author: THORNBERRY, Circuit Judge: CLARK, Circuit Judge

text:
    Samuel COREY, d/b/a Tokyo House Massage Parlor, Plaintiff-Appellee, v. CITY OF DALLAS et al., Defendants-Appellants.
    No. 73-1227.
    United States Court of Appeals, Fifth Circuit.
    April 10, 1974.
    N. Alex Bickley, City Atty., City of Dallas, Lois Bacon, Asst. City Atty., Kenneth C. Dippel, Dallas, Tex., for defendants-appellants.
    Jack Hill, Dallas, Tex., Gerald M. Birnberg, Houston, Tex., for plaintiff-appellee.
    Before THORNBERRY, GODBOLD and CLARK, Circuit Judges.
   THORNBERRY, Circuit Judge:

Appellee Samuel Corey brought this declaratory and injunctive action challenging the constitutionality of Section 25A-15 of the City Code of Dallas, Texas, which makes it unlawful for any person to administer a massage to any person of the opposite sex. The district court upheld Corey’s standing to attack the ordinance and invalidated it on the basis of the Equal Protection Clause. We reverse on the ground that Corey has no standing.

Corey owns and operates the Tokyo House Massage Parlors in San Antonio, Texas, in which female masseuses administer massages to male customers. He wishes to expand his business by opening a similar establishment in Dallas. To do so he would first need to obtain a massage parlor permit from the city. Prior to applying for such a permit, Corey would have to obtain a certificate of occupancy from the city building inspector sanctioning the use of the building for the specific purpose. This would require a substantial prior expenditure on Corey’s part in order to secure suitable premises. Having been informed that the permit would be denied on the basis of Section 25A-15, Corey chose not to pursue the expensive and apparently futile normal course of application but instead brought this action for declaratory and injunctive relief.

The district court found that the ordinance violates the equal protection rights of Corey’s prospective masseuses, since it restricts their opportunity to practice their chosen profession on the basis of sex classification, and it is not justified by any compelling state interest. The court found that Corey had standing to raise the rights of these third parties since the ordinance directly affected his own right to operate his business, thus imposing on him an injury that is not too indirect or remote to support his own standing.

Fthe usual rule in constitutional litigation is that one may not assert the rights of third parties. United States v. Raines, 1960, 362 U.S. 17, 80 S.Ct. 519, 4 L.Ed.2d 524; Tileston v. Ullman, 1943, 318 U.S. 44, 63 S.Ct. 493, 87 L.Ed. 603; Jeffrey Manufacturing Co. v. Blagg, 1915, 235 U.S. 571, 35 S.Ct. 167, 59 L.Ed. 364. There is a narrowly drawn exception to this rule which permits a litigant to raise the rights of third parties if it would be difficult or impossible for them to raise those rights themselves!) Eisenstadt v. Baird, 1972, 405 U.S. 438, 92 S.Ct. 1029, 31 L.Ed.2d 349; NAACP v. Button, 1963, 371 U.S. 415, 83 S.Ct. 328, 9 L.Ed.2d 405; NAACP v. Alabama, 1958, 357 U.S. 449, 78 S.Ct. 1163, 2 L.Ed.2d 1488; Barrows v. Jackson, 1953, 346 U.S. 249, 73 S.Ct. 1031, 97 L.Ed. 1586; Pierce v. Society of Sisters, 1925, 268 U.S. 510, 45 S.Ct. 571, 69 L.Ed. 1070. Although the district court held that this case falls within the exception, we disagree. The ordinance as written applies directly to the masseuses whose rights are allegedly infringed, unlike the statute in Eisenstadt or the restrictive covenant in Barrows. If any masseuses are ever prosecuted under the ordinance, they are free to defend by asserting their own equal protection rights. There is therefore no compelling need to permit Corey to assert their rights at this stage.

It is true that Corey is adversely affected in fact by the ordinance, since it prevents issuance of his massage parlor license. Also his interest in operating his massage parlor is obviously within the zone of interests to be regulated by the ordinance in question. Therefore, he has standing to attack the ordinance as violative of his own rights. Association of Data Processing Service Organizations, Inc. v. Camp, 1970, 397 U.S. 150, 90 S.Ct. 827, 25 L.Ed.2d 184. Nevertheless, he is still precluded from raising the rights of third parties in the absence of a strong reason to depart from the usual rule. This is made very clear by McGowan v. Maryland, 1961, 366 U.S. 420, 81 S.Ct. 1101, 6 L.Ed.2d 393, which held that retail store employees had standing to challenge a Sunday closing law on the basis of the Establishment Clause but no standing under the Free Exercise Clause, since they did not allege that their own free exercise rights were violated and there was no indication that it would have been difficult or impossible for the third parties whose free exercise rights were at stake to have challenged the law. Therefore, despite Corey’s standing to attack this ordinance on the basis of his own rights, he does not have standing to raise the equal protection rights of his prospective masseuses.

Because of our holding on the standing issue, we do not reach the merits.

Reversed.

CLARK, Circuit Judge

(concurring):

I respectfully disagree with the majority that this case should be reversed for lack of standing. I submit the tests were met. It will be difficult if not impossible, for massagists seeking to administer massages to members of the opposite sex to assert that this ordinance infringes upon their constitutional rights unless Corey, or some other present or prospective parlor operator affords them an opportunity to commit the proscribed conduct. Certainly, Corey’s position is sufficiently antagonistic to that of the city to present the dispute in an adversary context capable of judicial resolution. See Part III, State of Florida v. Weinberger, 492 F.2d 488 (5th Cir. 1974), decided this day.

While I would grant standing, I would uphold the validity of the ordinance, and reverse on the merits.

      . Section 25A-15 reads as follows:
      It shall be unlawful for any person to administer a massage as defined in section 25A-1 to any person of the opposite sex; provided, however, that this section shall not apply to any physician or chiropractor, nor shall it apply to any registered physical therapist or registered nurse operating under the direction of a physician.


source: Caselaw Access Project

author: GEWIN, Circuit Judge:

license: Public Domain

text:
    Peter J. BRENNAN, Secretary of Labor, Petitioner, v. SOUTHERN CONTRACTORS SERVICE and Occupational Safety and Health Review Commission, Respondents.
    No. 73-2682
    Summary Calendar.

    United States Court of Appeals, Fifth Circuit.
    April 12, 1974.

      Walter H. Fleischer, Stanton R. Koppel, Stephen F. Eilperin, U. S. Dept. of Justice, Washington, D. C., for petitioner.
    Allen H. Sachel, Sp. Counsel, William McLaughlin, Executive Sec., Occ. Safety & Health Review Comm., Washington, D. C., for respondents.
    Before GEWIN, COLEMAN and MORGAN, Circuit Judges.

       Rule 18, 5th Cir. See Isbell Enterprises, Inc. v. Citizens Casualty Co. of New York et al., 5th Cir. 1970, 431 F.2d 409, Part I.

      . Southern was also cited and penalized $200.00 for failing to report Ramsey’s death to the Occupational Safety & Health Administration within the prescribed period. It did not contest this penalty.

   GEWIN, Circuit Judge:

Pursuant to 29 U.S.C. § 660(b), the Secretary of Labor appeals from a final order of the Occupational Safety & Health Review Commission (the Commission) which found that regulation 29 C.F.R. 1926.105(a) (1973), under which Southern Contractors Service Company (Southern) had been charged with a serious violation, was inapplicable to the facts alleged in the complaint. This regulation provides as follows:

“(a) Safety nets shall be provided when workplaces are moré than 25 feet above the ground or water surface, or other surfaces where the use of ladders, scaffolds, catch platforms, temporary floors, safety lines, or safety belts is impractical.”

It is solely upon an interpretation of the language employed therein that the disposition of this appeal is contingent. The Commission maintains that where the use of one of the safety devices listed in this regulation is practical, then resort to safety nets is not required even though the practical device is not in fact utilized by the employer. Concluding that this construction is infirm, we reverse.

I

The Occupational Safety & Health Act of 1970, 29 U.S.C. § 651 et seq. (1970), was enacted to provide “so far as possible every working man and woman in the Nation safe and healthful working conditions. . . .”29 U.S.C. § 651. To effectuate this benevolent purpose, Congress authorized the Secretary of Labor, charged with enforcing the Act, to “set mandatory occupational safety and health standards. . . .” 29 U.S.C. § 651(b)(3). Employer noncompliance with the standards promulgated by the Secretary may result in the issuance of citations and the imposition of fiscal penalties. See 29 U.S.C. §§ 658(a), 659(a), 666.

The facts which gave rise to the sanctions imposed by the Secretary and subsequently vacated by the Commission are uncontroverted. Southern was engaged in disassembling the structural steel members of a missile launching tower at Launch Complex 34, Cape Kennedy Air Force Station, Cape Kennedy, Florida. Although its employees were required to work at various heights on the 300 foot structure, Southern failed to utilize any of the safety measures prescribed by 29 C.F.R. 1926.105(a). The tragic death of Darrell Ramsey, a Southern employee who fell from an exposed beam on the launching tower, brought Southern’s dereliction to the attention of the Secretary of Labor. An inspection of the missile launching tower by a compliance officer of the Occupational Safety & Health Administration confirmed the allegations of Southern’s noncompliance with 29 C.F.R. 1926.105(a) and inexorably led to the issuance of a citation for a serious violation of the Act and the imposition of a $500 penalty.

Pursuant to section 659(a), Southern sought review of the Secretary’s decision to impose these sanctions. At the proceedings conducted before the Administrative Law Judge, a safety specialist with the Air Force testified, at the behest of the Secretary, that in a dismantling operation such as the one conducted at Launch Complex 34 only safety belts with lanyards could properly protect workers while at the same time afford them the mobility required. Such safety belts, he claimed, would have been the practical safety equipment to utilize. The Administrative Law Judge ascribed paramount significance to this testimony, but much to the Secretary’s chagrin, seized upon it as the rationale for retracting not countenancing the sanctions imposed by the Secretary. His reasoning was as follows:

“The regulation in issue requires safety nets ‘where the use of ladders, scaffolds, catch platforms, temporary floors, safety lines, or safety belts is impractical.’ In other words, safety nets are required only if one of the other safety devices is impractical. The Secretary’s expert witness testified that a safety belt with a lanyard would have been the practical and desired type of safety equipment to have been worn by employees at the time of the accident. As safety belts are one of the itemized types of equipment that, if practical, eliminates the requirement of safety nets, Respondent was not in violation of the regulation relied upon by the Secretary.” (emphasis added)

On appeal, the Commission concurred in the gloss placed on the regulation at issue by the Administrative Law Judge.

II

This case presents a novel issue to this court. In Brennan v. Occupational Safety & Health Review Commission & J. W. Bounds, 488 F.2d 337 (5th Cir. 1973), a panel of this court was confronted with the related but nevertheless distinct issue of whether an employer who utilizes one of the safety devices enumerated in the regulation is amenable to sanctions for failing to employ a more effective device. Acknowledging the ambiguity inherent in the term “impractical”, the court declined to adopt the salutary interpretation of 29 C.F.R. 1926.105(a) pressed upon it by the Secretary. Significantly, however, it assumed that the Commission interpreted the regulation “as equivalent to finding that if ladders, scaffolds, catch platforms, temporary floors, safety lines, or safety belts are used, then a safety net is not required by 1926.105.” (emphasis added). Brennan v. Occupational Safety & Health Review Commission and J. W. Bounds, supra at 338. Thus, while rejecting the Secretary’s broad construction, the panel assumed that the regulation did serve some ameliorative purpose. In the instant case, the Commission seeks to disabuse this court of the aforementioned assumption.

Although agreeing with the panel in Brennan v. Occupational Safety & Health Review Commission and J. W. Bounds, supra, that the term “impractical” is ambiguous, we are constrained to hold that the Commission’s tortuous construction of the regulation cannot be sustained. Since, as was noted earlier, the Secretary is authorized to promulgate regulations, his interpretation is entitled to great weight. See Griggs v. Duke Power Co., 401 U.S. 424, 433-434, 91 S.Ct. 849, 854, 28 L.Ed.2d 158, 165 (1971); United States v. Chicago, 400 U.S. 8, 10, 91 S.Ct. 18, 20, 27 L.Ed.2d 9, 12-13 (1970); Bowles v. Seminole Rock & Sand Co., 325 U.S. 410, 413-414, 65 S.Ct. 1215, 1217, 89 L.Ed. 1700, 1702 (1945). We have held that the promulgator’s interpretation is controlling as long as it is one of several reasonable interpretations, although it may not appear as reasonable as some other. Roy Bryant Cattle Co. v. United States, 463 F.2d 418, 420 (5th Cir. 1972). See also Board of Directors & Officers, Forbes Federal Credit Union v. National Credit Union Administration, 477 F.2d 777, 784 (10th Cir. 1973). In view of the salutary purpose of the Occupational & Safety Health Act, we cannot conclude that the ambiguity in the term “impractical” is so fatal as to warrant condemnation of the Secretary’s interpretation of the regulation as unreasonable.

In contrast, the Commission’s construction would eviscerate the import of the regulation and flout the purposes of the enabling legislation. The Occupational Safety & Health Act was designed to protect the health and safety of workers and to improve physical working conditions on employment premises. See 29 U.S.C. § 651; 1970 U.S.Code Cong. & Admin.News p. 5177. Under the Commission’s interpretation, an employer unsolicitous of the safety of his employees could dodge the Act’s sanctions merely by adducing evidence that a device listed in 29 C.F.R. 1926.105(a) could have been practically utilized. And under this interpretation, the regulation rather than eliciting greater responsiveness on the part of employei’s would condone greater neglect.

Ill

To reiterate, we hold that 29 C.F.R. 1926.105(a) must be read to require an employer to employ either a safety net or one of the other safety devices listed in the regulations, and hence that failure to use any of such devices is a proper predicate for the imposition of sanctions prescribed in the Occupational Safety & Health Act of 1970. The citation issued by the Secretary charged the following violation: “Failure to provide safety nets, safety belts or other appropriate protection for workers exposed to falls of more than 25 feet.” Southern admittedly did not employ safety nets. Evidence having established that it was, in fact, practical to use safety belts, Southern was in violation of the regulation. Accordingly, we reverse the Commission’s order which found 29 C.F.R. 105(a) inapplicable to the facts alleged in the complaint lodged against Southern.

Reversed with directions to reinstate the citation issued by the Secretary.

      . 29 U.S.C. § 660(b) (Supp.1972-73):
      “(b) The Secretary may also obtain review or enforcement of any final order of the Commission by filing a petition for such relief in the United States court of appeals for the circuit in which the alleged violation occurred or in which the employer has its principal office . . . .”

      . We regret that neither the Commission nor Southern has availed itself of the opportunity to file a responsive brief, despite requests by this court to do so. Pursuant to F.R.A.P. 31(c), we are authorized to decide the issues presented without the benefit of oral argument.

      . Such inspections are authorized by 29 U.S.C. § 657(a)(1) & (2) (1972-73 Supp.).

      . 29 U.S.C. § 666 (j) provides that:
      “A serious violation shall be deemed to exist in a place of employment if there is a substantial probability that death or serious physical harm could result from a condition which exists, or from one or more practices, means, methods, operations or processes which have been adopted or are in use, in such place of employment unless the employer did not, and could not with the exercise of reasonable diligence, know of the presence of the violation.”

      . The Commission has adhered to this view in two other cases presented before it. See Secretary v. Drake-Willamette Joint Ventures, OSHRC No. 117, 2 CCH Safety & Health Guide Para. 15,655 (April 18, 1973): Secretary v. Verne-Woodrow Co., OSHRC No. 1607, 2 CCH Para. 16,271 (July 13, 1973), petition for review filed, No. 73-3134 (5th Cir., Dec. 19, 1973). In Secretary v. Verne-Woodrow Co., supra, however, Commissioner Cleary registered a strong dissent grounded upon reasoning similar to that announced in this opinion.


author: GEE, Circuit Judge:

text:
    R. W. NORRIS, Jr., Plaintiff-Appellee-Cross Appellant, v. BOVINA FEEDERS, INC., Defendant-Appellant-Cross Appellee.
    No. 73-2125.
    United States Court of Appeals, Fifth Circuit.
    April 10, 1974.

      A. W. SoRelle, III, H. A. Berry, Amarillo, Tex., Sam Aldridge, Farwell, Tex., for defendant-appellant.
    Walter P. Wolfram, Carroll E. Brown, Amarillo, Tex., for plaintiff-appellee.
    Before COLEMAN, AINSWORTH and GEE, Circuit Judges.
   GEE, Circuit Judge:

In this Texas diversity case, plaintiff R. W. Norris recovered, on jury findings, damages representing lost business profits for wrongful detention of an expensive and highly productive machine, a grain grinder capable of producing 100 tons of ground feed per hour. Norris’ judgment is attacked here by defendant Bovina Feeders, Inc. (Bovina), as awarding damages which are as a matter of law too speculative and uncertain to be proved to that degree of certainty which the law demands, as well as on other grounds. Though the appeal presents close questions, and though the evidence is meager on several significant points, we affirm.

In 1969 R. W. Norris and his brother, Morgan, formed a partnership and went into the business of preparing feed for livestock. Their specialty was grinding grain and hay and cubing alfalfa. This required the use of a large and expensive machine, which we will call Grinder X and which they acquired at some point during the overture to the actions which chiefly concern us. The process which they employed was the grinding of high-moisture grain, either so because green or because reconstituted by the addition of water. During these times, the steam-flaking process, a competitive method for processing grain, was finding increasing favor in the Panhandle of Texas and in adjacent areas of New Mexico where the Norris brothers operated, to such a degree as to threaten the grinding method with obsolescence.

Against this background, word reached the Norrises in 1970 that defendant Bovina, a large feedlot operation located in the Texas-New Mexico border area between Farwell and Bovina, Texas, had decided to contract out its feed-grinding on the stated rationale that cowboys were not grain grinders and experience was needed. They approached Bovina’s then manager and offered their services. After consultation with his board of directors and further negotiations, a verbal bargain was struck under which the Norris brothers were to grind Bovina’s feed requirements for four years, anticipated to exceed fifty thousand tons annually. In consideration of the sixe and duration of the arrangement, the Norris partnership agreed to do the work for a substandard unit price of six cents per hundredweight of feed ground and to purchase Bovina’s feed grinding machine (the Grain King) for twenty thousand dollars. There was testimony that at the time and in the area this was a handsome price indeed for the machine, in view of the inroads being made by the steam-flaking process. Terms of payment were lenient; the price was to be paid in four equal annual increments, without interest, and the Grain King was to remain on Bovina’s premises until paid out. As noted, the agreement was oral. This was, R. W. Norris testified, a large and important job for the partnership, since they had not been in business very long. To be sure to do “the right kind of job” they bought a twenty-thousand-dollar front-end loader, which they had no other use for and would not otherwise have purchased.

Thus'equipped, they fell to and completed the fall grinding season on green grain to the apparent satisfaction of all hands. From there, they took Grinder X with them to Hobbs, New Mexico, to do cubing of hay, leaving the Grain King with Bovina as agreed.

In February, we find them again in the Bovina-Farwell area, preparing to take Grinder X to Washington State to grind and cube alfalfa for export. At this time, Bovina’s manager told them the grain for the spring season was already on contract and would be ready sometime in April. Nothing was said about Bovina’s backing down on the word it had out to the Norrises.

Bovina had decided, however, or decided very quickly after their departure for Washington, to install its own steam-flaking process. About the same time, Bovina engaged a new general manager, Franz Lee Hicks. Hicks located R. W. Norris in Washington State and, according to Norris, gave him to understand that they were through and should come down, pay for the Grain King and get it off Bovina’s premises. Norris personally appealed over Hicks’ head to the president of Bovina but was advised that Hicks was the manager and matters would have to be worked out with him. Financially unable to respond to Hicks’ demand, R. W. Norris returned to work in Washington State and hoped for the best. About this time, Morgan Norris chose his family over the nomadic life dictated by the work of the partnership, which was dissolved. Morgan continued for a time as an employee, and R. W. Norris took over the partnership’s assets and liabilities.

Meanwhile, back at the feedlot, matters with the new steam-flaking installation had gone more slowly than expected. Swallowing hard (presumably), Hicks again located R. W. Norris in Washington, asking him to return to Texas and grind for Bovina temporarily until the new process came on stream. Norris agreed to do so. Nothing was said about the old agreement, and R. W. Norris simply reported to Bovina’s yard ready to go to work, Morgan and another employee accompanying him.

And at this juncture, Norris’ apparently supremely accommodating nature received another test: Hicks told him that Bovina would not allow him to use the Grain King grinder on the temporary job he had returned to do until he obtained and presented for Bovina’s inspection a written “release” from his brother Morgan. What sort of release was envisioned by Hicks’ diktat is the subject of confusion in the record. Morgan Norris testified that he understood Hicks to be demanding that he release Bovina from its four-year contract. And since there was no evidence that Hicks’ demand was made to anyone but R. W. Norris, it being undisputed that Hicks never mentioned it to Morgan directly or asked him to sign any kind of instrument, presumably this represented R. W. Norris’ belief also, communicated to Morgan. Hicks testified, on the other hand, that he merely meant a release from Morgan, a former partner, for the use of the machine by R. W. in his new capacity as sole proprietor. Hicks explained that in requiring the release he was prompted by his concern that Morgan be treated fairly by his brother, and that Morgan could not “come back against” Bovina for letting R. W. use property of the former partnership in fulfilling his temporary grinding contract. At any rate, the release was not forthcoming, the Grain King sat idle, and Norris did the job with Grinder X.

By so doing, he testified, he lost a job which he had in New Mexico, which would have required the use of Grinder X in conjunction with his cubing machine. On his evidence, at this work he would have produced eight to twelve thousand tons of cubes at a profit, according to his cubing experience, of about $3.83 per ton. A choice between the jobs was forced on him by Bovina’s refusal to let him use the Grain King since he did not have the economic resources to acquire a third grinder: “ . . .we was already fully loaded.” Hicks admitted that Norris complained and asked several times to be allowed to use the Grain King, but was refused each time because he did not have Morgan Norris’ written release. In late August of 1971, after he had finished the job with Grinder X, Norris filed this action. Later, he presented Bovina a written bill of sale or gift to him of Morgan’s interest in the Grain King, paid Bovina the balance due on it, and received possession upon receipting for it as intact and in satisfactory condition. Trial to a jury on the above evidence produced a special verdict as follows:

1. R. W. Norris had Morgan Norris’ consent to use the Grain King in performing his temporary grinding job for Bovina in summer 1971.

2. Bovina knew he had it.

3. Despite Norris’ request, Bovina, acting by an officer authorized or apparently authorized to do so, refused and prohibited him from using the Grain King.

4. Norris did not agree or acquiesce in this refusal.

5. Bovina’s refusal proximately caused damages to R. W. Norris.

6. The amount of these was $30,640.-00.

On this appeal, Bovina presents four grounds for reversal, couched in eight points.

The first point asserts that the claim on which Norris recovered, wrongful refusal of the use of the Grain King, was outside the pleadings and pretrial order, so that Bovina lacked fair notice of it. Plaintiff’s second count for relief complained that Bovina converted the Grain King and, asserting that interest from the date of the conversion would not fairly compensate plaintiff, asked for recovery of the loss of its use. The pretrial order defines a claim for “. . . the reasonable value of the use of such grinder which was lost to the partnership and hence to this Plaintiff. . . as a result of Bovina’s actions. These are somewhat elliptical statements of a claim intended as one for damages measured by what plaintiff could have earned elsewhere using Grinder X, which Bovina’s actions required plaintiff to substitute for the withheld Grain King. But it was indeed the Grain King’s use of which Norris was deprived, and he was not obliged to plead the method by which he proposed to measure his damages. We do not think Bovina was misled. Moreover, evidence of the lost New Mexico earnings came in without objection on any such ground, and the issue was, if sketchily pleaded, therefore tried by implied consent. Fed.R.Civ.P. 15(b).

Bovina next asserts that its repeated denial to Norris of the use of the Grain King was not actionably wrongful. Its argument proceeds along lines that a technical conversion was not shown since, having lawful possession, it could not by mere words have done so or, if it did not have possession, its words were of no force and Norris could and should have disregarded them. We are unimpressed. Bovina’s actions seem to fall easily within the language of our own Texas diversity decision, which Bovina cites to us, of Bankers Life Ins. Co. v. Scurlock Oil Co., 447 F.2d 997, 1004 (5 Cir. 1971):

Conversion is defined as the unlawful and wrongful exercise of dominion, ownership or control over the property of another, to the exclusion of the same rights by the owner.

Bovina’s contention based on lawful possession is disposed of by Texas cases cited in the brief, establishing the general Texas rule that one in lawful possession of another’s property may become liable for conversion upon a demand and refusal to deliver. E. g., Hull v. Freedman, 383 S.W.2d 236 (Tex.Civ. App.—Ft. Worth 1964, writ ref’d, n. r. e.); see 14 Tex.Jur.2d 12. The machine was on Bovina’s premises, of which it presumably had effective control, and we view the jury’s finding that Bovina prohibited its use by Norris as supported by the evidence and reasonable inferences therefrom. That Norris, as successor to Norris Brothers, was the Grain King’s owner seems plain: the very instrument which Bovina advances to establish its lawful possession recites a sale to Norris Brothers. It is really undisputed that Hicks, acting for Bovina, gave Norris repeated wrongful orders not to use the Grain King, orders which Hicks expected Norris to obey and which he did obey. This was enough.

Bovina next asserts that Norris is not entitled to recover for any wrong it did, since any done was to the partnership. There is no merit in this contention: the Norris brothers testified with one voice and without dispute that the partnership was dissolved before the last grinding job for Bovina and that Morgan worked that job as his brother’s employee. The wrong was to R. W. Norris.

Bovina’s most serious ground for reversal, and that presenting the close questions, is its claim that lost profits from the New Mexico job foregone are an improper measure of damages: remote, speculative, excessive, and beyond any reasonable contemplation of the parties.

Since Southwest Battery Corp. v. Owen, 131 Tex. 423, 115 S.W.2d 1097 (1938), in which earlier and more restrictive decisions were departed from, it has been the Texas law that lost profits of a business may be recovered as damages if the business is shown to be established and profitable at the time of the tort or breach of contract. The Texas rule, its qualifications, and the authorities establishing it are exhaustively reviewed and set out by Judge (now Justice) Pope in Atomic Fuel Extraction Corp. v. Slick’s Estate, 386 S.W.2d 180 (Tex.Civ.App., San Antonio 1965, writ ref’d, n. r. e.). The rule rests on reasoning that pre-existing profits, in the total context of circumstances, may supply the requisite legal certainty as to both fact and amount of damages, whereas to award as damages the hoped-for profits of a new and unestablished business is to leave too much to conjecture and speculation. It is this Texas rule upon which our inquiry must focus since, as the pretrial order quoted above shows, Norris’ claim was for injury to his business. We therefore lay to one side such Texas authorities as Reid v. El Paso Construction Co., 498 S.W.2d 923 (Tex.Sup.1973), also by Justice Pope, which we read as requiring specific notice to the tortfeasor of unusual agreements or particular arrangements outside the regular course of a business before he can be charged with damages for frustrating them. This rule would govern had Norris sued, for example, to recover profit lost because of actions by Bovina which interfered with an advantageous sale of the Grain King, arranged by him and unknown to Bovina, and would doubtless be fatal to such a claim.

The jury was carefully instructed by the court below to find damages vel non, and only such damages as might have been reasonably foreseen as naturally flowing from Bovina’s actions and were ascertainable with reasonable certainty, without speculation. Was there evidence meeting Boeing Co. v. Shipman, 411 F.2d 365 (5th Cir. 1969), standards that supports the verdict? The proof upon which their finding rests is somewhat slender, but essentially undisputed. R. W. Norris testified that, had his business not been crippled by Bovina’s wrongful refusal to let him use the Grain King, he would have been able to do another specific job which he had arranged for Grinder X. He had experience in such work, and his experience indicated a cost per unit processed of $8.17 and a return of $12.00. He estimated the lost job at eight to twelve thousand such units. No one contradicted him or seriously disputed his evidence, and if believed, it certainly established that interest on the value of the Grain King for the summer of 1971 would not adequately compensate his loss.

There was evidence that his business was established. At the time of the tort he had been in it since 1969 and had sufficient resources to acquire the expensive front-end loader for the Bovina job. Bovina made no complaint of the manner in which he performed such of the rather large job as he was permitted to perform. That such claims tend to be generated by disputes such as this is a fact familiar to men of ordinary experience. Certainly Bovina knew that he employed his equipment elsewhere when not in their service: its manager Hicks located him at work in Washington to recall him to Texas. Thus, though Norris’ case would not have suffered from more ample proof, we think it was within the jury’s province to conclude Bovi-na could reasonably have foreseen that by wrongfully immobilizing one-half of the grinding equipment of this feed-grinding business it was costing it some amount of profit. And, though Norris admitted he was financially straited by Bovina’s actions, his testimony was that he “was fully loaded” — not that he was sinking.

We are somewhat uncertain whether a Texas court would require stringent proof of general profitability of a business such as Norris’, which was plainly a going concern and known to be such by the tortfeasor, and where the proof was, though meager, clear that the specific job lost was in the regular course of business and would have been profitable — profitable enough, from the amount the jury found, to convert a loss year into a gainful one for many small enterprises such as his. And though we hold that the evidence was sufficient— barely sufficient — to support a conclusion of general establishment of a going concern, we indulge as an additional ground in an Erie guess that stringent proof would not be required in these circumstances falling, as they may be seen, somewhere in the area between the rules of the Texas Reid and Atomic Fuel decisions cited above. In our guess, we are comforted by Commercial Credit Equipment Corp. v. Elliott, 414 S.W.2d 35 (Tex.Civ.App.—Eastland 1967, writ ref’d n. r. e.), where cotton harvesting equipment was wrongfully sequestered and profits for loss of its use were allowed. Elliott was regularly in the cotton harvesting business, and there was clear testimony that he lost a profitable season by the defendant’s wrongful act in depriving him of his equipment. If there was evidence in the record of the general profitability of Elliott's business, the opinion lays no emphasis on it. Stressed instead is that he was regularly in the cotton harvesting business, and that the work lost would have been profitable. And Elliott, like Norris, was financially unable to procure other equipment — or even to make a replevin bond. We conclude that the damages shown by Norris were not fatally remote or speculative.

The argument that they were excessive observes that Norris was awarded more for loss of the Grain King’s use than the machine itself was worth, and points to other evidence which might have moved the jury to award a lesser amount. As noted above, however, there was specific testimony which supported the damages found and which would have supported more. And while the value of the thing withheld or converted doubtless has some rough relevance to calculating damages for loss of its use, there is no necessary logical connection between the two. An iron logic tells us that a surgeon may be deprived of a five-hundred-dollar fee by withholding his five-dollar scalpel, while experience observes that he probably has or could easily get a replacement for such an inexpensive instrument. Here, the "instrument” was expensive, and there was undisputed testimony that Norris was financially unable to replace it. We cannot say that the damages found by the jury were excessive.

The action of the court below in directing a verdict for Bovina on the claim grounded in breach of the four-year oral grinding contract must also be affirmed. Our Circuit’s view of the applicable Texas law, expressed in 21 Turtle Creek Square, Ltd. v. New York State Teachers’ Retirement System, requires an estoppel to invoke the Statute of Frauds grounded in a promise, additional to the oral agreement sought to be enforced, to reduce it to writing. No evidence of any such promise appears in this record.

Affirmed.

      . Once known as Bull Stop, but since elevated and Latinized.

      . Bovina does not seriously dispute that the agreement was as stated, relying instead on the Statute of Frauds. It appears that the contract was not performable within one year; R. W. Norris testified that the Grain King was to remain on Bovina’s premises for the four years of the contract and that the $5,-000 annual payment was to be withheld by Bovina from amounts due for grinding services.

      . Hicks, who was acting on legal advice at this point, doubtless felt no need to have R. W. Norris release the contract, having entered into a new and shortened agreement with him on the subject matter.

      . Obviously computed by multiplying $3.83, Norris’ estimated profit per ton on the lost New Mexico cubing job, by 8,000, his lowest figure for the tonnage he would have produced there.

      . Though the “no reversible error” writ notation of the Texas Supreme Court in Elliott indicates that Court’s want of satisfaction that the opinion has correctly declared the law, it also indicates that the result presents no error meriting reversal. Thus, the allowance of lost profits as damages in the case, a major part of that result, can scarcely have been thought erroneous.

      . 432 F.2d 64 (5th Cir. 1970).


author: TUTTLE, Circuit Judge:

text:
    EMMCO INSURANCE COMPANY, Plaintiff-Appellant, v. WALLENIUS CARIBBEAN LINE, S.A., Defendant-Third Party Plaintiff-Appellee, v. GULFSTREAM SHIPPING CORPORATION, Third Party Defendant.
    No. 73-1895.
    United States Court of Appeals, Fifth Circuit.
    April 12, 1974.

      F. Lawrence Matthews, William C. Cramer, Miami, Fla., for plaintiff-appellant.
    Frank J. Marston, Miami, Fla., for Wallenius Caribbean Line.
    Mercer K. Clarke, Miami, Fla., for Gulfstream Shipping.
    Before TUTTLE, GEWIN and RONEY, Circuit Judges.
   TUTTLE, Circuit Judge:

This is a suit for damages for breach of contract by the insurer, Emmco Insurance Company, who has been subrogated to the rights of the consignee, Quality Sales Corporation (Quality), against the carrier, Wallenius Caribbean Line (WCL).

The district court held under the Carriage of Goods by Sea Act, 46 U.S.C.A. § 1300 et seq., that the plaintiff had failed to carry its burden of proof (1) on liability, by failing to demonstrate that the partial thawing of the cargo resulted in spoilage and unmarketability, and (2) if liability was proven, of establishing the amount of damages by showing the difference between the fair market value of the cargo at destination had there been no spoilage and the market value as damaged. In other words, the consignee caused the cargo to be destroyed because of its deteriorated condition. The insurer reimbursed Quality $15,902.95 for the cargo pursuant to its insurance policy. In the subsequent suit by the insurer against the carrier, the district court found that there had been no proven damage. Plaintiff-appellant asserts that the district court’s decision was “clearly erroneous.”

FACTS

The cargo, 2,475 cartons of frozen french fried potatoes, was stowed in two refrigerated trailers which were placed aboard a freighter operated by WCL in August, 1971 at Port Everglades, Florida. On August 15, 1971, the trailers containing the cargo were unboarded in St. Thomas, Virgin Islands. One trailer was delivered to Quality on August 16, while the other remained in the trailer holding area. Because of the thawed condition of the cargo, discovered by Quality’s employees while unloading cartons on August 16, a marine surveyor, Mr. Robert Crytser, was engaged by Quality to ascertain the fitness for consumption of these potatoes. On August 17, Mr. Gonzalez Sibila, a marine surveyor from San Juan, Puerto Rico, was brought in by WCL to inspect the cargo. Also, on that date Mr. Edward Buzzell, an inspector from the Department of Health, Bureau of Environmental Sanitation, inspected and determined that the cargo should be condemned. A telephone offer to purchase the shipment sight unseen by a salvage broker in San Juan, Puerto Rico, for 40% of the invoice value of the cargo was allegedly made but not acted upon by Quality.I. The french fried potatoes were subsequently destroyed.

Appellant maintains that if the hearsay statements, improperly admitted, are subtracted from the evidence at trial, the district court’s decision is “clearly erroneous.” Fed.R.Civ.P. 52(a). An examination of the properly admissible evidence reveals that the court’s findings “are without adequate eviden-tiary support in the record” and leaves us with a “definite and firm conviction” that the district court was mistaken. Chaney v. City of Galveston, 368 F.2d 774, 776 (5th Cir. 1966).

LAW

Appellant excepts to two conversations, both testified to by Sibila, WCL’s marine surveyor, as inadmissible hearsay. Fed.R.Civ.P. 43(a). Each statement was accepted by the trial court, over appellant’s objections, for the truth of the information in the conversation.

The first conversation was an alleged offer, which Sibila stated a San Juan salvage broker conveyed to him, to salvage the cargo for 40% of its invoice value. The trial court inferred from this statement:

“The court finds that the amount does, not establish the fair market value of the cargo since the offer was submitted sight unseen and by an individual who specializes in the purchase and sale of merchandise on a salvage basis. The court, however, does find that said offer constitutes credible evidence that the cargo was marketable and not unfit for human consumption as alleged by the plaintiff.”

Hearsay is commonly defined as an out of court statement accepted for the truth of what the statement asserts. McCormick § 226; 5 Wigmore § 1361. This statement was made by an out of court declarant. One of the inferences that arises from its assertion is that the french fried potatoes have value as a food product, i. e. are edible. Since the court admitted it for that purpose, it erred. Sharp v. United States, 191 U.S. 341, 349, 24 S.Ct. 114, 48 L.Ed. 211 (1903); United States v. Carter, supra; Farmers Union Federated Co-op. Ship. Association v. McChesney, 251 F.2d 441, 446-447 (8th Cir. 1958); Carantzas v. Iowa Mutual Insurance Co., 235 F.2d 193, 196-197 (5th Cir. 1956).

The second conversation is contended to constitute hearsay within hearsay. The witness Sibila stated:

“Yes, there was one Mr.' — there was a health inspector from the Virgin Islands Department of Health who had seen the merchandise and acting upon request of the consignees made arrangements for destruction of the goods in the Virgin Islands.”

The district court accepted this as true: “Credible evidence was introduced, however, that the purported order of condemnation was issued at the request of Quality Sales Corporation.” Appellant argues that not only the statement by Sibila of what Buzzell said is hearsay, but that what Buzzell said that the consignee said totals double hearsay.

The district court clearly erred in admitting this twice handed-down statement. General Tire of Miami Beach v. NLRB, 332 F.2d 58, 61 (5th Cir. 1964). Not only was there no opportunity to cross-examine, but the alleged declarant, an employee of Quality, is not even identified. Appellant had no way of attempting to locate the declarant for trial.

The appellee does not offer, and we cannot discover, a rebuttal, in the form of an exception to the hearsay rule or other rationale, to appellant’s hearsay objections. Appellee submits, rather, that the court had correctly concluded that appellant had failed in his burden of proof on the issue of liability before the court considered the damaging hearsay statements. Therefore, it is necessary next to re-examine the evidence on liability, excluding the hearsay.

In reviewing a trial court’s determination, an appellate court is bound by the standard of Fed.R.Civ.P. 52(a):

“Findings of fact shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the trial court to judge the credibility of the witnesses.”

However, the presumptions under this rule normally accorded the trial court’s findings are lessened where the evidence consists of documentary evidence, depositions, and “situations where credibility is not seriously involved or, if it is, where the reviewing court is in just as good a position as the trial court to judge credibility,” 5A Moore’s Federal Practice 52.04 (2d Ed. 1969).

The evidence at trial consisted almost totally of depositions and documents. The components of the evidence on the issue with which we are concerned, except for the minor testimony of Mr. Pedrito Francois, the Director of the Bureau of Environmental Health for the Virgin Islands, are depositions and documents. In Sicula Oceanica, S. A. v. Wilmar Marine Engineering and Sales Corp., 413 F.2d 1332 (5th Cir. 1969), an admiralty suit involving similar types of evidence, this Court stated:

“This action in admiralty was tried without a jury and was submitted to the district court entirely on depositions and documents. The appellant’s burden, under Fed.R.Civ.P. 52(a), of showing that the trial judge’s findings of fact are ‘clearly erroneous’ is not as heavy, therefore, as it would be if the case had turned on the credibility of witnesses appearing before the trial judge. Galena Oaks Corp. v. Scofield, 5 Cir. 1954, 218 F.2d 217. Caradelis v. Refineria Panama, S. A., 5 Cir. 1967, 384 F.2d 589.” Id. at 1333-1334, n. 2.

From a reading of the Carriage of Goods by Sea Act, 46 U.S.C.A. § 1300 et seq., and the cases dealing with this Act, it is clear that appellant could establish a prima facie case merely by proof of receipt of the cargo by the carrier in good condition and delivery at destination damaged. Compagnie De Navigation v. Mondial United Corp., 316 F.2d 163 (5th Cir. 1963); M. W. Zack Metal Co. v. S.S. Birmingham City, supra, 311 F.2d at 337; Daido Line v. Thomas P. Gonzalez Corp., 299 F.2d 669, 671 (9th Cir. 1962); Interstate Steel Corp. v. S.S. “Crystal Gem,” 317 F.Supp. 112, 118 (S.D.N.Y.1970). Introduction of the clean on board bill of lading by appellant satisfies the showing of good order of the cargo at the time of shipping. 46 U.S.C.A. § 1303(4); Compagnie De Navigation v. Mondial United Corp., supra, 316 F.2d at 172-173. The pertinent issue concerning liability on appeal, therefore, is whether the partial thawing of the cargo caused total loss or damage to the cargo.

On this issue, the district court held: “The court concludes that while the condition of this cargo upon receipt of Quality Sales Corp. may have been different from the condition of the cargo at the time it was loaded into the trailers at Port Everglades, Florida, this change or difference did not result in actual damage to the cargo nor monetary damage to Quality Sales Corp.”

To summarize more specifically, the evidence of unmarketability consisted of an exhibit of the Health Department’s report by their inspector Buzzell declaring the french fries inedible, and the deposition of Quality’s marine surveyor, Cryt-ser, supporting this conclusion. On the side of marketability, the evidence was comprised of the testimony of WCL’s marine surveyor, Sibila, stating that the potatoes were uncontaminated and if refrozen, would be edible, and the hearsay salvage offer.

Having .found the salvage offer to be hearsay, the district court’s decision cannot be underpinned by its support. Concerning the testimony of both marine surveyors, there appears to be a question of whether they were qualified as experts on the issue of the fitness for human consumption of the french fired potatoes. Even allowing their testimony weight, their contradictory conclusions cancel out each other. This leaves the document of the Health Department which describes the potatoes as: “French fries received soft in texture, watery, some moldy. Unfit for human consumption. To be dumped at the municipal dump.” Even if the weight of this document is discounted as substantially as the district court did, the document would appear to be sufficient evidence on which to base a conclusion of appreciable damage. Shell v. Parrish, 448 F.2d 528, 530-531 (6th Cir. 1971); Sabatino v. Curtiss National Bank of Miami Springs, 415 F.2d 632 (5th Cir. 1969), cert. denied, 396 U.S. 1057, 90 S.Ct. 750, 24 L.Ed.2d 752 (1970). However, the court’s view of this document was too jaundiced. This document was properly admitted under the business record exception to the hearsay rule, 28 U.S.C.A. § 1732. The district court stated that there is no indication in the document that Mr. Buzzell, its author, saw the cargo. This is an erroneous presumption. Once the foundation was properly laid by Mr. Francois, the Director of the Bureau of Environmental Health, indicating that the regular business course was for the inspector to examine the cargo before issuing such a document, and since the document itself describes the purported condition of the cargo, the connotation must be that Buz-zell did inspect the cargo. Cf. Sabatino v. Curtiss National Bank of Miami Springs, supra, 415 F.2d 632.

The auxiliary issue is whether appellant established the amount of damages. This amount, as the district court correctly concluded, is the difference between the fair market value of the cargo in sound condition at its destination and the fair market value in its damaged state. Holden v. S. S. Kendall Fish, 395 F.2d 910 (5th Cir. 1968); Weirton Steel Co. v. Isbrandtsenmoller Co., 126 F.2d 593, 594 (2d Cir. 1942). Cf. Zajicek v. United Fruit Co., 459 F.2d 395, 402-403 (5th Cir. 1972). While the condemnation of the french fried potatoes is proof that the cargo was a complete loss in the Virgin Islands, the appellant still had to show, the fair market value of the cargo in sound condition. The district court found that some evidence, in the form of the invoice of the cargo which reflected the price paid by the consignee, was introduced on the issue of the fair market value, but concluded that this was not sufficient. Since there appears to be no readily available market quotation on french fried potatoes for the Virgin Islands, we are unable to understand why this was not competent evidence on the issue of market value. This Court rejected in Holden v. S. S. Kendall Fish, supra, 395 F.2d 910, the invoice value as market value because it was obvious that the market at the port of destination had dropped considerably. We pointed out under the Act that: “The carrier is not and should not be the guarantor of the ups and downs of commodity prices,” and the “Courts have consistently held that COGSA seeks the economic realities of the loss rather than the contractual bargain.” 395 F.2d at 912-913. Here, there was no indication in the record, such as a fluctuating market, that undermines the valuation by invoice; no hint that more than actual damages would be included in the invoice value.

While the duty to mitigate damages lay with Quality, the burden to show failure to mitigate is upon the appellee. 5 Corbin On Contracts §§ 1039, 1041 (1964). The testimony of Francois, the Director of the Bureau of Environmental Health, revealed that Quality was free to transport the cargo out of the Virgin Islands. The hearsay statement by Sibila concerning the alleged offer from a salvage broker in Puerto Rico was inadmissible to prove this failure. The appellee made no effort to depose or to present at trial the alleged salvage broker. The appellee has failed to satisfy its burden of proof of failure to mitigate damages.

CONCLUSION

The district court erred by admitting damaging hearsay, by taking an erroneous legal view of the Health Department’s document admitted under the business records exception to the hearsay rule, and by giving insufficient weight to the invoice value. Since we are unable to determine what the court’s judgment would have been but for these errors, we remand for its further consideration.

The judgment of the trial court is reversed and the case is remanded for further proceedings not inconsistent with this opinion.

      . During the trial, defendant, WCL, and third-party defendant, Gulfstream Shipping-Corporation, arrived at a settlement of their dispute and the third-party complaint was dismissed.

      . The record indicates that while the french fried potatoes had been found unfit for consumption in the Virgin Islands, the potatoes might have been marketable in some other port.

      . Since Sibila was a party to the conversation, his testimony is properly admissible to prove there was such a conversation. But when the testimony is accepted to prove the truth of the inferences arising from the statement, i. e. that an offer was in fact made, or that the cargo was worth 40% of its invoice value, or that the cargo had value, then the hearsay rule is invoked. United States v. Carter, 491 F.2d 625 (5 Cir. 1974).
      The main justification for excluding hearsay is lack of opportunity for the adversary to cross-examine the out of court declarant. McCormick § 224; 5 Wigmore § 1362. In other words, cross-examination in this case could have brought out exactly on what factual basis the salvage broker made the alleged offer, e. g. merely salvage speculation, actual first hand knowledge of the edible quality of the potatoes, the opinion of Sibila. The court could have then better judged the weight to which the statement was entitled.

      . This Court phrased a workable “clearly erroneous” formula in Chaney v. City of Galveston, supra, 368 F.2d at 776:
      “A finding is clearly erroneous when, although there is evidence to support it, the reviewing court on the entire evidence is left with a definite and firm conviction that a mistake has been committed. . . . It is well settled that in order for a reviewing court to set aside findings of fact by a trial court sitting without a jury, it must be clearly demonstrated that such findings are without adequate evidentiary support in the record, or were- induced by an erroneous view of the law, and the burden of showing that the findings are clearly erroneous is on the one attacking them.”

        See United States v. United States Gypsum Co., 333 U.S. 364, 68 S.Ct. 525, 92 L.Ed. 746 (1968).

      . United States v. Stringfellow, 414 F.2d 696, 699 (5th Cir. 1969); A. J. Industries, Inc. v. Dayton Steel Foundry Co., 394 F.2d 357, 360-361 (6th Cir. 1968); Caradelis v. Refineria Panama, S. A., 384 F.2d 589, 593-594 (5th Cir. 1967); M. W. Zack Metal Co. v. S. S. Birmingham City, 311 F.2d 334, 337-338 (2d Cir. 1962); Galena Oaks Corp. v. Scofield, 218 F.2d 217, 219 (5th Cir. 1954). Contra, Custom Paper Products Co. v. Atlantic Paper Box Co., 469 F.2d 178, 179 (1st Cir. 1972).

      . Because the events occurred in the Virgin Islands and the trial was in Florida, witnesses could not be subpoenaed. Therefore, the attorneys deposed all of the Virgin Island witnesses.

      . The Act places an extraordinary duty on the carrier as bailee, who has possession of the goods during transit. In consequence, once plaintiff has made this initial showing, the burden of the loss which the carrier cannot bring within an exception of the Act, he must bear. Compagnie De Navigation v. Mondial United Corp., supra, 316 F.2d at 169.

      . The trailers were discharged from the ships on August 15th. There was testimony at trial concerning the malfunctioning of the refrigeration units of the trailers in which the potatoes were stored and transported. A mechanic had been called to repair the trailers on August 17th.
      Quality received delivery of one trailer on August 15tli at which time it called in a marine surveyor. WCL sent over a marine surveyor on August 17th, which was also the date of the inspection by the Health Department. There was testimony by the defendant’s marine surveyor that if the potatoes had been maintained at the correct refrigerated temperature during transit, forty-eight hours, if not longer, was the minimum thawing time before damage. From this evidence, we assume that the time lapse or the responsibility for refrigerating the potatoes during this time as bearing on liability, had been settled.

      . Both parties objected to the respective testimony of the marine surveyor of the other party on this ground. And the appellant alleged in its motion for new trial that the court had found both surveyors unqualified on this point. The exact ruling of the trial court and whether the trial court relied on their testimony in determining this issue of fitness for human consumption is unclear from the record. On remand, the court can clarify its ruling.

      . The district court may, as it did, accept the other inconsistencies in the document to undermine its credibility. However, the appellant was able to explain away several of these discrepancies.

      . The appellant, in order to establish the amount owed, introduced the bill of lading as to the cost of ocean freight and insurance, the invoice of the goods shipped ($12,605.22) as to the market value of the potatoes, a bill from Charlie Trucking Service ($250) for hauling the cargo to the municipal dump for destruction, and a stipulation that the invoice value be reduced by the price of 35 cartons ($150) omitted from shipment.

      . Other courts in Carriage of Goods by Sea Act cases have utilized the invoice value for market value in order to compute damages. Elia Salzman Tobacco Co. v. S. S. Mormacwind, 371 F.2d 537, 539-540 (2d Cir. 1967) (tobacco); Weirton Steel Co. v. Isbrandtsenmoller Co., supra, 126 F.2d at 594 (tin plate).

      . There was some mention of a possible shipping strike which would have made importation more difficult. But this, if true, would seem to increase the market price in the Virgin Islands above the present invoice value of the cargo.


author: WISDOM, Circuit Judge: GEE, Circuit Judge

text:
    CREME MANUFACTURING CO., INC., Plaintiff-Appellee-Cross Appellant, v. UNITED STATES of America, Defendant-Appellant-Cross Appellee.
    No. 73-1609.
    United States Court of Appeals, Fifth Circuit.
    April 15, 1974.
    Rehearing Denied June 25, 1974.

      Scott P. Crampton, Asst. Atty. Gen., Meyer Rothwacks, Atty., Richard W. Perkins, Tax Div., Dept, of Justice, Washington, D. C., Lee H. Henkel, Jr., Chief Counsel, IRS, Washington, D. C., Lynn Ross, Jr., Tax Div., Dept, of Justice, Dallas, Tex., Roby Hadden, U. S. Atty., Tyler, Tex., for defendant-appellant.
    Allen E. Pye, J. Robert Dobbs, Jr., Tyler, Tex., for plaintiff-appellee.
    Before WISDOM, AINSWORTH and GEE, Circuit Judges.
   WISDOM, Circuit Judge:

The question for decision is whether the taxpayer’s excise tax liability should be based on the price at which it sold its product to a closely related promotion and sales corporation or on a constructive price, determined by the Internal Revenue Service, based on the price at which the related corporation sold the product to independent wholesalers.

Creme Manufacturing Company, Inc., the taxpayer, instituted this action in the district court to gain a refund of approximately $2,500 for overpayment of federal excise taxes. The United States counterclaimed for additional taxes, interest, and penalties, totalling almost $140,000, for the period July 1, 1964, through December 31, 1968. The Government contended that the taxpayer sold items subject to the excise tax “(otherwise than through an arm’s length transaction) at less than the fair market price”, 26 U.S.C. § 4216(b), and that the taxpayer’s federal excise tax liability was correctly determined by the Government on the basis of a higher “constructive sales price”. The district court dismissed the taxpayer’s complaint and held that the constructive price was properly the basis of tax liability for the period July 1, 1964, through April 30, 1968, but that the actual price charged was the correct basis after that date. We affirm the dismissal of the complaint and the district court’s holding with regard to the earlier period. We reverse and remand with regard to the later period.

. Nicholas Creme and his wife, Cosma Creme, organized Creme Lure Company in 1953 to manufacture and sell artificial fishing lures, primarily plastic “worms” developed by Nicholas Creme. Creme Lure paid a ten percent excise tax imposed on artificial fishing lures by 26 U.S.C. § 4161. The tax was based on the price charged by Creme Lure to wholesale distributors, generally 50 percent of the suggested retail price, less a standard discount of ten percent and, in some cases, additional advertising and volume discounts.

In 1961 the Cremes organized Creme Manufacturing Company, the taxpayer in the instant case, to conduct the manufacturing operations. Creme Lure thereafter limited its activities to promoting and selling finished products. The taxpayer sold 97 percent of its products to Creme Lure. Although maintaining their own books and bank accounts, both companies operated from the same premises, which were owned by Creme Lure, and shared certain employees.

Throughout the period in question (July 1, 1964-Deeember 31, 1968), Nicholas and Cosma Creme each owned 50 percent of Creme Lure. Creme Manufacturing was initially owned by Nicholas (36%), Cosma (36%), their three children (22%), and unrelated employees (6%). In January 1968 Nicholas and Cosma reduced their ownership interests in the taxpayer to 25 percent each, increasing the control of their two sons, Nicholas Jr. and Michael, to 19 percent and 18 percent, respectively. On May 1, 1968, ownership of Creme Manufacturing was transferred exclusively to Michael and Nicholas Jr., each taking a 50 percent interest.

With its creation in 1961, Creme Manufacturing became subject to federal excise taxes, and Creme Lure’s excise tax liability ceased. Although Creme Lure continued to sell to wholesalers for approximately 40 percent of the suggested retail price, Creme Manufacturing sold to Creme Lure at a price 25 percent of the list price. The taxpayer paid excise taxes based on this latter price.' But the Internal Revenue Service refused to permit the creation of Creme Manufacturing to reduce its tax revenue. The Service assessed additional taxes computed under Section 4216(b) of the Internal Revenue Code of 1954, based on the price charged by Creme Lure to independent wholesalers.

The taxpayer’s accountant testified at trial that he set the price charged Creme Lure at 25 percent of list because this was the price at which other, independent manufacturers offered to produce lures for Creme Lure. Another witness, in the business of manufacturing prepackaged, ready-to-sell lures for Bommer Bait Company, testified that he charged Bommer approximately 25 percent of list price.

The only issue before us on this appeal is whether the taxpayer’s federal excise tax liability should be based on a constructive price determined by the Internal Revenue Service under Section 4216(b). Ordinarily, federal excise tax liability is computed on the basis of the actual price charged by the manufacturer. But where the article in question is “sold (otherwise than through an arm’s length transaction) at less than the fair market price”, Section 4216(b) authorizes the Internal Reevnue Service to compute tax liability based on a constructive price. 26 U.S.C. § 4216(b). The criteria for the imposition of a constructive price are cumulative. Use of a eonstruc-tive price on which to base tax liability is authorized only if the article is sold neither through an arm’s length transaction nor at a fair market price.

By permitting the Internal Revenue Service to impose a constructive price, Congress sought to prevent taxpayers from reducing their excise tax liability by charging artificially low prices to related buyers who then, without excise tax liability, might obtain the market price from independent buyers. By such a scheme, were it not for Section 4216(b), taxpayers could reduce their taxes below those of their competitors and eventually emasculate the excise tax. The United States urges on this appeal that what is really behind this provision is a congressional objective to prevent taxpayers from creating a new, lower tax base by dividing their manufacturing and selling operations into separate but related corporate entities. We are of the opinion, however, that so long as the price charged by a manufacturing corporation to a related sales corporation may be proved to be a true representation of the article’s worth at that time, that price may serve as the base for federal excise taxes. We find no support for the Government’s position in the legislative history of Section 4216(b). Furthermore, the Internal Revenue Service itself has recognized instances where taxpayers may reduce their excise taxes by separating manufacturing and sales functions into distinct but related corporations. In Revenue Ruling 69-568, 1969-2 Cum.Bull. 209, the taxpayer manufactured articles subject to the excise tax. It sold the articles to independent dealers; it sold the idéntical articles to its wholly-owned sales and distribution subsidiary, at the same prices charged the independent dealers. The Service held that, because the prices charged to independents were the same as those charged to the taxpayer’s subsidiary, the intercompany sales prices were the proper bases for the excise tax. The Government concedes here that “a different question would be presented” if the taxpayer sold lures to unrelated, independent distributors at the same prices it sold to Creme Lure. Thus we find the Government’s contention that we should establish a special test for related manufacturers and distributors singularly unpersuasive.

We see no reason to distinguish the taxpayer in the instant case from any “private brand” manufacturer. Instead of promoting and selling its product to the public, a private brand manufacturer makes articles under the vendee’s brand name, leaving most of the advertising, selling, and distribution costs to the vendee. Because it incurs fewer expenses, the private brand manufacturer can sell for a lower price than the “full service manufacturer”, who must bear costs other than manufacturing. Consequently, if the excise tax is based on the actual price charged, the private brand manufacturer will pay a lower excise tax.

Both the Internal Revenue Service and the courts have recognized that the price charged by private brand manufacturers may legitimately serve as the base for excise taxes. See Rev.Rul. 63-238, 1963-2 Cum.Bull. 519; Shakespeare Co. v. United States, 1969, 419 F.2d 839, 189 Ct.Cl. 411, cert. denied, 400 U.S. 820, 91 S.Ct. 37, 27 L.Ed.2d 47. We see no reason to apply different standards of tax liability to a private brand manufacturer who sells to independent, unrelated distributors and to one who sells only to related distributors. Both are under the same requirements. If the Internal Revenue Service assesses a deficiency on the basis of a constructive price because the sale from the private brand manufacturer to the distributor is neither at arm’s length nor at a fair market price, the taxpayer must show that the Service’s determination was incorrect. Cf. Holland v. United States, 1954, 348 U.S. 121, 126, 75 S.Ct. 127, 99 L.Ed. 150. There is nothing per se improper, therefore, with splitting manufacturing and selling functions into distinct corporations. And, furthermore, we consider the motivation of the taxpayer to be irrelevant. Courts have long held that a taxpayer may arrange its business affairs with an eye toward the tax consequences and that it need not maintain a corporate structure so as to pay the highest taxes. See Buffalo Meter Co., 1948, 10 T.C. 83, 89; Seminole Flavor Co., 1945, 4 T.C. 1215, 1235.

The arm’s length and fair market criteria are interrelated. Both are directed to ensuring that the price on which the excise tax is based represents a bona fide expression of what the article is in fact worth. If the taxable transaction is at arm’s length, the price charged and paid is taken to be an accurate representation of the true worth; that is, the fair market price. But if the transaction is not at arm’s length, some other manifestation that the price is nonetheless an accurate portrayal of the article’s worth is required. The price must be more than “fair”; it is not enough that the price compensate the manufacturing company for costs— and even provide a profit. The price must be a “market” price; it must be the price which independent buyers in arm’s length transactions would be willing to pay.

The first question we address is whether the sales by Creme Manufacturing to Creme Lure were at arm’s length. The district court found that sales made before May 1, 1968, when Nicholas Creme and his wife, Cosma, owned and controlled both Creme Manufacturing and Creme Lure, were not at arm’s length. But the court found that, because Nicholas and Cosma severed all control and ownership on May 1, all sales made thereafter were arm’s length sales. In emphasizing ownership and control to the exclusion of other factors in its examination of sales made after May 1, the district court reached an incorrect result. We believe that the evidence clearly establishes that none of the transactions between Creme Manufacturing and Creme Lure in the period in question, either before or after May 1, may properly be considered arm’s length.

To be at arm’s length under Section 4216(b), a transaction must be between parties with “adverse economic interests”. Campana Corp. v. Harrison, 7 Cir. 1940, 114 F.2d 400, 408, overruled on other grounds, F. W. Fitch Co. v. United States, 1945, 323 U.S. 582, 65 S.Ct. 409, 89 L.Ed. 472. Each party to the transaction must be in a position to distinguish his economic interest from that of the other party and, where they conflict, always choose that to his individual benefit. In other words, if the seller would hesitate to raise the price for the sole reason that it would hurt the buyer, the parties are not at arm’s length. Overlapping ownership and control are indicators that the parties may not be adverse, see e. g. Campana Corp. v. Harrison, supra, but the absence of these factors does not automatically signal an arm’s length transaction. We must examine the entire relationship of the parties.

Before Cosma and Nicholas Creme gave up their interests in Creme Manufacturing on May 1, 1968, the corporations were commonly owned and controlled. The taxpayer’s argument to the contrary notwithstanding, we do not believe there can be serious question as to the non-arm’s length nature of the relationship of Creme Lure and Creme Manufacturing during that period. The period after April 30, 1968, presents a more difficult question. Viewing the totality of the relationship, however, we conclude that the corporations did not exhibit adverse economic interests. The operational ties between the two corporations were tight. The corporations shared the same facilities and some of the same employees. They shared the same risks as to sales made by Creme Lure (Creme Manufacturing did not receive payment until Creme Lure was paid by the independent distributors). Creme Lure held itself out to the public as the manufacturer, and Creme Manufacturing used the stationery of Creme Lure. Moreover, neither the formation of Creme Manufacturing nor the bowing out of the elder Cremes made any substantial change in the day-to-day activities of producing and selling. Finally, we cannot ignore the familial bonds between the corporations. As of May 1, 1968, the parents owned Creme Lure; their sons owned Creme Manufacturing. It remained essentially a family enterprise, with a common goal of enhancing the family fortunes. Although, as the district court observed, the sons were legally free to break their filial and corporate ties, there is no evidence that they even contemplated doing so. We are convinced that each corporation was operated with an eye toward the success of the other. Mere transfer of stock among the family members did not transform the intercompany sales into arm’s length transactions.

Even non-arm’s length parties can avoid the imposition of a constructive price as their excise tax base if their sales are shown to be at a fair market price. The taxpayer here maintains that the fair market price can be established by evidence that independent

manufacturers would produce the product at that price. Four other manufacturers had offered to manufacture and sell the Creme lures to the Cremes at the price Creme Manufacturing charged Creme Lure. The Government argues, on the other hand, that the fair market price is the price at which the taxpayer’s product would be “available to the trade”, established here by sales from Creme Manufacturing to independent, unrelated distributors. Creme Manufacturing, of course, made no such sales.

The taxpayer's test, using the price for which others offer to make the product, may in some situations provide an accurate representation of the fair market price — but only where the product gains no increase in value from the fact that it is made by the taxpayer. It is a matter of the value of the manufacturer’s affiliation with the product. The Court faced this problem in Bourjois, Inc. v. McGowan, 2 Cir. 1936, 85 F.2d 510, 512, cert. denied, 300 U.S. 682, 57 S.Ct. 753, 81 L.Ed. 885:

“But to take the appellant’s products as mere unnamed blends, mixtures or compositions saleable to the trade as such at the time the appellant sold them is to ignore the very thing which gave them their peculiar sales value; that is, the trade-names under which they were sold not only eventually to the wholesalers, retailers, and consumers but by the appellant itself to the sales corporations.”

See also H. R. Laboratories v. United States, S.D.N.Y.1943, 55 F.Supp. 266, 268, aff’d, 2 Cir. 1945, 151 F.2d 118; Inecto Inc. v. Higgins, S.D.N.Y.1937, 21 F.Supp. 418, 423. Where the fact that the product was made by a particular manufacturer adds substantially to its value, the product’s worth cannot be measured by the price for which an independent private brand manufacturer would be willing to make the product available. In this event we think that some objective manifestation of the price others would pay for the product, as made by the taxpayer, is necessary.

The evidence established the importance of the manufacturer’s name in the instant case. Creme Lure’s catalogues during the period in question emphasized the fact that it did not market merchandise made by unrelated manufacturers under the Creme brand name:

“CREME LURES are manufactured solely by the CREME LURE COMPANY. They are made of soft flexible plastic from a formulation developed by Creme Lure Company and used exclusively in the manufacture of our own products. Rigid quality control as exercised in the manufacture of Creme Lures assures the purchaser of uniform, highest quality lures.”

We think it clear that the fact that the lures were made by a Creme corporation gave them a distinctive value. In any event, the burden was on the taxpayer to show that the value of the lures it sold to Creme Lure was essentially the same as the value of the lures the independent manufacturers offered to produce. The taxpayer did not meet this burden. Neither, therefore, did the taxpayer meet its burden of establishing that the price at which other manufacturers offered to sell lures to Creme Lure represented the fair market price for the lures actually sold by Creme Manufacturing to Creme Lure.

The taxpayer failed to prove that it sold its products to Creme Lure in arm’s length transactions or at a fair market price. The dismissal of the taxpayer’s complaint and the judgment of the district court awarding the United States a judgment in the amount of $86,382.13 in taxes, plus interest, as a tax deficiency for the period July 1, 1964 through April 30, 1968 is affirmed. The dismissal of the remainder of the United States counterclaim is reversed and remanded for the further proceedings consistent with this opinion.

GEE, Circuit Judge

(dissenting):

I respectfully dissent from the Court’s holding that taxpayer’s excise tax should be calculated upon a constructive price set by the Internal Revenue Service. Section 4216 of the IRC does not authorize this, even where the transaction is not at arm’s length, unless the “. article is . sold ... at less than the fair market price.” The court below found as a fact that “. . . the price charged by Creme Manufacturing was a fair market price charged in a similar fashion as that charged by others in the ordinary course of trade.”

Record evidence, some of which is mentioned in the majority opinion, supports this finding. The majority disregards it on the basis of Bourjois, Inc. v. McGowan, 85 F.2d 510 (2d Cir. 1936), and other cases cited.

An examination of each of these cases shows that the item which gave the article or preparation there involved — otherwise a mere assembly of commonly-available materials into a generic product — its distinctive value, the trade name, was controlled by the manufacturing corporation. Thus, in those eases the real economic power in the picture, the power to discharge the sales organization and have the trademarked product sold by another, remained with the parent manufacturing corporation, and the sales corporation bought the finished product, including the affixed name, from the manufacturer. The item was thus unique and could be bought for resale from no one else. The courts in those cases were correct in refusing to consider its “fair market price” as determinable by reference to other articles or preparations which were not and could not be purchased elsewhere with the valuable trade name affixed.

the Our case is the reverse. Here sales corporation retained control of the trade name Creme Lure. The evidence pointed not towards the importance of the manufacturer’s technique but towards the distinctive, inherent value of the name Creme Lure. Creme Lure did not limit its sales to plastic worms. During the period in question, Creme Lure bought other types of fishing tackle from unaffiliated manufacturers, pre-packaged and with the Creme Lure label affixed.

The advertising, which misleadingly stated that Creme Lures were manufactured by Creme Lure Company, did not conclusively show that because Creme Manufacturing Company produced the product it was inherently more valuable. Indeed, the misleading portion of the statement substantiates the conclusion that the value was in the name.

The power to authorize affixing of the trade name was in Creme Lure, and with it the power to fire Creme Manufacturing and have the article made, with the name affixed, by another. When Creme Lure bought each finished article from Creme Manufacturing, it did not buy the affixed trade name on it; it already owned that and could have bought similar articles, with the name affixed on them by its prior authorization, from at least four other manufacturers noted in the record.

Thus, I conclude that the district court properly measured the fair market value of the manufactured product by the price for which an independent private brand manufacturer would be willing to make the product for the sales corporation, rather than by an objective manifestation of the price others would pay for the worms.

Bourjois and its siblings seem to me to stand for some such principle as that the fair market price of Beluga caviar may not properly be determined by reference to the going price for caviar in general; my understanding of the Court’s holding is that the fair market price of caviar in general may not be determined in that way either.

      . “There is hereby imposed upon the sale of fishing rods, creels, reels, and artificial lures, baits, and flies (including parts or accessories of such articles sold on or in connection therewith, or with the sale thereof) by the manufacturer, producer, or importer a tax equivalent to 10 percent of the price for which so sold.” 26 U.S.C. § 4161.

      . If all the discounts were given, a lure with a suggested retail sales price of $1 would sell to wholesale distributors for 39.69 cents.

      . Creme Manufacturing sold the other three percent of its products to Creme Lure of Canada at the same prices charged to Creme Lure. At all times during the period in question Nicholas Creme owned 50 percent of Creme Lure of Canada.

      . The House Report for the predecessor of Section 4216 (b) stated :
      “[P]rovision is made for transactions in which, by reason of the relationship of the parties, the price charged does not represent a fair value arrived at by an arm’s-length sale. For example, a manufacturer may transfer his product to a selling agency controlled by him, at a bookkeeping price below market value. Or a manufacturing corporation may sell plant equipment to an affiliated concern at an arbitrary price. It is essential that in such eases the tax be imposed on the same value as in the case of similar sales between independent parties.”
      H.R.Rep.No.708, 72 Cong., 1 Sess. 38 (1932).

      . There was conflicting testimony at trial concerning the reasons for the creation of Creme Manufacturing, whether it was created primarily for tax avoidance or to provide the Creme children with a business of their own.

      . See note 3 supra.

      . Creme Manufacturing Co. v. United States, 348 F.Supp. 270 (E.D.Tex.1972).


author: GOLDBERG, Circuit Judge:

text:
    BIG TOWN NURSING HOMES, INC., Plaintiff-Appellant, v. RESERVE INSURANCE COMPANY, Defendant-Appellee.
    No. 73-1682.
    United States Court of Appeals, Fifth Circuit.
    April 10, 1974.

      Walter H. Mizell, Dallas, Tex., for plaintiff-appellant.
    B. Thomas McElroy, Dallas, Tex., for defendant-appellee.
    Before BROWN, Chief Judge, and GEWIN and GOLDBERG, Circuit Judges.
   GOLDBERG, Circuit Judge:

Plaintiff-appellant, Big Town Nursing Homes, Inc. (“Nursing Home”), brought this diversity action against its insurer, Reserve Insurance Company (“Reserve”), in order to recover a sum alleged to be due under the malpractice endorsement of a general liability policy. The district court held for defendant on the ground that the actions giving rise to plaintiff’s loss did not fall within the definition of malpractice under the applicable Texas law. We reverse.

In September of 1968 Mr. Howard Newman voluntarily entered Nursing Home in order to receive treatment for alcoholism. On six occasions during the following two months Mr. Newman attempted to quit the premises. Five times he was observed and restrained; on the sixth try he managed a successful escape. Understandably annoyed at Nursing Home’s overeager ministrations, Mr. Newman filed suit seeking recovery for false imprisonment. After receiving notice of the suit, Nursing Home tendered the defense to Reserve on the basis of a malpractice rider to its insurance policy. Reserve denied liability under the policy, and plaintiff was forced to proceed with the defense at its own expense. This effort met with less than resounding success, and Nursing Home suffered a $13,000 adverse judgment. Plaintiff claims that this judgment, necessary attorneys fees, and the incidental expenses of litigation, a total of more than $17,000, are properly owed by Reserve under the contract of insurance.

The. professional liability endorsement at issue here provides in relevant part:

“It is agreed that such insurance as is afforded by the policy under the liability coverages also applies to damages because of injury, including death, sustained by any person and arising out of malpractice as defined herein committed during the policy period ....
“1. ‘Malpractice’ means malpractice, error or mistake (a) in rendering or failing to render to such person, or to the person inflicting the injury, medical, surgical, dental or nursing care, including the furnishing of food or beverages in connection therewith

Appellant contends that its treatment of Mr. Newman clearly amounts to error or mistake in the rendering of nursing care, and is therefore covered by the policy. We find this argument persuasive.

Nursing Home is licensed under the laws of Texas to furnish “food and shelter to . persons . . . and [to provide] minor treatment under the direction and supervision of a physician ... or services which meet some need beyond the basic provision of food, shelter and laundry.” Mr. Newman originally sought to avail himself of all of these services during the course of a hoped-for convalescence and rehabilitation. But when he attempted to end his stay, he was restrained. The district court held that under Texas law liability for this action would not be covered by a professional liability endorsement because the restraint resulted from an administrative decision on the part of appellant’s management and from mechanical action on the part of its employees, and therefore lacked the necessary exercise of a professional judgment. See Maryland Casualty Co. v. Crazy Water Co., 160 S.W.2d 102 (Tex.Civ.App. Eastland, 1942, n. w. h.). This conclusion, however, is directly contradicted by findings of fact appearing in the opinion below.

The district court noted that while “[t]here is some confusion as to who ordered the nurses and other personnel to restrain Mr. Newman . . . there is a general policy among the treating doctors that when a patient is irrational or is apt to hurt himself the nurses are to restrain the patient until the doctor performs an examination and orders otherwise.” The court specifically found that on at least one occasion “the nurses placed Mr. Newman in a geriatrics chair to restrain him until he became more rational.” What emerges from these findings is not the picture of a purely physical action in response to a business determination, but rather the exercise of a trained nursing judgment in obedience to an established medical policy. Indeed, in light of the condition that prompted Mr. Newman to enter Nursing Home, it is very likely that he originally expected and desired a degree of supervision and control that he was unable to provide for himself. The litigation in state court has established that appellant’s employees incorrectly evaluated the patient’s anger and anxiety as dangerous irrationality. A malpractice endorsement is designed to protect the insured from the financial burdens arising from precisely such misinterpretations of a patient’s condition.

Appellee raises three additional defenses of the judgment below: 1) that coverage is barred by the “criminal act” exclusion in the policy; 2) that the policy limits recovery to damages for “bodily injury”, and does not therefore encompass the exemplary damages or compensation for mental suffering awarded in the state court; and 3) that Nursing Home breached the notice requirement of the policy by filing a false report. The district court did not rely on these propositions in denying recovery, and we find them to be without merit.

Appellee’s interpretation of the criminal act exclusion common to malpractice liability insurance as embracing all manner of technical assaults, batteries, and. imprisonments would largely destroy the efficacy of such policies. We decline to take this radical step in the application of state law in the absence of any substantial showing that Texas state courts would so hold. The Texas cases cited by appellee in support of its position are inapposite, for they deal either with “intentional act” exclusions or with criminal conduct on the order of murder. Appellee’s argument that recovery under the policy is limited to damages for bodily injury must fall to the language of the endorsement itself, which defines coverage as extending broadly to “damages because of injury.” In regard to appellee’s third contention, we note that there has been no finding at any point in this proceeding that appellant’s agent knowingly falsified information in his insurance report, an admitted prerequisite under Texas law to loss of coverage on the ground of inadequate notice. Fidelity & Casualty Company of New York v. Griffin, 178 F.Supp. 678 (S.D.Tex.1959). In addition, we note that this basis for denying coverage appears particularly inappropriate here. Reserve rejected all liability and refused to defend following appellant’s admittedly accurate statement that the claim arose from an allegation of false imprisonment. Throughout this litigation appellee has maintained that this information alone was sufficient for its purposes. Certainly no more detailed or accurate statement of Mr. Newman’s experiences would have affected Reserve’s course of action, for it had determined from the opening line to refuse all responsibility under the policy.

“(5) No liability shall attach to the company hereunder in respect of: (a) criminal acts or services rendered while under the influence of toxicants or drugs . . . .”

Since appellee has not only denied liability under the policy, but has also breached its distinct contractual duty to defend, we must remand for assessment of the attorneys’ fees incurred by Nursing Home in the unsuccessful state court litigation and those expenses of the state court suit which Reserve had obligated itself to pay in the contract of insurance.

Reversed and remanded.

      . Vernon’s Tex.Rev.Civ.Stat.Ann. art. 4442c (1972).

      . The endorsement provides that: