author: MACK, Circuit Judge.

text:
    HARE & CHASE, Inc., v. NATIONAL SURETY CO.
    District Court, S. D. New York.,
    March 18, 1931.

      Cabell, Ignatius & Lown, of New York City (Hartwell Cabell and Milton B. Ignatius, both of New York City, and Joseph S. Clark, Sr., and Joseph S. Clark, Jr., both of Philadelphia, Pa., of counsel), for plaintiff.
    Lord, Day & Lord, of New York City (Henry De Forest Baldwin, George De Forest Lord, and Sherman Baldwin, all of New York.City, of counsel), for defendant.
   MACK, Circuit Judge.

After the defendant moved for the appointment of an auditor in an action at law by the successor in interest of Hare & Chase, Inc., the obligee of a bond against the obligor, plaintiff’s motion for a transfer of the cause to the equity side of the court to determine several equitable issues raised by the amended answer was granted. Reformation of the bond because of alleged mutual mistake, and enjoining of the further prosecution .of the" action at law because of an alleged equitable estoppel, were thereby sought.

Plaintiff’s assignor, Hare & Chase, Inc. (hereinafter referred to as plaintiff), an automobile finance company, had-its principal place of business in Philadelphia, Pa.; defendant, a surety company, in New York.

In 1920, defendant issued a bond indemnifying plaintiff against ultimate loss resulting from defaults in tbe installment obligations acquired by it in the course of its business; this ultimate loss was the deficiency after resale of cars, plaintiff’s security for the obligations.

On October 1, 1922, the 1920 bond was superseded by two bonds, one covering losses on wholesale business, the financing by plaintiff of a purchase of cars by dealers from manufacturers or distributors; the other covering losses on retail business, the discounting by plaintiff of paper given by retail buyers, of individual cars to the dealer seller. The latter notes were ordinarily without recourse on the dealer and were secured only by the ear itself; in the wholesale transaction, the dealer was directly obligated on the notes discounted for the manufacturer or distributor.

All of these bonds covered paper acquired only from or through dealers whose names had been submitted to and approved by defendant; they recited that plaintiff would from time to time acquire automobile paper secured by “commercial or passenger vehicles, tractors or trailers.” The wholesale 1922 bond stated that defendant’s liability “shall be limited to the amount named in notice of acceptance.” - The 1922 bonds further limited the coverage to 70 per cent, of the wholesale and 75 per cent, of the retail purchase price of the car.

None of the bonds contained any reference to the computation or payment of the premiums other than the statement that defendant’s obligation'was in consideration of premiums computed at an agreed rate.

Each of the bonds bore an annotation “rate 1%,” but, as to the 1922 bonds, that rate was afterwards reduced.

None of the bonds described the form or contents of reports to be rendered in respect of the business currently acquired or specified the time for premium payments. Erom 1920 on, however, reports were rendered monthly and the corresponding premiums remitted some weeks thereafter. The reports did not name the make of car, or indicate whether it was a passenger ear, new or used, or some other motor vehicle. The last column of the form called for the amount of notes; the premiums were calculated on the amounts thereby reported.

Not all of plaintiff’s business was entered in its contract register; such other dealings, including paper discounted for other finance companies, were not reported, and no premiums were paid thereon. Alfred Hare, who was in charge of the business, believed that under each of the bonds he had the right to report only such of the business as he desired covered by the bonds. While the reports currently rendered have been referred to as “liability reports,” they were useless as such, inasmuch as the outstanding liability could at no time be determined from them. They reflected only the new business acquired, without any indication of the business run off.

Early in 1923, so-called “deductibles” under the bonds were dealt with by successive collateral undertakings; these “deductibles” were the definite amount or a certain percentage of losses • which plaintiff alone was to bear before defendant’s obligatio.n to reimburse should be enforceable.

No formal agreement was prepared to cover the last increase of the deductible; in the course of conferences it was suggested that the bond itself should be rewritten to include the deductible in order to avoid misapprehension as to the extent of the coverage by those who might see only the bonds and not the supplemental agreements.

After lengthy negotiations during 1924, the bond in suit covering retail and wholesale transactions, with a collateral premium agreement, was executed some time in January, 1925, effective as of January 1, 1925. This bond indemnified plaintiff against ultimate loss upon secured notes held by it above a minimum deductible loss of $600,000 for each period of six months; in other words, an initial loss to that amount for each such period was to be borne by the obligee itself; in other respects, it followed substantially the texts of the 1922 bonds.

The report under the 1925 bond for the month of January, 1925, was not forwarded until May 5th; it was accompanied by a request that plaintiff be advised whether the form was satisfactory. While the record discloses no reply thereto, this form was continued without objection during the life of the bond. The simplified report, merely listing the states from which business emanated, and specifying, as to each state, only the total wholesale and the total retail paper, was apparently adapted only to determine the amount of premiums due and to enable defendant to report to the several Insurance departments the business transacted by it. It did not reflect the nature of plaintiff’s current business, the makes of cars financed, or the dealers from whom paper was purchased. Such detailed information, if required by defendant, could however have been obtained by inquiry of plaintiff or by examination of its records, in accordance with provisions of the bond.

1. Reformation. Because there is no provision in the bond expressly requiring plaintiff to render reports to the surety on newly acquired obligations, as an express condition precedent to coverage, the question of reformation is here presented, on defendant’s contention that such a clause was omitted by mutual mistake.

Whether or not on a fair interpretation of the provisions of the bond as written and unreformed defendant is liable at law for losses on unreported transactions is not now before this court in this equity proceeding. The notes upon which loss was sustained and for which plaintiff claims indemnity under the bond were not reported to defendant in any form. Furthermore, premiums in respect thereto were never paid and were not tendered until after the losses in question had occurred and the controversy in respect to liability had arisen. The notes in question secured by 1,503 taxicabs, originally discounted by the General Finance Company of Indianapolis, were rediscounted by plaintiff for the latter company. They bore the full indorsement of the taxicab dealer that had made the sale, the Premier Motors, Inc. (manufacturers of the. taxicabs), and the General Finance Company. Many of the sales involved were of fleets of taxicabs, as distinguished from the sale of an individual car to an individual purchaser.

The rediscounting by plaintiff was pursuant to a contract of March 31, 1924, by the terms of which plaintiff agreed to rediscount for the General Finance Company automobile paper up to $1,000,000. While, prior thereto, it had rediscounted such paper for other finance companies, such discounts were but rarely noted in its monthly reports to defendant.

Under the 1920 and 1922 bonds, monthly reports of the new paper acquired were sent to defendant, although, as heretofore stated, the bonds contained no express provision that made this necessary; defendant’s approval of dealers alone was required thereunder. Premiums were paid on the basis of the reports. In addition to these so-called “liability reports,” actual credit files of dealers whose paper was being discounted were sent to defendant until the 1925 bond became effective; thereafter, this procedure, not required by the bond, was discontinued.

While plaintiff continued to send defendant the monthly reports of new business, although in the greatly modified form above stated, during.the effective period of the 1925 bond, no mention- was ever made therein of the General Finance business and no premiums were paid thereon. When this business began under the contract of March, 1924, the General Finance Company was engaged almost exclusively in financing Ford car sales. In June, 1924, however, plaintiff began to rediscount fleet taxicab paper for the General Finance Company; the latter was only then entering upon this new field of activities. From June 20, 1924 to January 1, 1925, $1,300,796.50 of this paper was thus rediscounted.

The negotiations between plaintiff and defendant for the 1925 bond were begun in the spring of 1924 and consummated in January, 1925. This period of negotiation, therefore, overlaps plaintiff’s discounting of the General Finance Company taxicab paper. The principal actors in the negotiations were Rathbone, defendant’s vice chairman, the Hare brothers, and Watkins, a so-called “special agent” of defendant. It is largely to the testimony and correspondence of these men that we must look for the facts.

The main reasons for redrafting the 1922 bond were Rathbone’s desire to increase the deductible initial loss to be borne by the obligee, to $600,000, and Alfred Hare’s desire for a reduction in the premium rate. These inter-related matters were the focal points of the discussions which begán in the spring of 1924. A supplemental issue was raised by Hare with respect to the reports. At that time, under the 1922 bond, they were bulky and, for plaintiff, expensive. Rathbone agreed, at least tentatively, to a change in their form. Immediately after a conference on December 5, 1924, between Rathbone and the Hare brothers, Rathbone dictated the following memorandum to Simpson, manager of his guaranteed note department:

“In discussing the Hare & Chase bond today with broker Watkins and both of the Mr. Hares, a suggestion was made that in view of the large deductible, we could waive the reports that they are now sending in or very much modify them.
“I tentatively agreed to a monthly report that will give the number of ears covered, the amount of the paper in dollars, the amount of the ultimate loss sustained, and the amount of salvage collected — all to be reported by states. Do you see any objection to this plan?”

The questions to be decided in this proceeding for reformation of the bond go beyond this “tentative” agreement. Did the parties reach a definite and complete agreement as to points apparently not expressed in the bond? If so, did they intend to include it in the written terms of the bond, or were they content to leave it as a collateral agreement? And if an agreement to report all business was to be so included, was it to be expressed as a condition precedent to liability?

The general principles as to reformation are simple; their application to a particular situation is often troublesome. Written agreements are reformed only upon the clearest evidence of fraud or mutual mistake. A mere preponderance of the evidence will not suffice. Philippine Sugar Co. v. Government of Phillipine Islands, 247 U. S. 385, 38 S. Ct. 513, 62 L. Ed. 1177; Skelton v. Federal Surety Co. (C. C. A.) 15 F.(2d) 756; Bailey v. Lisle Mfg. Co. (C. C. A.) 238 F. 257; Snell v. Ins. Co., 98 U. S. 85, 25 L. Ed. 52. In my opinion, the evidence adduced by defendant falls short of the degree of proof required. It has failed clearly to establish the actual terms of the agreement which it now seeks to have this court incorporate into the bond as written. There is no such proof of an agreement made before the execution of the bond, certain in its terms, for periodic reports. At best a mode of reporting was agreed to “tentatively” by Rathbone. This so-called agreement between Hare and Rathbone, even if it be construed as final in its details, may have been merely a routine matter, not directly connected with the bond itself. That is the tenor of the testimony of Alfred Hare. It has certainly not been satisfactorily established that both parties intended it to be a condition precedent to coverage, or that any such intention was communicated by either to the other party or to any one else at the time. True it is that Alfred Hare himself seemed to be under the impression, as well during the time that the earlier bonds were in force as during the period of the 1925 bond, that unreported paper was not and was not intended to be covered, and that no premium thereon was to be paid. On a proper interpretation of the bond, it may be found that in this respect he erred. I express no opinion thereon, for we are here dealing, not with the construction of the bond itself, but with its reformation. The state of mind of Hare alone, regardless of whether or not he erred, casts no light upon the state of mind, the intent of Rathbone. A mistake to be ground for reformation must be mutual. If, under the bond as written, unreported business was covered, Hare’s belief and intention, if not shared by Rathbone, that only reported business should be covered, would not bar an action by defendant to recover unpaid premiums on unreported business. In the present equity • proceeding, on the issue of reformation, I must assume, hypothetically, that the bond covers unreported business; on any other hypothesis, the prayer for reformation would be futile. The question then is, Did defendant, through Rathbone, share Hare’s intent that the bond should cover only reported business? The reports, although referred to as “liability reports,” did not indicate the outstanding liability of the surety under the bond at any given time. Only new business was reported as it came in to plaintiff monthly; no reports were made of retired obligations. The only method by which the surety could gauge its outstanding liability was by an inspection of the books of Hare & Chase, which contained a record of paid off obligations. The reports themselves, in the modified form accepted under the 1925 bond, showed merely the number of cars covered, the amount of paper, the amount of ultimate loss, and the amount of salvage collected— reported by states. Neither the names of the dealers nor the makes of cars were stated. In the absence of proof to the contrary, it is fair to interpret the purpose of these reports as that for which alone they appear useful, to compute premiums and to render accurate reports to insurance commissioners of the states in which defendant engaged in business. The reports, therefore, do not justify the conclusion that defendant intended to cover only reported business.

But if it were otherwise, defendant would have another difficulty; it has certainly failed to establish any clear intention to have reduced to writing and incorporated into the bond the alleged agreement to limit the coverage to reported business. In his memorandum of December 5, 1924 to the manager of his guaranteed note department, Rathbone notes that he “tentatively agreed” to a new form of reports, but says nothing about putting this into the bond; furthermore, it does not appear that he wrote any similar memorandum to Whitlow or Garner, who drew the bond. Their testimony tends also to cast light' on defendant’s attitude toward inclusion of such a provision into the bond. Whitlow testified as follows:

“Q. Did Mir. Hare ever object to including this provision for liability reports in the bonds? There was no objection?' A. That question was never raised in my presence.” Gamer, defendant’s attorney, testified as follows :
“Q. Did you know Mr. Rathbone’s agreement with Mr. Hare as to these monthly liability reports? A. I never heard of that agreement until after this claim was made.'
“Q. Did you notice that there was no provision in the bond as drafted, with respect to periodic liability reports? A. I did not, and my attention was not directed to it; that was not one of the things taken up for my consideration.”

If there was any intention on defendant’s part, through Rathbone, actually to include the provision for periodic reports in the bond as a condition precedent, it is difficult to believe that he would have neglected to state this either to the Hares or to the men who were drafting the bond.

Cases holding that an inadvertent omission by a scrivener from the written contract of an agreement arrived at in preliminary negotiations is a ground for reformation are therefore inapplicable. Nor are the cases that a mistake of law, as well as a mistake of fact, will support a decree of reformation, of any greater applicability. See Philippine Co. v. Government of Philippine Islands, 247. U. S. 385, 38 S. Ct. 513, 62 L. Ed. 1177; Griswold v. Hazard, 141 U. S. 260, 11 S. Ct. 999, 35 L. Ed. 678; Snell v. Ins. Co., 98 U. S. 85, 25 L. Ed. 52; Skelton v. Federal Surety Co. (C. C. A.) 15 F.(2d) 756; Clarksburg Trust Co. v. Commercial Casualty Co. (C. C. A.) 40 F.(2d) 626. I say this because I am not convinced that there was a mutual misconstruction of the bond, if misconstruction it be. A mere mistake of law by one party lacking the eonsensuality of an objective expression by both parties is, of course, no ground for reformation. If it were, all contracts would be subject to nullification at the suit of the party who could best plead carelessness or ignorance.

Defendant in support of its claim for reformation cites Murray v. Dake, 46 Cal. 644; Maher v. Hibernia Insurance Co., 67 N. Y. 283, as holding that an oral agreement or provision, though unenforceable in its inception, may, by the subsequent conduct of-the parties, become binding.

In Murray v. Dake, defendant was led to omit a provision of the lease which he would have inserted had it not been for the assurances of plaintiff that it was not necessary to insert it. Here, however, we have no such situation. Rathbone never suggested to Hare the inclusion of a clause making reporting a condition precedent to coverage, and Hare, therefore, never had occasion to counter with the suggestion that such a clause was unnecessary.

In Maher v. Hibernia Insurance Co., plaintiff had returned a fire insurance policy to the defendant’s agent requesting that the phrase “occupied as a dwelling” be changed to state the fact that a grocery store was kept in the building. Defendant’s agent declined to correct it, expressly stating that the policy as written covered the store. Plaintiff further proved that, after the policy was issued, defendant’s secretary and general agent, after having seen the policy, examined the building. The question was as to the admissibility of parol evidence to this effect. The Court of Appeals held there was no error in its admission. In that case, as in the Murray Case, there was a reliance by the party seeking reformation on an active representation of the other party, which created a sense of security in the language as written.

I find, therefore, that defendant has failed to establish by that high degree of proof required the facts necessary to support a decree of reformation.

2. Equitable estoppel. Plaintiff’s conduct upon which defendant bases this claim may be divided into two parts: (a) The representations or concealments prior to the execution of the bond in suit and (b) the failure, after the execution of the bond, to report the facts in reference to the General Finance Company’s rediscounted paper, including the method of refinancing it. I am satisfied upon reconsideration that the plaintiff did'not waive its right to have the issues raised by these latter matters tried before a jury. Liberty Oil Co. v. Condon Bank, 260 IT. S. 235, 43 S. Ct. 118, 67 L. Ed. 232, prescribes the proper procedure for the trial of equitable issues in a law case; it does not purport to extend the scope of the equity jurisdiction to curtail the right of trial by jury. Liberty Oil Co. v. Condon Bank, at page 243 of 260 U. S., 43 S. Ct. 118. The propriety of plaintiff’s methods in dealing with the rediscounted paper when it became overdue is a subject of legal defence, and, in the absence of a waiver, is not to be dealt with in equity. The determination of the issue • of misrepresentation or concealment prior to the completion of the bond and its effect as an estoppel is here by plaintiff’s consent; it moved for a transfer to the equity side after the defendant’s answer had been amended to ask the relief now prayed. It admitted that its objection to the determination in equity went solely to events .subsequent to the completion of the contract. Although an estoppel in pais is cognizable as a defence at law [See Dickerson v. Colgrove, 100 U. S. 578, 25 L. Ed. 618; Weber v. Hertzell, 230 F. 965 (C. C. A. 8th)], plaintiff’s motion and its consent to have the issue "tried in equity is a waiver of its right to a jury trial thereon.

As to the negotiations prior to the execution of the bond, defendant’s position is that it relied upon a continuance of the general character of plaintiff’s business which was, so far as it was concerned, the discounting of pleasure ear paper. The financing of taxicabs, in particular, and the rediscounting of paper previously discounted, in general, constituted, it claims, a material deviation from plaintiff’s prior business which had been represented by plaintiff to defendant, either affirmatively or by its silence, as the type of financing to be covered under the 1925 bond. The evidence, in my judgment, supports defendant’s position. That defendant was interested in the details of plaintiff’s business is strikingly apparent from the testimony. Nor can one escape the conclusion that Hare’s information given to the defendant’s officials was on the basis of an apparently full disclosure. The parties were negotiating the 1925 bond with the background of their mutual experience under the earlier bonds. If Alfred Hare’s recollection that the type of financing engaged in by his company was not discussed at any time subsequent to June, 1924, is correct, it is clear that Rathbone must have assumed a continuance of earlier conditions (and by his silence Hare affirmed this belief), or Rathbone would have engaged in the same sort of inquiry which he seems to have made in the earlier negotiations. Prior to the writing of the former bonds, as well as during their term, Rathbone and the Hares discussed the type of financing done; Hare explained in detail the makes of cars his company accepted and his reasons for refusing ethers. In at least one of his annual reports, as president of Hare & Chase, to the stockholders, of which Hare sent a copy to the defendant, he listed by name the makes of cars financed. From correspondence introduced in evidence, it appears also that Hare apprised defendant of the success of his business, always stressing its conservative character. The method of doing business was gone over in discussions between the Hares and Rathbone; when the Hare & Chase branches were to become separate" corporations early in 1925, it was made known to Rathbone. He recognized it, as he said, as a mere change in form from the old way of doing business. Discussion was had specifically about the taxicab business. Rathbone told Hare he did not like taxicab paper and did not care to have it on his books; Hare agreed and said he, too, was unfavorable to taxicab paper. Emlen Hare testified that at every meeting “* * * the safety of our proposition and the type of stuff we financed was discussed. * * *” Certain taxicab business had been reported to defendant prior to the 1925 bond, but this did not include fleets; and such taxicab financing as was done appears to have been hedged about with such special safeguards as a requirement of weekly instead of monthly payments. That Alfred Hare recognized the difference in the class of business between pleasure car and taxicab fleet financing is shown by his early unwillingness to take the General Finance Company taxicab paper and by his insistence that the safety of the Hare & Chase proposition lay in its reliance upon the ear itself rather than upon the dealer. He recognized that in the, ease of taxicabs the car itself had little resale value, and that the only possibility of getting any salvage on taking possession was in its actual operation. The credit application which Hare & Chase required retail purchasers to fill in included a question as to whether the vehicle was to be used to carry passengers for a consideration, thus indicating again a distinction in the mind of plaintiff’s officers as to the type of risk. The subsequent course of conduct when the taxicab paper became overdue shows the difference in risk involved. Alfred Hare justified the refinancing of the taxicabs by plaintiff, including reconditioning of the cabs and their operation by subsidiaries of the General Finance Company as the only possible way to save the situation, inasmuch, as when repossessed, the resale on the open market of taxicab fleets was admittedly impossible.

A bond that guarantees against losses is construed as a policy of insurance. American Credit Co. v. Athens (C. C. A.) 92, F. 581; Tebbets v. Mercantile Credit Co. (C. C. A.) 73 F. 95, 97; Shakman v. U. S. Credit System Co., 92 Wis. 366, 66 N. W. 528, 32 L. R. A. 383, 53 Am. St. Rep. 920; Claflin v. U. S. Credit System, 165 Mass. 501, 43 N. E. 293, 52 Am. St. Rep. 528; Joyce, Insurance (1917) § 339h; 1 Cooley, Briefs on Insurance, 122. The rule of strietissimi juris is therefore inapplicable, and the rights of the parties must be governed by analogy to the law in respect to other forms of insurance contracts. See 2 Cooley, supra, 988.

Defendant, in its pleadings, alleges both misrepresentation and concealment. Gener-' al' statements in evidence may well lead to the inference that, during negotiations preliminary to the earlier bonds, the Hares affirmatively stated their policy of refraining from the assumption of fleet taxicab risks. At that time, this was, apparently, true. On this record I must, however, hold that, during the course of the negotiations which directly led to the bond in suit, no active misrepresentations were made by plaintiff that they did not accept fleet taxicab risks. But even if there were affirmative representations in the early part of these negotiations, defendant’s contention that a failure to disclose the material change after June, 1924, evidenced by the taking of taxicab paper under the General Finance Company contract of March, 1924, brings the case within the rule that such a change creates a duty of disclosure, is untenable. The cases imposing a duty to disclose changes in material elements of the risk, occurring between the time of the application and the issuance of the policy, are predicated upon the applicant’s fraudulent intent. Stipcich v. Metropolitan Life Ins. Co., 277 U. S. 311, 48 S. Ct. 512, 72 L. Ed. 895; Piedmont Life Ins. Co. v. Ewing, 92 U. S. 377, 23 L. Ed. 610; Equitable Life Assurance Co. v. McElroy (C. C. A.) 83 F. 631; Cable v. United States Life Ins. Co. (C. C. A.) 111 F. 19, reversed on other grounds 191 U. S. 288, 24 S. Ct. 74. 48 L. Ed. 188; Harris v. Security, etc., Ins. Co., 130 Tenn. 325, 170 S. W. 474, L. R. A. 1915C, 153, Ann. Cas. 1916B, 380; Cummings v. Connecticut General Life Ins. Co., 101 Vt. 73, 142 A. 82.

No proof of such fraudulent intent was made in the present ease. In view of Hare’s belief that the taxicab paper was not covered by the bond, his failure to disclose the taking of taxicab paper under the General Finance contract cannot be attributable to any fraudulent motive. The defense, therefore, based' upon plaintiff’s conduct before the execution of the bond must be that of intentional nondisclosure of material facts, and not of active misrepresentation or fraudulent concealment- of such facts.

Logically, the distinction between an erroneous negative reply to an inquiry as to the taking of taxicab paper and an intentional but nonfraudulent failure to disclose the existence of such a practice, where no specific inquiry is made, is slight. See Weigle v. Cascade Fire Ins. Co. (1895) 12 Wash. 449, 452, 41 P. 53.

Yet for practical reasons the distinction between such a misrepresentation, and such a nondisclosure or concealment may be important. The emphasis in the law of insurance, in this respect, rests largely upon a recognition of the usual relative inequality in knowledge and skill between the insurer and the insured. The ordinary applicant for insurance Cannot be expected to know what are all the factors material to the risk; on the other hand, the insurer, generally, can adequately protect itself in covering in specific questions a wide range of subject-matter. The reluctance of the courts, in recent years, to aid the' unwary insurer at the expense of the insured’ who in good faith has failed to disclose a material fact, and the resulting practice of insurers to require answers to specific questions, make the ease of innocent nondisclosure by the insured comparatively rare in these days. Some reference must, therefore, be had to the eases of innocent misrepresentation. 3 Joyce, Insurance (1918). § 1844. The rule may be taken to be fairly established, although not without exceptions, that, where the insurer is induced to enter ' into the contract by a representation as to a material fact, the policy will be avoided, whether the misrepresentation was made willfully with intent to deceive, or through innocent mistake. 3 Cooley, Briefs on Insurance (1927) 1911; 3 Joyce, Insurance (1918) § 1902, collecting eases.

It is earnestly contended that the modern rule as to nondisclosure, however, relaxes the rigor of the strict doctrines of marine insurance to the extent that a failure to disclose a material fact does not afford the insurer a defense unless a fraudulent intention on the part of the insured is proved. See cases in 3 Joyce, p. 2985, note 20. The. validity of this generalization must be tested in the light of the rationale of the eases which support it and its applicability here on a careful analysis of the facts of the present controversy.

Admittedly, we are not dealing with a case of actual fraud; but, on the other hand, it is neither a ease of ignorance of the materiality of the facts, nor of forgetfulness to disclose them. Hare well knew the materiality to the insurer of full knowledge of the General Finance Company business in determining whether it would accept this risk of taxicab fleet losses, and, if it did so, then in fixing the minimum deductible loss to be required and the premium to be paid. His failure to disclose the facts was within the bounds of good faith solely because of his belief that Hare & Chase were not to be and were not covered as to unreported General Finance Company paper. The nondisclosure is unique in this, that, though the material fact was concealed intentionally, the concealment was not fraudulent. The question, therefore, is this: If the insured intentionally fails to disclose material facts because of his belief that the insurance is not to cover the undisclosed risk, and pays no premium for such risk, is he estopped to establish a claim in respect to such a risk?

An analysis of the cases which on the ground of the insured’s good faith abate the rigor of the marine insurance rule of full disclosure demonstrates that in those cases the insured honestly believed himself within the coverage of the policy. In those circumstances, on a balancing of the interests involved, the insured’s good faith and honest reliance upon the validity of his policy, as against the insurer’s ability to eliminate the possibility of mistake by opportunely focusing attention upon the material matter, very properly led to a denial of the defense. But when, as here, the insured, instead of relying upon any supposed protection under the policy, fails to make disclosures which it knows would be material because it believes itself in no event covered as to certain risks, the balancing of interests should inure to the benefit of the insurer. It has not been afforded the essential information for a decision as to its willingness to eover the risk; the insured, on the other hand, has in no sense been lulled into security by any assumption that the policy has granted protection.

A second important ground of distinction between the instant case and the ordinary case of life, fire, or credit insurance, is illustrated by the informal nature of the negotiations. In the standard forms of insurance, the material elements of the risk have been included within standardized applications. This practice serves by exclusion to narrow the field of material facts. See Williston, Contracts § 1499, note 81; Phoenix Mut. Life Ins. Co. v. Raddin, 120 U. S. 183, 7 S. Ct. 500, 30 L. Ed. 644; Keatley v. Grand Fraternity (D. C.) 198 F. 264; See 3 Joyce, Insurance (1917) §§ 1844, 1914. A matter which is not made the subject-matter of inquiry is deemed immaterial. In substance, there is a waiver. See Elliott, Insurance § 91. In the instant case, there was no application blank; in view of the subject matter of the contemplated insurance, there were not and there could not well have been any standardized questions. This contract of insurance could have been and was made only after negotiations and these between business men on an equal footing.

There was no such inequality in .experience between insurer and insured as is usual in insurance contracts. Cf. Taft, J., in Penn Mutual Life Ins. Co. v. Mechanics’ Savings Bank (C. C. A.) 72 F. 413, 38 L. R. A. 33. Hare was an expert insurance man; the bond and collateral agreements were modified at his suggestion, and his criticism of their terminology was invited. There were proposals and counter proposals. The discussions were had on the basis of an apparently full "disclosure upon which defendant properly relied. There is no basis therein for any analogy to a waiver by defendant of a disclosure of facts material to the risk.

After repeated consideration of the evidence and arguments, I am satisfied that the relief must be granted to defendant. The most exhaustively reasoned ease ostensibly supporting the generalization contended for by plaintiff is Penn Mutual Life Ins. Co. v. Mechanics’ Savings Bank (C. C. A.) 72 F. 413, 38 L. R. A. 33. But none of the grounds of distinction there relied upon seem apposite in the present case. (1) In marine insurance, the ship is often not subject to inspection by the insurer. See Ranney, J., in Hartford Protection Ins. Co. v. Harmer, 2 Ohio St. 452, 59 Am. Dec. 684. True, defendant might have demanded such an audit of the applicant’s books as would have revealed the nuances of the financing theretofore engaged in by plaintiff. But in the light of its past continuous dealings with plaintiff, there was, in my judgment, ño occasion for such a demand. It is, therefore, unlike an inspection of premises for fire or medical examination for life insurance. (2) That an applicant for life or fire insurance “is not required to rack Ms brain or memory for circumstances of possible materiality, not inquired about and to volunteer them,” in view of the many questions specifically asked of him, offers no analogy to the instant ease, for the reasons heretofore stated. (3) The inability of the insured, because of his death at the time when litigation would usually occur, to explain his failure to disclose, is ordinarily applicable only in life insurance eases. (4) While failure to disclose a clearly material fact is ordinarily tantamount to fraud, the instant ease demonstrates that the insurer would not be properly protected if actual fraud were the only basis for such a defense. (5) The officers of a finance corporation applying for indemnity insurance like applicants for marine insurance, but, in this respect, unlike applicants for life insurance, understand the usages of the business -and the need of full disclosure as a basis for assuming the risk.

The recent case of General Reinsurance Corp. v. Southern Surety Co. (C. C. A.) 27 F. (2d) 265, adds nothing to the general doctrine urged by plaintiff. There the insured honestly deemed itself within the coverage of the reinsurance contract; it was moreover found to be ignorant of the material fact which it failed to disclose. Indeed, some of the language of the court seems to support the defendant’s contention. At page 273 of 27 F.(2d), it is said that the insurer has a defense (1) where insured, having actual knowledge of material facts, has intentionally failed to disclose them truthfully; (2) where insured, though not having actual knowledge of material facts, yet-has intentionally, and in bad faith, refused to become acquainted with the facts.

It is to be noted that in (1) intentional nondisclosure is specified without, as in (2), the addition of bad faith.

The bond in suit is a Pennsylvania contract. The obligations of the contract are referable to the law of that jurisdiction, for the last act requisite to the consummation of the agreement, the signing by Hare & Chase of the collateral agreement and its deposit in the mails, occurred in Pennsylvania. The validity of such defenses to the contract as are here interposed are determined by reference to the law of the place of contracting. American Law Institute, Restatement of the Conflict of Laws. Tentative Draft No. 4, §§ 357, 369. Logically, even if the defense does not contemplate a complete avoidance of the whole contract, but merely aims to limit the zone of its application, the law of the jurisdiction by which the obligation of the contract itself is determined should control.

There seems to be no Pennsylvania case directly in point. It was held in an early case that, even innocent concealment gives a defense to the insurer. Smith v. Ins. Co. (1851) 17 Pa. 253, 55 Am. Dec. 546. Gibson, J., said (at page 261 of 17 Pa.): “It is not sufficient for the insured to answer all the questions propounded to him. Like a witness on the stand, he is bound to tell the whole truth without waiting to be interrogated.” In that ease, plaintiff, a mortgagee insured against fire loss, had disclosed only one of several mortgages held lay him. When the loss occurred, the insurer expressed its willingness to settle for that portion of the risk covered by the mortgage disclosed, or for the entire risk if the plaintiff would permit it to be subrogated to his rights under the undisclosed mortgages as well. Although there was no proof of actual fraud, the court held for the defendant.

The rule, as broadly laid down in the Smith Case, is probably no longer the law in Pennsylvania. The Penn Mutual Case, supra, involved a Pennsylvania contract of life insurance. While the Smith Case does not appear to have been there considered, its broader implications seem to have been supplanted by a view more favorable to the insured, at least in life insurance. It has accordingly been held in Pennsylvania that, where statements in a life insurance application are to be considered as representations and not, as warranties, misstatements, even though material, will not forfeit the policy, if made in good faith. Kuhns et al. v. N. Y. Life Ins. Co. (1929) 297 Pa. 418, 147 A. 76, and cases cited. Cf. Keatley v. Grand Fraternity (D. C.) 198 F. 264; Id. (D. C.) 198 F. 272. The law of fire insurance seems to be the same. Imperial Fire Ins. Co. v. Murray (1873) 73 Pa. 13. It may, accordingly, be taken as established doctrine in Pennsylvania that the strict rules of marine insurance have been relaxed in life and fire insurance. But no Pennsylvania authority has been cited or found in which the insured did not believe himself covered by the policy as to the misrepresented or concealed matter.

In the absence of a warranty, undisclosed matter must in any event be material to render its nondisclosure significant. The test of the materiality of a fact was stated by Story, J., to depend upon, whether it would have influenced the underwriter “either riot to underwrite at all, or not to underwrite, except at a higher premium.” Columbian Ins. Co. v. Lawrence, 10 Pet. 507, 516, 9 L. Ed. 512. The more recent eases are in accord with this formulation. McCaffrey v. Knights of Columbia, 213 Pa. 609, 612, 63 A. 189; Young v. American Bonding Co., 228 Pa. 373, 380, 77 A. 263; Miller v. Maryland Casualty Co., 193 F. 343 (C. C. A. 3d); Davis-Scofield Co. v. Agricultural Ins. Co., 109 Conn. 673, 145 A. 38, 40.

In life insurance, the weight of particular elements of a risk is ordinarily determinable by reference to the relation of that element to the average mortality. In fire insurance, the more common increases in hazard are also clearly discernible as material. In the type of guaranty insurance here involved, the tests of materiality are not so simple. There is no actuarial table to which reference may be had as a basis for judgment.- The field is one in which the risks are speculative and largely individual. The premium rate is arrived at, at least partially, as in this case, by a process of trial and error by the insurance company, and by bargaining limited by competition. The ultimate decision in each ease both as to assumption of the risk and as to the premium rate must be based upon a business judgment in the light of all relevant and material facts. Applying the test of Story, J., I find the concealment clearly material in the present ease. I have hereinabove referred to the discussions between Rathbone and the Hares as to taxicab paper, and to Hare’s own views on the subject. Whether defendant actually would have refused the risk if it had been presented cannot of course be positively known. Although plaintiff, prior to the final negotiations of December, 1924, had discounted fleet taxicab paper for the General Finance Company (to the amount of $1,200,-796.50 from June, 1924, to Jan. 1, 1925, of which $1,048,894.50 was outstanding on the latter date), nothing of this was disclosed to defendant, which was entitled to exercise its own independent judgment as to whether or not it would take a risk of this kind. The lack of diversity in this financing of fleet taxicab paper, coupled with the difficulty of realization of cash upon resale in the open market, makes the risk different in kind from the regular branch discounting of pleasure cars engaged in by plaintiff. Plaintiff’s ultimate willingness to take the risk of discounting notes based upon such transactions cannot of course limit the defendant insurer’s independent exercise of judgment thereon.

Plaintiff invokes the rule of mutuality of estoppels. Accepting, for the purposes of this equity hearing, plaintiff’s construction of the bond as written and unreformed, to cover automatically unreported business, I agree that defendant would have an absolute right to recover the premiums on such business. Plaintiff argues that, if defendant had discovered the facts and the disaster had not come, defendant would therefore never have ■ sought a reformation of the bond or asserted an estoppel as against plaintiff, and in any event plaintiff would have been in no position to estop defendant from asserting successfully such a claim. Thus mutuality of estoppel fails.

This contention is based upon a misconception of the application of the mutuality rule. An estoppel arising out of the misconduct of one party is in its very nature unilateral; by reason of the misconduct, that party is estopped. Bigelow Law of Estoppel (1913) 710; Ewart Estoppel By Misrepresentation (1900) 198. If his opponent takes advantage of that estoppel, he cannot thereafter make claims inconsistent therewith. In that sense, but only in that sense, is there a requirement of mutuality in respect to such an estoppel. As applied to the present case, defendant could not on the one hand, defeat plaintiff’s claim by the estoppel, and, on the other hand, assert at the same time a right under the bond as written to premiums on the unreported business.

Much evidence has been introduced regarding the status of Watkins who was instrumental in bringing the contracting parties together, and the matter has been fully argued. Plaintiff contends that Watkins, as defendant’s agent, obtained knowledge of the General Finance Company proposition during the course of his employment, and'that such knowledge binds the defendant. As there is no claim that notice was given by plaintiff to Watkins as such agent for transmission to the defendant, we are concerned only with the actual scope of Watkins’ authority, and not with any reliance upon an apparent authority. American Law Institute, Restatement of the Law of Agency, § 498, and comment. Coneededly he had no power to complete contracts or to determine the acceptability of risks. His function was that of solicitation and introduction. He received requests from Hare which he passed on to an official of defendant. At times they were granted; at other times, not. When he had gotten a responsible official to “take up the matter,” his duties and powers were ended. In view of this position of Watkins, affected as it was with no semblance of responsibility, it is clear that his status was at best merely that of a soliciting agent.

The evidence divides itself into two parts: Alleged knowledge acquired by Watkins on or before January 2, 1925, that plaintiff re-discounted taxicab fleet paper, and alleged knowledge acquired by him some months later, through contacts with Dixon of the Premier Cab Company, an organization whose notes the General Finance Company was discounting, and with Githens of the latter company.

Notice or knowledge communicated to a soliciting agent subsequent to the binding date of the contract does not affect the insurer. Ætna Fire Ins. Co. v. Kennedy, 161 Ala. 600, 50 So. 73, 135 Am. St. Rep. 160, Taylor v. State Ins. Co., 98 Iowa, 521, 67 N. W. 577, 60 Am. St. Rep. 210; Cobel v. Hartford Ins. Co., 154 Minn. 233, 191 N. W. 592; Kring v. Globe, etc., Ins. Co., 195 Mo. App. 133, 189 S. W. 628. See Wood v. American Fire Ins. Co., 149 N. Y. 382, 44 N. E. 80, 52 Am. St. Rep. 733; Lewis v. Guardian Fire Ins. Co., 181 N. Y. 392, 74 N. E. 224, 106 Am. St. Rep. 557; Moller v. Niagara Fire Ins. Co., 54 Wash. 439, 103 P. 449, 24 L. R. A. (N. S.) 807, 132 Am. St. Rep. 1115; 5 Cooley, Briefs on Insurance, 4053.

The policy in suit was completed some time during the month of January, 1925. It is clear, therefore, that any facts which may have been disclosed to Watkins subsequent, to the completion of the contract in January, 1925, could not be imputed to the knowledge of the defendant.

We are remitted, therefore, to the evidence of Watkins’ knowledge of January 2, 1925. Alfred Hare was vague in his recollections. He could not remember as to how much of the details of the General Finance business he had informed Watkins, but he thought that he must have told Watkins of the general relations of the plaintiff with the General Finance Company. He did not recall specific conversations. The other testimony as to Watkins’ knowledge during the period under consideration related to a chance meeting of Watkins with Githens and Dixon on January 2, 1925, through the medium of Alfred Hare. Dixon testified that Hare introduced him to Watkins as “the man that builds these cabs we have started to take paper on.” The evidence does not indicate that the General Finance business was then discussed in the presence of Watkins. Githens does not testify to anything similar being said in his introduction to Watkins. Watkins specifically denies the testimony of Dixon.

On the whole, I am convinced that the testimony is too weak to support a finding that Watkins, at that time, knew of the re-discounting relation between the General Finance Company and the plaintiff. Knowledge of an agent,.even of a general agent, to be imputed to his principal, must be actual knowledge. Williams v. Atlas Assurance Co., 22 Ga. App. 661, 97 S. E. 91; Hughes v. Metropolitan Ins. Co., 117 Me. 244, 103 A. 465 (strictly construing a statute making knowledge of an agent that of the insurance company). See Lorie v. Connecticut Mutual Life, 15 Fed. Cas. page 891, 892, No. 8509. Mere conjecture, based upon vague recollection which- gives not a semblance of detail is not sufficient. Assuming, therefore, contrary to defendant’s insistent argument, that Watkins was defendant’s agent and not a mere broker, plaintiff nevertheless cannot recover, because of a failure to prove Watkins’ actual knowledge of the essential facts.

In view of this result, it is unnecessary to discuss the testimony relating to payments made by both parties to Watkins or to decide his exact position, whether it was that of a broker, or defendant’s special agent, or plaintiff’s agent.

Under the foregoing analysis, it is unnecessary too to -consider the testimony introduced to show the refinancing operations engaged in by plaintiff after the original taxicab paper had matured.

Since the issue of the effect of nondisclosure prior to the completion of the contract is before me on the equity side of the court by plaintiff’s consent, the ease will be determined on the merits. An injunction will issue restraining the action at law against defendant upon any claims arising out of losses on unreported rediscounted taxicab paper of the General Finance Company or on the refinanced notes of its subsidiaries.

       Although Gordon v. Prudential Insurance Co., 231 Pa. 404, 80 A. 882, suggests that the “good faith of the insured is immaterial where a material change has taken place,” the facts indicate t that the applicant there must have known that he was seriously ill. Moreover, as was said in the Cummings Case, supra: “No question of good faith arose in the case. The question was merely whether the contract of insurance had become effective, and, since the premium was not paid during the good health of the insured, as provided by the receipt, the policy did not become binding.” 101 Vt. 73, 142 A. 82, at page 89.

       Cf. 3 Joyce, Ins., § 1847. “If the act of the insured in withholding a material fact or circumstance is intentional or designed, then it will be an actual fraud necessarily avoiding contract.”


source: Caselaw Access Project

author: To the Honorable George P. Hahn, United States District Judge: HAHN, District Judge.

license: Public Domain

text:
    In re HILLEBRAND.
    No. 6328.
    District Court, N. D. Ohio, W. D.
    Aug. 27, 1930.
   Report of Special Master.

To the Honorable George P. Hahn, United States District Judge:

The undersigned, heretofore appointed special master herein, by order dated April 10, 1930, to inquire into the specifications in opposition to the discharge of said bankrupt, to hear testimony, and to report his findings thereon, together with the testimony, to the court, does hereby report as follows:

Hearings were had before me at which Messrs. Cotter & McFellin, Toledo, Ohio, appeared on behalf of Frank A. Carabin, the objecting creditor, and Messrs. Geo. A. Bassett and Frank H. Foster appeared on behalf of the bankrupt, upon which hearings testimony was taken and evidence introduced, as shown by the transcript of proceedings and exhibits herewith transmitted.

The pleadings herein consist of specifications in opposition to discharge of bankrupt, answer to specifications, supplemental answer and exceptions to the specifications, amended supplemental answer and exceptions to the specifications, and reply to answer to specifications and supplemental answer and exceptions to specifications.

The specifications of objections are based upon the following grounds:

(1) That the bankrupt “failed to keep books of account or records from which her financial condition and business transactions might be ascertained.”
This ground was not insisted upon or argued by counsel for the objector.
(2) That within a period of twelve months immediately preceding the filing of the petition in bankruptcy herein, which was filed February 11, 1929, the bankrupt concealed from her creditors and from the trustee herein, with intent to hinder, delay, and defraud her creditors, certain moneys, • to wit:
(a) The sum of $750, which, it is alleged, the bankrupt received in July, 1928, and caused to be deposited by her sister, Julia Maier, in the name of said sister, for the use and benefit of the bankrupt, in the Security Savings Bank & Trust Company, Savings Department, Toledo, Ohio, and which continued to be her property and was an asset of her estate at the time she filed her voluntary petition in bankruptcy.
(b) The sum of $40 of which the bankrupt was the owner at the time she filed her petition, said moneys being on deposit to her credit in the Mutual Savings Association of Toledo, Ohio.
(3) That the said bankrupt made a false oath in said bankruptcy proceedings by failing to list said sums of $750 and $40 as assets in her schedules, and in testifying before the referee, upon general examination, that said schedules contained a true and correct statement of all her assets and that she had no other property of any kind, when, as a matter of fact, she was at the time the owner of said sums.

Taking up first the objection based upon the item of $40, it is admitted that the bankrupt at the time of her bankruptcy had an account at the Mutual Savings Association of Toledo, under the name of Frieda Maier) her maiden name, in which there was a balance of $40, which she did not list in her schedules. In explanation of why it was not listed in her schedules, the bankrupt testified that she told counsel of this deposit before the schedules were made up, hut that she learned for the first time at her examination before the referee that her counsel misunderstood hqr; that upon learning the facts her counsel advised her to turn the deposit over to the trustee, which was done. Her counsel, Mr. Frank H. Foster, testified that he understood the bankrupt to say, at the time he was getting information from her upon whieh to base the schedules, that she had a Christmas savings account in the Mutual Savings Association, but that it was in her mother’s name and that is the reason he did not schedule it as an asset of the bankrupt; that it developed at the hearing before the referee that while the deposits were being made for the mother the account was in the name of bankrupt and he advised that it be turned over to the trustee. (Rec. pp. 64, 71.)

It seems 4o us that the weight of evidence offered is insufficient to show that the bankrupt knowingly and fraudulently omitted the deposit of $40 from her schedules or so testified with regard thereto before the referee, and we are of the opinion that the specification of objection on this ground has not been sustained.

As to the $750 item, the bankrupt in her answer denies that the same ever belonged to her. In addition to raising this question of fact, she urges res adjudicata as a bar to the prosecution of the objection on this ground. This question, if decided in favor of the bankrupt, makes unnecessary in this court the determination of the question of fact involved.

The trustee under the authority of this court commenced an action in the court of common pleas of Lucas county, Ohio, against Julia Maier, the sister of the bankrupt, alleging that the said $750 deposited to her credit was the property of the bankrupt and assets of her estate, and seeking to recover the same on that ground; the ease was tried before a judge and jury in that court, whieh jury rendered a verdict in favor of the said Julia Maier and against the trustee, and the court, in its journal entry, found “that the defendant Julia Maier is the sole owner of the $750.-00 and all accumulations thereon, now on deposit in the name of the said Julia Maier amd that the plaintiff has no right, title or interest therein.” The ease was appealed'by the trustee to the Court of Appeals of Lucas County and there affirmed; the court in its journal entry making exactly the same finding as that of the common pleas court above quoted.

It is the contention of counsel for the bankrupt that the judgment in the state court is conclusive upon the question of the ownership of the $750, and that this question of fact cannot be. re-examined in this proceeding. Counsel for the objector contend that the issue here is not identical nor is it between the same parties, and that the judgment of the state court is not res adjudicata.

The cases upon this subject are very much in conflict, and in order that the court may have before it the decisions of some of the courts on this subject, we call attention to the following:

A case supporting the contention of the objector is In re Cornell, 97 F. 29, 3 A. B. R. 172 (D. C. N. Y. 1899), holding: “2. A court of bankruptcy will not stay its decision upon a bankrupt’s application for discharge,. to await the result of a pending action in a state court wherein creditors of the bankrupt seek to set aside a transfer of property made by him before the adjudication of bankruptcy, and which they allege to have been fraudulent as to creditors, the same plaintiffs opposing the bankrupt’s discharge on the ground of the same alleged fraud; for the issues are not identical, nor would the decree of the state court determine the right of the bankrupt to be discharged.”

There is no discussion of cases in this opinion.

A case against the contention of the objector is In re Skinner, 97 F. 190, 3 A. B. R. 163 (D. C. Iowa, 1899), a decision by Judge Shiras, in whieh it was held: “2. A judgment rendered by a state court in a suit to which the bankrupt, his wife, and the trustee, as the representative of creditors, were all parties, finding that a conveyance of property by the bankrupt to his wife was fraudulent as to creditors, and should be set aside, and the-property transferred to the trustee, is conclusive evidence of the points decided, on the bankrupt’s subsequent application for discharge, opposed by creditors on the ground of such fraudulent conveyance as a concealment of assets.”

This case cites and quotes from Southern Pacific R. R. Co. v. United States, 168 U. S. 1, 48, 18 S. Ct. 18, 42 L. Ed. 355.

Another ease against the contention of the objector is In re McGurn, 102 F. 743, 4 A. B. R. 459 (D. C. Nev., 1900), in whieh case, a creditor commenced suit in the state court (24 Nev. 370, 55 P. 304, 56 P. 94), where judgment was entered against the creditor upon a verdict that the transfer by the bankrupt to his wife of his business and property was not made with intent to hinder, delay, and defraud creditors. Objection was made to the discharge by the creditor on the ground that the bankrupt was the owner of the said business and property and which he failed to schedule. The court held that the action of the state court was res adjudieata. ■It said on page 745 of 102 F., and page 462 of 4 A. B. R.: “This court is requested to review the evidence in that ease, and to decide that the courts of the state erred in not rendering a judgment in favor of the opposing creditor herein. This it respectfully declines to do. There must be some other facts, some other proceedings, some further evidence, in order to bring the ease within the provisions of the bankruptcy act, and justify this court in refusing to grant petitioner’s application.”

Another ease in point along the same line is In re Tiffany, 147 F. 314, 17 A. B. R. 296 (D. C. N. Y. 1906, Hough, J.), in which it was held: “1. The judgment of a state court, in a suit brought by a bankrupt’s trustee, refusing to set aside a transfer of property made by the bankrupt as fraudulent,- concludes creditors, who cannot thereafter set up the same ground to defeat the bankrupt’s discharge.”

The court cites, among other cases, Rejall v. Greenhood, 92 F. 945 (9 C. C. A., 1899), which holds: “1. In a suit to set aside an assignment for the benefit of creditors, the assignee represents all the beneficiaries of the trust; and a judgment against him is binding upon such beneficiaries, though they were not parties to the suit.”

The court in the Eejall Case cites a number of cases, including several from the Supreme Court of the United States, in one of which, Kerrison v. Stewart, 93 U. S. 155, 23 L. Ed. 843, opinion by Waite, Ch. J., it is said, page 162 of 93 U. S.: “The trustee is himself the chosen representative of all, and whatever binds him must bind them.”

Another case against the contention of the objector is that of In re Winchester, 155 F. 505 (D. C. Pa. 1907, Ewing, J.), where it was held: “A bankrupt cannot be refused a discharge on the ground of fraudulent concealment of assets because of his failure to state in his schedules, or to advise his trustee of the fact, that he had expended money in the improvement of property owned by his wife, where in a plenary suit by the trustee against the wife it was determined that the creditors had no lien upon or interest in the property because of such expenditure.”

In this case the special master found the bankrupt guilty of fraudulent concealment and recommended refusal of his discharge. The court says on page 506 of 155 F.: “That decree [in the state court] virtually determines that the bankrupt had no interest in the real estate of his wife subject to the claim of his creditors, and consequently in failing to disclose the expenditures he had made in making these improvements he cannot be guilty of a concealment of assets.” No eases are cited in this opinion.

A case supporting the contention of the objector is In re Cohen, 192 F. 751, 26 A. B. R. 544 (D. C. N. J. 1911, Rellstab, J.), where it is held: “Where a referee in bankruptcy was directed to take proof and report findings on exceptions to the bankrupt’s petition for discharge, it was his duty to exercise an independent judgment on the facts brought before him, and not to follow the judgment of another tribunal on the facts brought before it, though considering the identical question raised by the specifications; and hence a report that he was still convinced that the bankrupt had sworn falsely to material facts, as objected in the specifications, but that, in view of the fact that a jury on indictment had found him not guilty of such offense, the referee recommended the bankrupt’s discharge, was erroneous.” There were no cases cited in this opinion and there was no discussion of the law.

Another case in support of the position of the objector is In re Mayer, 195 F. 571, 28 A. B. R. 342 (D. C. N. Y. 1912, Mayer, J.) in which it was held:

“1. A judgment, in an action in a state court to recover a preferential payment to which the bankrupt was not a party, does not operate as an estoppel or a bar against the bankrupt seeking a discharge. * * *
“3. A special master directed to take proof and make a report on exceptions to a bankrupt’s petition for discharge must exercise an independent judgment on the facts brought before him, and should not follow the judgment of another tribunal on facts brought before it, though the identical question may have been tried out before such tribunal on substantially the same facts.”

The court cites no other cases than the case of In re Cohen, supra.

Another case against the contention of the objector is that of In re Seavey, 195 F. 825, 27 A. B. R. 373 (D. C. N. Y. 1912, Hough, J.), holding: “Where a bankrupt’s trustee instituted proceedings in a state court to set aside as fraudulent an assignment of an alleged interest in certain property under the will of her grandfather, and to establish his right thereto as trastee, and the bankrupt duly defended such action, in which the trustee was successful, the judgment, in the absence of an appeal therefrom, was conclusive, and could not be collaterally attacked or reviewed for error in the bankruptcy proceeding.”

A somewhat different rule was laid down in the ease of In re Krall (D. C. Conn. 1912, Platt, J.) 196 F. 402, in which it was held: “Where, in prior proceedings in bankruptcy, it had been determined that the bankrupt was guilty of concealment of assets, such determination was res judicata, and established a prima facie ease in support of objections to the bankrupt’s discharge on that ground.” The court said on page 403 of 196 F.: “The question at issue before him [the master] as to concealment of assets was res adjudieata, and the record evidence made out a prima facie case. It presented a decision of the same issue in the same ease and practically between the same parties, because these obiecting creditors here were represented by the "trustee in the earlier controversy.” No cases are cited on this point.

Another case along the same line is that of In re Shear, 201 F. 460 (D. C. N. Y. 1913, Hazel, J.), in which it was held: “A prior adjudication that the bankrupt had made a false oath, in the course of his examination in the relation to the conduct of his business, on the certificate of the referee, and summary punishment for contempt, constitute prima facie proof of a relevant specification against his application for the discharge; but he may still show that the offense was not knowing-Iv and fraudulently committed.”

A ease involving this question, which has been cited in support of their respective contentions, by both the bankrupt and objector, is that of Sawyer v. Orlov, 15 F.(2d) 952, 9 A. B. R. (N. S.) 6 (1 C. C. A. 1926), petition for certiorari denied, 274 U. S. 736, 47 S. Ct. 574, 71 L. Ed. 1316 (1927), in which it was held:

“1. It is wholly irregular for referee, on petition for discharge of bankrupt, opposed on ground that, within four months before filing of petition in bankruptcy, bankrupt made transfer with intent to hinder, delay, and defraud creditors, to take into consideration finding of court in suit by trustee in bankruptcy to set aside the transfer.
“2. Referee’s finding that bankrupt made transfer with deliberate intent to defraud creditors, affirmed by 'decree denying composition, was conclusive determination of the fact between the parties to composition proceeding, when called in question in subsequent proceeding for discharge of bankrupt, to which they were likewise parties.
“3. Proceeding for bankrupt’s discharge being different cause of action from prior one for composition, decree in the prior pro-' ceeding need not be pleaded to be admissible in evidence in the later proceeding and is there conclusive as to the matters directly in issue and either admitted by the pleadings or actually tried in the prior proceeding between the same parties.”

The first paragraph of the syllabus above quoted is relied upon by counsel for the objector. The court cites no cases in its opinion in support of this proposition. The second paragraph of the syllabus is relied upon by counsel for the bankrupt. The court cites upon this proposition the following eases: Sutton v. Wentworth (C. C. A.) 247 F. 493, 501; Cromwell v. County of Sac, 94 U. S. 351, 352, 24 L. Ed. 195; Southern Pacific R. R. Co. v. United States, 168 U. S. 1, 18 S. Ct. 18, 42 L. Ed. 355.

Another ease sustaining the contention of the objector is that of In re Jutkovitz (D. C. N. Y. 1919, Chatfield, J.), 259 F. 915, in which the court held: “2. At hearing on objections to a bankrupt’s discharge, evidence held to sustain a special master’s findings that the bankrupt failed to schedule a piano, and sought to defraud his creditors by transferring assets to his father, although a state court had refused to set aside the transfer.”

A ease favoring the contention of the objector is that of In re Weiner, 28 F.(2d) 881, 12 A. B. R. (N. S.) 651 (D. C. Md. 1928, Coleman, J.), in which it was held: “Court’s refusal to confirm composition offered to creditors by bankrupt, on ground that condition of bankrupt’s books cast doubt on bona tides of bankrupt’s conduct of his business, under Bankruptcy Act, § 12d, 11 USCA §' 30(d), held not necessarily res judicata on bankrupt’s subsequent application for discharge under section 14b, 11 USCA § 32 (b).” There is no discussion of cases in the opinion.

Another ease holding against the contention of the objector is In re Davis (D. C. Mass. 1928, Morton, J.), 28 F.(2d) 883, in which it was held: “1. Court in hearing objections to bankrupt’s discharge, could not determine whether assignment was made with intent to hinder, delay, and defraud creditors, where litigation over assignment was still pending between the assignee and the trustee in bankruptcy.” In this ease there was litigation brought in the District Court over the assignment of accounts, which was still pending, having been sent back for further proceedings by the Circuit Court of Appeals (Forman v. Jacobs, 26 F.(2d) 764); this transaction being involved in one of the grounds of objection to discharge. The court said on page 884 of 28 F.(2d): “While that matter is still unsettled, this ground of objection cannot well be passed upon.” No cases are cited in the opinion on this point. The discharge was refused. Upon appeal, the Circuit Court of Appeals [Davis v. Jacobs, 35 F.(2d) 936] reversed the case upon other grounds than the point referred to above and did not pass upon that question.

Another ease in favor of the contention of the bankrupt is In re Ruthkowski, 39 F.(2d) 969, 15 A. B. R. (N. S.) 602 (D. C. Minn. 1930, Sanborn, J.), in which it was held: “A judgment of a state court, in an action by a trustee in bankruptcy against a bankrupt and his son, that a chattel mortgage was given by the bankrupt with intent to hinder and defraud his creditors, is conclusive in subsequent application for a discharge and objections thereto.” The court cites among other eases Southern Pacific R. R. Co. v. United States, 168 U. S. 1, 18 S. Ct. 18, 42 L. Ed. 355, and In re Tiffany (D. C.) 147 F. 314.

It would seem to us that the better reason and the weight of authority support the conclusion that the judgment of the state court is conclusive here. A leading and controlling case on this subject is that of Southern Pacific Railroad Company v. United States, 168 U. S. 1, 18 S. Ct. 18, 42 L. Ed. 355, cited and quoted in some of the cases above referred to, in which it was held: “A right, question, or fact distinctly put in issue, and directly determined by a court of competent jurisdiction, as a ground of recovery, cannot be disputed in a subsequent suit between the same parties or their privies; and, even if the second suit is for a different cause of action, the right, question, or fact once so determined must, as between" the same parties or their privies, be taken as conclusively established, so long as the judgment in the first suit remains unmodified.” The court said on this subject, page 48 of 168 U. S., 18 S. Ct. 18, 27:

“The importance of this question, independently of the magnitude of the interests to be affected by our decision, and of the earnest contention of learned counsel, justifies a reference to some of the adjudged eases, showing the grounds upon which this salutary rule rests.
“The general principle announced in numerous cases is that a right, question, or fact distinctly put in issue, and directly determined by a court of competent jurisdiction, as a ground of recovery, cannot be disputed in a subsequent suit between the same parties or their privies; and, even if the second suit is for a different cause of action, the right, question, or fact once so determined must, as between the same parties or their privies, be taken as conclusively established, so long as the judgment in the first suit- remains unmodified. This general rule is demanded by the very object ;£or which civil courts have been established, which is to secure the peace and repose of society by the settlement of matters capable of judicial determination. Its enforcement is essential to the maintenance of social order; for the aid of judicial tribunals would not be invoked for the vindication of rights of person and property if, as between parties and their privies, eonclusiveness did not attend the judgments of such tribunals in respect of all matters properly put in issue, and actually determined by them.
“Among the eases in this court that illustrate the general rule are Hopkins v. Lee, 6 Wheat. 109, 113 [5 L. Ed. 218]; Smith v. Kernochen, 7 How. 198, 216 [12 L. Ed. 666]; Thompson v. Roberts, 24 How. 233, 240 [16 L. Ed. 648]; Washington, Alexandria & Georgetown Steam Packet Co. v. Sickles, 24 How. 333, 340, 341, 343 [16 L. Ed. 650]; Russell v. Place, 94 U. S. 606, 608 [24 L. Ed. 214]; Cromwell v. Sac County, 94 U. S. 351 [24 L. Ed. 195]; Campbell v. Rankin, 99 U. S. 261 [25 L. Ed. 435]; Lumber Co. v. Buchtel, 101 U. S. 638 [25 L. Ed. 1072]; Bissell v. Spring Valley Township, 124 U. S. 225, 230, 8 S. Ct. 495 [31 L. Ed. 411]; and Johnson Co. v. Wharton, 152 U. S. 252, 14 S. Ct. 608 [38 L. Ed. 429].”

The court goes on to comment upon the cases cited. It further says on pages 59, 60 of 168 U. S., 18 S. Ct. 18, 31: “But according to the weight of authority, and upon principle, the former judgment, if admissible in evidence at all, is conclusive of the matters put in issue and actually determined by it. Mr. Greenleaf correctly' says that ‘the weight of authority, at least in the United States, is believed to be in favor of the position that, where a former recovery is given in evidence, it is equally conclusive, in its effect, as if it were specially pleaded by the way of •estoppel.’ 1 Greenl. Ev. § 531. This view is in accord with the decisions of this Bourt above cited. See, also, Marsh v. Pier, 4 Rawle [Pa.] 273, 288 [26 Am. Dec. 131]; Lawrence v. Hunt, 10 Wend. [N. Y.] 80, 83 [25 Am. Dec. 539]; Betts v. Starr, 5 Conn. 550 [13 Am. Dec. 94]; Sawyer v. Woodbury, 7 Gray [Mass.] 499, 502 [66 Am. Dec. 518]; Jennison v. West Springfield, 13 Gray [Mass.] 544; Cannon v. Brame, 45 Ala. 262; Trayhem v. Colburn, 66 Md. 277, 278, 7 A. 459; Garton v. Botts, 73 Mo. 274, 278; Walker v. Chase, 53 Me. 258, 260; Lynch v. Swanton, 53 Me. 100, 102; Prather v. Owens, Cheves [S. C.] 236; Jones v. Weathersbee, 4 Strob. [S. C.] 50, 54, 55 [51 Am. Dec. 653]; Warwick v. Underwood, 3 Head [Tenn.] 238, 240 [75 Am. Dec. 767]; Isaacs v. Clark, 12 Vt. 692, 694 [36 Am. Dec. 372].”

A later ease in the Supreme Court of the United States involving a similar question is that of United States v. Moser, 266 U. S. 236, 45 S. Ct. 66, 69 L. Ed. 262, in which it was held: “While the doctrine of res judicata does not apply to unmixed questions of law, a fact or right distinctly adjudged cannot be disputed in a subsequent action between the same parties, even upon another demand and though the' original determination was reached upon an erroneous view or application of the law.”

The court says on this subject in its' opinion on pages 241, 242 of 266 U. S., 45 S. Ct. 66, 67:

“The general principles are well settled, and need not be discussed. The scope of their application depends upon whether the question arises in a subsequent action between the same parties upon the same claim or demand or upon a different claim or demand. In the former ease a judgment upon the merits constitutes an absolute bar to the subsequent action. In the latter case the inquiry is whether the point br question presented for determination in the subsequent action is the -same as that litigated and determined in the original action. Cromwell v. County of Sac, 94 U. S. 351, 352, 353, 24 L. Ed. 195. The rule is succinctly stated in Southern Pacific R. R. Co. v. United States, 168 U. S. 1, 48, 18 S. Ct. 18, 27, 42 L. Ed. 355:
“ ‘The general principle announced in numerous eases is that a right, question or fact distinctly put in issue and direetly determined by a court of competent jurisdiction, as a ground of recovery, cannot be disputed in a subsequent suit between the same parties or their privies; and even if the second suit is for a different cause of action, the right, question or fact once so determined must, as between the same parties or their privies, be taken as conclusively established, so long as the judgment in the first suit remains unmodified.’
“And in New Orleans v. Citizens’ Bank, 167 U. S. 371, 396, 17 S. Ct. 905, 913, 42 L. Ed. 202, this court, speaking through Mr. Justice White, said:
“ ‘The estoppel resulting from the thing adjudged does not depend upon whether there is the same demand in both eases, but exists, even although there be different demands, when the question upon which the recovery of the second demand depends has under identical circumstances and conditions been previously concluded by a judgment between the parties or their privies.’ And see Myers v. International Trust Co., 263 U. S. 64, 44 S. Ct. 86, 68 L. Ed. 165.
“The suits here are upon different demands; and the point at issue is to be determined by applying the second branch of the rule. The question expressly and definitely presented in this suit is the same as that definitely and actually litigated and adjudged in favor of the claimant in the three preceding suits, viz: whether he occupied the status of an officer who had served during the Civil War.
“The contention of the government seems to be that the doctrine of res judicata does not apply to questions of law; and, in a sense, that is true. It does not apply to unmixed questions of law. Where, for example, a court in deciding a case has enunciated a rule of law, the parties in a subsequent action upon a different demand are not es-topped from insisting that the law is otherwise, merely because the parties are the same in both cases. But a fact, question or right distinctly adjudged in the original action cannot be disputed in a subsequent action, even though the determination was reached upon an erroneous view or by an erroneous application of the law. That would be to affirm the principle in respect of the thing adjudged but, at the same time, deny it all efficacy by sustaining a challenge to the grounds upon which the judgment was based. See Gunter v. Atlantic Coast Line R. R. Co., 200 U. S. 273, 291, 26 S. Ct. 252, 50 L. Ed. 477; United States v. California & Oregon Land Co., 192 U. S. 355, 358, 24 S. Ct. 266, 48 L. Ed. 476; Scotland County v. Hill, 112 U. S. 183, 187, 5 S. Ct. 93, 28 L. Ed. 692; Southern Minnesota Ry. Ext. Co. v. St. Paul & S. C. R. Co., 55 E. 690, 695, 696, 5 C. C. A. 249; Pittsford v. Chittenden, 58 Vt. 49, 57, 3 A. 323; Bigelow on Estoppel (6th Ed.) p. 112. A determination in respect of the status of an individual upon which his right to recover depends is as conclusive as a decision upon any other matter. Clemens v. Clemens, 37 N. Y. 59, 72; Pittsford v. Chittenden, supra.”

With reference to the argument of the objector that the judgment against the trustee in the suit in the state court is not conclusive here because in that case the issues were not identical and the parties were not the same, the issue in the state court was the same as here, that is, as to who was the owner of the $750, and it would also seem to be the law that’ a judgment against the trustee is binding upon the creditors whom he represents. In re Tiffany (D. C.) 147 F. 314; Rejall v. Greenhood (C. C. A.) 92 F. 945; In re Winchester (D. C.) 155 F. 505; Kerrison v. Stewart, 93 U. S. 155, 23 L. Ed. 843, supra. This would probably be particularly so under the circumstances of this ease, where the objecting creditor was represented by counsel who represented the trustee in the state case, actively participated in its proceedings and, being the largest and practically the only creditor, would have been the principal beneficiary of any judgment for the trustee rendered in the state case.

We presume there may be eases of objections to discharge based upon facts also involved in adjudications in other cases in which the trustee, a creditor, or the bankrupt is a party, where the principle of res adjudieata may not apply, as, perhaps, where the ease in the other court involving the fact in question of the discharge is a criminal case and it is necessary to prove it beyond a reasonable doubt, whereas the bankrupt act provides that on the healing of objections to a discharge, when the objector shall show to the satisfaction of the court that there are reasonable grounds for believing that the bankrupt has committed any of the acts which would prevent his discharge in bankruptcy, “the burden of proving that he has not committed any of such acts shall be upon the bankrupt”; or where the other ease is an action to recover property and it is necessary to prove elements in order to recover which are not required to uphold the objections, such as notice or knowledge of insolvency; or where the evidence in tbe two cases is so materially different that the rule should not be applied.

If we did not believe that we were concluded by the judgment of the state court, our finding of fact would have been that this money was the property of the bankrupt.

Our conclusion is that the specifications of objections to the discharge of the bankrupt 'have not been sustained and that she should be granted her discharge.

We are transmitting herewith the pleadings and the transcript of proceedings and testimony together with the exhibits.

Respectfully submitted,

Fred H. Kruse,

August 27,1930. Special Master.

Report of Special Master.

To the Honorable George P. Hahn, United States District Judge:

The undersigned, to whom was re-referred the above ease with instructions to take further testimony with reference to the participation, if any, by the bankrupt through the employment of counsel or otherwise in the defense of suit by the trustee against Julia Maier in the state court, does hereby report as follows:

A hearing was had before me at which Messrs. Cotter & MeFellin appeared on behalf of Frank A. Carabin, the objecting creditor, and Messrs. George A. Bassett and Frank H. Foster appeared on behalf of the bankrupt, on October 10, 1930, upon which hearing testimony was taken, as shown by the transcript of proceedings transmitted herewith.

Witnesses examined were Harold W. Fraser, Mrs. Amelia Maier, Julia Maier, the bankrupt, Frank H. Foster, and George A. Bassett. Mr. Fraser, who represented Julia Maier in the state court case, testified that he had had frequent conferences with the bankrupt with regard to the case in the common pleas court and that she was present during the hearing of the ease in that court and in the Court of Appeals. Mrs. Amelia Maier, the mother of the bankrupt, testified she consulted with Mr. Fraser in company with both her daughters with regard to the ease in the common pleas court, and that Mr. Foster, who was the attorney for the bankrupt in her bankruptcy case, was also there occasionally; that they first went to see Judge Bassett and afterwards consulted Mr. Fraser, had frequent conferences with him, and were present during the trial of the case in both the common pleas court and the Court of Appeals. Julia Maier, the sister of the bankrupt, defendant in the state ease, testified that she retained Judge Bassett and Mr. Fraser as attorneys in the ease in the state court, and that her sister, the bankrupt, was there all the time the cases were being heard; that Frieda desired Judge Bassett to assist Mr. Foster in the case and that upon the recommendation of Mr. Foster they employed Judge Bassett and Mr. Fraser. Frieda Hillebi’and, the bankrupt, testified that she went to .see Judge Bassett on the suggestion of Mr, Foster, who was her attorney in the bankruptcy case; that she consulted him on numerous occasions, was at Mr. Fraser’s office several times consulting him regarding her interest in the cáse, was present at the trial in the common pleas court, and participated in that proceeding, and was also present in the Court of Appeals; that she was there for the purpose of protecting her own interest and that is why she employed Judge Bassett and Mr. Fraser; that she employed Judge Bassett as one of the attorneys in the case and afterward consulted and employed Mr. Fraser; that Judge Bassett was her attorney in the matter of objections to her discharge in bankruptcy and examined all the witnesses in her behalf. Mr. Foster testified that after the case was started in the common pleas court, Frieda and her sister consulted him and he directed them to Judge Bassett; that he had frequent consultations with Judge Bassett in the matter; that his work in connection with the ease in the common pleas court was in the nature of counsel; that he did not take part in the actual trial of the ease, although he was present in the courtroom a number of times. Judge Bassett testified that he acted as attorney for Frieda on the objections to the discharge; that in the trial of the case in the state court of Brannon, Trustee, versus Julia Maier, he appeared as the attorney for Julia Maier and the bankrupt. There was no testimony offered on behalf ,of Mr. Carabin, the objecting creditor, to contradict the testimony of these witnesses.

Conclusion.

My conclusion is that the testimony adduced before me, as above set forth, shows the active participation by the bankrupt through the employment of counsel and otherwise in the defense of the suit of the trustee against Julia Maier-in the state court.

Respectfully submitted,

Fred H. Kruse,

December 12, 1930. Special Master.

Frank H.-Foster, of Toledo, Ohio, for bankrupt.

Cotter & MeFellin, of Toledo, Ohio, for objecting creditor, Frank Carabin. '

HAHN, District Judge.

This matter came on to be heard this day and date upon report of one Fred H. Kruse, Esquire, to whom as special master was referred by order of court duly entered herein the petition of the bankrupt for discharge, and the specifications in opposition thereto having been filed in this court, and no objection to said report having been filed within the time specified by law. Now, upon consideration of . said bankrupt’s petition for discharge, said specifications in opposition thereto and said report of said special master, it is ordered that the said report of the said special master be, and the same hereby is, approved and confirmed, and that the said discharge of the said Frieda Hillebrand, bankrupt, be and it is hereby granted.


author: HOUGH, Circuit Judge.

text:
    L. LITTLEJOHN & CO., Inc., v. UNITED STATES.
    District Court, S. D. New York.
    Sept. 29, 1922.
   HOUGH, Circuit Judge.

I have drawn an order which is almost self-explanatory, yet I may state my reasons for so doing.

The amended libel seeks by positive averment to put the United States out of court so far as sovereign immunity is concerned.

Nevertheless the United States comes in by this suggestion and asserts an immunity which rests either upon ownership of the Antigone or possession, control, and operation thereof.

Nowhere does the suggestion use the words “lawful ownership,” or property or possession; but it is of course assumed that any unqualified assertion of ownership or the like is an allegation of lawful ownership, etc.

Every variant of this allegation is categorically denied by the traverse or answer.

The court may entertain the belief (I do) that it is almost matter of public knowledge as to just how this vessel came into the possession of the United States, what had been done with her, and for what she was being used when in collision with the Gaelic Prince.

The court may believe (as I do) that the single and ultimate question here is whether vessels with the Neckar-Antigone’s history could be said to be within the meaning of the law vessels belonging to the United States or public vessels of the United States.

But I am not authorized to take judicial cognizance of this matter, and I am persuaded that the documents and affidavits submitted on the suggestion-hearing do not and cannot tell the whole story. I should want to know what the United States had done to the vessel, whether it had been rebuilt and reconditioned, how it was manned, and especially what, if any, steps had been taken by the original private German owner to maintain or reassert any claim of ownership in the original Neckar. In short, I do not think that a sufficient groundwork is laid for the argument made at bar.

The practice of making suggestions like this has undoubtedly grown. It seems to me it is bad practice. In this action in personam the same issues could (and I think should) have been raised by an answer containing exceptions, or rather exceptive allegations; then a preferential trial could have been asked on the exceptive allegations relating to jurisdiction.

The best analogy to such a thing as this “suggestion” on the instant side is the trial of a claim. That is to say, it is old practice that a person proffering a claim to a vessel in rem may be called upon in limine to thresh out his right to claim. So here the United States must first thresh out its right to be dismissed without trial; and I have endeavored to frame an order which will produce a record upon which, if decision is given for the government, appeals can safely be made.


author: NETERER, District Judge.

text:
    Ex parte WILSON SEEN LEE.
    No. 20410.
    District Court, W. D. Washington, N. D.
    Oct. 16, 1930.
    John *J. Sullivan and Michael F. Ward, both of Seattle, Wash., for applicant.
    Anthony Savage, U. S. Atty., and Hamlet P. Dodd, Asst. U. S. Atty., both of Seattle, Wash., for the United States.
   NETERER, District Judge.

The finding of the Commissioner of Immigration and Secretary of Labor, there being some evidence, must be sustained. It is not for the court to weigh the testimony.

The birth certificate filed fourteen or fifteen years after the birth is of no probative value, Nagle v. Dong Ming (C. C. A.) 26 F.(2d) 438; and pregnant is this conclusion as to the fact by the statement of the doctor that he had no data from which to register this birth and that no one caused him to register it at that late date, and that he did not know the party registered, nor have any record in his possession to show the birth. This information was given by the doctor May 1, 1914, and the petitioner is alleged to have been born January 6, 1897. The certificate was made December 23, 1911.

In addition to the contradictory and unsatisfactory evidence presented at the former hearing of the petitioner and his brother, Seen Ban, it is shown that two Chinese, Chung You and Kam Fat, on May 7, 1914, identified the photograph of Sen Jan, alleged father of the petitioner, and claimed to have known him for over twenty-five years, had business relations with him, and knew him and his wife well in Bakersfield, Cal., alleged place of birth, and said that Sen Jan had no family, “No, there was just him and his wife.”

The petitioner must rest upon the proofs presented in this case, and, if some evidence supports the finding of the Commissioner of Immigration and Secretary of Labor, in the absence of flagrant error, the finding is conclusive. United States ex rel. Vajtauer v. Commissioner of Immigration, 273 U. S. 103, 47 S. Ct. 302, 71 L. Ed. 560. See, also, United States ex rel. Leong Ding v. Brough (C. C. A.) 22 F.(2d) 926; Chin Yow v. United States, 208 U. S. 8, 28 S. Ct. 201, 52 L. Ed. 369; Low Wah Suey v. Backus, 225 U. S. 460, 32 S. Ct. 734, 56 L. Ed. 1165. Judge Wilbur, for the court, in Gung You v. Nagle (C. C. A.) 34 F.(2d) 848, said at page 851:

“The present statement of the rule is that the courts will only interfere in such plain eases of flagrant disregard of fundamental principles of justice as constitute a denial of due process of law.
“The courts are powerless to interfere with conclusions of the immigration authorities and can only deal T^ith cases where the principles of justice have been flagrantly outraged. * * * ”

Upon the entire record in this ease, the writ must be denied.


text:
    In re DRAKE et al.
    No. 31459.
    District Court, W. D. Washington, N. D.
    Feb. 11, 1931.

    Boon Cason, of Portland, Or., for bankrupts.
   NETERER, District Judge.

This matter comes before the court on report of the referee recommending dismissal of the petition, the court not having jurisdiction.

On the 15th of December, 1930, order of adjudication was entered upon the voluntary petition filed of even date, alleging principal place of business and residence of the bankrupts for the greater portion of the six months next immediately preceding the filing of the petition to be in this judicial district. Order of reference was duly made, and the referee immediately called the first meeting of creditors, and bankrupts appeared for examination pursuant to order of the court.

The referee, after examination of the bankrupts under oath, their attorney being in attendance, found that bankrupts' in August, 1930, acquired a homestead in Multnomah county, Or., and established a domicile, and have since resided thereon, and in this proceeding claimed the same as exempt, that they had not resided elsewhere since said time, and reported the matter to the court, together with costs incurred, and recommended dismissal on the ground that the court had not jurisdiction, and also that the court make disposition of the fees deposited with the clerk pursuant to law and court rule.

On presentation of the report to the court on February 4, 1930, the matter was ordered placed on the motion calendar for hearing by the court on February 9, the regular motion day; and on the same day the attorney for the bankrupts was notified of such hearing by regular mail addressed to him at the McKay Building, Portland, Or.

The record clearly shows that the bankrupts had established a domicile in and were residents of the state of Oregon at the time of adjudication, and had maintained such domicile upon such residence since August, 1930, and had no principal place, or any place, of business elsewhere during that time.

Section 2, Bankruptcy Act 1898, provides that the bankruptcy courts are invested with jurisdiction within their respective districts to (1) “adjudge persons bankrupt who have had their principal place of business, resided, or had their domicile within their respective territorial jurisdictions for the preceding six months, or the greater portion thereof. * * *” 11USCA § 11(1).

It is obvious upon the record and the law that this court was, and is, without jurisdiction, and that the proceeding must be dismissed. I think it must follow, likewise, that the fees deposited for the clerk, referee, and trustee must be paid to the parties for whom deposited, and who rendered service. No trustee having been appointed, that deposit should be returned to the petitioners.

An order may be duly entered.


text:
    Ex parte TATSUO SAIKI. Ex parte HYOICHI OHASHI.
    Nos. 20434, 20435.
    District Court, W. D. Washington, N. D.
    Dec. 15, 1930.

      Henry A. Monroe and Fred H. Lysons, both of Seattle, Wash., for petitioners.
    Anthony Savage, TJ. S. Atty., and Hamlet P. Dodd, Asst. U. S. Atty., both of Seattle, Wash., for respondent.
   NETERER, District Judge.

The legal questions as to each petitioner are identical and will be disposed of together. Both are natives of Japan.

Saiki, a common laborer, arrived at the port of Seattle, as a member of a crew of the steamer Meiko Maru, April, 1917, and deserted while on shore leave, and claims never to have left the United States. '

Ohashi, a common laborer, arrived at the port of Aberdeen, United States, January, 1920, as a seaman, deserted while on shore leave, and claims not to have left the United States since.

On the 12th of March, 1930, both petitioners sailed from the port of Seattle as passengers on board the steamship Admiral Evans, destined for Alaska. The vessel en route called at the port of Ladysmith, B. C., March 13, at which port it stopped for less than ten hours. The petitioners did not leave the ship. On March 16, 1930, the vessel arrived at Katehikan, Alaska; after-wards, each of the petitioners was duly arrested by the immigrant inspector under authority of warrant issued by the Assistant Secretary of Labor, September 19, 1930. After a due and regular hearing thereafter, warrant of deportation was issued by the Assistant Secretary of Labor, commanding the return of each of the petitioners to Japan.

No unfairness in the hearing of either of the petitioners is charged. The only issue is whether the Assistant Secretary of Labor misconstrued the law as applicable to the petitioners in ordering the deportation. The petitioners contend, having purchased transportation from Seattle to Ketchikan on an American vessel, over the navigation of which they have no control, the entry in British ports en route does not interrupt the continuity of .their residence in the United States, in which they have been resident for ten years or more.

Petitioners rely on Weedin v. Okada (C. C. A.) 2 F.(2d) 321; In re Kogi Saito (D. C.) 18 F.(2d) 116. The issues in these cases are controlled by United States ex rel. Claussen v. Day, 279 U. S. 398, 49 S. Ct. 354, 73 L. Ed. 758.

Section 203, title 8, USCA, provides: “When used in this subchapter the term ‘immigrant’ means any alien departing from any place outside the United States destined for the United States. * * * ”

Section 213: “No immigrant shall be admitted to the United States unless he (1) has an unexpired immigration visa. * * * ”

Section 1 of Act Feb. 5, 1917 (8 USCA § 173) provides: “The term ‘United States’ [as used in the act] shall be construed to mean the United States, and any waters, territory, or other place subject to the jurisdiction thereof, except the Isthmian Canal Zone.”

The waters of Ladysmith, B. C., were not subject to the jurisdiction of the United States.

The Supreme Court in United States ex rel. Claussen v. Day, supra, says: “ * * * The word ‘entry’ by its own force implies a coming from outside. * * * ”

It is clear that the vessel came from a foreign port with the petitioners on' board, and it would appear from the definition of the “United States,” which the Congress was qualified to give, when the vessel entered the port of Ladysmith, the waters of which are under foreign jurisdiction, that the petitioners were stripped of all residential qualities in the United States, and were without the United States, and, on returning, came within -the United States. The Claussen Case, supra, was decided by the Supreme Court May 13,1929, whereas the eases above named and relied on by the petitioners were decided in 1927 and 1924. There does not appear to be any distinction between these instant cases and the Claussen Case, except that, in the Claussen Case the petitioner was away a longer period of time. The Supreme Court concludes the decision by saying: “And it is clear that petitioner departed from the United States on the Elisha Atkins and that, when he landed'at Boston on his return from South American and Cuban ports, he made an entry into the United States within the meaning of the act.”

The writ in each ease is denied.