author: HUTCHESON, Circuit Judge.

text:
    BENNETT v. COSMOPOLITAN FIRE INS. CO.
    No. 6039.
    Circuit Court of Appeals, Fifth Circuit.
    June 30, 1931.
    Rehearing Denied Aug. 5, 1931.
    Harold Kassewitz and George J. Baya, both of Miami, Fla., for appellant.
    O.-D. Batchelor, of Miami, Fla., for ap-pellee.
    Before FOSTEB, SIBLEY, and HUTCHESON, Circuit Judges.
   HUTCHESON, Circuit Judge.

Appellant, as most men do, not before but . after he had sustained a loss by fire, read his policy. From such reading learning that there were things in it which he had not supposed were there, he filed his bill in equity to reform the policy, and to recover upon it as reformed. The things amiss in the policy as written which he sought by his reformation suit to correct were: (1) That the pol-iey, though originally written in his name, had, by an indorsement made without his consent, been written in his wife’s name; (2) that the concurrent insurance clause, instead of providing concurrently for $18,000 on the dwelling and $5,000 on the furniture and fin-ishings, really provided for only $16,000 on the dwelling and $3,000 on the furniture and finishings. He set up his loss, pleaded the filing of proofs of loss, the denial by the company of all liability under the policy, that he had requested payment of the insurance, and that he had done every act and thing necessary to entitle him to receive payment. Further, by way of anticipation of defenses which he thought would be, and which sure enough were, urged against him, appellant declared, first, as to the provision of the pol-iey. that, if foreclosure proceedings he commenced with knowledge of the assured, unless a counter indorsement appeared on the policy the policy would be void, that he had no knowledge that such a suit had been brought against him; and, second, that though the company was threatening to, they ought not to be permitted to assert against him the provision of the poliey that “the entire poliey shall be void if the subject of insurance be personal property and be or become encumbered by a chattel mortgage,” unless consent is indorsed upon the poliey, for that there was only one mortgage on the property, and this upon the building and the furniture jointly; that the company through its lawful agent was not only fully advised of, but had fully consented to it by the indorsement on the policy of a New York standard mortgage clause in favor of Austin, the mortgagee named in the mortgage.

Not to be outdone by the .plaintiff, the defendant not only interposed the defenses which the plaintiff had anticipated, but went him one better, basing a sweeping defense to the suit upon the allegation that plaintiff had not, as required by the policy, within the sixty-day period therein fixed, filed his proofs of loss.

On these pleadings the cause went to trial, and on full proof the court found that the rider, of date May 11, 1929, “Poliey should read name of assured Dora C. Bennett,” was placed on the poliey wrongfully and without the knowledge or authority of plaintiff, and that he was entitled in this respect, therefore, to have the relief asked by way of reformation or cancellation so as to reinstate himself as the insured.

The court, ruling upon the authority of Harris v. N. British & Mercantile Ins. Co. (C. C. A.) 30 F.(2d) 94, that the filing of proofs of loss is an affirmative duty of the assured, and a condition precedent to his filing suit, further ruled that, since plaintiff’s suit affirms that his wife, who filed the proofs of loss in her name, was not the assured, but that plaintiff was, he may not be permitted to claim that the proofs filed by her can he taken as proofs filed by the assured, for either Dora C. Bennett was the assured for all purposes, including the making of proofs, or she was not the assured for any purpose.

Upon the point of waiver by the defendant by its acceptance of Dora C. Bennett’s proofs of loss, and its nonaetion thereafter, coupled with its complete denial of liability on the policy, the court found that this was all referable, not to the poliey, but to the claim of Dora C. Bennett alone; that William M. Bennett had taken no action on the poliey, had asserted no claim under it, and that no act of the company could be treated as waiver of proofs of loss by him.

We think this point of view too rigid, too narrow, and not in accordance with authority. In the first place, though, as the court found, the insertion of the wife;s name in the poliey was without authority and void as to Bennett, we think the defendant, having brought about the resulting conversion by this unauthorized act, is estopped to deny the effectiveness of the proofs of loss as sueh when made by the person in whose name by their unauthorized rider they have as to themselves at least placed the insurance. Moreover, we think that all of the facts in evidence, the action of the adjuster of the company in having William M. Bennett join with his wife in the nonwaiver agreement, the acceptance by the company of the proofs in the name of Dora G. Bennett, the denial of any liability on the poliey, the failure of the company to ask for additional proofs, and, generally, their nonaetion in regard to the matter of proofs, make it perfectly clear that this defense is waived. To hold otherwise would be to permit dealings with this policy by the company in which husband and wife were by its representatives dealt with interchangeably to create a lying in wait and an entrapment resulting therefrom.

It is settled law that the provision in a poliey for proofs of loss must be complied with unless waived, but that, as its entire purpose is to give the company, if they desire it, the benefit of detailed information as to the nature and extent of the loss which they contain, the filing of such proofs where the nature and extent of the loss is not the real matter in controversy may be easily waived. Cooley, Briefs on Insurance (2d Ed.) Vol. 2, 6019; Continental Insurance Company v. Fortner (C. C. A.) 25 F.(2d) 398; Liverpool & London Ins. Co. v. Dillon (C. C. A.) 16 F.(2d) 774; Fireman’s Fund Ins. Co. v. Borschow (C. C. A.) 30 F.(2d) 18; Couch’s Ency. of Ins. Law p. 5586.

It is a dry and strained construction which, contrary to the substantial principle upon which the law of this kind of case is grounded, denies, because proofs were sent in by Dora C. Bennett, instead of by her husband, the effect of waiver to multiplied acts of the company constituting such waiver. The action of the court in so ruling was error, for which the case must be reversed.

There were other issues in the ease which appellant incorrectly assumes were decided in his favor. Upon this assumption he now insists that, it appearing that the court below erroneously decided against him the issue of proofs of loss, this court should grant him here the relief for which he prayed. The ap-pellee, on the other hand, conceding that these issues were not decided in its favor by the trial court, urges that they should have been, and now presents them for decision in its favor here, and the judgment of the court below thereon affirmed.

While we do not agree with appellee that this court should undertake here to decide these issues, we do think it desirable, in view of another trial, to briefly comment upon the points presented. These points are'four: (1) That plaintiff did not prove demand before suit brought; (2) that the policy was avoided by the mortgage foreclosure begun with planitiff’s knowledge; (3) that plaintiff was carrying concurrent insurance in excess of that permitted in the policy; and (4) that the policy was avoided by the faet that the furniture was incumbered by a chattel mortgage without consent thereto being indorsed upon the policy.

The first, second, and third points may be briefly disposed of. There is no merit in the first point, for no particular form of demand is necessary as a prerequisite to suit, and the record teems with evidence of insistent and persistent demands. The second point, that the beginning of foreclosure suit as a matter of law avoided the policy, is equally without merit, for the record shows that this question presents an issue of faet which must be decided when the case is retried.

The third point, the matter of concurrent insurance, presents also issues of fact which must be determined on a retrial. If the trial court finds the issue of faet with the plaintiff that the parties intended to write the concurrent insurance provision so as to embrace all of the insurance which he carried, the contract must be reformed to give that intention effect. The remedy in such ease presents no difficulty, for it is recognized, not only in the federal courts, but elsewhere, that an insurance contract will be reformed like any other under proper circumstances to effectuate the intention of the parties. Phenix Ins. Co. v. Hilliard, 59 Fla. 590, 52 So. 799, 138 Am. St. Rep. 171; Northern Assurance Co. v. Grand View Bldg. Ass’n, 203 U. S. 106, 27 S. Ct. 27, 51 L. Ed. 109; Lumber Underwriters v. Rife, 237 U. S. 605, 35 S. Ct. 717, 59 L. Ed. 1140; Hartford Ins. Co. v. Nance (C. C. A.) 12 F.(2d) 575; Forkner v. Twin City Fire Ins. Co. (C. C. A.) 19 F.(2d) 419; Columbia Ins. Co. v. King (C. C. A.) 30 F.(2d) 887.

The fourth point presents matter which, because of the state of the authorities, requires a somewhat more extended discussion. The point made here is that, because there was a mortgage on the building and furniture, and the policy contained no indorsement specifically consenting to this chattel mortgage, that clause of the policy, “This entire policy shall be void if the subject of insurance be personal property, and be or become encumbered by a chattel mortgage,” avoids the policy.

The policy in suit, though written for a single premium, showed separately the amount written on the dwelling, $10;000 from that written on the furniture, $3,000. In ad- • dition, there was indorsed on the policy a New York standard mortgage clause, payable to O. J. Austin as first mortgagee, Austin being the holder of the mortgage for $4,000 covering the dwelling and the furniture.

Defendant cites in support of his claim that the contract should be treated as indivisible and the existence of the chattel mortgage on the furniture should be given effect to avoid, not only the insurance on it, but that on the dwelling as well. Fries-Breslin Ins. Co. v. Star Fire Ins. Co. (C. C.) 150 F. 611. There, however, the insurance was in a lump sum covering both items, not, as here, in two sums allotted to the dwelling and the furniture respectively.

In this situation the great weight of authority treats the contract as divisible, and, if it gives any effect to the clause in question, gives it effect only as to that part of the insurance written on the personal property. Downey v. German Alliance Co. (C. C. A.) 252 F. 701; Hartford Fire Ins. Co. v. Jones (C. C. A.) 15 F.(2d) 1; Bills v. Hibernia Ins. Co., 87 Tex. 547, 29 S. W. 1063, 29 L. R. A. 706, 47 Am. St. Rep. 121; Cooley, Briefs on Insurance (2d Ed.) vol. 3, p. 2945.

Because of the mortgage clause indorsed on the policy, we think it plain that the invoked clause cannot be given any effect whatever here. It was established that the mortgage clause was placed upon the policy by the written direction of the insured advising the company’s agent of the existence of the mortgage and of the name of the mortgagee. By this clause it was provided “Loss or damage * * * shall be payable to O. J. Austin as first mortgagee as interest may appear.”

The policy covered both dwelling and contents; the mortgage also covered both, and it was not necessary that the details of the mortgage be set out in the indorsement. Hosford v. Germania Fire Ins. Co., 127 U. S. 399, 8 S. Ct. 1199, 32 L. Ed. 196. There can be no question but that insurer and insured so understood it, and that, if the policy had not carried the mortgage clause or some other effective indorsement, plaintiff would have been entitled to reform the policy to make it conform to that mutual understanding. Plaintiff, however; does not need that relief here, for upon the principle that “the interpretation should be adopted which is most favorable to the insured, if such interpretation be not inconsistent with the words used,” Royal Ins. Co. v. Martin, 192 U. S. 162, 24 S. Ct. 247, 251, 48 L. Ed. 385, we think it clear that the mortgage indorsement is a compliance with that provision of the policy requiring an agreement to the existence of the chattel mortgage to be indorsed thereon. Hosford v. Germania Fire Ins. Co., 127 U. S. 399, 8 S. Ct. 1199, 32 L. Ed. 196; Fidelity Phenix Fire Ins. Co. v. Queen City (C. C. A.) 3 F.(2d) 784.

Three cases are cited against this view, Atlas Reduction Co. v. New Zealand Ins. Co. (C. C. A.) 138 F. 497, 9 L. R. A. (N. S.) 433; Bank v. Hartford (D. C.) 1 F.(2d) 43; Woods v. Ins. Co., 82 Wash. 563, 144 P. 650. Of the first it may be said that, while the majority upon the authority of Bates v. Equitable F. & M. Ins. Co., 10 Wall. 33, 19 L. Ed. 882, did decide that a loss payable clause in favor of the mortgagee was not effective to relieve against the chattel mortgage prohibition, Judge Hook, in a thoroughly well-considered dissenting opinion, pointing out that the Bates Case related to an ordinary loss payable clause, and not to a mortgage clause, reached the opposite and, we believe, the correct conclusion. Of the second ease, that it was decided without discussion upon the sole authority of Atlas Reduction Co. v. New Zealand Ins. Co., supra.

The third case went off on its facts, the court there holding, not that a mortgage clause protecting the holder of a chattel mortgage would not relieve against forfeiture where there was no misrepresentation or deceit, but that it could not relieve under the facts of that ease, which established, not only that the insurer did not know of the existence of the chattel mortgage, but that the indorsement had been placed on the policy as the result of a deliberate misrepresentation, with intent to deceive by the insured, that the mortgage in question did not cover chattels,

Because the court erroneously found against plaintiff that the failure to file proofs of loss in his name defeats his action, its judgment is reversed and the cause remanded for further proceedings not inconsistent with this opinion.


source: Caselaw Access Project

author: SPARKS, Circuit Judge.

license: Public Domain

text:
    FLYNN et al. v. UNITED STATES. HARTZELL v. SAME.
    Nos. 4561, 4565.
    Circuit Court of Appeals, Seventh Circuit.
    June 30, 1931.
    Rehearing Denied July 25, 1931.
    Abraham Teitelbaum and George R. Bieber, both of Chicago, Ill., for appellants.
    George E. Q. Johnson and Walter Wiles, both of Chicago, Ill., for the United States.
    Before ALSCHULER, EVANS, and SPARKS, Circuit Judges.
   SPARKS, Circuit Judge.

These appeals, while based on two separate transactions, present substantially the same legal questions and were argued together. We shall discuss cause No. 4561 first.

Appellants Flynn and Fair were charged by grand jury indictment in two counts. The first count alleged unlawful possession of intoxicating liquor fit for use for beverage purposes, and the second count alleged unlawful transportation of intoxicating liquor fit for beverage purposes. Both appellants pleaded not guilty and orally waived their rights to a trial by jury, and the cause was tried by the court without a jury. Both were found guilty as to each count, and each was fined $1 on count 1, and ordered confined three months in jail on count 2.

On October 22, 1930, at 8:30 a. m., two police officers of the city of Chicago, driving an automobile in one of the alleys of that city on a tour of inspection, met these appellants driving in the opposite direction in a Ford automobile. Immediately after passing, appellants turned into an intersecting alley. No one was with them. Thereupon the officers backed their automobile to the intersection and followed appellants. The Ford car was out of sight of the police not to exceed thirty or forty seconds. Upon their regaining sight of the Ford car, it had come to a stop in the alley in front of a private garage, the door of which was partially open. Flynn was standing beside the Ford with his hand on its door, and Fair was sitting in the front seat reaching backward over the seat toward the floor. The back seat cushion was missing. Flynn recognized and saluted the officers. One officer asked them what they had in the car. Fair said he did not know, and Flynn said, “You can see what it is.” The officers thereupon looked into the Ford and found therein hack of the front seat, four filled five-gallon cans. The officers opened the Cans, smelled and tasted the contents, and found it to be alcohol, and arrested Flynn and Fair.

There was no means of exit or entry to the garage save the door opening into the alley and a window ,on the side next to the officers, and the window had. been in the officers’ unobstructed view since they entered that alley. The officers had no search warrant nor warrant of arrest, and the arrest was made without any co-operation or knowledge of any federal officer. After the arrest, the federal prohibition administrator at Chicago was informed of the facts, and he took appellants into custody from the police.

The substance of appellants’ statements is to the effect that they were on their way to a funeral and a friend asked them to help him deliver some packages, as to the contents of which they had no knowledge. They consented, and the friend entered the car and sat on the back seat, the cushion of which, so far as they had knowledge, had not been removed, although it was missing when the officers found the liquor. This friend directed them to the private garage in controversy, and he got the liquor from the garage and placed it in the Ford, after which the Ford had not moved.

On this statement of faets appellants claim (1) that there was an unlawful search and seizure; (2) that there was no transportation; (3) that they had no knowledge of the contents of the packages; (4) that the evidence does not show that the liquor found was intoxicating and fit for beverage purposes; and (5) that the jail sentence on the second count is not authorized by statute.

It is unnecessary to discuss the first claim, inasmuch as the search was made upon the invitation of appellants, and they are thus precluded from now saying that it was unreasonable and violative of the Constitution. As to the second point raised, the court no doubt concluded that the story of the friend was fiction and that there was no such person present; that the cans of alcohol had never been in the garage; and that appellants could not have driven from the intersection to the garage, and taken the back cushion out and loaded the four cans of alcohol into the Ford in thirty or forty seconds. It was therefore reasonable to conclude from these circumstances that the alcohol was in the Ford when appellants passed the policemen. This claim is based urholly 0n matters of fact, and the trial court’s determination thereof is final. This is likewise true of claim 3. As to claim 4, it is not necessary to allege or prove that alcohol is either intoxicating or fit for beverage purposes. Alksne v. United States (C. C. A.) 39 F.(2d) 62. As to claim 5, the imprisonment under count 2 is warranted by statute. Title 27, U. S. C. 1930 Supp., § 91 (27 USCA § 91).

The judgment of the trial court as to appellants Flynn and Fair is affirmed.

In cause No. 4565 appellant Hartzell was likewise charged with possessing and transporting alcohol and whisky, but on a different state of faets and at a different time. Appellant orally waived a jury, and the court, after hearing the evidence, found and adjudged him guilty as charged in the indictment, and ordered him. to be confined in the DeKalb county jail at Sycamore, Ill., for three months, but assessed no fine.

In addition to the errors assigned in cause No. 4561, this appellant insists that the court committed reversible error in not also assessing a fine against him. If this be an error, it is most certainly not harmful to appellant, and he is in no position to complain for that reason.

What was said by this court in the foregoing opinion with relation to the errors assigned in cause No. 4561 is applicable to and governs the same questions as presented in the appeal of Hartzell; but whether there was a transportation of liquor by Hartzell, as charged, of course depends upon the facts in evidence which relate to the Hartzell transaction.

On September 6, 1930, police officers of the city of Chicago noticed a Buiek coupé standing at the curb about 75 or 100 feet from the entrance of a public garage in Chicago. The officers recognized the automobile as one they had previously seen driven by appellant Hartzell. They had previously been informed that Hartzell was engaged in selling and transporting intoxicating liquor, and they thereupon went to the automobile, looked in it, and found twelve one-gallon cans of alcohol, twenty-two pint bottles of whisky, and six one-gallon bottles of whisky therein. They saw Hartzell standing alone in front of the garage 75 feet or 100 feet away from the automobile. The officers asked him if he owned the automobile, and he replied that he did, and made no explanation whatever concerning the liquor found in it. The officers thereupon arrested appellant Hart-zell, seized the automobile and its contents, and reported the faets to the federal prohibition administrator, who took custody of appellant and adopted the seizure. The officers had neither a search warrant nor a warrant of arrest.

Wé think these faets and circumstances were sufficient to warrant the trial court in finding and adjudging appellant Hartzell guilty of possessing and transporting intoxicating liquor as charged in the first and second counts of the indictment, under the authority of Carroll et al. v. United States, 267 U. S. 132, 45 S. Ct. 280, 69 L. Ed. 543, 39 A. L. R. 790.

The judgment is affirmed.


author: COTTERAL, Circuit Judge.

text:
    COMMERCIAL NAT. BANK OF LOS ANGELES v. CATRON et al.
    No. 409.
    Circuit Court of Appeals, Tenth Circuit.
    July 1, 1931.
    Thomas Keely, of Denver, Colo. (Wm. V. Hodges, D. Edgar Wilson, and H. C. Vidal, all of Denver, Colo., on the brief), for appellant.
    C. C. Catron, of Santa Fé, N. M., for ap-pellees.
    Before COTTERAL, PHILLIPS, and McDERMOTT, Circuit Judges.
   COTTERAL, Circuit Judge.

The Commerical National Bank of Los Angeles appeals from a judgment of dismissal on demurrer to an amended complaint, in a suit it brought against John W. Catron and Virginia P. Catron, on two promissory notes, dated at Los Angeles, Cal., May 24, 1923, payable with interest and attorneys’ fees to plaintiff at its banking house in that city. The first cause of action declared on a note for $5,000, credited with $87.50 as interest, and a further payment of $1,664.25, disclosing on its face that it was secured by a trust deed of real property. The second was on a note for $1,123.01, with like interest and attorneys’ fees.

The defendants demurred to each count-The ground of demurrer to the first was it stated no cause of action, because under a statute of California but one action is allowed for recovery of debt or the enforcement of a mortgage and it did not accrue until the security was exhausted and then only as a demand on a deficiency judgment. The ground of demurrer to the second count was that there was not a sufficient jurisdictional amount in controversy.

The demurrer was sustained. Thereafter the plaintiff filed an amended complaint, further alleging that the defendants had executed the trust deed (a copy of which is exhibited) to trustees of real estate in Los An-geles, that the property had been sold to plaintiff pursuant to the deed, and that the net proceeds realized were shown by the larger credit on the note. The second note was again pleaded, showing the’ amount due as before, except a credit of $19.65 as interest.

The defendants renewed their demurrer, asserting that the trust deed was of the nature of a mortgage, that the sale of the property under it was void, and the plaintiff held the property as an involuntary trustee as under a mortgage, wherefore by the statute there was no right of action on the note. The former jurisdictional objection was taken to the second cause of action. This demurrer was sustained and the action dismissed.

The statute invoked by the defendants is section 726, Code Civ. Proe., which provides: “There can be but one action for the recovery of any debt, or the enforcement of any right secured by mortgage upon real or personal property, which action must be in accordance with the provisions of this chapter. In such action the court may, by its judgment, direct the sale of the encumbered property (or so much thereof as may be necessary), and the application of the proceeds of the sale to- the payment of the costs of court, and the expenses of the sale, and the amount due plaintiff. * * *«

Counsel for appellant rightly maintain that the statute relates only to a remedy in the courts of California and does not affect a substantive right of contract, sought to be enforced in other courts, and that it has no application to a suit upon á note secured by a deed of trust.

In Maxwell v. Ricks (C. C. A.) 294 F. 255, where there was a suit upon two' notes, the question arose whether the remedy was affected by a mortgage security. It was conceded that in the courts of California but one action was allowed to the creditor, but it was held that the right to subject the property to a debt was not so connected with the common-law right of action thereon as to exclude a remedy in other courts and that the statute did not purport to and did not impair the obligation or the transitory character of suit in a court possessing jurisdiction over the parties and subject-matter. There were citations not only to cases in point but to controlling authority from the Supreme Court of the United States, and the remedy on the notes was sustained-. The principles announced in that case are sound and they afford a satisfactory precedent for the disposition of this case in favor of the bank. Like rulings were made in Dolbear v. Foreign Mines Development Co. (C. C. A.) 196 F. 646, and in Mantle v. Dabney, 47 Wash. 394, 92 P. 134.

It may well be added it is a general rule that in the absence of a restrictive statute in force where suit is brought, a secured creditor has a remedy on either his demand or security, or on both, and that the law of the forum governs as to the character and extent of the remedy. 41 C. J. 839; 1 C. J. 56, 57. And we find no statute in New Mexico which affects the remedy of the bank on the note.

Furthermore, the California courts have pointed out the essential difference between mortgages and trust deeds to be that the former create liens and the latter convey title, showing there was no occasion to affix a statutory condition upon a recovery of a debt, where it is secured by a trust deed, or otherwise than by a mortgage, from which it follows it was not done by the remedial statute here involved. Commerical Sav. Bank v. Hornberger, 140 Cal. 16, 73 P. 625; Smiley v. Watson, 23 Cal. App. 409; 138 P. 367; Ould v. Stoddard, 54 Cal. 613; Martin v. Becker, 169 Cal. 301, 146 P. 665, Ann. Cas. 1916D, 171; Sacramento Bank v. Murphy, 158 Cal. 390, 115 P. 232; Weber v. McCleverty, 149 Cal. 316, 86 P. 706.

The demurrer to the first cause of aetion in the original eomplaint should have been overruled, because the bank had an independent remedy on the note, regardless of the trust deed. The amendment made to the eomplaint in view of the adverse ruling presents no different question and no ground for a demurrer. But it has resulted in considerable discussion of the effect of the trust deed and the sale under it upon the right to a recovery.

But the discussion is based on the erroneous assumption that it was first essential for the bank to exhaust the security effected by the trust deed. Even from that standpoint, there is no force in the arguments for the defendants. For example, the point is sought to be made that the note described in the trust deed is dated May 25, one day later than the note in suit, and for that reason there was no valid sale under the trust, deed and no exhaustion of that security. But the note was only the evidence of a debt incurred by a loan of the same amount, and it cannot be doubted there was but one note. The misdescription is too technical for serious notice. It is also said that the identity of the note was not sufficiently pleaded, but the point is only another technicality. The amended complaint can only be reasonably construed as declaring on the note described in the trust deed. However, the discussion is wholly immaterial, as the trust deed and the sale under it in no way affected the remedy of the bank on the note.

Our conclusion is that it was error to sustain the demurrer to the first count of the amended complaint.

There was also manifest error in sustaining the demurrer to the second count. It is true the note there pleaded did not of itself reach the required jurisdictional amount in controversy. But the rule is well settled that all the demands in suit are to be taken together for purposes of jurisdiction, and it is not lost where upon a trial either a defense is established or the recovery is less than is required to be alleged when suit is brought. Hughes Fed. Prac. & Proc. vol. 1, §§ 490, 503; Heffner v. Gwynne-Treadwell Cotton Co. (C. C. A.) 160 F. 635; Edwards v. Bates County, 163 U. S. 269, 16 S. Ct. 967, 41 L. Ed. 155; Schunk v. Moline, M. & S. Co., 147 U. S. 500, 13 S. Ct. 416, 37 L. Ed. 255; Tennent-Stribling Shoe Co. v. Roper (C. C. A.) 94 F. 739; Board of Commissioners v. Vandriss (C. C. A.) 115 F. 866; Lilienthal v. McCormick (C. C. A.) 117 F. 89; Yates v. Whyel Coke Co. (C. C. A.) 221 F. 603.

The order sustaining the demurrer to the amended complaint and the judgment dismissing this action are accordingly reversed, and the ease is remanded to the District Court, with direction to require an answer of the defendants.

Reversed.


author: MANTON, Circuit Judge.

text:
    UNITED STATES v. STEIN et al.
    No. 437.
    Circuit Court of Appeals, Second Circuit.
    June 29, 1931.

      - Carl Breeher, of New York City, for appellant Stein.
    Blau, Perlman & Polakoff, of New York City (Moses Polakoff and Samuel Mezansky, both of New York City, of counsel), for appellant Lagatutta.
    Sanford H. Cohen, of New York City (Sanford H. Cohen and George Cohen, both of New York City, of counsel), for appellant Porges.
    George Z. Medalie, U. S. Atty., of New York City (Ellamarye Failor, Asst. U. S. Atty., of New York City, of counsel), for the United States.
    Before MANTON, SWAN, and CHASE, Circuit Judges.
   MANTON, Circuit Judge.

The appellants were convicted of conspiracy to violate section 225 of the Criminal Code (U. S. C. title 18, § 355 [18 USCA § 355]). Section 37, Cr. Code (U. S. C., title 18, § 88 [18 USCA § 88]). .Section 225 makes it a crime for "whoever, being a postmaster or other person employed in or connected with any branch of the Postal Service, shall loan, use, pledge, hypothecate, or convert to his own use, or shall deposit in any bank, or exchange for other funds or property, except as authorized by law, any money or property coming into his hands or under his control in any manner whatever, in the execution or under control of his office, employment, or service, whether the same shall be the money or property .of the United States or not * *' * shall be deemed guilty of embezzlement; and every such person, as well as every other person advising or knowingly participating therein, shall be fined * * * or imprisoned * * * or both.”

The conspiracy charged here began September 1, 1928, and ended April 3,1929, and was formed in the Southern district of New York. Lagatutta was employed in the postal service of the United States, selling postage stamps at the Times Square Post Office Station, and he agreed with his fellow conspirators to use money belonging to the United States for the purchase of other United States postage stamps from Stein at a discount. He gave a share of the profits which accrued after he had sold these stamps bought from Stein to Porges. He received a package containing $637 worth of stamps from Stein on April 3,1929. Stein confederated with Laga-tutta and Porges to the end that Lagatutta would embezzle moneys which came into his hands in the course of his service in the post office and use it to purchase stamps from him (Stein) at a discount, and then Porges would share in the profits. Lagatutta met Porges at the Times Square Station, and was handed an envelope containing $637 worth of stamps, and then paid Porges a share, after he sold the stamps which he had thus purchased. There was evidence that Lagatutta passed him a sum of money.

Stein went into the stamp business in July or August, 1928, and Porges told him he might -sell the stamps for him and later introduced him to Lagatutta. These sales were made and the moneys obtained from Lagatutta at the Times Square Station. Lagatutta was the wholesale clerk at this station, and was seen passing out money to Stein on March 29, 1929. He was seen putting some bills in his pocket after a sale on March 30, 1929, and later passing bills to Porges, and again on April 2,1929, Lagatut-ta was seen selling postal* cards to an unknown man and afterwards giving some of the money received in the sale to Porges. There was testimony that Winfield, a stamp clerk in the Grand Central Station, gave Porges "money right out of the cash drawer” in return for stamps which he had not sold to Porges. This was done at Porges’ request. This testimony, prior in date, was received by the court as showing a criminal intent.

There is testimony that, during the time named as marking the dates of the existence of the conspiracy, one Kelton, an unnamed conspirator, sold stamps to Porges on three different occasions and waited while Porges took the stamps to the Times Square Station and returned with the money. Stein came into the business in the latter part of 1927 or early in 1928; thereafter the sales were made to Lagatutta. It was fully established that each appellant was connected with the conspiracy.

There was no explanation given as to Porges’ receipt of money from Lagatutta other than his participation in the crime charged. It was clear that government funds were used. Indeed, Lagatutta admitted that •he gave Stein money received at his stamp window in the course of his official duties. This amounted to a violation of the law.

It is argued that a charge of conspiracy to violate section 225 will not lie. Since an employee of the postal service may not loan, use, pledge, hypothecate, or convert to his own use funds and property of the government in his possession and control, if he does, he commits an offense without the concurrent action of any one else. Indeed, it is only where a second party knows the character of the funds which he receives that it is possible for him to concur in the unlawful purposes, and the knowledge on the part of the second party does not change or alter the nature of the offense if the postal employee does the forbidden things enumerated in the statute. Therefore there is no necessity for concurrent action of another to make out the substantive offense denounced as unlawful in the statute. When Lagatutta used money coming into his hands, under the control of his office, to assist Stein in his enterprise, he violated the statute, and since the three appellants conspired to violate the statute, the charge of conspiracy is sufficiently established. Robilio v. U. S., 291 F. 975 (C. C. A. 6); Laughter v. U. S., 259 F. 94 (C. C. A. 6); Israel v. U. S., 3 F.(2d) 743 (C. C. A. 6).

It is argued that the indictment is indefinite and uncertain. On the contrary, we think it sufficient and clearly apprises each of the appellants of the crime which they were called upon to meet, and it is sufficiently explicit to avail appellants on any subsequent plea of former conviction. Hauger v. U. S. (C. C. A.) 173 F. 54. It charges an unlawful agreement and every essential element of the agreement, and particularly sets forth the time, place, and circumstances of the agreement and the carrying out of the conspiracy.

Complaint is made of the receipt of testimony as to the admission made by Stein, but this is without merit. The court limited the testimony given by the witness as to this admission as applicable only to Stein, and cautioned the jury to guard against its further use. It contained a statement as to the time he met Porges, the place he met him, and the introduction given by Porges to Lagatutta. There was no error in admitting this as against Stein.

It is argued that the assistant United States attorney improperly referred in summation to “robberies of thousands of dollars worth- of stamps,” as indicating the source from which the stamps in question came. On objection, the court properly made known to the jury that this was merely speculation on her part and must be regarded by the jury as such. While there was no evidence of the robbery of the stamps, the stamps were being sold for less than their value. Counsel for the government kept well within the limitations required, and no prejudicial error was established.

There is testimony, to which objection was made, to the effect that Porges received stamps from Kelton more than one year pri- or to the date of the filing of the indictment, at a place about half a block from the Times Square Station. He was shown to have' walked toward the station and the inference is that he went there to sell the stamps. It is permissible to show that a conspirator, during the time of the conspiracy, acted with another coeonspirator, unnamed in the indictment and represented to be unknown to the grand jury. Porges had in truth sold stamps to Lagatutta for a period continuing up to the time that Stein entered the conspiracy. It was to be expected that he would take Stein to Lagatutta when Stein started in selling stamps. Robilio v. U. S., 291 F. 975 (C. C. A. 6). The evidence of the sale through Kelton was admissible as bearing on his intent. Workin v. U. S., 260 F. 137, 139 (C. C. A. 2).

We find no errors prejudicial to the appellants such as would require a reversal. The convictions are affirmed.

Judgments affirmed.


author: SWAN, Circuit Judge.

text:
    TRUSSELL MFG. CO. v. WILSON-JONES CO.
    No. 353.
    Circuit Court of Appeals, Second Circuit.
    June 29, 1931.

      Duell, Dunn & Anderson, of New York City (Charles W. Hills and Charles W. Hills, Jr., both of Chicago, Ill., C. Earl Hovey, of Kansas City, Mo., and Alexander C. Mabee, of Chicago, Ill., of counsel), for appellant.
    Eraser, Myers & Manley, of New York City (Arthur C. Eraser and Louis E. Giles, both of New York City, of counsel), for ap-pellee.
    Before L. HAND, SWAN, and CHASE, Circuit Judges.
   SWAN, Circuit Judge.

Both parties are manufacturers of loose-leaf devices, including loose-leaf binders of the ring type, in which the leaves are held in the binder by means of rings that are capable of being opened and closed and extend, when closed, through perforations in the marginal edges of the leaves. The patent in suit relates to a loose-leaf binder of the ring type, but the particular claims in litigation, claims 6, 7, and 8, have to do only with the cover and back-plate of the binder. Claim 6 reads as follows: “6. In a binder, a flexible cover having its back portion split on its inner side to form flaps, and a metal back plate inserted in such split portion, and the flaps fastened down against it to embed it in such back portion.” Claim 7 differs only in requiring that the metal back-plate inserted in the split portion of the cover be “cemented therein.” Claim 8 describes the same structure but specifies that the back portion of the cover be so split as “to form flaps of tapering thickness.” The construction is described in the specifications, with references to the drawings, as follows:

“The book back A’ is of novel construction. The leather sheet is slitted from the middle toward the sides to form flaps ii (Fig. 12). These flaps are turned up and the metal back plate G (Fig. 8) which is suitably curved, is inserted beneath them and cemented both to the integral back portion J and on its upper side to the flaps ii. It thus forms a stiffening plate embedded in the leather of the book back. Its upturned end portions form ears hh. To fasten the book back thus formed to the ring mechanism, it is only necessary to bring the parts together and turn down the ears hh over the ends of the sheath plate F.” Page 2, lines 69-83.

Infringement of the patent, if the claims in suit be valid, is admitted; but their validity is questioned on the ground of anticipation in the prior art and as involving nothing more than mechanical skill.

The advance which the patentee claims to have made over the prior art in respect to the cover of a loose-leaf binder is the idea of using a single sheet of flexible material (leather) and embedding therein between its inner and outer surfaces at the proper location to constitute the back of the binder a metal plate," to which can be fastened the ring mechanism for holding the loose leaves. This is said to produce a binder stronger, more durable, and of neater appearance than had previously been known with the old form of cover built up from several layers of material.

The appellant argues that the claims in suit are not limited to a structure in which the cover and back are integral, but are broad enough to include the old “built-up^’ type óf cover. This contention cannot prevail. Not only do the specifications provide, “This cover may as heretofore be constructed of a single integral sheet of leather or other suitable material, so that the sides or flaps of the book back A' are all made of one sheet,” but the claims themselves, in specifying a cover “having its back portion split on its inner side to form flaps,” with a metal back-plate inserted “in such split portion,” implicitly demand a single integral sheet of cover material.

Again, attack is made upon the claims as being of a hybrid character, neither for a product nor for a process, but an attempt to define the article by the method of its manufacture. This contention must also fail. The claims are for an article of manufacture, not for a process; and it is true, of - course, that an old article cannot be patented by claiming it as the produet of a new process. American Tube Works v. Bridgewater Iron Co., 132 F. 16 (C. C. A. 1); Cochrane v. Badische Anilin & Soda Fabrik, 111 U. S. 293, 311, 4 S. Ct. 455, 28 L. Ed. 433. But, if the article is new, it may be patented, and the claim will not be invalidated merely because it describes the article with some reference to the method of producing it. Dunn Wire-Cut Lug Brick Co. v. Toronto Fire Clay Co., 259 F. 258, 260 (C. C. A. 6); Eibel Process Co. v. Paper Co., 261 U. S. 45, 43 S. Ct. 322, 67 L. Ed. 523.

The defense of anticipation by the prior art was considered by the court below in a characteristically careful and thorough opinion. Little need be added on this phase of the case. Coneededly the best reference is the patent to F. Von Schlegel, issued in 1908. It is urged that this shows a binder having a back-plate embedded in flaps of the cover which must have been slitted or skived to receive it. But this contention depends altogether upon the drawings and the hatchings which they show. We need not say that never in any circumstances could drawings alone be enough to prove an anticipation, though the language used in some of the cases might seem to go so far. See A. R. Mosler & Co. v. Lurie, 209 F. 364, 366 (C. C. A. 2); Gray Telephone Pay Station Co. v. Baird Mfg. Co., 174 F. 417, 421 (C. C. A. 7). But even if drawings may at times be enough, the rule is perfectly settled, and it is a useful one, that to be an anticipation the disclosure must be clear. Atlantic Gulf & Pac. Co. v. Wood, 288 F. 148, 155 (C. C. A. 5); Skelly Oil Co. v. Universal Oil Products Co., 31 F.(2.d) 427, 431 (C. C. A. 3); Canda v. Mich. Malleable Iron Co., 124 F. 486, 492 (C. C. A. 6). Von Schlegel’s patent does not meet this requirement. It is pure conjecture, and that merely from the drawings without the aid of any text, whether Von Schlegel meant what Trussell later disclosed, or meant only the familiar built-up type of cover.

This is equally true of the German patent to Gebruder Friedrichs, which was not pleaded as a technical anticipation, but was offered in evidence to show the state of the airt. The construction of this cover and back is even more difficult to conjecture than is Von Schlegel’s. This disclosure is not sufficiently clear to satisfy the rule already mentioned. Indeed, it has been urged that that rule must be applied more strictly to foreign than to domestic patents. Much may be found in the books which seems to support such a distinction. See Seymour v. Osborne, 11 Wall. 516, 555, 20 L. Ed. 33; Hanifen v. E. H. Godshalk Co., 84 F. 649, 651 (C. C. A. 3); In re Ek, 57 App. D. C. 203, 19 F.(2d) 677, 678. However, we see little basis for it. An inventor is charged with knowledge of whatever the prior art discloses, but the disclosure, to be an anticipation, must be clear and certain. Why it need be more clear in a foreign patent than domestic one, we confess is not obvious to us. But we need not now determine whether the distinction is too firmly established to be disregarded. We mention it merely by way of a caveat.

So the question of validity comes down to whether it was invention to conceive of this type of cover and back-plate, when built-up covers with strengthening metal strips were old. It was certainly no great step forward in the art, but even a small step may require invention rather than mechanical skill. Whether or not it did is a matter of judgment upon which equally reasonable men will not invariably agree; and for the solution of the problem no hard and fast rules can be laid down. An advance which seems small and obvious after it is made may often gain support for the claim that inventive thought was required to make it, by reason of its immediate and wide-spread adoption by the trade. Kurtz v. Belle Hat Lining Co., 280 F. 277 (C. C. A. 2); Van Heusen v. Earl & Wilson, 300 F. 922 (D. C. S. D. N. Y.); Franc-Strohmenger & Cowan v. Arthur Siegman, Inc., 27 F.(2d) 785 (C. C. A. 2). The patent in suit, however, is not thus aided, for the patented devices were- not manufactured commercially until fourteen years after the patent issued. This was because of the difficulty of forming the flaps. Trussell testified that there was no standard machine which he could find for performing this operation, and that he had to design and develop his own method of splitting the leather, and “junked over $2,000 worth of equipment” in trying to build the splitting machine which was finally evolved. Though a patentee is not obliged to put his patent to immediate use, so long a delay as here occurred may well raise a doubt whether Trussell’s inventive thought did not reside in devising the machine for making the article rather *than in the conception of the article itself; but, although the doubt assails, it does not convince. The machine was not evolved independently of the patented article, but in an effort to make commercially practicable the manufacture of an article already conceived. The conception of a binder of the patented description was a new and useful idea, and, although it was no great advance over the old construction, we cannot say that any one acquainted with the prior art and possessing ordinary mechanical skill might have conceived the idea of a binder so constructed. Not only does a patent carry a presumption of validity, but the defendant’s own efforts to accomplish the same result and escape infringement adds something of persuasion in favor of invention. See H. D. Smith & Co. v. Peck, etc., Co., 262 F. 415, 417 (C. C. A. 2); Kurtz v. Belle Hat Lining Co., 280 F. 277, 281 (C. C. A. 2). We think the court below was correct in holding the patent valid.

The extent of the reference for the collection of damages is questioned upon the ground that the markings on plaintiff’s articles are not sufficiently clear to comply with the statute. 35 USCA § 49. This is a question which can as well be disposed of now as upon a later appeal from the final decree. A large number of binders were introduced in evidence, and Trussell upon cross-examination was asked to read the markings impressed thereon to give notiee of patent protection. In some instances he was able to da so either with the naked eye or with the aid of a magnifying glass; in others he failed even with the glass. He was more successful than was either the court below or this court; but there is something almost ludicrous in a contention that, because the patentee himself can succeed with a magnifying glass in reading the larger part of his patent notices, the goods are properly marked. Trussell testified that plaintiff’s policy was to make the notice sufficiently clear for competitors to see but as inconspicuous as possible for purchasers, because the trade objects to any marking. The District Judge said that he was not convinced that plaintiff was deliberately failing to mark its product with the patent notiee required by statute, but he made no express finding that the marking was sufficient to comply with the statute. To us it seems clear that it was not. The statute requires a patentee “to give sufficient notice to the public” that the article is patented. If a patentee chooses, it matters not for what reason, so to mark his goods that a magnifying glass is required to read what he says, it is not a “sufficient notiee to the public”; and ' in that event he must prove the giving of actual notiee of infringement to the particular defendant whom he would charge with damages. See Dunlap v. Schofield, 152 U. S. 244, 14 S. Ct. 576, 38 L. Ed. 426; Coupe v. Royer, 155 U. S. 565, 584, 15 S. Ct. 199, 39 L. Ed. 263; Flat Slab Patents Co. v. Turner, 285 F. 257, 267 (C. C. A. 8). He must mark his goods plainly. He cannot placate the trade by using only illegible references to his patent monopoly and yet put competitors on notice on the theory that their interest will be keen enough to induce them to employ a magnifying glass to discover what the marking says. He cannot eat his cake and have it too. Accordingly, the decree must be modified to limit the collection of damages to infringements occurring after due notice was given to defendant. The bill alleged and the answer admitted that such notiee was given by letter dated March 16,1928.

It is also contended that the patent was multifarious, and, as no disclaimer was filed, that costs were improperly awarded against appellant. Sessions v. Romadka, 145 U. S. 29, 12 S. Ct. 799, 36 L. Ed. 609. But we need not consider this point, for neither the answer nor any assignment of error raised it.

The deeree will be modified as above indicated, and, thus modified, is affirmed.


author: HICKS, Circuit Judge. HICKENLOOPER, Circuit Judge.

text:
    UNAKA & CITY NAT. BANK v. UNITED STATES.
    No. 5681.
    Circuit Court of Appeals, Sixth Circuit.
    June 11, 1931.
    HICKENLOOPER, Circuit Judge, dissenting.
    Cox, Taylor & Epps, of Johnson City, Tenn., for appellant.
    William J. Carter, U. S. Atty., of Knoxville, Tenn., and C. M. Charest and E. E. Angevine, Bureau of Internal Revenue, both of Washington, D. C.
    Before DENISON, HICKS, and HICK-ENLOOPER, Circuit Judges.
   HICKS, Circuit Judge.

Under the provisions of the Judicial Code, section 24, par. 20 (U. S. C. Title 28, § 41 [20]; 28 USCA § 41 [20]) appellant, Unaka & City National Bank, sued the United States, appellee, to recover $1,276.04, being income tax and interest thereon for the year 1921. Upon the hearing, the suit was dismissed. The facts are embodied -in an original and supplemental stipulation.

Prior to September 11, 1920, the Unaka National Bank and the City National Bank were separate banking institutions located in Johnson City, Tenn. On that date they consolidated under the provisions of the Act of Nov. 7, 1918, c. 209 (Tit. 12, § 33 et seq., U. S. C. [12 USCA § 33 et seq.]), and became the Unaka & City National Bank, the appellant. This statutory procedure is rather simple. Omitting details, consolidation is accomplished upon such terms and conditions as are lawfully agreed upon by-.a majority of the board of directors of each bank, ratified and confirmed by the affirmative vote of the shareholders owning at least two-thirds of the outstanding capital stock of each bank, and approved by the Comptroller of the Currency.

It is stipulated that, as a result of the combination, appellant acquired all of the properties, both real, personal and mixed, and assumed all the liabilities of the Unaka Bank & City Bank, and that it issued its capital stock to the stockholders in the same proportion to their holdings of stock in the old Unaka Bank and City Bank. The supplemental stipulation goes into particulars as to the method pursued in effecting the consolidation. It sets forth that on September 11, 1920, the Unaka Bank went into voluntary liquidation or dissolution (see title 12, § 181 et seq., U. S. C. [12 USCA § 181 et seq.]), and no longer had any corporate existence except for the closing of its affairs; that the City Bank changed its title to the Unaka & City National Bank of Johnson City, Tenn. (see title 12, § 30, U. S. C. [12 USCA § 30]), and increased its capital stock $200,000 (see title 12, §§ 57, 58, U. S. C. [12 USCA §§ 57, 58]); that appellant, by the issuance' of stock, paid for the assets it had acquired from the Unaka Bank through the consolidation; that the stockholders of appellant were the same individuals who had been stockholders in the old, constituent banks. With the assets of the Unaka Bank the appellant acquired the banking house for the sum of $38,-500, this being the exact amount the Unaka Bank had paid for it in 1901. On June 29, 1921, appellant sold this banking house for $60,000. Its March 1, 1913, value was $51,-260.

The proper basis upon which to compute appellant’s profit is the point in issue. Appellant claims that this basis is the March 1, 1913, value. Appellee insists that it is the cost to appellant of the property acquired in. September, 1920. If appellee is right, appellant’s net taxable profit was $21,500, the amount upon which it paid. If appellant is right, its taxable profit was only $8,739.60, and it is entitled to recover the excess payment. We think the controlling statute is section 202(a) of the Revenue Act of 1921, 42 Stat. 229“That the basis for ascertaining the gain derived or loss sustained from a sale or other disposition of property, real, personal, or mixed, acquired after February 28, 1913, shall be the cost of such property. * *

By giving to the language of the stipulations its plain and ordinary meaning, i. e., appellant acquired the banking house after February 28, 1913, it seems clear, therefore, that section 202(a) fixes the cost thereof to appellant as the basis for ascertaining its gain. However, appellant urges that this statute is not relevant, because, notwithstanding the stipulation to the contrary, the legal effect of the merger was not to vest the absolute ownership of the assets of the constituent banks in appellant, but rather to unite the two old banks under one head, retaining substantially their same corporate identity and assets, and that in this aspect the Unaka Bank, at the time of the sale of the banking house in 1921, was the real or beneficial owner thereof, and that, having acquired it before March 1,1913, the proper basis for computing profit is found in section 202(b) of the Revenue Aet of 1921.

To this contention we cannot agree. It is well understood that mergers, amalgamations, or consolidations of corporations may assume different forms and result in different relationships, but such considerations are not relevant here. We are dealing with a statutory consolidation the terms and conditions of which have been lawfully agreed upon, and, if the stipulations of fact are to be honored, it stands out that, pursuant thereto, appellant acquired the banking house for $38,500 on September 11,1920, and issued its stock in payment therefor. We think appellant’s contention is not only at variance with the undisputed facts, but is in conflict with title 12, § 34, U. S. C. (12 USCA § 34), the second section of the consolidation statute above referred to, which, upon the accomplishment of such statutory merger, vests all the rights, franchises, and interests of the constituent bank in every species of its property, personal and mixed, in the bank into which it is consolidated.

Appellant also relies upon section 202(b) of the Revenue Aet of 1918 as interpreted by articles 1567 and 1568 of Treasury Regulation No. 45. It is enough to say that said section 202(b) was repealed as of January 1, 1921, by section 1400 (a) of the Revenue Act of 1921 (42 Stat. 320).

We have examined section 202(e) with its paragraphs (1), (2) and (3), eited by appellant, but we find nothing relevant therein.

Our conclusion has further support in this: That in section 204(a) of the Revenue Act of 1924 (43 Stat. 253 [26 USCA § 935 (a)]) Congress did provide that where, in certain reorganization schemes, assets are transferred from one corporation to another, they shall retain the same basis in the new corporation as in the old. This is substantially the provision which appellant contends was applicable in 1921, but which the Ways and Means Committee of Congress in its “Statement of Changes in the Revenue Aet of 1921 by H. R. 6715 and the Reasons Therefor,” thought did not exist.

Judgment affirmed.

HICKENLOOPER, Circuit Judge.

I cannot concur. The only question presented is whether, when there has been a consolidation or merger of two corporations, A and B, to form the new corporation AB, which latter acquires all the assets of A and B and assumes all of their liabilities, and which issues its stock to .the former stockholders of A and B, “in the same proportion held by them” in A and B, AB shall thereafter be entitled to use, for income tax purposes under the act of 1921, and upon the sale (in 1921) of certain real estate previously owned by B, the same cost basis (here the March 1, 1913, value) as B would have been entitled to use had no consolidation intervened. The proper answer to this question seems to me to depend exclusively upon whether there has been a true consolidation and merger as distinguished from what should more properly be designated an exchange of property— property for stock—or a simple purchase and sale.

It may be conceded that a new basis might well be established in the ease of a purchase of property, even of several kinds and in bulk, and the payment of the purchase price in stock or securities at an agreed valuation; but it is extremely difficult to see how such new basis of investment value in the hands of the transferee could be established without raising as of the same time the question of profit or loss to the transferor, and to the stockholders of the transferor; and the Revenue Acts have been peculiarly consistent in providing by express enactment that ño loss or gain shall be recognized as to either the corporations or stockholders in event of reorganizations, consolidations, combinations, or mergers. See Revenue Act of 1918, § 202 (b), c. 18, 40 Stat. 1060; Revenue Act of 1921, § 202(c) (3), c. 136, 42 Stat. 230; Revenue Act of 1924, § 203(b) (3), c. 234, 43 Stat. 256 (26 USCA § 934(b) (3), etc. Thus, also, that the stockholder who, by just such a transaction as that with which we are here concerned, receives stock in the consolidated (or reorganized) company, in exchange for the stock ther&tofore held by him in one of the corporations which was a party to the consolidation, is not required to account for gain or loss in respect of the new stock, has been authoritatively established in Weiss v. Stearn, 265 U. S. 242, 44 S. Ct. 490, 68 L. Ed. 1001, 33 A. L. R. 520. There would therefore seem to be no purchase and sale or exchange of property within the act upon which the new basis could be founded.

It would seem to me, also, a matter of supreme indifference whether the consolidation be effected by A acquiring all the assets and assuming all the liabilities of B, and issuing its capital stock to the former stockholders of B, by reversing such procedure, or by both A and B transferring their assets to an entirely new corporation, AB, which in turn assumes all liabilities of A and B. The important factor is that, by consolidating, the identities of both A and B are merged in AB, the businesses of both are continued, and the stockholders of both retain, presumably, the same monetary value of interest in the new entity. There is, then, no reasonable ground for contending that a right which belonged to B before the combination, albeit such right was only the right to use an admitted basis of valuation of real estate for income tax purposes, should not pass to AB, and be exercised by it when and if occasion arose. This conclusion would seem implicit in the very nature of the transaction—the right of B to the given basis, a property right, an asset, passing from B to AB.

But it is said that consolidations of corporations may assume different forms and result in different relationships but such considerations are not relevant here; that, if the stipulations of fact are to be honored, it stands out that pursuant thereto “appellant acquired the banking-house for $38,500 on September 11, 1920, and issued stock therefor.” This impresses me as subordinating the very substance of what is known to have taken place to a form of expression and as arriving at a construction of the stipulation by the isolation of a single expression from its context, which expression also seems to me to be contrary to the evident intent of the document as a whole and inconsistent with practically every other part of it,—a slip, or even, possibly, .a pitfall into which counsel have been led or inadvertently fallen. The stipulation just as specifically concedes that the transaction was one of pure consolidation ; that the building was acquired “pursuant to the consolidation agreement”; that the consolidated bank acquired all the properties of both parties to the consolidation, real, personal and mixed, and assumed all liabilities; that, after consolidation, the stockholders of the consolidated bank were “the same persons who were stockholders in the old Unaka National Bank and the City National Bank”; and that the stock of the consolidated bank was issued to them “in the same proportion held by them in the Unaka National and the City National Banks.” Construing this stipulation by its four- comers, keeping in mind what is general knowledge as to the method and mode of such consolidations and the provisions of the Code regulating them, and considering the matter from its practical viewpoint—with regard to substance rather than to form (Weiss v. Stearn, supra, at page 254 of 265 U. S., 44 S. Ct. 490, 492)—I cannot conclude that the expression that the property was acquired by the appellant “for the sum of $38,500.00 pursuant * * 4 etc., meant anything at all but that $38,500 was the value at which it was carried upon the books of the Unaka National Bank before the consolidation and upon the financial state1ment of that bank which formed a part of the consolidation agreement. This position also gains force when we note the exact identity of this amount and the original cost of the building in 1901. In the ease last cited Mr. Justice MeReynolds says: “Questions of taxation must be determined by viewing what was actually done, rather than the declared purpose of the participants.” This language is especially pertinent to the issue before us.

Nor is it apparent to me why, if the fact of a consolidation be conceded, this consideration is not relevant here. Had the real estate been the property of the City National Bank whose charter was not surrendered, and which was used as the vehicle to effect the consolidation, doubtless no contention would ever have been made that the consolidated bank was not entitled to use the March 1, 1913, value. If this be so, it is not clear why the consolidated bank is not entitled to the •same rights in respect of property of the Un-aka National Bank, especially since the Act of Npv. 7,1918, c. 209, § 2, 40 Stat. 1044 (12 USCA § 34) specifically provides that “the said consolidated national bank shall hold and enjoy the same and all rights of property, franchises, and interests in the same manner and to the same extent as was [were( ?)] he)d and enjoyed by the national bank so-consolidated therewith.” Could anything be more explicit to the effect that the consolidated bank should be subrogated as regards property rights and interests to the exact position of the bank which was merged with it?

Finally, upon this branch of the case, we come to the meaning of section 202 (a) of the Revenue Act of 1921, supra, “that the basis for ascertaining the gain derived or loss sustained from a sale or other disposition of property, real, personal, or mixed, acquired 'after February 28, 1913, shall be the cost of such property.” (Italics mine.) Obviously “acquired” can mean in that association only “acquired by purchase or exchange,” for otherwise there would be no “cost.” The section could have no possible application to a gift of real estate, nor to a devise or inheritance. By the same token it should have no application to a consolidation of corporations in which there is a merging of interests, not a purchase and sale in the true sense, nor an exchange. We have been cited to no case holding the section to apply to a consolidar tion, and I doubt if such a precedent could be found, for otherwise the industry of counsel would have uncovered it.

But were the matter less clear than it seems to me from its inherent nature and from the absence of any provision in terms hopelessly inconsistent with the right claimed, I should feel “constrained to follow the long and unbroken line of executive construction, applicable to words which Congress repeatedly reemployed in acts passed subsequent to such construction.” Poe v. Seaborn, 282 U. S. 101, 116, 51 S. Ct. 58, 61, 75 L. Ed. 239. See, also, McCaughn v. Hershey Chocolate Co., 283 U. S. 488, 51 S. Ct. 510, 75 L. Ed.-, and cases there cited. Treasury Regulation 45, article 1568, was promulgated under the 1918 act, which contained the familiar provisions as to computing income or gain arising from the exchanges of property. This article precisely fits the case at bar. It provides, inter alia: “Similarly, the cost after reorganization, merger or consolidation of the assets of A or of the consolidated corporation is the sum of the cost (or 'tfie fair market value as of March 1, 1913) of the assets of A and of B for the purpose of ascertaining gain or loss upon a subsequent sale. The new invested capital of A or of the consolidated corporation is to be determined as if A and B were rendering a consolidated return as affiliated corporations.” (Italics mine.) This position has never been abrogated by act of Congress, by judicial pronouncement, or by Treasury Regulation. Its natural equity seems to me apparent. It was even more explicitly stated in article 1574 of Treasury Regulation 69 under the 1926 Act: “In conformity with the principle of ignoring for tax purposes those reorganizes tions which result merely in a change of form, the statute provides further * * * that the assets acquired by a corporation a party to the reorganization shall have the same basis for determining * * * gain or loss from subsequent sale as they had in the hands of the corporation from which they were acquired.” (Italics mine.) See, also, article 1566(b) of Regulation 62, promulgated under the 1921 act.

Counsel for the government offers no argument to refute the persuasive effect of repeated re-enactment of the statute by Congress in substantially the same terms, and the failure to amend it, “in the face of the consistent administrative construction.” We are asked, on the other hand, to imply an intent to require a new or different basis (the book value of the consolidating or merging company) because of the inclusion of section 204 (a) (7) in the Revenue Act of 1924, 26 USCA § 935 (a) (7), and are cited to the case of Anargyros v. Edwards, 22 F.(2d) 707 (D. C. N. Y.) and the “Statement of Changes in the Revenue Act of 1921 by H. R. 6715, and the Reasons Therefor” (Ways and Means Committee), as supporting the contention made. The case cited does not seem to me in point, and the statement of the Ways and Means Committee demonstrates, if it shows anything, that the change was intended to prevent an increase in the basis, through consolidation or reorganization, and to compel the use of the same basis as when the property was in the hands of one of the parties to such consolidation. The power to increase the basis upon reorganization under acts prior to 1924 is admitted. But, apart from the in»aptness of these citations, nothing can be added to a taxing statute by implication. See cases cited in dissenting opinion in Aluminum Castings Co. v. Routzahn, 282 U. S. 92, 100, 51 S. Ct. 11, 75 L. Ed. 234. Unless clearly within the letter of the act, the subject is not bound. See Crooks v. Har-relson, 282 U. S. 55, 61, 51 S. Ct. 49, 75 L. Ed. 156.

For the reasons above stated, I feel constrained to respectfully dissent.


text:
    GARRISON v. PILLIOD CABINET CO. et al.
    No. 388.
    Circuit Court of Appeals, Tenth Circuit.
    June 15, 1931.
    Fred Hinkle, of Wichita, Kan., for appellant.
    Austin M. Cowan, of Wichita, Kan. (W. A. Ajares, C. A. McCorkle, J. D. Fair, and W. A. Kahrs, all of Wichita, Kan., on the brief), for appellees. '
    . Before COTTERAL, PHILLIPS, and McDERMOTT, Circuit Judges.
   COTTERAL, Circuit Judge.

A controversy arose over the election of a trustee for the estate of H. W. McCoy, trading as the McCoy Candy Company. The referee sustained an objection to the votes of creditors for M. E. Garrison, counted those cast for George R. Bassett, and approved his election. Garrison appeals from an order affirming the referee’s aetion.

In November, 1929, Garrison, as executive manager of the Wichita Association of Credit Men, obtained a trust mortgage upon the assets of the bankrupt, and was proceeding to liquidate and administer the estate for creditors. The transfer, conceded to be a common-law assignment, was not attended with the requirements fixed by statute, and it exacted a release by accepting creditors of their demands. A like instrument was held invalid as to other creditors, under the laws of Kansas. McCord-Norton Shoe Co. v. Brown, 131 Kan. 19, 289 P. 417. The assignment was an act ,of bankruptcy.

An involuntary petition was filed against McCoy in January, 1930, and an adjudication followed the next month. Meantime, Garrison caused a letter to be mailed to the creditors asking them to execute proofs of their claims on inclosed forms, which also appointed him and Fred Hinkle, an attorney, as proxies to vote the claims. The National Association of Credit Men of Chicago, with which the Wichita Association was affiliated, wrote the creditors urging them to forward their claims to the latter, so that it might control the administration of the estate. The result was that the Wichita Association received twenty-six of the claims upon the forms sent to creditors. These claims were allowed, aggregating $4,326.47. The votes they authorized and another of the First National Bank of Wichita, for $1,270.18, were offered by Hinkle for Garrispn, as trustee. The bank claim was voted for Garrison. Eleven claims aggregating $1,368.54 were voted for Bassett. An objection was made to the voting of the twenty-six claims on the ground that they had been solicited by Garrison while assignee, in violation of general order 39 (11 USCA § 53), which in terms prohibits a receiver or his attorney from soliciting “any proof of debt, power of attorney, or other authority to act for, or represent any creditor for any purpose. «• * » » The objection was sustained, and Bassett’s election as trustee was approved.

The District Court affirmed that decision, holding both that the restrictions of the general order applied and that Garrison was not a: proper person to act as trustee, because of the prior assignment.

Counsel for appellant insists that ’ the general order has no application and should not be extended to assignees. We agree that it is inapplicable. It is suggested that a like reason exists for applying the restriction to assignees. But the rule, expressed in plain language, cannot be extended to parties not actually named. There is no room for interpretation beyond its terms. The rule was relaxed,- in the amendment of January 13, 1930" (11 USCA § 53), which provided that, where a banking institution, with the approval of the Circuit Judges, is always appointed as receiver, notice may be given to creditors of its availability and means to aid them in'• filing claims and voting for'trustee. It is' not conceivable that the Supreme Court in these explicit references to receivers intended to forbid the like practice by assignees.

It is said the solicitation of claims by a party disqualifies him to act as trustee. We think this fact alone is an insufficient test to' be applied, without an inquiry into other considerations, affecting the fitness of the applicant. And in the present case the question is presented whether the. rejection of the-votes offered for Garrison should be sustained, because of his prior relation as assignee.

By general order 13 (11 USCA § 53), it is provided that the selection of a trustee shall be subject to' the approval of the referee. Primarily, the creditors are entitled to make the selection. But, in their situation, they are not always sufficiently advised to protect their interests, In any event, a supervisory power óver the selection of a trustee is vested in the referee; to be exercised for good cause, in sound discretion. In re Leader Mercantile Co. (C. C. A.) 36 F.(2d) 745.

The selection of an assignee as trustee is presumably improper, as he is bound to account for his dealings with the bankrupt’s property, from which conflicts with the creditors may result. Remington on Bankruptcy, § 1104, citing In re Clay (C. C. A.) 192 F. 830. He may be committed in. favor of creditors whose claims are invalid or preferential in bankruptcy. Demands may have arisen under the assignment, which will provoke contests between claimants and creditors, and even plenary suits with the trustee may be requisite to determine them. See Randolph v. Scruggs, 190 U. S. 533, 23 S. Ct. 710, 47 L. Ed. 1165; May v. Henderson, 268 U. S. 111, 45 S. Ct. 456, 69 L. Ed. 870. Obviously, a trustee should not be selected when his position may be inconsistent with the rendition of his duties to creditors in bankruptcy. The presumption against the propriety of appellant’s selection as trustee has not been overcome in-this ease.

His disqualification sufficiently appears. He has no standing that entitles him to complain of the adverse rulings. There was no error, therefore, iff refusing the votes offered in his favor and approving the selection of his opponent. The order, oi the-District Court is affirmed. ' ' -


author: HICKS, Circuit Judge.

text:
    STEELE v. COMMERCIAL MILLING CO.
    No. 5674.
    Circuit Court of Appeals, Sixth Circuit.
    June 11, 1931.
    H. C. Milligan, of Detroit, Mich., for appellant.
    James Turner, of Detroit, Mich. (Angell, Turner, Dyer & Meek, of Detroit, Mich., on the brief), for appellee.
    Before MOORMAN, HICKS, and HICKENLOOPER,' Circuit Judges.
   HICKS, Circuit Judge.

Suit for damages for personal injuries. Gratiot street in Detroit at the point where appellant was injured runs east and west. Two street ear tracks are located on it. The street is of concrete surfaced with asphalt except that the paving between the car tracks is of granite blocks. On each side of the street and between the curb and the sidewalk is a grass plat. Appellant lived in Cincinnati but operated trucks between Cincinnati and Detroit. At the time he was injured he was standing on the grass plat on the south side of the street engaged in conversation with one Perry. His business there was to buy tires for a truck. Appellee’s truck with a five-ton trailer attached and driven by one Morkowitz was traveling eastwardly upon the street at the rate of 10 to 15 miles per hour. A Chevrolet coupé and other ears were parked along the curb on the south side so that, in order to pass, Morkowitz was driving with the inside wheels of his truck upon the asphalt and the outside ones upon the granite block pavement of the car line: Both truck and trailer were loaded but the trailer was not loaded quite to capacity. The trailer was coupled to the truck by a steel drawbar fitted into drawheads and held by coupling pins. The drawheads were located at the centers of the rear end of the truck and the front end of the trailer respectively. The trailer had two safety chains attached to' its front end, one on each side of the coupling and near the outside of the trailer. These chains were connected to the trailer by eye-bolts driven through the frame of the trailer and riveted. The chains extended crosswise from the front of the trailer to the rear of the truck and were there attached by hooks operating in eyebolts. At the point of the accident the trailer became detached, made a sudden left turn, then a right turn, crashed into the eoupé, and shoved it about 25 feet along the street and over the eurb. The trailer crossed the curb and struck and injured appellant.

As designed the pull of the trailer is upon the drawbar only. It was not intended that the chains should ordinarily draw the trailer. They are safety factors only. After the accident it was discovered that the drawbar had become detached from both the truck and trailer and was found in the street. The coupling pin attaching it to the truck was broken in two places and the drawbar’s connection with the trailer was also broken. It is obvious that when these breaks occurred the stress of the trailer fell upon the chains. Upon inspection an eyebolt attaching one of the chains to the trailer was found pulled entirely through the frame of the trailer and a portion of the frame itself had been pulled out. The eyebolt upon the opposite side of the trailer had been pulled into the frame and the connecting hook had been pulled straight. It is clear that the accident happened because the chains and connections had failed to hold. If, after the drawbar had broken, the chains had pulled the load no accident would have happened.

The declaration alleges various acts of negligence. Appellant, however, upon the trial abandoned all of them except the matter of the chains. Counsel said: “I might say, Tour Honor (to interrupt), that I waive all grounds of negligence except the failure to have chains on,—I rely entirely on that point.” Counsel thereupon introduced Act No. 8 of the Statutes of Michigan, Public Acts, 1919, Extra Session. This aet had then been repealed by Act 321, Public Acts of 1923, but its substance had been re-enacted with additional provisions and is found at section 4763 of the Compiled Laws of Michigan for 1929. This section is set out in the margin.

The declaration alleges a failure of the defendant (appellee) “to comply with all the laws of the State of Michigan respecting the operation of motor vehicles upon the highways of the State.” This allegation is too general in its nature to constitute good pleading, but it was not challenged nor was any bill of particulars or more specific statement requested. There was the plea of the general issue only.

The court sua sponte instructed the jury to return a verdict for appellee. We think that in this there was error. Although penal in character (see section 4767, Compiled Laws of Michigan, 1929), we think the statute (of which the court might have taken judicial notice, Lamar v. Micou, 114 U. S. 218, 5 S. Ct. 857, 29 L. Ed. 94, Baltimore & O. R. R. Co. v. Reed, 223 F. 689, 697 [C. C. A. 6]) was intended for the protection of travellers upon the highway. The provision requiring (1) a six-inch minimum deflection of the trailer wheels from the tracks of the truck; (2) suitable safety chains or devices and that they and their connections shall be of sufficient strength to haul the trailer when loaded; and (3) red and green lights reflect this purpose. See Wilkowski v. Grant Iron & Metal Co., 219 Mich. 535, 538, 189 N. W. 10. We think appellant was within the class the statute was designed to protect. We regard tbe grass plat as within the protected limits. The immediate purpose of the aet was to prevent the trailer from becoming'detached and running wild.

The issue, none too clearly but we think sufficiently presented, was whether the statute was violated,—i. e., whether the chains were “of sufficient strength to haul the trailer when loaded.” Although this statute was penal in form, its breach would constitute adequate basis for civil liability for all damage directly and proximately caused thereby. Cf. Davis v. Wolfe, 263 U. S. 239, 243, 44 S. Ct. 64, 68 L. Ed. 284; Minneapolis, etc., Ry. v. Goneau, 269 U. S. 406, 410, 46 S. Ct. 129, 70 L. Ed. 335; Sherry v. B. & O. R. Co., 30 F.(2d) 487, 488 (C. C. A. 6); Zajkowski v. Am. Steel & Wire Co., 258 F. 9, 13, 6 A. L. R. 348 (C. C. A. 6). In terms it imposes an absolute obligation, and the conceded facts—that the trailer broke loose from the truck and ran wild—demonstrate that the safety chains (or their connections) were not of sufficient strength to haul the trailer when loaded, that is, to prevent the very mischief which was in contemplation and which here occurred.

The defendant introduced testimony with intent to show that the truck and trailer did not separate because the chains and connections were of insufficient strength, but because of some sudden shock from the impact of the trailer upon cobblestones or against holes or rough places in the pavement. The street was not an unusual one, nor did it appear that the impacts received were not such as should reasonably have been anticipated in ordinary urban operation. The insufficiency of the chains to prevent a parting of truck and trailer, when the drawbar failed upon the journey, was due solely to their construction or deterioration, to the nature of the other appliances (including the drawbar and its connections), or to the known and quite customary condition of the street over which the truck was voluntarily operated. All of these matters are to be considered as contemplated and attending conditions of, and included within, the statutory definition of the prescribed strength of the chains. Under such circumstances manifest error was committed in directing a verdict for defendant.

The judgment is therefore reversed, and the cause remanded for a new trial.

       “4763. Trailers; equipment. See. 6. All trailers or jemi-trailers hauled by any motor propelled vehicle must be so attached to such vehicle aud to each other, if more than one (1) trailer is hauled, with such forms of coupling devices as will prevent such trailer or trailers or semi-trailers from being deflected more than six (6) inches from the path of the towing vehicle’s wheels. Trailers must also be connected to the towing vehicle or to each other by suitable safety chains or devices, one (1) on each side of the coupling and at the extreme outer edge of the vehicles and each such chain or device and connection so used shall be of sufficient strength to haul the trailer when loaded. On all trailers and semi-trailers so hauled on the public highways between the hours of one (1) hour after sunset and one (1) hour before sunrise shall be carried a green light on the left side of each trailer or semi-trailer, which light shall be so fixed as to be plainly visible to the drivers of other vehicles or to persons using such highways. A red light shall be properly fixed to the rear of the last trailer so hauled between the hours above stated.”