to said victims such price and pretended price at which the said sales and pretended sales had been made. That upon inquiries being made of the exchange defendant Keough should communicate with said victims, making fraudulent statements purporting to be from disinterested mining stockbrokers that large amounts of stock had been handled for the public at prices to be therein quoted, and that the said mining company had been in successful operation for several years, was shipping large amounts of ore daily which brought large returns to the company and its stockholders, and that the prospects were excellent for it also to become a large eopper producer. That the said Reno Stock Exchange was not an active and reliable stock exchange, but upon the contrary an inactive and moribund organization largely controlled by defendant Keough. That during the year 1929 the said mining company was not actively operating any mines producing ore, nor prosecuting development work. That at no time was the stock of said mining company a good purchase for the said victims in any ¡amount above 25 cents per share.

• From the indictment it appears that the offenses charged grew out of or were based upon a contract or agreement between the officers of the mining company and Wallace & Company, whereby prior to May 1, 1929, there was given to one James P. Kane an option to purchase 1,000,000 shares, apparently half of the capital and all the treasury stock of the mining company, for 25 cents per share, provided such stock be sold within one year. To effect the sale of this stock to individual purchasers throughout the United States at prices apparently ranging around ten times the option price was the purpose to be accomplished. The office of James P. Kane was located in Boston. Kane, who was not made a defendant, testified upon the hearing as a witness for plaintiff.

For some time prior to the events involved in the indictment, as appears from the evidence, there had existed at Reno, Nev., a mining-stock exchange known as Reno Stock Exchange, which was incorporated under the laws of the state of Nevada. The defendant Keough was a member of that exchange, and at the times in question, if not an officer thereof, largely responsible for the control and direction of its affairs. Comparable to mining stock exchanges existing in the more populous centers of the mining states, it was a small institution.

At the hearing the plaintiff called William A. Cueman as a witness, who testified that he was a postal inspector residing at Jersey City, N. J.; that he called at the office of the defendant Keough at Reno, Nev., on January 27,1930, and finding him absent left word for him to call upon him at the post office; that later the defendant called as requested, stating he was Mr. Keough. This testimony was offered for the purpose of identification, which question was conceded. Plaintiff also offered a certified copy of the indictment, and' rested.

Upon behalf of defendant the records and files of the Reno Stock Exchange relating to the listing of the New Mexico Copper & Manganese Corporation upon that exchange were submitted. The defendant Keough testified that in June or July, 1929, the defendant Withington, with whom he had no prior personal acquaintance, called at his office at the Reno Stock Exchange and took up with him the matter of listing on the exchange what he stated to be a “legitimate” mining corporation ; that it owned considerable property and was a producer; and that further details and reports would be received from the president of the company. At that time defendant Withington was given a blank application form provided by the exchange for such purpose. Defendant Keough further testified that he was advised by defendant Withington that as sales of stock were made, notification of the same would be made by James P. Kane. A membership in the Reno Stock Exchange was taken out in the name of James -P. Kane. The arrangement made with Withing-ton, according to defendant Keough, was that Keough & Company was to receive the regular broker’s commissions on all sale transactions received from or made to James P. Kane.

On July 22, 1929, as appears from the records of the Reno Stock Exchange, the defendant Goodier as president of the New Mexico Copper & Manganese Corporation filed an application in regular form for the listing of the stock on the Reno Exchange. Accompanying the application were certified copies of the articles of incorporation, record title té and leasehold interest of the company-in mining- properties in New Mexico, a photostatie copy of a mining engineer’s report upon the property, a letter of the president of the company giving a general description of the property, workings, etc., and among numerous other matters stating:

“We have been operating these properties for the past six years and our aggregate tonnage of manganese shipped is over three hundred thousand gross tons making a general average of fifty thousand gross tons' per year.”

Accompanying the application was also a “Profit and Loss statement,” showing “gross ore sales $213,447.59,” a “gross profit $160,-307.11,” which “less items of expense” left apparently .a net profit of $24,563.93. To this was added a certificate of the president of the mining company reading:

“I hereby certify the above a true statement of the profit and loss statement in connection with the operation of the property 'over the last eight months of operation.”

There was also a “Statement of Assets ■and Liabilities” showing “Equipment of the stated value of $30,500,” “cash in bank $2,-50Q,” and total assets, including “Properties,” $2,033,000. The “liabilities” were given as “Authorized capital stock, $2,000,000.00, less stock in treasury $1,000,000.00.”

In practice defendant Keough would receive telegrams daily from James P. Kane advising him respecting sales, the price per share, and the number of shares, which Keough would post or cause to be posted as •sales having been made on the Reno Exchange, for which he charged and received the usual broker’s commission of one per cent. An exhibit introduced by the plaintiff on cross-examination of defendant Keough is a statement, dated August 31, 1929, entitled: “Sales transacted by George C. Keough & Co., Inc. for J. P. Kane, 89 Broad Street, Boston, Mass, week of Aug. 26th to Aug. 31st, Inc.” The statement appears to contain a manifest error which when allowed for shows sales aggregating 11,000 shares for an aggregate sales price of $27,155. Prom this it would appear that if the statement represented an account of actual - sales to purchasers, that after paying defendant Keough his commission and paying the company 25 eents per share on the option contract, there would remain for Wallace & Company approximately 90 per cent, of the total proceeds.

The only overt act charged in the eonspiriacy count of the indictment as having been directly committed by defendant Keough alleges that on or about August 22, 1929, Keough mailed a letter at Reno, Nev.,. addressed to Harold P. Gabele, Massillon, Ohio, “in which it was stated in part, 'there seems to be a ready sale at the bid price for this issue any time it is offered.’ ” -Upon cross-examination the original of this letter was offered in evidence by the plaintiff, the body of which reads:

“Your letter of inquiry to the Reno Stock Exchange regarding New Mexico Copper and Manganese stock has been handed to our firm by the secretary of the Exchange for answerr ing.
“This was done for the reason that our firm has been handling both the sales and purchases of the above named issue. Today sales amount to 2100 shares, 1100 shares sold at $2.25 and 1000 shares sold at $2.30.
“We would be glad to execute your orders for you either way on this stock; and either by mail or wire.
“There seems to be a ready sale at the bid price for this issue any time it is offered'. Kindly let us know your desires in regard to the stock you own at your earliest convenience.”

There appears from this letter a readiness to execute orders “either way.” This expression is instructive, taken in connection with the fact as'shown by the testimony both of the defendant Keough and plaintiff’s witness Kane, that money was sent from time to time by Kane to Keough & Company to take care of not only the commissions charged by Keough & Company, but for the purchase of stock offered for sale on the exchange otherwise than through Kane. It is apparent from the letter in question that Keough was ready and willing to sell stock to Kane which had apparently been purchased through Wallace & Company.

Plaintiff also introduced on cross-examination a letter from Keough & Company, signed by defendant, of date August 26,1929, addressed to the said Gabele,. replying to another letter, and in part reading:

“Enclosed you will find a newspaper clipping stating the mines condition and development of the New Mexico Copper and Manganese Co. We have handled the above named issue for this company since July 26th, and find them very reliable in their business dealings.
“Today this stock sold on the Reno Stock Exchange 800 shares at $2.25, 800 shares at $2.30, 500 shares at $2.35 and 700 shares at $2.40 and it looks like it was scheduled for a much higher figure. •
“Any time we can he of service to you in either the-purchase or disposal of any mining issue listed or unlisted, we axe at your service.”

The newspaper clipping referred to was' from the mining news page of a daily newspaper published at Reno, and was a statement concerning the mining company’s property in New Mexico, apparently made up from the statements furnished by the company and filed with the Reno Stock Exchange.

.On August 30,1929, Gabele again wrote to Keough & Company that he wished to sell 200 shares “at the current market price,” which he stated, from the bulletin he had received of date August 27th, “was $2.40 per share.” On September 4th defendant Keough sold the stock for. Gabele at $2.45 per share to James P. Kane.

Plaintiff also offered in evidence on cross-examination a letter of date September 20, 1929, from George C. Keough & Company, Inc., signed by defendant Keough, addressed to Miss Mabel E. Bardsley, New York Mills, N. Y., and purporting to be in reply to a letter addressed to the Reno Stock Exchange. With the exception of a statement relative to stock sales, and other statements hereinafter noted, the letter, is a recital of statements appearing in the letter .of the president of the mining company, profit and loss statement, and the report of the mining engineer filed by the company with the Reno Stock Exchange.

There are.-a couple of misstatements in the letter to Miss Bardsley which should be noted. The letter states:

“The New Mexico Copper and Manganese Co. has been in operation six years. * * * During that time they-have shipped an aggregate of over 300,000 tons. * * * It is now shipping 500 tons daily, its profits for the last eight months of operation up to July 1929, was set at $25,201.19.”

The New Mexico Copper & Manganese Corporation was not organized until January 29, 1929. Prior to that time the properties appear to have been operated by the defendant George P. Goodier and a copartnership consisting of the said Goodier and two others under the firm name or style of “Manganese Leasing Company.” The property and interests of Go.odier and of the partnership were transferred to the said New Mexico Company. The financial statements and ore production recited in statements filed with the Reno Exchange covering a six-year period necessarily largely, if not entirely, related to., the prior history of the properties .acquired, by the company. The erroneous statements could easily have been made inadvertently in view of -the wording of the letter of the president of the company to the secretary of the Reno Exchange. While a corporation was organized to take over title to the properties, the personal control and management thereof appears to have remained the same. The statements filed with the exchange were for the purpose of showing the company was a meritorious mining company and so entitled to have its stock listed. For such purpose the date of the corporation was not so important, and one might entirely overlook giving that consideration in replying to the letter of Miss Bardsley.

In view of the statements contained in the Bardsley letter, and as having a bearing upon the question of probability of defendant Keough’s participation in the alleged fraudulent acts and conspiracy it will be instructive to here quote excerpts from the said engineer’s report:

“Recommendations and Conclusions.
“With the necessary capital available, to carry out a comprehensive program of exploitation, your plan should be to expand as fast and as largely as possible your present output of manganif erous iron ores.
“A new tunnel should be driven in order to reach the ore bodies ■ ’ * * * at a lower level; such a tunnel would afford you a cheaper exploitation * * * on a larger scale.
“Also a large eleetrie-shovel-mi-ned quarry * * * could likely lie created on the Comanche ore body, on the Fierro No. 4 claim, in a short time and at a relatively low cost.
“It would also be greatly to your advantage to install a milling plant, * * * and thereby raise the grade of the ore enough to permit you to * * * broaden greatly your possible market and as a result to considerably increase your production.
“At the same time, * * * your program should comprise also an aggressive campaign of exploration of the copper ores, with the hopes that it should be rewarded by some exceptionally valuable discoveries.”

There is nothing in this case to indicate that defendant Keough was not justified in reasonably assuming the correctness of the rer ports, letters, and-documents filed with the ex7 change relative to the merits of the mining company. It appears from the indictment that the stock of the company also had been listed on the Denver Stock & Mining Exchange.

Assuming that the statements concerning the mining property filed -with the Reno Stock Exchange relative to past operations and future prospects were substantially true, and the proceeds of treasury stock sales less reasonable expenses were to go into the company’s treasury for the development recommended, some difficulty might be found in determining at what price per share sales would be indicative of fraud.

Keough testified he knew nothing of the fraud as alleged other than in respect to the sales or purported sales of stock on the Reno Exchange; that he had never seen but one copy of “The Tape & Ticker,” and that had been mailed to him by some person who had received it; that he had no arrangements with Wallace & Company; that he had not made sales of the stock. To the question propounded by the United States Attorney, “What was the object of their wiring you to make sales'?” he answered: “That was their business, and they had a membership on the Reno Stock Exchange; their stock was listed on the Reno Stock Exchange, and the sales made, if they were made in New Jersey, New Orleans or San Francisco, they were entitled to be put on the board of the Reno Stock Exchange.”

The principal question on this hearing concerns defendant Keough’s transactions with J. P. Kane relative to sales or purported sales of stock on the exchange. It is manifest that these reported sales were used by Wallace & Company,as one of its strongest arguments to induce investments in the stock at prices indicated by the quotations.

On August 2,1929, James P. Kane wrote a letter to George C. Keough & Company reading as follows:

“I wired you $500 yesterday and also instructions on trades. Henceforth I will wire you each night by night letter the transactions for the following day which I trust you will put through accordingly. I will give you the price figures in total and trust you will split the transactions up in smaller lots on your exchange so as to make the issue active trading. I have the handling of N. M. C. & M. on this end, and all transactions will go through me. I wish you would wire me immediately of all bids- and offers made through sources that may materialize on the floor of your exchange and I will take care of them accordingly. It is our intention to ship you some certificates in the next few days, and make other arrangements for a business like handling of your account.”

On the same date Kane wired the followingdispateh:

“Make sales today 3600 at one-seventy 2000 at one-eighty. Break these transactions into sales of one two and five hundred share lots. Close at one-eighty.”

Defendant Keough admitted receiving telegrams of the nature of one appearing to have been sent by Kane, of date August 26, 1929, reading:

“Make sales today 2800 at 2.25, 2.30, 2.35, 2.40. Close- at 2.40.”

Defendant also recalled that he had received a wire from Kane of date August 7, 1929, to the effect, “F. E. Bettenger holder of N. M. write or wire him that stock is active and looks going to much higher prices wire tenor of his communication,” and that he replied to Kane by wire reading, “Bettenger wire for quotations and activity answered as you instructed.”

It must be conceded that the stock transactions between Kane and Keough were not regular sales as that expression is understood upon a stock exchange. They may, for the purpose of this hearing, be regarded, as alleged in- the indictment, as “wash sales.” As such sales bear upon the question of probable cause for removal, it will be instructive to consider the same in the light of the testimony of James P. Kane, called by the plaintiff as a witness in rebuttal.

Kane testified that he established business relations with Keough through défendant Witbington. He testified: “At Wallace & Company’s instruction Withirigton was sent west to make arrangements for trades to be made through me. After advising Mr. Keough that trades through me -were to be accepted, he then told me how to word the wire, and after the first wire Wallace & Company would telephone daily the wires to be sent.” Kane further testified that he sent money to Keough to pay commissions and for the purchase of stock; that Keough was instructed by him to purchase stock offered through other sources for sale on the exchange; that the stock quotations he sent to Keough he sent for the purpose of having him put them on the Reno Exchange; that as far as he knew they were sent as sales to be made in Reno; that he notified Keough it was-not necessary to report the transactions unless' they were not made; that he paid commissions to Keough “for transactions made as per the wires”; that “there would be no way of my knowing whether they (the wires) were fictitious or not”; that he did not know of any scheme to defraud the public until it was stopped; that he did not know of a membership in his name on the Reno Stock Exchange, but it was possible such membership could have been purchased and he not know of it.

The testimony relative to transactions between defendant Keough and Wallace & Company is substantially as follows: Kane testified that he had sent Keough “twenty-five hundred or three thousand dollars, but not more than that. * * * I notified them (Wallace & Company) that Keough needed more money, and they would send the money to him.” Keough testified to having “at one time received a wire from James P. Kane which read something like this, ‘that Wallace & Company are wiring’ — I think it was ‘$5,-000 — credit the account of J. P. Kane.’ ” Keough testified that on September 4, 1929, he received a wire from Wallace & Company, New York, transmitting $5,000, and that he “notified both parties” respecting the receipt of this money.

The amount of money — approximately $8,000 — sent to Keough was to cover not only Keough’s commissions but to pay for stock offered for sale on the exchange and purchased by Keough for the account of James P. Kane. The amount of the stock so purchased does not appear, but Keough testified that stock was sent to local banks and brokers for sale upon the exchange; that he “bought from people all over the United States. * * *' J. P. Kane was the buyer of all the stock that I purchased through, the country.”

Concerning the call made upon defendant Keough by the postal inspector, Mr. Cueman, on January 22,1930, defendant testified:

“He * * * wanted to know if I would let him see or have access to my records with Wallace & Company. I told him that I had no dealings with Wallace & Company. ‘Well,’ he says, ‘I would like to see what you have got with everybody and all concerned on the New Mexico Copper & Manganese Corporation.’ * * * I got him the records, put him in an office by himself, a private room, and dug out everything I had — all the records. He asked me could he take them over to his office in the post office. * * * I let him take the records * * * perfectly willing that he should have them.”

Concerning the same matter, Mr. Cueman, called as a witness for defendant, testified that defendant gave him the records “voluntarily and freely.”

Upon a hearing for removal where the defendant raises the question of probable cause, two questions of prime importance are presented. Where an offense is charged to have been committed within a district in another state, the court of the district where a defendant so charged resides or may be found should readily direct such removal in the absence of a showing upon the part of defendant of want of such probable cause. Upon the other hand, as said by the Supreme Court of the United States in dealing with a similar question, “To require a citizen to undertake a long journey across the continent to face his accusers, to incur the expense of taking his witnesses, and of employing counsel’ in a distant city, involves a serious hardship to which he ought not to be subjected,” [Hyde v. Shine, 199 U. S. 62, 78, 25 S. Ct. 760, 762 (50 L. Ed. 90)] unless upon a review of the evidence submitted it appears that the defendant has failed to overcome the prima facie case made out from the indictment alone (Beavers v. Henkel, 194 U. S. 73, 24 S. Ct. 605, 48 L. Ed. 882; United States v. Mathues [D. C.] 284 P. 368), and such additional evidence as the prosecution may also submit. Hyde v. Shine, supra; Haim v. Mathues (C. C. A.) 19 F.(2d) 22; Hardy on Removal, 48.

The law governing in a proceeding for removal is concisely stated in an excerpt from the book “Removal of Federal Offenders” by Hardy, reading:

“While to effect removal, it is only necessary, therefore, that a probability of guilt be shown, on the other hand, a discharge is authorized only when the defendant shall have removed ‘all reasonable grounds of presumption of the commission of the offense.’ As it is elsewhere expressed, the prima facie‘ease of probable cause must be overcome by rebuttal ‘so clear and convincing as to leave no reasonable room for doubt.’ If upon an inquiry such as that obtaining in removal proceedings, said Marshall, quoting the words of Blackstone, ‘it manifestly appears that no such crime has been committed, or that the suspicion entertained of the prisoner was wholly groundless, in such cases only’ is it lawful totally to discharge him. Probable cause does not exist, it has been said, when ‘a substantial doubt’ is shown; when the record is ‘barren of all evidence,’ or shows ‘an entire absence of evidence’ against the defendant.” « * # • where the net result of the evidence is to raise a doubtful or controverted question of faet, the court to which application for removal is made should not weigh the evidence and settle that issue. In every such case removal should be made and those questions referred to the trial court.” Page 54.

The court is of opinion that the defendant has made out a ease of want of probable cause within the rule quoted. As before stated, the gist of the conspiracy to use and the use of the mails to defraud was to effect the sale of stock in the New Mexico Copper & Manganese Corporation to individual purchasers at prices greatly in excess of the option price to be paid the company. There is nothing in the evidence submitted indicating that the defendant Keough ever knew or heard of this option price of 25 cents per share prior to the time of the call upon him by the postal inspector. When defendant Withington called upon defendant Keough in July relative to listing the stock on the Reno Exchange, ostensibly he was acting on behalf of the mining company. From statements made, and particularly from letters and documents filed upon the part of the mining company with the exchange, defendant Keough was justified in the assumption that the company possessed a producing mine, and with sufficient capital had promise of becoming a large and profitable mining property. Keough apparently had no reason to assume that stock sales effected through James P. Kane were not on account of the mining company, and that the proceeds of such sales, less reasonable commissions and expenses, were to go into the mining company’s treasury. There .is nothing to indicate that Keough had knowledge that Kane was a mere employee of Wallace & Company. It is not reasonable to assume that Keough knew of the contractual relations between the mining company and Wallace & Company respecting the option, and so knowing would agree with the members of the latter firm to perform a most important part in a known fraudulent scheme, and accept for his contribution substantially but a hundredth part of the spoils of the nefarious enterprise. It must be conceded that the carrying out by defendant Keough of the telegraphic directions received from Kane respecting stock sales to be posted on the Reno Exchange did not constitute regular stock exchange transactions. It would not follow, however, from these transactions alone that Keough knew or should have known of the scheme, to defraud as alleged in the indictment. It is charged, in the indictment that these were “wash sales.” We- do not find that the courts have defined or recognized a definition of so-called “wash sales.” The Century Dictionary gives the following definition:

“A fictitious kind of sale, disallowed on the stock and other exchanges, in' which a broker who has received orders from one person to buy and from another person to sell a particular amount or quantity of some particular stock or commodity simply transfers the stock or commodity from one principal to the other and pockets the difference, instead of executing both orders separately to the best advantage in each case, as is required by the rules of the different exchanges.”

The transactions involved in this case do not fit this definition. It is claimed that stock is sometimes sold upon a stock exchange when the seller and ostensible purchaser are the' same person, company, or corporation; that this procedure is not uncommon following the listing of a new company on an exchange; that it is sometimes done for the purpose of. creating a market for the stock, usually relying on quotations appealing in the public press to stimulate public interest. Whether' the character of sales here involved might be regarded as in some such category is not important to determine. Whatever their character they were not commendable. So far as defendant Keough is concerned, however, there is nothing to indicate that he knew that such sales or pretended sales which he was posting upon the Reno Stock Exchange were for the purpose of aiding Wallace & Company to dispose of stock upon which they held an option,, to purchasers at prices greatly in excess thereof, and that such company, and not the mining company, was to be the recipient of the greater portion of the proceeds of sales to in-dividual investors.

As said by the Circuit Court of Appeals for the Sixth Circuit in Meehan v. United States, 11 F.(2d) 847, 849:

“Whenever there is affirmative proof, unchallenged except by the indictment, demonstrating lack of guilt, removal should be denied ; if the conclusion of no probable cause is put in any substantial doubt by proofs in addition to the indictment, the removal should he made.”

In the ease at bar the testimony of witnesses produced upon the part of the prosecution tends to confirm the position or contention of defendant of lack of knowledge of or participation in the offenses as charged in the indictment. .

The objections are sustained, 'and the warrant for removal denied.


source: Caselaw Access Project

author: TUTTLE, District Judge.

license: Public Domain

text:
    HOLMAN v. CLARK (Crescent Gravel Co. et al., Garnishees).
    No. 649.
    District Court, E. D. Michigan, N. D.
    March 19, 1931.
    R. B. Savidge, of Reed City, Mich., for plaintiff.
    Beach & Beach, of Saginaw, Mich., for defendant and garnishees.
   TUTTLE, District Judge.

This is a garnishment proceeding in connection with an action in assumpsit brought in this court by the plaintiff, Philip A. Holman, as receiver for Reed City National Bank, an insolvent national bank, to recover from the principal defendant, Oliver W. Clark, as a stockholder in such bank, the amount of an assessment levied against him by the Comptroller of the Currency, pursuant to the applicable federal statutes. At the time of commencing this action; on July 31, 1930, and as an incident thereof, the plaintiff instituted herein this garnishment proceeding against Crescent Gravel Company and American State Bank, Michigan corporations, as garnishee defendants, in claimed conformity with the Michigan garnishment statutes. Section 13122 et seq., Michigan Compiled Laws of 1915.

Aside from certain questions concerning the liability, on the merits, of the garnishee defendants to the plaintiff, there is presented the preliminary question as to whether the Michigan statutory provision on which the plaintiff bases his right to maintain this garnishment proceeding sufficiently supports such claimed right. Specifically, this involves the narrow question as to wheth-; er this action to recover the statutory liability of a stockholder in a national bank is an: action “arising- upon contract,” within the. meaning of the Michigan garnishment statute invoked.by the plaintiff as a basis for this, garnishment proceeding.

Section 13122 of the Michigan Compiled Laws of 1915, as amended by Act No. 305 of the Michigan Public Acts of 1925, provides that “in all personal actions arising upon contract,” if the plaintiff or his agent or attorney shall file with the clerk of the court in which such action is commenced an affidavit showing that any person is indebted (with certain exceptions not material here) to the defendant therein and that such defendant is indebted to the plaintiff “on such contract,” in a given amount, and that the plaintiff is apprehensive of the loss of such amount unless a writ of garnishment issue against such person, such writ shall be so issued directed to such person, as garnishee defendant. Such statute further provides that from the time of the service of such writ such garnishee defendant shall be liable to the plaintiff to the amount of any debt due from him to the principal defendant, These statutes contain other provisions which have no materiality here and which need not be mentioned.

Pursuant to this statute, and as a basis for the garnishment proceeding here involved, the plaintiff filed herein an affidavit by his attorney, reciting that this cause was “a personal action arising upon contract”; that the said garnishee defendants were indebted to the principal defendant herein; that the principal defendant was indebted to the plaintiff, “upon said contract,” in a specified sum; and that the affiant was apprehensive of the loss of the debt so due from the principal defendant to the plaintiff unless writs of garnishment issue to the garnishee defendants. Thereupon writs of garnishment were so issued, followed by certain proceedings which need not be here described. The garnishee defendants now urge that these garnishment proceedings should be dismissed, on the ground already stated.

The right of the plaintiff to recover from the principal defendant herein arises solely from the federal statutory provisions governing national banks. Section 64 of title 12 of the United States Code (12 USCA § 64) provides that “the stockholders of every national banking association shall be held individually responsible for all contracts, debts, and engagements of such association, each to the amount of his stock therein, at the par value thereof in addition to the amount invested in such stock.” Section 192 of the same title provides that, on becoming satisfied that any national banking association is insolvent and in default in its obligations, the Comptroller of the Currency may appoint a receiver, and that such receiver “may, if necessary to pay the debts of such association, enforce the individual liability of the stockholders.” The record herein satisfactorily shows that the necessary action has been taken by the Comptroller of the Currency to enforce this liability of the defendant in this action.

I am satisfied that the question here involved has been decided adversely to the contention of the present plaintiff by the United States Supreme Court in the case of McClaine v. Rankin, 197 U. S. 154, 25 S. Ct. 410, 412, 49 L. Ed. 702, 3 Ann. Cas. 500. That case involved an action by a receiver of a national bank to enforce the liability of a stockholder thereof under the federal statute involved here. The question there presented was whether such an action was an action upon a contract within the meaning of a certain state statute of limitations applicable to such an action. In holding that the action was brought for the enforcement of a purely statutory liability and was not an action to recover upon a contract, and so was not subject to the state statute relating to actions upon contract, the Supreme Court said:

“The question must be met whether this is an action brought on a contract or not. But it is an action to recover on an assessment levied by the Comptroller of the Currency by virtue of the act of Congress, and although the shareholder, in taking his shares, subjected himself to the liability prescribed by-the statute, the question still remains whether that liability constituted a contract within the meaning of the statute of limitations of the state of Washington.
“Some statutes imposing individual liability are merely in affirmation of the common law, while others impose an individual liability other than that at common law. If § 5151 had provided that subscribing to stock or taking shares of stock amounted to a promise directly to every creditor, then that liability would have been a liability by contract. But the words of § 5151 do not mean that the stockholder promises the creditor, as- surety for the d.ebts of the corporation, but merely impose a liability on him as secondary to those debts, which debts remain distinct, and to which the stockholder is not a party. The liability is a consequence of the breach by the corporation of its contract to pay, and is collateral and statutory. • • »
“It is true that in particular cases the liability has been held to be, in its nature, contractual, yet, it is nevertheless . conditional, and enforceable only according to the Federal statute, independent of which the cause of action does not exist. * *. *
“But here the right to sue did not obtain until the Comptroller of the Currency had acted, and his. order was the basis of the suit. The statute of limitations did not commence to run until assessment made, and then it ran as against an action to enforce the statutory liability, and not an action for breach of contract.”

Section 5151 of the United States Revised Statutes to which the court there referred is now sections 63, 64'of title 12 of the United States Code (12 USCA §§ 63, 64), already hereinbefore quoted. That decision has not been overruled or modified, either expressly or by inference, and is therefore clearly binding upon this court and decisive of the question now under consideration.

Plaintiff cites the case of Wattles v. Wayne Circuit Judge, 117 Mich. 662, 76 N. W. 115, 72 Am. St. Rep. 590, holding that a foreign judgment is a contract of record, and that therefore an action upon such a judgment is an action upon a contract within the meaning of the Michigan garnishment statute; and counsel contends that such decision is here applicable and, being a decision of a state Supreme Court construing a statute of such state, should be followed by this court. As, however,' the question as to the nature and effect of the federal statutes on which- the rights of the parties to this action depend is a federal question, it is obvious that under familiar rules of federal law this court is bound to follow applicable decisions of the United States Supreme Court rather than opposing decisions of any state court. It is therefore unnecessary to determine whether the action of the Comptroller of the Currency or of the plaintiff receiver constitutes, or is equivalent or analogous to, a foreign judgment within the meaning of the Michigan Supreme Court decision just cited.

For the reasons stated, I reach the conclusion that the present action is not an action “arising upon contract,” within the meaning of the Michigan garnishment statute. As, therefore, the right of the plaintiff to maintain these garnishment proceedings is and must be based solely upon the claim that this is an action upon a contract, these garnishment proceedings are without any proper legal basis, and must be dismissed on that ground.

A judgment will be entered accordingly:


author: HAHN, District Judge.

text:
    BRUMBACK v. DENMAN.
    No. 3316.
    District Court, N. D. Ohio, W. D.
    Nov. 14, 1930.
    John S. Brumback and Orville S. Brumback, both of Toledo, Ohio, for plaintiff.
    Eugene Angevine, Sol. for Department of Internal Revenue, of Washington, D. C., and Lee N. Murlin, U. S. Atty., of Toledo, Ohio, for the United States.
   HAHN, District Judge.

This is an action to recover a deficiency assessment of United States income tax in the amount of $3,069.15, assessed and collected by the defendant from the plaintiff for the calendar year 1922. In that year the plaintiff in his return deducted a loss incurred in land in the Bitter Root Valley in Ravalli county, Mont., purchased in 1912. The plaintiff purchased and owned in fee simple a one-half interest in 130 acres of undeveloped, arid land that was exploited for fruit-raising possibilities, and which to that end was dependent upon artificial irrigation. His venture was for purposes of resale and speculation. The irrigation was furnished by the Bitter Root Valley Irrigation Company, a private corporation which, in about 1908, constructed an irrigation canal some 70 miles in length. By 1920 a large part of the wooden flumes and water lines constructed by the irrigation company was badly deteriorated and in need of repair and rebuilding, but the irrigation company was then insolvent and in the hands of a receiver. The landowners in the valley then formed a political organization under the laws of the state of Montana, known as the Bitter Root irrigation district, which purchased the irrigation canal and the old water system from the receiver of the irrigation company. The only way the irrigation district could function was by the issuance of bonds which were to be paid by taxes and assessments upon the lands in the Valley. Under the Montana law, and as a result of a court proceeding authorized by that law, an order was entered on the 24th day of June, 1922, in the district court of the Fourth judicial district of the state of Montana in and for the county of Ravalli, authorizing a bond issue in the aggregate amount of $1,146,000, and the “levying of a special tax or assessment upon all of the lands of the said Bitter Root Irrigation District to pay the principal and interest of said bonds when the same shall fall due.”

In view of the history of the lands in the Bitter Root Valley, and the certainty of the placing of taxes and assessments upon the lands therein because of the proceedings just related, the salability and marketability of the land of the plaintiff was, destroyed upon the entering of the court’s order of June 24, 1922, and the same became worthless for the purposes of the plaintiff. The testimony does not leave any doubt upon “this point. More than 40 per cent, of the lands were forfeited for taxes, and for at least six years no lands were sold at prices above the delinquent tax thereon. The plaintiff, upon whom rested the first duty of determining the matter, in the year 1922 concluded that the land was 'worthless, that he would take his loss as a result of the situation; thereupon, in 1922 he refused to pay further taxes upon the property, charging it off oh his books, and had no further transactions with relation to it, nor did he exercise further dominion over it. The taxes not being paid, the property was sold for taxes October 3, 1923, the legal title being transferred pursuant to the tax sale February 13,1926. The plaintiff deducted the amount of his loss upon the property in his income tax report for the year 1922.

Both sides have argued the ease as involving a construction of section 214 of the Revenue Act of 1921 (42 Stat. 239, 240), particularly that portion thereof which is as follows:

“Sec. 214. (a) That in computing net income there shall be allowed as deductions: * * *
“(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.”

It is not argued that the regulations are helpful in determining the point upon which counsel agree that the ease turns. The taxT payer argues that the property became absolutely worthless in the year 1922, and that he was entitled to claim the loss for that year. The government, relying upon the case of the Appeal of A. J. Schwarzler, 3 B. T. A., 535. (1926), argues that even if the property became worthless in the year 1922, the plaintiff could not have the benefit of the loss so long as he held the legal title to the property; that he was not divested of the legal title until February 13, 1926; and that the plaintiff was entitled to claim the loss, not for 1922, but for the year 1926.

The reasoning of the Schwarzler Case, in so far as it is claimed to apply to this case, is represented by the following, at page 538:

“The testimony produced tends to show that the property in question had decreased in value, due to changes in the neighborhood, that it was not desirable as a building site, and that taxes had been permitted to ac.cumulate against it until they equaled or exceeded its then value. Assuming all this to be true, the taxpayer did not sustain a loss in the taxable year. * * *
“Here there is no question but that the legal title to the property attempted to be abandoned was in the taxpayer, and remained in it until after the taxable year in question. It could exercise dominion over it to the ex-elusion of everyone else, and it is difficult to conceive how it could sustain a loss with respect to the property and still have the property to deal with as its own. True, the value of the property may have declined by reason of changed conditions and the taxpayer’s neglect to pay taxes thereon. In fact, every piece of property upon which taxes are permitted to accumulate and which is located in a neighborhood which has become undesirable, necessarily suffers a diminution in its market value, but it has never been held that a taxpayer could deduct as a loss the diminution in value of land the title to which is still retained, and the difference is one of degree only. Losses from dealing in real or personal property, growing out of the ownership thereof, are deductible only when ascertained and determined upon an actual, completed, and closed transaction during the taxable year, and are not sustained through the mental ’processes by which a taxpayer determines that the property is worthless and charges it off on its books, while it still retains the title to the property itself.” (Italics supplied.)

Plaintiff denies that the Schwarzler Case should be applied to this ease, and argues that his loss was established for income tax purposes by the court’si order hereinabove referred to, and which was entered on the 24th day of June, 1922. Plaintiff relies upon the cases of United States v. White Dental Company, 274 U. S. 398, 47 S. Ct. 598, 600, 71 L. Ed. 1120, and Lucas v. American Code Company, 280 U. S. 445, 50 S. Ct. 202, 203, 74 L. Ed. 538. .The pertinent excerpt from the White Dental Case, supra, is as follows:

“The ease turns upon the question whether the loss, eoncededly sustained by the respondent through the seizure of the assets of the German company in 1918, was so evidenced by a closed transaction within • the meaning of the quoted statute and treasury regulations as to authorize its deduction from gross income of that year. The statute obviously does not contemplate and the regulations (article 144) forbid the deduction of losses resulting from the mere fluctuation in value of property owned by the taxpayer. New York Ins. Co. v. Edwards, 271 U. S. 109,116, 46 S. Ct. 436, 70 L. Ed. 859’, cf. Miles v. Safe Deposit Co., 259 U. S. 247, 42 S. Ct. 483, 66 L. Ed. 923. But with equal certainty they do .contemplate the deduction from gross income of losses, which are fixed by identifiable events, such as the sale of property (articles 141,144), or caused by its destruction or physical injury (articles 141, 142, 143), or, in the case of debts, by the occurrence of such events as prevent their collection (article 151).
“The transaction evidencing the loss here was the seizure of the property of the German company. The loss resulted to the respondent because it was a creditor and stockholder of that company which, as a result of the sequestration, was left without property or assets of any kind.” (Italics supplied.)

In the above excerpt the court refers to certain regulations, although the decision of the court was not based upon a regulation. It is not claimed that any regulation applies to this ease, and no regulation which has been called to the court’s attention makes it a condition precedent to the allowance of a loss that the taxpayer shall have been divested of title to the worthless property involved. In this case, therefore, as in the White Dental Co. Case, the interpretation of the statute alone is involved. However, any regulation to be valid must be subservient to the intent and purpose of the statute, and could not make that a condition to the allowance of a loss which would not be consistently required under the applicable statute.

The excerpt from the American Code Case, supra, is as follows:

“Generally speaking, the income tax law is concerned only with realized losses, as with realized gains. Weiss v. Weiner, 279 U. S. 333, 335, 49 S. Ct. 337, 73 L. Ed. 729. Exception is made, however, in the case of losses which are so reasonably certain in fact and ascertainable in amount as to justify their deduction, in certain circumstances, before they are absolutely realized. As respects losses occasioned by the taxpayer’s breach of contract, no definite legal test is provided by the statute for the determination of the year in which the loss is to be deducted. The general requirement that losses be deducted in the year in which they are sustained calls for a practical, not a legal, test.”

The thought underlying the principles applied in these cases decided by the Supreme Court of the United States seems to be that a taxpayer may have the benefit of a loss which is indicated by an identifiable event which marks or fixes the loss with reasonable (not absolute) certainty as to its occurrence and the amount thereof. Further, the test to be applied is a practical, not a legal, one. It seems to follow that it must depend largely, if not wholly, upon the facts relating to the particular loss. A change of title may establish a loss in, one ease; an order of a court may establish it in another; but it cannot be said categorically that there can never be a properly deductible loss in the case of real estate so long as the táxpayer holds the title. It seems to the court that it certainly cannot be said to be a condition precedent where, as here, there is present such an identifiable event of as far-reaching consequence as the court order relied upon in this case.

The government argues that the taxpayer’s loss in this ease was forecast some years before the entering of the court’s order, and that, upon the taxpayer’s theory, he might as logically have claimed the loss in years prior to the year 1922'. But in this court’s opinion such a claim, if .made prior to the Montana court’s order, would have been met by the government with the eases cited in the White Dental Case, and, which hold: “The statute obviously does not contemplate * * * deduction of losses resulting from the mere fluctuation in value of property owned by the taxpayer.” United States v. White Dental Co., supra, at page 491 of 271 U. S., 47 S. Ct. 598, 699. In this ease the entering of the court’s order on June 24,1922, was the decisive event.

The only portion of the court’s opinion in the Sehwarzler Case which is applicable then to this case is that which holds that a loss should not be allowed because the taxpayer still holds title, and thus may exercise dominion over the claimed worthless property. But the continuing power to exercise dominion over worthless property exists in the case of personal property, corporate stock, bad accounts, and other property where losses are generally (perhaps always) allowed without reference to questions of title to the property or the power to exercise dominion over the same. It appears in the White Dental Case, supra, that the taxpayer continued to hold title .to the stock of the German company for every purpose, though the power to exercise dominion was temporarily suspended. However, it appears (at page 400 of 274 U. S., 47 S. Ct. 598, 599) that in 1922 the tangible assets and the lease of the German corporation were sold for the sum of $6,000, and the respondent was required to include that amount as income in its income tax report for that year.

The court is of the opinion that the rule of the Sehwarzler Case should not be applied in this ease. There was not in that ease, as there is in this, an identifiable event such as the court’s order of June 24, 1922, which definitely fixed the taxpayer’s loss regardless of questions of title. There should he a judgment in favor of the plaintiff in the amount of $3,069.15, with interest. The requested special findings of fact may be formulated under rule 34 of this court. ‘ Exceptions are saved to the defendant. An order may be entered accordingly.

       Although the property was sold for taxes October 3, 1923, the Revised Code of Montana, .§ 2291, allowed a period of redemption. Hence a deed for the property was not ordered until February 13, 1926.

       In the American Code Case, supra, it was held that the deductible loss resulting from an employer's breach of a contract of employment was not established until litigation concerning the same was finally terminated; thus a court’s order fixed the loss.

       It was said in the Scbwarzler Case that losses “are not sustained through the mental processes by which a taxpayer determines that the property is worthless and charges it off on its books, while it still retains the title to the property itself.” That might have been said of the plaintiff in this case if the plaintiff had attempted to charge off his loss in any year prior to 1922, when the Montana court entered its order. Upon the entering of that order the plaintiff here charged the property off on his books, exercised no further dominion over it, failed to pay the taxes on it, and every act of his thereafter was inconsistent with any thought on his part to exercise dominion over it. The plaintiff in the year 1923 received an installment of rent, but that was rent earned in the year 1922 and, as shown by the evidence, its transmittal to the plaintiff was delayed!


author: AUGUSTUS N. HAND, Circuit Judge.

text:
    UNITED STATES v. McMURTRY.
    District Court, S. D. New York.
    Aug. 25, 1930.
    Charles H. Tuttle, U. S. Atty., of New York City (Frank W. Ford, Asst. U. S. Atty., of New York City, of counsel), for the United States.
    John J. Cunneen, of New York City, for defendant.
   AUGUSTUS N. HAND, Circuit Judge.

Congress in 1916 created a Council of National Defense, the purpose of which was the “co-ordination of industries and resources for the national security and welfare.” Section 2 (50 USCA § 1). Its duties among other things were “to supervise and direct investigations and make recommendations to the President and the heads of executive departments as to * * * data as to amounts, location, method and means of production, and availability of military supplies; the giving of information to producers and manufacturers as to the class of supplies needed by the military and other services of the Government, the requirements relating thereto, and the creation of relations which, will render possible in time of need the immediate concentration and utilization of the resources of the Nation.” Section 2 (50 USCA § 3). It was empowered to adopt rules and regulations for its work and to organize subordinate bodies for its assistance in special investigations either by the employment of experts or the creation of committees. Section 2 (50 USCA § 4).

On March 4, 1918, the President undertook to reorganize a subordinate board of the Council of National Defense known as the War Industries Board by making it an administration body responsible only to himself. He had been authorized under section 120 of the Act of June 3,1916 (50 USCA § 80), to place an order for needed material with any person, which was to be given preference over all private engagements, and under the Overman Act of May 20, 1918 (40 Stat. .556), he was authorized “to make such redistribution of functions among executive agencies as he may deem necessary.” Section 1.

The "War Industries Board set up an Administrative Committee called the Wool Division which met representatives of the wool dealers and growers and promulgated regulations fixing the prices of the 1918 wool clip on the basis of those approved by the government as the Atlantic seaboard priees on July 30, 1917. The regulations provided that the government should have a prior right to acquire all of the 1918 wool clip or any portion thereof at the priees fixed by the War Industries Board, the remainder to be subject to allocation for civilian purposes under the direction of that Board. According to the terms of the regulations, the growers were to receive fair priees for their wool based on the Atlantic seaboard prices as established on July 30,. 1917, less freight to seaboard, moisture, shrinkage, and interest, and less a gross profit to the dealer which should in no cases exeeed 1% cents per pound on the total season’s business, such profit to cover all expenses from grower to loading wool on board cars. On consignments forwarded to distributing centers the priees to be paid for the wool to approved dealers were to be the Atlantic seaboard values of July 30,1917, plus a commission of 4 per cent, to be paid by the government, if bought by the government, or by the manufacturer to whom the wool is allocated for other than government purposes — this commission to include grading and other expenses of handling.

The regulations provided that all the wool of the 1918 clip must be distributed through approved dealera in approved centers of distribution, and defined approved dealers as those dealers authorized by the War Industries Board to handle wool who are located in the distributing centers. The regulations also contained the following clause upon which the claims of the government in this action are based: “As a guard against profiteering, the books of all approved dealers in distributing centers shall be at all times open to government inspection, and if it be found that their gross profits, including the aforesaid commission of 4 per cent, are in excess of 5 per cent on the season’s business then those gross profits shall be disposed of as the government decides.”

These regulations have been held invalid by the Court of Appeals of the Fourth Circuit in United States v. McFarland, 15 F. (2d) 823, 833, and by the Court of Appeals of the First Circuit in United States v. Smith, 39 F. (2d) 851, on the ground that there was no authority either in the act creating the Council of National Defense, or in the Overman or Lever Acts authorizing the fixing of priees for the sale of wool, and it has been substantially conceded by the government that the validity of the regulations cannot be sustained, so far as they purported to fix priees.

But the Wool Division obtained from approved dealers to whom it issued permits agreements to conduct their business in accordance with the regulations, and the government insists that any dealer who signed such an agreement and sold wool to the government became bound to perform his contract in accordance with the regulations, entirely irrespective of whether they were issued under proper authority or not.

The defendant in the case at bar applied for a license as an approved dealer and executed an agreement in the following form:

“May 27,1918.
“I, the undersigned, having received from the Wool Division of the War Industries Board a permit to operate as an approved wool dealer in a distributing center, hereby agree to operate subject to the rules heretofore adopted or to be adopted by said Board for the handling of the 1918 domestic clip.
“My permit is subject to immediate revocation for failure to comply with said regulations.
“John E. McMurtry & Co.
“New York, N. Y.”

The government contends that the foregoing instrument when followed by the receipt of wool from McMurtry and the payment to him of a 4 per cent, commission gave rise to an obligation on his part to repay to the United States any excess of his gross profits (including his commission of 4 per cent.) which exceeded 5 per cent, of the season’s business. Indeed Judge Rose, writing for the Circuit Court of Appeals of the Fourth Circuit, in United States v. McFarland, supra, though dismissing the claim against McFarland because (among other reasons) McFarland had entered into no specific agreement to operate subject to the regulations of the Wool Division, distinguished McFarland’s relation from that of one who had executed an agreement so to operate. He said: “The government * * * insists that it is entitled to recover because the defendants for a valuable consideration promised to make the payment demanded of them. If such a promise was made, and its enforcement is not forbidden by some rule of public policy, it may well be held binding, whether it was or was not one which those acting for the government had a right to require. * * * If there was an express contract, it would scarcely be necessary to inquire into the extent of the powers of either the Wool Section or the War Industries Board. Who suggests the form a government contract takes is usually immaterial.”

The foregoing apparently amounts to a dictum to the effect that sales made under a license accompanied by an agreement by an approved dealer in the form which MeMurtry executed impose a binding obligation upon the dealer to fulfill his promise as far as performance is not forbidden or excused by some rule of public policy. Agreements in the form executed here have been treated as creating valid obligations on the part of the dealer to repay excess profits according to the regulations both by the Circuit Court of Appeals of the Seventh Circuit in United States v. Kraus, 33 F.(2d) 406, and by numerous decisions of the District Courts.

But the defendant says that the agreement here was executed under duress, and that the provision for repayment of excess profits is, therefore, unenforceable and invalid. The Supreme Court, has, however, frequently held that such means as the Wool Division employed to prevent profiteering and to expedite the delivery of materials which the government wished to secure does not amount to duress, and that, where duress does not exist, a person contracting with the government must ordinarily perform his contract irrespective of whether the government would have had the right to require'performance from one who had not contracted voluntarily. Frost Trucking Co. v. R. R. Com., 271 U. S. 583, 46 S. Ct. 605, 70 L. Ed. 1101, 47 A. L. R. 457; American Smelting Co. v. United States, 259 U. S. 75, 42 S. Ct. 420, 66 L. Ed. 833; Morrisdale Coal Co. v. United States, 259 U. S. 188, 42 S. Ct. 481, 66 L. Ed. 892; Silliman v. United States, 101 U. S. 465, 25 L. Ed. 987.

None of these decisions, however, seems to require performance of a regulation to repay excess profits such as is found here. The government bought wool on its own terms and neither makes any complaint of the price it has paid nor does it, by reason of the regulations, or otherwise, seek to recover anything for its own benefit. It could not keep any excess profits collected without a breach of faith, for it has declared another purpose in its regulations, however indefinite that purpose may have been, nor, as the opinion in United States v. McFarland, supra, points out, can it distribute any such profits in an equitable way. The plan was to keep down prices by requiring the dealers to part with any profits in ..excess of 5 per cent, of the season’s business. The exaction of a repayment of excess profits was not by way of damages, for no one had suffered any damages in a legal sense, but was in order to prevent profiteering at the expense of the woolgrowers by penalizing the dealers. The persons to whom any excess profits were to be paid were wholly unascertained at the time the regulations were promulgated; indeed they were not mentioned in the regulations even as a class. The requirement of the regulation that the excess profits should be repaid not as damages to the United States, and not even for its benefit, but for such disposition as “the government decides” involves the imposition of a penalty. No authority was given to the War Industries Board to impose penalties, nor could Congress delegate to' it such a matter. United States v. Grimaud, 220 U. S. 506, 31 S. Ct. 480, 55 L. Ed. 563; United States v. Eaton, 144 U. S. 677,12 S. Ct. 764, 36 L. Ed. 591.

The ease is quite different from Dayton-Goose Creek Ry. v. United States, 263 U. S. 456, 44 S. Ct. 169, 68 L. Ed. 388, 33 A. L. R. 472. There excess income earned by the railroads while under government control, being a fund to which no railroad had any legal or equitable right, was held properly distributable among the weaker railroads in order to help them to discharge their public duties more effectively. Here the excess profits neither belonged to the United States nor was distributable among members of any named class. The attempt to recover them under an unauthorized regulation is the mere enforcement of a penalty and not the requirement that the defendant perform a contract for the benefit of the United States or of any ascertainable person.

In United States v. Smith, 39 F.(2d) 851, where the facts were like the present, .the Circuit Court of Appeals of the First Circuit held that the acceptance of the license by the defendant only hound him to meet valid requirements of the regulation, and that the repayment of excess profits was not such a requirement. In United States v. McFarland, 15 F.(2d) at page 836, et seq., the Court of Appeals of the Fourth Circuit definitely held that a requirement that excess profits should be repaid was invalid because such an exaction would involve the enforcement of a penalty and not the performance of a contractual obligation. The acceptance of a license upon condition that the licensee conform to certain regulations was held in United States v. Smith supra, only to bind the licensee to conform to such as were valid. See, also, Power Mfg. Co. v. Saunders, 274 U. S. 490; 47 S. Ct. 678, 71 L. Ed. 1165; Hanover Insurance Co. v. Harding, 272 U. S. at page 507, 47 S. Ct. 179, 71 L. Ed. 372, 49 A. L. R. 713; Frost Trucking Co. v. R. R. Co., 271 U. S. at page 594, 46 S. Ct. 605, 70 L. Ed. 1101, 47 A. L. R. 457; W. W. Cargill Co. v. Minnesota, 180 U. S. at page 468, 21 S. Ct. 423, 45 L. Ed. 619. If the license and regulations be taken on their own merits without considering the written agreement to operate in accordance with their provisions, the clause for the disposition of excess profits would clearly be void because such a regulation was made without authority. As a contractual provision it is invalid because requiring the payment of a penalty.

At the trial I took a special verdict because I was then under the impression that the regulation for repayment of excess profits was valid for the reason that the defendant had contracted to conduct his business subject to the regulations. But the elaborate opinion of the Circuit Court of Appeals of the Fourth Circuit in United States v. McFarland, and of the Circuit Court of Appeals of the First Circuit in United States v. Smith, which followed the McFarland decision, have caused me to modify my former view. If the provision relating to the repayment of excess profits had been for the purpose of a readjustment of the prices paid to the dealers by the United States and for its benefit, a different question would have been presented from the one here. But an agreement to pay profits to unascertained and undesignated third persons is in quite a different category.

For the foregoing reasons the motion of the defendant for the direction of a verdict in his favor is granted and a general verdict is hereby directed for the defendant upon both causes of action, and the motion of the plaintiff for the direction of a general verdict in its favor is denied.

Judgment for the defendant shall be entered accordingly.


author: FRANK J. COLEMAN, District Judge.

text:
    FRANC-STROHMENGER & COWAN, Inc., v. FLEX THRED CORPORATION et al.
    District Court, S. D. New York.
    March 20, 1931.
    Duell, Dunn & Anderson, of New York City (Charles Neave, C. E. Dunn, and J. E. Daniels, all of New York City, of counsel), for plaintiff.
    Dean, Fairbank, Hirsch & Foster, of New York City (G. A. Ferris, M. Hirsch, F. J. Foster, and A. Gruber, all of New York City, of counsel), for defendants.
   FRANK J. COLEMAN, District Judge.

The patent in suit applies to neckties, and covers a means of safeguarding their resiliency in ordinary use. The usual four-in-hand necktie consists of a piece of silk properly cut, folded, and sewed, and containing within it a lining which gives it support and body. Since the silk is customarily cut on the bias, the fabric stretches longitudinally of the tie under the pulls and strains of adjustment to the person. If the stretching is not. excessive, the fabric will resume its normal condition after the strain is released; but, if the stretching has been too great, the fabric will be to some extent permanently distorted, and will present a stringy appearance.

The problem of preventing the silk from stretching too far longitudinally in ordinary use was first solved by the trade by making the lining nonstretehable and sewing the silk to it. The fabric of the lining was cut straight, and not on the bias, and was therefore inelastic both longitudinally and laterally. Since the silk was sewed to it, the entire tie was rigid, and presented disadvantages in adjustment and in durability.

A more satisfactory solution was found in the Langsdorf patent, No. 1,447,090, issued in 1923, in which it was provided that the fabric of the lining be cut on the bias so as to give it some elasticity both longitudinally and laterally, but rigid enough to give substantial support to the silk. The result of these provisions is that the tie, including both the silk and the lining, is stretchable, but the support given by the lining prevents the silk from being stretched in ordinary use to the point where its resiliency is lost. The Langsdorf idea has proved highly successful, and has been generally adopted by the trade.

The patent in suit, issued to Leoni in 1927, solves the same problem as the Langsdorf patent, of providing stretehability to the tie but curtailing it so that the silk cannot in ordinary use be extended to the point of permanent distortion; and the means disclosed is a lining so elastic as to give in itself insufficient support to the silk to prevent its being stretched excessively, but combined with an inelastic tape in which there is some slack so that, when under the strain of adjustment the lining has been stretched to the extent of the slack in the tape, it can stretch no farther, and consequently gives the needed support to the silk. The Leoni patent has not proved very successful commercially, and at the present time no ties are manufactured under it.

The defendants, who are manufacturers of ties, use a knitted woolen lining which is elastic in all directions and is in itself more easily stretchable than the silk. Instead of sewing the edges of the silk along the back of the tie with ordinary thread, a knitted elastic thread is used, which not only sews the edges of the silk together, but sews them to the lining, and is securely anchored to both at its ends. The principal questions presented are whether this knitted thread performs the function of the tape specified in the Leoni patent, and, if so, whether the device comes within the purview of the patent.

The claims relied on read as follows:

“1. A necktie including a body material, a strip of uncreasable elastic material stretchable in all directions and means allowing for and limiting the stretch of the same in the direction of the length of the tie.
“2. A necktie lining including a strip of uncreasable elastic material stretchable in all directions, and means allowing for and limiting to a predetermined degree, the stretch of said strip of material in the direction of the length of the tie.”

The principal question presented is whether the knitted thread of defendant’s product is “a means allowing for and limiting the stretch” of the lining.

The claims are not entitled to a broad construction, not only because of the previous crowded condition of the art, but also because of the very slight commercial effect the invention has had. The specification mentions sheet rubber as the preferred material for the lining, and provides that a “nonelastic strip of material or tape,” longer than the sheet rubber, be fastened to it at both ends so that as the tie is pulled the rubber will stretch only to the length of the tape. It is plain that the inventor had in mind, as his “means allowing for and limiting the stretch” of the lining, a nonstretehable member or tape which would offer no resistance to the stretch of the lining until the slack in the tape was exhausted, and would then rigidly stop further stretch. The expression “limiting the stretch” should, I believe, be given this meaning, rather than that of retarding the stretch; and this is made clearer in the second claim, where the expression is, “limiting to a predetermined degree.”

If this construction of the claims is correct, . defendant’s product certainly does not infringe, because the elastic knitted thread could under no circumstances rigidly stop the stretch of the lining. The most it could do would be to add its support to both the lining and the silk, so’ that there would be three elastic members to sustain the pulls of adjustment. It should be noted, also, that the patent’s tape acts only on the lining, while defendants’ knitted thread acts as much on the silk as on the lining.

But even if a broader construction of the claims be adopted so as to bar the knitted thread, if it merely adds,its support to retard the stretch of the entire tie, still there was no infringement, because I am convinced the preponderance of the evidence requires a finding that the thread does not accomplish that result. In the first place, I believe that Plaintiff’s Exhibits 3 and 4, which were the ties relied on as instances of infringement, were essentially similar to the general run of defendants’ product, and were made in the same way. Their linings were more stretchable than those now used by defendants, but this difference is of no significance. Furthermore, I believe the tests of defendants’ witness Maeia were more reliable than those of plaintiff’s witness Dyer.

The knitted thread cannot substantially diminish the stretch of the tie because of three facts: (1) It is so much longer than the distance between the points at which it is anchored in the tie that there must be considerable slack in it when the tie is finished; (2) it is materially more stretchable than the silk, so that the limit of stretch would be reached by the silk before the knitted thread could give substantial support even if there were no slack in it; and (3) it is so easily broken that, if its limit of stretch were reached, it would be unsafe to have it take up much of the strain. I believe the testimony of defendants’ witness as to how their ties are made. The knitted thread is used merely to hold the edges of the silk and the lining together, and the purpose of its stretehability is to obviate the necessity of having an unsightly degree of slack in it to allow for the stretch of the tie. The thread is loosely sewed through both the silk and- the lining without any exact measurement or positioning of it, and the slack which it is given is concealed in the looseness of the stitches. Notwithstanding Mr. Dyer’s testimony, I believe it very improbable that the knitted thread takes up any appreciable part of the strain in ordinary use.

Since I believe that there was no infringement, it is unnecessary to consider the other defenses. I accordingly direct a decree for the defendants.


text:
    KENAN et al. v. BOWERS, Collector of Internal Revenue.
    District Court, S. D. New York.
    Oct. 27, 1930.
    Root, Clark & Buckner, of New York City (George E. Cleary, of New York City, of counsel), for plaintiffs.
    Charles H. Tuttle, of New York City (Walter H. Schulman, of New York City, of counsel), for defendant.
   FRANK J. COLEMAN, District Judge.

The principal question presented is whether the taxpayer, Mary Flagler Bingham, was entitled to a deduction of $308,-860.69 from her gross income of 1917 because of her payment of that amount to the trustees of her deceased husband’s estate as compensation for their services. The husband, Henry M. Flagler, had died in 1913 leaving all his property, valued at about $26,000,000, in trust for a period of five years with the power in the trustees to extend the term for an additional five years in their discretion. He nominated three trustees who qualified, but in 1915, one of them having died, it became necessary to obtain a substitute. The will limited the compensation of the trustees to $5,000 a year each, which was entirely disproportionate to the labor and responsibility involved; consequently the widow agreed at the time the substitute was appointed in 1915 that they should receive$400,000 in 1918 as additional compensation. Instead of abiding by the terms of that agreement, she voluntarily advanced the date of payment and in 1917 out of her personal funds, paid the item in dispute $308,860.69, on account of their additiohal compensation. Since she reported on a cash basis she deducted the entire amount from her gross income for that year, but the Treasury Department refused to allow any part of it as an expense item and collected an additional tax of approximately $165,000 on account of it, which plaintiffs now seek to recover.

The widow was vitally interested in the proper administration of the trust, not only because she was practically the sole beneficiary, but also because her personal funds were to some extent involved in a railroad and a hotel company controlled by the trustees. The trust estate consisted in part of 105,000 shares out of a total of 125,000 shares of the capital stock of the Florida East Coast Railway Company, and the remaining 20,000 shares were owned by the widow personally. Also she owned bonds of the railroad in the amount o£ $1,775,000, and had loaned to the trustees an additional $875,000 for the use of the railroad and of the hotel company of which the trust estate owned the entire capital stock and outstanding securities.

Her beneficial interest in the estate included both principal and income. Disregarding certain negligible bequests the will provided that she was to receive the entire corpus at the termination of the trust, and so much of the income as was not used in developing the properties owned by the estate. More specifically, the will directed that during the first five years she be paid an annuity of $100,000, the balance of the income to be used in developing the various properties; and that during the remainder of the term in addition to the annuity she be paid all the income not needed in the business enterprises.

The services for which the widow agreed to pay additional compensation were to be rendered entirely to the trust estate and not to her personally or to her individual property. They thus had no direct but a very large indirect value to her. Furthermore, this value had relation to her interest in the corpus of the trust estate rather than to her income from it or from her individual property. The services did, of course, to some extent bear on her income from both the trust estate and from her individual property, because her annuity of $100,000, her share of the trust income during the extended period of the trust and her dividends and interest from the stock and bonds of the railroad, which she individually owned, might have been affected by a maladministration of the trust. But that result would be inconsiderable and' almost negligible in comparison with the effect upon the corpus of the trust. The trustees had been given very wide powders in the development and administration of the properties, and during the first five years the bulk of the trust income was to be returned to the properties and to become part of the eorpus, with power in the trustees to continue to do so in their discretion during any extension of the term. The conclusion must be drawn, therefore, that, in agreeing to pay the additional compensation, the widow had as her principal purpose the protection and development of the corpus of the trust estate, including the accumulations, and only incidentally the protection of her individual property and óf her income from it and from the trust.

The statute controlling is the Revenue Act of 1916 (89 Stat. 759) section 5 of which reads as follows:

“See. 5. That in computing net income in the ease of a citizen or resident of the United States—
“(a) For the purpose of the tax there shall be allowed as deductions—
“First. The necessary expenses actually paid in carrying on any business or trade, not including personal, living, or family expenses ;
“Second. All interest paid within the 'year on his indebtedness;
“Third. Taxes paid within the year imposed by the authority of the United States, or its Territories, or possessions, or any foreign country, or under the authority of any State, county, school district, or municipality, or other taxing subdivision of any State, not including those assessed against local benefits;
“Fourth. Losses actually sustained during the year, incurred in his business or trade, or arising from fires, storms, shipwreck, or other casualty, and from theft, when such losses are not compensated for by insurance or otherwise: Provided, That for the purpose of ascertaining the loss sustained from the sale or other disposition of property, real, personal, or mixed, acquired before March first, nineteen hundred and thirteen, the fair market price or value of such property as of March first, nineteen hundred and thirteen, shall be the basis for determining the amount of such loss sustained;
“Fifth. In transactions entered into for profit but not connected with his business or trade, the losses actually sustained therein during the-year to an amount not exceeding the profits arising therefrom;
“Sixth. Debts due to the taxpayer actually ascertained to be worthless and charged off within the year;
“Seventh. A reasonable allowance for the exhaustion, wear and tear of property, arising out of its use or employment in the business or trade. * * * ” '

The only pertinent part is the clause denominated “First,” the subsequent clauses being set forth merely for their possible bearing upon its construction. From the wording of that clause it is apparent that the payment to the trustees was not deductible unless it was a necessary expense as distinguished' from a capital expenditure and unless it was made in carrying on the business of the taxpayer, Mary Flagler Bingham. It should be borne in mind that there were two separate entities involved, one the trust estate and, the other, Mrs. Bingham. It may be assumed that, had the payment been made by the trust estate, it would have been deductible from the latter’s gross income as a necessary expense of carrying on the estate’s business. The difficult questions now presented are whether the payment was made in carrying on the business of Mrs. Bingham, and, if so, whether it was not a capital expenditure rather than a necessary expense.

It was in its general nature a business and not a personal or family transaction. On the other hand, Mrs. Bingham had no “business or trade” in the narrow sense. She had an individual estate valued at about $34,-000,000 exclusive of her interest in the trust and took some part in the management of that; but she in no way participated in the management of the trust estate.

The plaintiffs contend that there are two grounds for holding that the payment was made in carrying on the business of Mrs. Bingham; (1) that it was made in the management of income producing property which Mrs. Bingham equitably owned and (2) that the business of managing and developing the trust property was the business of Mrs. Bingham individually because the trustees were virtually her agents. Both these contentions are based upon the theory that the distinction between the two entities should be disregarded, and that in this action at law the court should consider the trust property as virtually hers, even though there were some minor beneficiaries.

Legally, the trust property belonged to the trustees and not to Mrs. Bingham, and the management of it was their business and not hers.- They were not her agents and had no power to bind her individually. The federal income tax statutes gave them the status of independent taxpayers, requiring them, not only to report the entire income of the trust estate, but to pay the tax upon it though they were allowed to deduct from the gross income of the estate so much as was distributed to the beneficiaries. Federal Income Taxation, Klein, pages 1134, 1137, 1138, 1156. The case, therefore, presents a situation where one taxpayer voluntarily paid an item that might have been a deductible expense of another taxpayer and was actuated to do so by economic reaspns relating to an indirect and somewhat remote financial benefit to the payor.

Cases are cited where the Board of Tax Appeals has considered somewhat similar situations and has either allowed or disallowed the deduction. I exclude those cases relating to partnerships because in them neither the common law nor the tax statutes recognize the same distinction between two separate entities. In Le Blanc v. Commissioner, 7 B. T. A. 256, and in Re Harold Mortenson, 3 B. T. A. 300, the Board allowed a stockholder to deduct from his own gross income the payment of an item which might have been an expense of the corporation; but in Charles Lesley Ames v. Commissioner, 14 B. T. A. 1067, and Hal E. Roach v. Commissioner, 20 B. T. A. 919 (September 1930) the Board refused a similar deduction. There probably cannot be a rigid rule established because the taxpayer’s “business or trade” has been held to be a very elastic expression applicable to much more than the continuous course of conduct usually connoted by those words. On the other hand, under all the circumstances of this case I believe it would be stretching the meaning too far if the deduction in question were permitted, since Mrs. Bingham neither owned the property upon which the services were to be expended, nor would receive as income, even indirectly, the fruits of those services, except to a negligible extent. As in Commissioner v. Marshall Field, 42 F. (2d) 820, 823, decided by the Circuit Court of Appeals of this circuit in July, 1930, the payment must'be held to “fall within those general costs of protecting one’s property for which the statute makes no allowance.”

If the above conclusion is correct, it is unnecessary to consider whether the payment by Mrs. Bingham should be considered an expense or a capital expenditure. The services for which the compensation was paid were to cover at least five and perhaps ten years and were related to the corpus of the estate rather than to the taxpayer’s income. Though she reported on a cash basis, there are strong reasons for not permitting her to deduct this entire amount in one year, particularly when certain details of the transaction are considered which have not yet been mentioned. Her original agreement with the trustees made in 1915 did not make her personally liable for the additional compensation, but provided that the trustees “shall receive from my share of said estate in full compensation for the services * * * the sum of $400,000 in addition to the sum of $5,000 per year * % * the said sum of $400,000 to be paid at the expiration of five years from May '24, 1913 and said persons * * * shall be entitled to credit themselves with said sum in accounting with me at the termination of said trust.” The payment which she actually made in 1917 gave her no greater right ¡of deduction than would a payment under the -original agreement because it was voluntarily made by her and did not secure for her or for the estate anything which had not already been secured by the original agreement. The actual payment was therefore not a “necessary” one, except in so far as it was made on account of the original agreement and the latter tends to indicate that the expenditure was to be a capital one, rather than an expense.

As to the other items sought to be deducted from that year’s gross income, there can be no question. The $485.01 paid for clerk hire and the $250 paid for the rent of a safe in the management of Mrs. Bingham’s individual income-producing property were plainly deductible. As to whether certain dividends amounting to $24,355 should be included in the gross income for 1917 rather than 1916, the defendant makes no opposition, and the plaintiff’s contention is therefore allowed.

Settle findings on notice.


author: HOLMES, District Judge.

text:
    NEELY et al., v. PLANTERS’ NAT. BANK OF CLARKSDALE, MISS.
    District Court, N. D. Mississippi, Delta Division.
    March 31, 1931.
    Maynard, FitzGerald & Venable, of Clarksdale, Miss., for plaintiffs.
    Brewer & Brewer and Roberson & Cook, all of Clarksdale, Miss., for defendant.
   HOLMES, District Judge.

The plaintiffs, on motion, are seeking to remand to the chancery court of Coahoma county, Miss., from whence it was removed, this suit in equity to set aside as fraudulent a conveyance to the defendant of certain real estate situated in said county. The bill was filed by judgment creditors of the grantor in the alleged fraudulent conveyance against the Planters’ National Bank of Clarksdale, Miss., and not only seeks to set aside the transfer, but asks for a personal decree against the alleged fraudulent grantee, and for a lien to be declared upon the property so conveyed. There is also a prayer for general relief.

The suit was instituted and service had only a few hours after the bank had closed its doors and suspended business on account of insolvency, but while its officers were still in charge of its assets. About three weeks later, A. F. Rawlins was legally appointed receiver for said institution by the Comptroller of the Currency of the United States, and, having duly qualified under the appointment, is now acting in that capacity, having taken possession of all the assets of the bank.

Within the time required by the removal statutes, without being or becoming a party defendant in the state court, the said receiver, after giving notice of an intention so to do, filed a petition and bond to remove the canse to this court, and an order of removal was formally made by the chancery court of the state. As soon as the record was filed here the plaintiffs made a motion to remand.

The petition remove is in the name of the bank. It begins: “Your petitioner, Planters National Bank, of Clarksdale, Mississippi, by and through its receiver, A. F. Rawlins, specially appearing for the sole and single purpose of presenting this motion.” And then proceeds to allege as grounds of removal (1) that the plaintiffs are citizens of the state of Mississippi, and the receiver, Rawlins, is a citizen of the state of Arkansas; (2) that this is a ease for winding up the affairs of a National Banking Association. It concludes: “Planters National Bank, Clarksdale, Mississippi, by A. F. Rawlins, its receiver.”

No question of the authority of the receiver to file the petition to remove is raised by the officers of the bank, whose attorney appeared at the hearing and resisted the motion to remand, and, as the right of removal will be determined upon other grounds, nothing is decided with reference thereto.

The suit is-not against Rawlins, the nonresident, either individually or as receiver, but is against the bank in its corporate capacity. Therefore, there is no diversity of citizenship which would entitle the cause to be removed.

The mere fact that a National Banking Association is established under the laws of the United States is not a ground of removal. For jurisdictional purposes a national bank is deemed a citizen of the state in which it is located. Judicial Code § 24, par. 16 (28 USCA § 41 (16). Wichita National Bank v. Smith (C. C. A.) 72 F. 568; Petri v. Bank, 142 U. S. 644, 12 S. Ct. 325, 35 L. Ed. 1144; Burnham v. Bank (C. C. A.) 53 F. 163.

If the action of the receiver in entering the state court to remove for the bank be construed as a voluntary appearance and intervention by him as a defendant, in which that court acquiesced by granting the order of removal, there is still no diversity of citizenship which would confer jurisdiction on this court because an intervening defendant or a substituted party comes into the suit subject to all the disabilities of the original defendant so far as the right of removal is concerned. Cable v. Ellis, 110 U. S. 389, 4 S. Ct. 85, 28 L. Ed. 186; Houston & T. C. Railway Co. v. Shirley, 111 U. S. 358, 4 S. Ct. 472, 28 L. Ed. 455; Jefferson v. Driver, 117 U. S. 272, 6 S. Ct. 729, 29 L. Ed. 897.

The second ground relied upon by the receiver to support jurisdiction here is that this is a case for winding up the affairs of a National Banking Association within the meaning of par. 16, § 24, of the Judicial Code (28 USCA § 41 (16).

An action brought against the receiver of a national bank, or against the bank and the receiver jointly, is a ease for the winding up of the affairs of a National Banking Association, and is removable. International Trust Co. v. Weeks, 203 U. S. 364, 27 S. Ct. 69, 51 L. Ed. 224; Studebaker Corporation v. First National Bank (D. C.) 10 F.(2d) 590; Larabee Flour Mills v. First National Bank (C. C. A.) 13 F.(2d) 330; Moulton v. National Farmers’ Bank (D. C.) 27 F.(2d) 403; Id. (C. C. A.) 31 F.(2d) 1018; Guarantee Co. v. Hanway (C. C. A.) 104 F. 369.

But, as has been shown, this suit was brought against the bank alone before the receiver was appointed, and was pending at the time of his appointment. The latter may properly be made or become a party, but his presence is not indispensable to a continua-' tion of the suit. While he may be admitted as a defendant, on his own application, to defend in behalf of his trust, such admission does not give him the right to remove to the federal court. Denton v. Baker (C. C. A.) 79 F. 189. Speckert et al. v. German National Bank (C. C. A.) 98 F. 151.

Since a National Bank does not lose its corporate existence upon the appointment of a receiver, a creditor of such bank has the right to sue it in the state court without joining the receiver, and such action is not removable. Moulton v. National Farmers’ Bank (D. C.) 27 F.(2d) 403; Bank of Bethel v. Pahquioque Bank, 14 Wall. 383, 20 L. Ed. 840; Earle v. Pennsylvania, 178 U. S. 449, 20 S. Ct. 915, 44 L. Ed. 1146.

The appointment of the receiver after the filing of the suit against the bank, and the subsequent assumption of custody by him of all of its assets, with statutory duties to perform in reference thereto, did not confer jurisdiction on this court and make the cause removable, since the suit as filed by the plaintiffs was not a controversy between citizens of different states or a case for winding up the affairs of a national bank, and no other federal jurisdictional ground appears.

The motion to remand should be sustained, and it may be so ordered.