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    GENERAL FINANCE CORPORATION et al. v. KEYSTONE CREDIT CORPORATION et al.
    No. 3084.
    Circuit Court of Appeals, Fourth Circuit.
    June 17, 1931.

      A. W. Patterson and M. J. Fulton, both of Richmond, Va., for appellants and cross-appellees.
    Hartwell Cabell, of New York City, and Murray M. McGuire, of Richmond, Va. (Ca-bell, Ignatius & Lown, of New York City, McGuire, Riely & Eggleston and Shewmake & Gary, all of Richmond, Va., M. B. Ignatius, of New York City, John S. Eggleston, Oscar L. Shewmake, and J. Vaughan Gary, all of Richmond, Va., on the brief), for ap-pellees.
    Joseph S. Clark, of Philadelphia, Pa. (Gerald F. Flood, of Philadelphia, Pa., Brockenbrough Lamb, of Richmond, Va., Clark, Clark, McCarthy & Wagner, of' Philadelphia, Pa., and Christian & Lamb, of Richmond, Va., on the brief),' for appellee and cross-appellant.
    Before PARKER and NORTHCOTT, Circuit Judges, and GLENN, District Judge.
   PARKER, Circuit Judge.

For some time prior to the year 1926, the National Credit Corporation, hereafter called the National Company, -and the Virginia Mortgage & Finance Corporation, hereafter called the Virginia Company, both being corporations organized under the laws of Virginia, were engaged, in the city of Richmond, in the business of discounting paper secured by mortgages and liens on automobiles. In that year the stockholders of these corporations entered into contracts with Hare & Chase, Inc., a corporation of Pennsylvania, under the terms of which they exchanged their holdings of stoek for stoek in Hare & Chase, these contracts being made upon the faith of certain statements of the officers of Hare & Chase as to the financial condition of that corporation. After the transfer of stoek, the National and the Virginia Companies, whose stoek was then owned by Hare & Chase, were kept alive as active corporations and were operated by officials chosen at corporate meetings controlled by Hare & Chase.

The stock of the National and Virginia Companies eame into the possession of the Keystone Credit Corporation, hereafter called the Keystone Company, under the following circumstances: In January, 1927, it was discovered that the financial condition of Hare & Chase was very precarious as the. result of investment in certain taxicab paper which had been discounted for a corporation of Indianapolis. A meeting was thereupon had between its officers and representatives of the Royal Indemnity Company, a corporation which had guaranteed the payment of paper which it had discounted and deposited under a trust agreement with the Equitable Trust Company to procure certificates used as a basis of credit. At this meeting was represented also the Royal Insurance Company of Liverpool, which owned the stoek of the Royal Indemnity Company, and which, for the purpose of saving Hare & Chase from receivership, agreed through its representatives to advance to that corporation at once the sum of $1,000,000 and further sums later, as same should be needed. Hare & Chase on its part agreed to execute its notes for the sums so advanced and to assign as collateral thereto certain stocks and other securities, including the stoek which it owned in the National and Virginia Companies. Pursuant to this contract, the advancements were made by the Royal Insurance Company, and notes were given evidencing same, and the securities agreed upon, including the stock of the National and Virginia Companies, were assigned to one Fortington, agent and financial representative of the Royal Insurance Company in the United States. Shortly thereafter he and other representatives of the Royal Insurance Company caused the Keystone Company to be organized under the laws of Pennsylvania, and transferred to it the notes of Hare & Chase executed for the advancements as well as the securities which had been delivered as collateral thereto, including the stock in the National and Virginia Companies.

Among the assets of the Virginia Company were certain notes amounting to about $115,000 secured by mortgages on personal property other than automobiles. After the transfer of the stock of that company to Hare & Chase, a Virginia corporation was organized under the name of the General Finance Corporation, hereafter referred to as the General Company, to take over this paper and handle same and paper of similar character. One S. R. Brame, who was made president of both the National and Virginia Companies after the transfer of their stock to Hare & Chase, was made president of the General Company also; and the $115,000 of paper of the Virginia Company was transferred to the General Company by him under circumstances hereafter more fully explained.

On May 2, 1927, suit was instituted against Hare & Chase in the law and equity court of Richmond, Va., by Brame and four other stockholders of the National Company, in behalf of themselves and other persons similarly situated, alleging that the exchange of stoek between the National stockholders, on the one hand, and Hare & Chase, on the other, had been secured by fraudulent representations, and asking that the contract be rescinded and set aside, and that their rights in the National Company be restored to them. This suit was duly removed into the federal court by Hare & Chase, and, on June 13th following, that corporation, together with the Keystone Company, filed an independent suit in that court against the National, Virginia, and General Companies and S. R. Brame, alleging that Hare & Chase was the owner of the stock in the National and Virginia Companies, that same had been assigned to the Keystone Company, and that Brame was diverting the assets of both of these companies to the use and benefit of the General Company. The bill prayed that a receiver be appointed for all three companies, that an accounting be had, and that the usual incidental injunctions be granted.

The defendants in the suit last mentioned filed answer alleging that the stock of the National and Virginia Companies had been acquired by Hare & Chase through fraud, and that the Keystone Company had taken the assignment of the stock with actual or constructive knowledge thereof. They consented to the appointment of a receiver for the National and Virginia Companies, but asked damages by way of counterclaim for the destruction of the business of these companies by Hare & Chase. At the same time the stockholders of the Virginia Company filed an intervening petition setting up fraud on the part of Hare & Chase in acquiring their stock and asking that the exchange be rescinded and their stock returned to them. A receiver was thereupon appointed for the National and Virginia Companies and an order was entered consolidating the two suits for the purpose of joint hearing. Thereafter a compromise was entered into between the Virginia stockholders, on the one hand, and Hare & Chase and the Keystone Company on the other, by the terms of which all matters in difference between them were settled upon the agreement that 55 per cent, of the proceeds of the assets of the Virginia Company should be distributed among its former stockholders and the remaining 45 per cent, should go to Hare & Chase or the Keystone Company.

The consolidated causes were referred to a special master who heard much testimony and filed a number of reports with the court as to the matters in controversy. After considering these in the light of the evidence, the learned judge below held: (1) That there was fraud on the part of Hare & Chase in securing the stock of the National Company from its stockholders; (2) that rescission of the contract and return of the stock could not be decreed because the stock was held by the Keystone Company, which the court found to be a holder for value not affected with notice of the fraud; (3) that, not being able to grant rescission, the court would award damages to such of the National stockholders as were shown to have parted with their holdings in that company because of reliance upon the fraudulent representations of Hare & Chase; and (4) that the transfer of assets from the Virginia Company to the General Company was void and of no effect, and that such assets were to be treated as the property of the Virginia Company. The assignments of error challenge the jurisdiction of the court to entertain the claims of stockholders amounting to less than $3,000 and the correctness of the holdings of the trial court with respect to the matters enumerated. We shall consider, first, the jurisdictional question and then the other questions in the order named.

The Question of Jurisdiction.

Neither the original bill of the National stockholders nor the amended and supplemental bill, filed after removal to the federal court, contained any allegation as to the amount in controversy. The petition for removal filed by Hare & Chase, however, alleged that the amount in dispute exceeded the value of $3,000, exclusive of interest and costs. The proof showed that three of the complainants in the original bill, Brame, Maurice, and Hill, owned stock in the National Company of a value largely in excess of $3,000 each, and the amended and supplemental bill brought in as complainants a large number of other stockholders with holdings in excess of that amount, although the holdings of many of complainants were less than $3,000. The suit, however, whether tested by the original or by the amended bill, was not one in which the individual complainants sought each for himself to set aside the transfer which he had made and to recover the stock with which he had parted. Its purpose was to rescind the contract made by the National stockholders collectively with Hare & Chase and to restore to them collectively the rights in the National Company with which they had parted under that contract. While each stockholder had made a separate transfer of his stock, he had done this pursuant to the provisions of the contract which he together with the other stockholders had entered into, and one of the conditions of which was that 70 per cent, of the outstanding stock should be transferred before any transfer should be effective. After the exchange was completed, Hare & Chase owned the entire stock of the National Company; and it was this stock that complainants sought to subject to the claims of those who had been defrauded to the end that their rights in the National Company might be restored. They were seeking to rescind on the ground of fraud a contract to which all of the defrauded stockholders were parties, and to recover for the benefit of these stockholders the fund created by the transfers under the fraudulent contract. A further purpose of the bill was to protect the assets of the National Company from wrongful diversion by Hare & Chase, who through stock ownership controlled its board of directors.

It is clear, we think, that the matters involved in the suit were (1) the fund (i. e. the stock of the National Company) which complainants were seeking to recover for the benefit of themselves and other stockholders who had been defrauded under the contract in which all had joined, and (2) the assets of the National Company, the protection of which in the interest of former stockholders was asked in the bill. Handley v. Stutz, 137 U. S. 366, 11 S. Ct. 117, 34 L. Ed. 706. In such case it was clearly proper to allow a defrauded stockholder, even though his holdings were of a value less than the jurisdictional amount, to intervene for the purpose of sharing in the recovery of the fund in controversy as well as for the purpose of protecting the assets of the corporation in which he claimed an interest. The case is not one where plaintiffs, having separate and distinct demands, have united for convenience and economy, but where several plaintiffs have united for the assertion of a right in which they have a common and undivided interest. Troy Bank v. Whitehead, 222 U. S. 39, 41, 32 S. Ct. 9, 56 L. Ed. 81.

And it not necessary to decide whether claims of complainants here are of such a character that they could be aggregated for the purpose of jurisdiction, if none of them equaled the jurisdictional amount. See discussion in Lion Bonding Co. v. Karatz, 262 U. S. 77, 43 S. Ct. 701, 67 L. Ed. 1206. As we have seen, the claims of a number of the complainants are far in excess of the jurisdictional amount; ¡and the only question is whether those complainants whose claims are less than such amount shall be allowed to join in the suit for the purpose of recovering and sharing in the fund in controversy and protecting the assets in which all of the defrauded stockholders have an interest. It is well settled that this question must be answered in the affirmative. Handley v. Stutz, supra; Stewart v. Dunham, 115 U. S. 61, 5 S. Ct. 1163, 29 L. Ed. 329; Conway v. Owensboro Savings Bank (C. C.) 165 F. 822; Id. (C. C.) 185 F. 950; Huff v. Bidwell (C. C. A. 5th) 151 F. 563; Stanwood v. Wishard (C. C.) 134 F. 959.

The Question of Fraud.

The court below found that the stock of the National stockholders was procured by Hare & Chase by means of false and fraudulent representations; and we think that this finding is fully sustained by the evidence. The facts are that, while the National Company had suffered a slowing up of business, was in need of additional capital, and was anxious to effect a favorable consolidation with a larger and stronger company, it was in sound financial condition, and its stock was worth more than par. Its officers were approached by representatives of Hare & Chase who proposed to take it over and give its stockholders stock in Hare & Chase in exchange for their holdings. As an inducement to the proposed exchange, it was represented that Hare & Chase was the largest independent company in the United States, doing an “exclusive automobile finance business”; that 90 per cent, of its business was with cars of certain standard makes; that it had capital of $5,000,000, surplus of $970,459, and reserves of $884,-423; that, since the company had been in business, its credit'losses had averaged approximately one-half of 1 per cent.; and that credit losses sixty-five times as great as losses sustained in the past would be required to exhaust its capital surplus and reserves. These statements were made in a letter of June 30, 1926, which was laid before the meeting of the stockholders of the National Company and was accompanied by an auditor’s statement supporting the figures quoted. This letter contained the following very significant paragraphs:

“Our receivables represent an average indebtedness per individual of approximately $250.00 owing from approximately 80,000 individuals. With this tremendous spread and a credit investigation having been made of each individual by our own organization in advance of our purchasing the note, it would seem incredible that our experience on losses in the past could be increased to any great extent.
“Over 90% of our business is with cars of the following makes:
Ford Studebaker Overland-Willys-Knight
Chevrolet Maxwell-Chrys. Buick-Nash
Dodge Hupmobile Hudson-Essex
“Our company investigates the credit of every purchaser in advance of approving the sale by the dealer. We only write business in territories where we are organized for efficient credit and collection work, and the result in credit efficiency is best illustrated by the fact that on November 30th, our paper over sixty days past due only amounted to $64,979.00 against a turn-over for the 12 preceding months of $45,421,085.”

A committee of stockholders of the National Company visited Philadelphia and conferred with one Jones, vice president of Hare & Chase, relative to' its financial condition. He repeated to the committee the representations contained in the letter of June 30th, and neither he nor any other official of Hare & Chase apprised the committee or any one connected with the National Company that there was anything in connection with the business of Hare & Chase to put any different aspect upon its affairs from that presented by the letter of June 30th and the accompanying financial statement. The committee returned, and, to a meeting of National stockholders held July 17th, reported in favor of accepting the proposition which Hare & Chase had made. The stockholders unanimously decided to accept the proposition, and later transferred to Hare & Chase their shares of stock in accordance therewith. There can be no question that in so doing they relied upon the statements contained in the letter of June 30th, which were repeated to their committee, or that they would have rejected the offer of Hare & Chase if they tad understood the true condition of its affairs.

As a matter of fact, Hare & Chase, instead of being in the flourishing condition depicted by the letter of June 30th, was concealing a condition which constantly threatened disaster and ultimately resulted in ruin. This condition was the result of its investment in paper secured by hens on taxicabs, which at the time aggregated more than $4,-500,000. Taxicab paper was generally recognized in the business as not providing a safe form of investment, and was almost universally eschewed by conservative companies. The experience of Hare & Chase with it had been most unfortunate. A year or so prior to this time it had begun handling taxicab paper for the General Finance Company of Indianapolis. The volume of the paper thus handled had grown from one million to four and one-half million dollars. It was not paid when due, and it had become necessary to repossess the taxicabs upon which liens were held. These cabs had then been reconditioned, and liens had been taken for the original loans plus the cost of reconditioning. This cancer eating at the very heart of the delicate financial structure which Hare & Chase had built up is thus graphically described in the report of the special master:

“The testimony discloses that from its inception the volume of the General Finance rediscounts outstanding, almost continuously increased. The original contract amount of $1,000,000.00 had become 2% million on November 30, 1925, and 4% million on June 30,1926. The past dues had also heavily increased during that time, the voluminous correspondence between Alfred Hare and Gi-thens, president of General Finance, including constant references to the unsatisfactory conditions of the latter’s obligations in this respect. The refinancing of cabs had' resulted, in many instances, in a heavy increase of the indebtedness secured by particular vehicle by reason of the addition of reconditioning and refinancing costs to the original obligation. In some cases, a cab upon which $1,900.00 was originally loaned, became security for as much as $3,300.00 and from about January 1, 1926 the increase in General Finance Corporation’s obligations to ■ Hare and Chase represented entirely an increase of loans without additional security except the increase in value of cabs due to reconditioning. November 30, 1926, Hare and Chase had on hand $789,000.00 of General Finance notes representing defaulted installment payments on its obligations.”

At the time of the letter of June 30th, this taxicab situation was bad and constantly growing worse. The company had on hand over $600,000 of the paper which was past due, in addition to approximately $60,-000 of past-due truck paper. It had advanced large sums for reconditioning, and this was secured merely by increase in the amount of the liens held against the secondhand taxicabs. The trouble which the officers of the company were having with this paper was sufficient notice that it was not worth anything like face value; and it is significant that less than half a million dollars, or only about 10 per cent., was ultimately realized from it.

The presence of this paper and the situation with regard thereto rendered false practically every statement contained in the letter of June 30th. See Fletcher Cyclopedia of Corporations, vol. 2, p. 1368; Manning v. Berdan (C. C.) 135 F. 159. That letter stated that 90 per cent, of the business of Hare & Chase was with ears of certain standard makes. As a matter of fact, more than 10 per cent, of its business was not only with, but tied up with, questionable paper on commercial taxicabs. It represented that on November 30th Hare & Chase had paper sixty days past due of only $64,979, the clear inference being that the past-due paper was negligible in amount, whereas the fact was that on December 30, 1925, Hare & Chase had past-due taxicab paper amounting to $345,000, and at the time of the representation had past-due paper exceeding $660,000. It represented that the losses of Hare & Chase had been only one-half of 1 per cent., and that it was incredible that, with the spread of its credit system, the percentage of losses could be greatly increased, whereas the presence of the taxicab paper meant that the company was inevitably facing losses of most serious proportions. It represented that the surplus of Hare & Chase was $970,-459 and reserves $884,423, whereas a proper valuation of the taxicab paper would have wiped out surplus and reserves and a large part of the amount set up for capital. As was well said by the learned judge below: “In this view of the evidence, it is perfectly clear that at the time of the exchange of stocks, Hare & Chase, instead of having nearly $7,000,000 of capital, surplus and reserves, was in imminent peril of having this item of its balance sheet entirely absorbed in the payment of losses accruing out of improvident advances of money in the manner above indicated. The master finds, and I think correctly, that Jones, the vice-president with whom the negotiations for the acquisition of the stock of the National Company were had, had either actual knowledge or the means of knowledge of the volume of his company’s taxicab paper. I think he should likewise have found that the character of the correspondence between Githens, president of the Pittsburg Company, and Jones and the fact that the latter was in active charge of much of the company’s business and during Hare’s absence in Europe in the summer of 1926, largely responsible for its policy, created an uneseapable inference that he not only knew the fact but realized the precarious position of his company thus produced.”

It is idle to argue that Hare & Chase had hopes of ultimately realizing the face value of the paper. In the light of the experience of the company, such hopes were without any adequate foundation; and certainly they furnished no warrant for including such paper at its face value among the assets of the company without an accompanying statement which would apprise a prospective purchaser of the company’s stock of the true situation.

And it is no answer to the charge of fraud to say that Jones did not know the financial condition of his company when he put forward a statement of its condition for the guidance of prospective purchasers of its stock with whom the company was dealing. Jones was vice president of the company, and dealt with the committee of National stockholders when it visited Philadelphia for the purpose of making investigation. He made representations orally as well as by letter showing that Hare & Chase was in splendid financial condition. By reason of its holdings of the questionable taxicab paper, which Jones did not disclose, these representations conveyed an entirely false idea as to its financial condition. It is elementary that a false representation may, in contemplation of law, be made fraudulently so as to afford a right of action in damages, and a fortiori, ground of equitable proceedings, when made under circumstances in which the party ought to know, if he does not know, of its falsity; as, where having “special means of knowledge,” it is his duty to know. Bigelow on Fraud, 509, 516; Cook on Stock and Stockholders, § 145; 12 R. C. L. p. 336; Prewitt v. Trimble, 92 Ky. 176, 17 S. W. 356, 36 Am. St. Rep. 586; Lehigh Zinc & Iron Co. v. Bamford, 150 U. S. 665, 14 S. Ct. 219, 37 L. Ed. 1215.

Furthermore, it is well settled that a false representation of a material fact constituting an inducement to a contract, on which the opposite party has a right to rely, is ground for rescission in equity, though the party making the representation may have been ignorant as to whether it was true or false; the real inquiry being, not whether the party making the representation knew it to be false, but whether the opposite party believed it to be true, and was misled by it in entering into the0 contract. Kell v. Trenchard (C. C. A. 4th) 142 F. 16, 23; Halsey v. Minnesota-South Carolina Land Co. (C. C. A. 4th) 28 F.(2d) 720; Smith v. Richards, 13 Pet. 26, 10 L. Ed. 42; 12 R. C. L. 345, 346; note Ann. Cas. 1913C, page 63.

The Rights of the Keystone Company.

We think it clear that the judge below was correct in holding that the contract between the ,Na"tional stockholders and Hare & Chase could not be rescinded and the stock in the National Company restored to complainants, because that stock had been pledged by Hare & Chase to secure bona fide loans and the Keystone Company held it for value and without notice of the fraud which had been perpetrated. The circumstances surrounding the Keystone’s acquisition of the stock are as follows:

The Royal Indemnity Company was a guarantor of paper which Hare & Chase had deposited with the Equitable Trust Company under a trust agreement. On the failure of the makers of this paper to pay it' at maturity, the -Indemnity Company became liable thereon, with right to reimbursement from Hare & Chase. In January, 1927, Hare & Chase became financially embarrassed because of the failure of the makers of this paper to pay same on maturity; and its officers had a conference with representatives of the Indemnity Company and of the Royal Insurance Company of Liverpool which owned the stock of the Indemnity Company. At this conference it was thought that the situation could be worked out by the Royal interests making loans to Hare & Chase and continuing to guarantee Hare & Chase paper. As a condition of making the loans and continuing the course of guaranteeing paper, however, the Royal interests demanded that collateral be pledged with them to secure the loans and that sufficient Hare & Chase stock be transferred to enable them to control and direct its policy. A contract to this effect was entered into and loans were made and collateral pledged pursuant thereto. Beginning with an advancement of $35,-000 on January 25, 1927, and followed with $465,000 on January 27th, $500,000 on February 14th, $400,000 on February 28th, and $200,000 on March 2nd, these loans continued until a total of $3,684,900 had been loaned, in addition to $653,506.42 paid under the guarantee of the Indemnity Company and $402,083.45 reloaned from proceeds of collateral pledged.

The first $1,600,000 was advanced by the Royal Insurance Company through one Fort-ington, its financial representative in the United States, and the notes evidencing the loans were made payable to him. Shortly after entering into the agreement, however, the representatives of the Royal Insurance Company, realizing that the matter could be more satisfactorily administered through an independent corporation, organized the Keystone Company and transferred to it the notes of Hare & Chase and the collateral pledged as security therefor, taking in exchange the stock of the Keystone Company, and subsequent loans were made through the Keystone Company. That company later assumed the collection of outstanding Hare & Chase paper for the account of Hare & Chase and the purchase of new paper which was discounted through Hare & Chase. This, however, had no connection with the loans to Hare & Chase or the notes taken in connection with the loans or the collateral pledged as security therefor.

At the time of the original loan by the Royal interests, notes were given by Hare & •Chase aggregating $1,000,000, and collateral was pledged having a par or face value of $2,696,723.14 included in which was the stock in the National Company amounting to $262,200. The original notes given Forting-ton provided that collateral pledged should be held as security for the particular notes and any other notes of the maker held by the holder, and the notes made to the Keystone Company provided that the collateral originally pledged with Fortington should be held as security therefor. There is no question, therefore, that the collateral pledged is held by the Keystone as security for all the loans made; and the record leaves no doubt that the amount of these loans was largely in excess of the value of the collateral.

The master and the District Judge have found that the loans relied upon by the Keystone Company were made in good faith; that the collateral including the stock of the National Company was actually pledged; that neither the representatives of the Royal interests nor the Keystone Company had notice of the fraud on the National stockholders; and that the collateral pledged is not sufficient to repay the loans. It is well.settled that findings of the master approved by the judge will not be disturbed on appeal, unless clearly wrong; and there is nothing in the record here to justify disturbing them. On the contrary, a careful examination of the record convinces us that they are correct.

If we understand the argument of counsel for the National stockholders with regard to this phase of the ease, it is: (1) That there was a merger of the National Company with Hare & Chase which extinguished the existence of the National Company, and that for that reason the pledge of its stock conferred no rights on the pledgee; (2) that the Royal representatives and the Keystone Company took the stock with notice of the equities of the National stockholders; (3) that the transfer was void as a preference of the Royal Indemnity Company; (4) that there was no actual delivery of the stock, and consequently no valid pledge thereof; and (5) that upon a proper accounting of collateral pledged the loans would be paid off and the National stock left to be reached by the National stockholders. None of these contentions can be sustained.'

On the contention as to merger, it is clear that what occurred was a sale or transfer by the stockholders of their corporate stock, not a sale by the corporation of its assets. The corporate existence of the National Company was not affected thereby; but it was kept alive and was functioning with a full quota of officers and directors and a corporate existence entirely separate and distinct from that of Hare & Chase. The sale of its stock to Hare & Chase no more extinguished its existence or destroyed the rights of holders of stock to pledge same than a sale of stock by its stockholders to any other individual or corporation would have done. After acquiring the stock of the corporation, Hare & Chase might have liquidated or dissolved it; but this was not done, nor was anything done which in any way impaired the right to pledge the stock acquired or exercise any other of the usual rights of ownership.

In the ease of American Railway Express Co. v. Fleishman, Morris & Co., 149 Va. 200, 141 S. E. 253, upon which complainants rely, there was a transfer of the assets of one corporation to another in exchange for its stock; and the question was the liability of the latter corporation for the debts of the former to the extent of the assets acquired. A similar question was before this court in the ease of Cobb v. Interstate Mortgage Co. (C. C. A. 4th) 20 F.(2d) 786, 789. But it is clear that the doctrine of these and similar cases has no application here. “There is ho consolidation or merger merely because one company owns a majority or all the stock of. another company.” Fletcher, Cyclopedia of Corporations, vol. 7, § 4667; Jessup v. Ill. Cent. R. Co. (C. C.) 36 F. 735, 741; Calor Oil & Gas Co. v. Franzell, 128 Ky. 715, 109 S. W. 328, 33 Ky. Law Rep. 98, 36 L. R. A. (N. S.) 456; Venner v. Chicago City R. Co., 258 Ill. 523, 543, 101 N. E. 949.

And there is absolutely no evidence that the Royal representatives or the Keystone-Company had any knowledge of the fraud perpetrated on the National stockholders or knowledge of anything to put them on notice of the fraud at the time that they made the loans and received the pledge of the collateral as security therefor. It is argued that the reports made to the Royal Indemnity Company as to the paper which it guaranteed were sufficient to put it on notice that Hare & Chase was dealing in taxicab paper, that the taxicab indebtedness was being pyramided, and that the financial condition of Hare & Chase was impaired as a result; but the question is, not whether the Royal representatives had reason to believe that Hare & Chase was dealing in taxicab paper or that its financial condition was impaired, but whether they had notice of the fraud by which the stock in the National Company was acquired, i. e., of the false representations made to induce the exchange by the National stockholders. There is nothing whatever to show that they had such knowledge or nor tice.

The other points do not require discussion. Complainants are not creditors attacking a preferential transfer by a bankrupt or insolvent for the benefit of an insolvent estate, but are seeking to recover for themselves property which they have transferred and which has been pledged by the transferee with a third party. Even if they had the rights of creditors, they could not attack the pledge here as a voidable preference, for the reason that it was made for a present consideration and not to secure a pre-existing debt. On the question of delivery, the evidence shows beyond peradventure that the stock was actually delivered at the time of the pledge. And as to accounting' for collateral, there can be no question upon the record that the value of the collateral pledged was less than the indebtedness secured and that upon no theory could the pledgee be de-'' prived of any of the stock held by it. Under such circumstances, it is not necessary to consider a number of interesting points of law ably argued by counsel.

The Award of Damages to the National Stockholders.

Not being able to grant rescission because the stock of the National Company acquired by the fraud of Haré & Chase had been pledged to a bona fide holder for value without notice of the fraud, the learned judge below granted the defrauded National stockholders such relief as lay within his power by awarding them damages against Hare & Chase. ’This award was made in favor of stockholders who testified that they relied upon-the false representations and also in favor of those who participated by proxy in the stockholders’ meeting to which the committee reported and which decided upon the exchange of stock, but was denied to stockholders who neither testified to reliance upon the representations nor participated in the meeting. The exceptions to this action present four questions: (1) Whether it was proper to make any award of damages to stockholders; (2) whether it was proper to make the award in favor of the stockholders who did not testify as to reliance but participated by proxy in the stockholders’ meeting; (3) whether it was proper to deny an award to those who neither testified to reliance nor participated in the meeting; and (4) whether Brame and other stockholders who participated in stockholders’ meetings of Hare & Chase, after learning of the fraud, are by that action precluded from recovery.

We think that, upon the first or general question, there can be no doubt that it was proper to make an award of damages to the defrauded stockholders. The rule in such eases is well stated by Professor Pomeroy in his Equity Jurisprudence (4th Ed.) vol. 1, p. 374, as follows: “If a court of equity obtains jurisdiction of a suit for the purpose of granting some distinctively equitable relief, such, for example, as the specific performance of a contract, or the rescission or cancellation of some instrument, and it appears from facts disclosed on the hearing, but not known to the plaintiff when he brought his suit, that the special relief prayed for has become impracticable, and the plaintiff is entitled to the only alternative relief possible of damages, the court then may, and generally will, instead of compelling the plaintiff to incur the double expense and trouble of an action at law, retain the cause, decide all the issues involved, and decree the payment of mere compensatory damages.”

The rule is thus tersely stated by Judge Dent in Robinson v. Braiden, 44 W. Va. 183, 28 S. E. 798, 802: “It is a well-established rule that equity, having taken jurisdiction for one purpose, will retain it for others necessary to the final settlement of all matters involved in the litigation between the parties, growing out of, and connected with, the subject-matter of the suit. 1 Beach, Mod. Eq. Jur. § 21 (see cases cited); Gormley v. Clark, 134 U. S. 338, 10 S. Ct. 554 [33 L. Ed. 909]; Beecher v. Lewis, 84 Va. 630, 6 S. E. 367; Walters v. Bank, 76 Va. 12, 19. The principle is almost universal that jurisdiction of the subject-matter does not depend upon the ultimate existence of a good cause of action in the particular case. Where equity has acquired jurisdiction upon equitable grounds, it may go on to complete adjudication, establish legal rights, and grant legal remedies otherwise beyond its scope; and no fact subsequently ascertained, showing want of good cause of action in the particular case, can defeat that jurisdiction.”

See, also, Holland v. Anderson, 38 Mo. 55; Case v. Minot, 158 Mass. 577, 33 N. E. 700, 22 L. R. A. 536; Milkman v. Ordway, 106 Mass. 232; Hazen v. Lyndonville Nat. Bank, 70 Vt. 543, 41 A. 1046, 67 Am. St. Rep. 680, 689; Cincinnati & C. Traction Co. v. American Bridge Co. (C. C. A. 6th) 202 F. 184; Waite v. O’Neil (C. C. A. 6th) 76 F. 408, 34 L. R. A. 550; Woodcock v. Bennet, 1 Cow. (N. Y.) 711, 13 Am. Dec. 568, 586; Hall v. Delaplaine, 5 Wis. 206, 68 Am. Dec. 57; note to Pomeroy’s Equity Jurisprudence (4th Ed.) vol. 1, pp. 374 to 379, and cases there cited.

Argument is made in behalf of Hare & Chase that, since complainants are not entitled to rescission, they are not entitled to damages, and reliance is placed upon cases such as Houldsworth v. City of Glasgow Bank and Liquidators, 5 App. Cas. 317; Oakes v. Turquand, Law Rep. 2 H. L. 325; Wilson v. Hundley, 96 Va. 96, 30 S. E. 492, 70 Am. St. Rep. 837; and Virginia-Carolina Rubber Co. v. Flanagan, 150 Va. 276, 142 S. E. 376. These eases, however, have no application here. The Virginia cases hold that a stockholder whose subscription has been obtained by fraud may not retain the stock and sue for damages, but must offer to return the stock and sue in equity for rescission. That is exactly what complainants here have done, and damages are being awarded them in lieu of a return of the consideration with which they have parted solely because its return has been made impossible, not by them, but by the corporation which perpetrated the fraud. The English cases cited and the current of authority in this country are to the effect that one who has been induced by fraud to subscribe to the stock of a corporation may not rescind the subscription or recover damages from the corporation, after insolvency has intervened and the assets of the corporation are being administered for the benefit of creditors, as against creditors who extended credit after the subscription. This is upon the principle that the assets of the insolvent corporation constitute a trust fund for the benefit of its creditors. Fletcher, Cyclopedia of Corporations, vol. 2, pp. 1411-1419, and eases there cited. This doctrine, however, is asserted for the protection of creditors. Fletcher, vol. 2, p. 1419; Newton Nat. Bank v. Newbegin (C. C. A. 8th) 74 F. 135, 33 L. R. A. 727; In re Eureka Furniture Co. (D. C.) 170 F. 485. It cannot be availed of to shield the corporation which perpetrated the fraud.

The judge was clearly right in denying an award to the stockholders who did not participate in the creditors’ meeting and did not testify to reliance upon the fraudulent representations made. It is elementary that to recover on the ground of fraudulent representations one must have relied upon them; and, as to the stockholders who did not participate in the meeting or testify in the ease, there is nothing to show such reliance. And we think it is equally clear that he was right in making an award to the stockholders who participated in the stockholders’ meeting by proxy and voted to accept the Hare & Chase offer. The evidence as to the proceedings at that meeting leaves little doubt that the action there taken was because of reliance upon the representations made in the letter of Hare & Chase and verbally to the committee of stockholders'; and it is, ■of course, imxhaterial whether the stockholder himself acted upon the representations made or whether he acted through an agent. The fact that these stockholders were represented by proxy shows either that they were satisfied with the proposition of Hare & Chase because of the statements in the letter sent to them or that they were delegating the decision to some one in whom they had confidence. In either event, they are entitled to recover; for it is manifest that one who is defrauded through false representations made to his agent upon which the agent relies is in no different position from one who relies upon such representations himself.

And we agree with the judge below that Brame and the other stockholders who participated in the Hare & Chase stockholders’ meeting of March 4th are not precluded from recovery by reason of that participation. It is true that ordinarily one who has been defrauded, upon learning of the fraud, is put upon his election either to rescind the contract or stand upon it and recover the damages sustained, and that, if he does anything which amounts to a ratification, he will not be allowed to rescind. But here rescission was not possible, because the National stock, as we have seen, had been pledged to a bona fide holder for value without notice. The point raised would come with more force if rescission were being awarded; but these stockholders are not obtaining a rescission of their contract, but merely damages for the fraud perpetrated upon them; and the general rule is that one who has been defrauded may recover the damages sustained as a result of the fraud, notwithstanding he has affirmed the contract. Fletcher, vol. 2, p. 1395. It is true that in some of the Virginia decisions, it is held, contrary to the general rule (Fletcher, vol. 2, p. 1395), that one who subscribes to stock because of fraudulent representations must seek rescission and may not affirm and sue the corporation for damages; but'it is clear that this rule has no application, where, under the circumstances of the case, rescission is not possible, as where the corporation has parted with the consideration received in such way that it cannot be restored.

The Controversy as to Assets Transferred to the General Finance Corporation.

After Hare & Chase acquired the stock of the Virginia Company, Brame was elected president of that corporation and placed in charge of its affairs. Among its assets were notes secured by chattel mortgages other than automobile paper worth in the aggregate $115,453.98. Brame agreed with the officials of Hare & Chase to organize a new corporation to handle this paper; and the terms of the agreement briefly stated were as follows: The corporation was to have preferred stock of $100,000; 2,000 shares of .common stock were to be issued. The $115,-000 of Virginia Mortgage paper was to be transferred to it; and Hare & Chase was to accept $60,000 of preferred stock with 600 shares of common stock and notes for $55,-453.98, maturing monthly over a period of six months and secured by the transferred Virginia paper, in exchange therefor. At the same time another agreement was entered into, by the terms of which Hare & Chase was to accept from the corporation to be organized stock of Hare & Chase at an agreed ratio in exchange for the stock of the corporation issued to it, provided the common stock of Hare & Chase was worth at the time as much as $23.00 per share, this exchange privilege being limited, however, so as to permit the exchange for only one-sixth of the stock in any one month.

Pursuant to this agreement, Brame proceeded on January 10, 1927 to organize the General Finance Corporation of Virginia, heretofore and hereafter referred to as the General Company, with himself as president. In that capacity he executed to the secretary and treasurer of the Virginia Company, of which he was also president, a receipt for the $115,453.98 of paper, but gave that company no consideration for same. He issued to Hare & Chase $60,000 of preferred and 600 shares of common stock, and executed to that corporation notes of the General Company for a total of $55,453.98, all of which he forwarded to Hare & Chase on January 11th, pursuant to the agreement theretofore had with its officials. While Brame testifies that the transfer of the Virginia Company paper was authorized by the directors of that corporation, no minutes showing such action by the directors were produced; and, if the directors did authorize the transfer, it is clear that the only directors present authorizing it were persons who were also directors of the General Company, i. e. Brame, Maurice, and Shopofl. Brame issued fifty qualifying shares of common stock to the directors of the General Company; and later, for a consideration of $20, issued the remaining 1350 shares of common stock to himself.

On January 28th Brame was in Philadelphia in connection with the financial difficulties of Hare & Chase. While he was there, Jones, the vice president of Hare & Chase, gave back the stock and notes to him. There is some controversy as to the circumstances surrounding the return, and as to whether it was made to Brame in his capacity as president of the Virginia Company; but certain it is that Brame carried the stock and notes back to Richmond with him and held them there until after the institution of these suits. No stock was ever issued to the Virginia Company, nor were any notes executed to it. On February 8th, when Hare & Chase was in such great financial difficulties that it was arranging to surrender control to the Royal interests, and when its common stock was worth little, if anything, Brame wrote a letter to Hare & Chase inclosing certificates of Hare & Chase stock to take up one of the notes executed by the General Company and $10,000 of its preferred stock. On February 21st, when the financial condition of Hare & Chase was even worse, he forwarded additional certificates of Hare & Chase stock, with a letter stating that they would take up in full the remaining $50,000 of General Company’s preferred stock under the previous agreement.

The position of the General Company is, that as a result of the foregoing transactions, the paper of the Virginia Company has been transferred to the General Company and is held by it subject only to a lien for the balance due on the notes executed to Hare & Chase amounting to approximately $45,000. If this be correct, then, as a result of the manipulations of Brame, the Virginia Company and its stockholders, without any consideration whatever, have been deprived of assets to the net value of more than $70,000, which have gone to a corporation practically all of the stock of which is owned by Brame, having been purchased by him for $20. In other words, Brame, while president of the Virginia Company, has put through a series of transactions as the result of which, by investing $20 in the common stock of the General Company and surrendering to Hare & Chase some of its practically worthless stock, which transactions benefited the Virginia Company not one iota,- he has obtained for his own use and benefit, or, what is the same thing, for the use and benefit of the corporation which he owns, assets of the Virginia Company of a net value exceeding $70,000. It is needless to say that no such position can be sustained.

We shall not take time to discuss the technical irregularities which vitiate the proceedings upon which the General Company relies. The fact that stock was voted Hare & Chase merely by the directors and not by the incorporators or stockholders of the General Company; the fact that the General Company never secured the $100,000 subscription to its preferred stock as provided by the agreement with Hare & Chase; the fact that the General Company was authorized to redeem its stock by exchange of Hare & Chase stock only to the extent of a certain amount per month and only when Hare & Chase stock was of a certain value; the fact that the sale of the Virginia Company’s paper was not authorized at a stockholders’ meeting — all of these matters might be discussed at length, as they have been in the report of the referee and the briefs of counsel. We prefer, however, to place our decision on the broad ground that the transfer of the assets, if there was a transfer, from the Virginia to the General Company, was void because made without consideration moving to the Virginia Company, and because made by officers and directors who were also officers and directors of the General Company and were clearly acting against the interest of the Virginia Company in the transaction. It is well settled that such a transfer will not be upheld. Geddes v. Anaconda Copper Co., 254 U. S. 590, 599, 41 S. Ct. 209, 212, 65 L. Ed. 425; Corsicana Nat. Bank v. Johnson, 251 U. S. 68, 90, 40 S. Ct. 82, 64 L. Ed. 141; Twin-Lick Oil Co. v. Marbury, 91 U. S. 587, 588, 23 L. Ed. 328; Finefrock v. Kenova Mine Car Co. (C. C. A. 4th) 22 F.(2d) 627, 632; Addison v. Lewis, 75 Va. 701, 720; Fletcher, Cyclopedia of Corporations, vol. 4, §§ 2338, 2376, 2378. As said by the Supreme Court in Geddes v. Anaconda Copper Co., supra: “The relation of directors to corporations is of such a fiduciary nature that transactions between boards having common members are regarded as jealously by the law as are personal dealings between a director and his corporation, and where the fairness of such transactions is challenged the burden is upon those who would maintain them to show their entire fairness and where a sale is involved the full adequacy of the consideration. Especially is this true where a common director is dominating in influence or in character. This court has been consistently emphatic in the application of this rule, which, it has declared, is founded in soundest morality, and we now add in the soundest business policy. Twin-Lick Oil Co. v. Marbury, 91 U. S. 587, 588, 23 L. Ed. 328; Thomas v. Brownville, Ft. Kearney & Pacific R. R. Co., 109 U. S. 522, 3 S. Ct. 315, 27 L. Ed. 1018; Wardell v. Railroad Co., 103 U. S. 651, 658, 26 L. Ed. 509; Corsicana National Bank v. Johnson, 251 U. S. 68, 90, 40 S. Ct. 82, 64 L. Ed. 141.” ’ (Italics ours).

The ease has been ably presented by counsel, and the record shows that it was carefully considered by the special master and the learned judge below. After full consideration, in the light of the briefs and arguments, we think that the decree below was in all respeets correct, and same will accordingly be affirmed. One-third of the costs on this appeal will be assessed against the appealing National stockholders, one-third against Hare & Chase, and one-third against the General Finance Corporation.

Affirmed.


source: Caselaw Access Project

author: EVANS, Circuit Judge.

license: Public Domain

text:
    DIAMOND et al. v. NEW YORK LIFE INS. CO.
    No. 4456.
    Circuit Court of Appeals, Seventh Circuit.
    June 19, 1931.
    Walter Bachrach, Benjamin C. Bachrach, and Arthur Magid, all of Chicago, Ill., for appellants.
    Homer H. Cooper, Frank H. Scott, and Wendell J. Brown, all of Chicago, Ill., and Louis H. Cooke, of New York City, for appellee.
    Before ALSCHULER, EVANS, and SPARKS, Circuit Judges.
   EVANS, Circuit Judge.

Appellee issued two $5,000 insurance policies on the life of one Harry H. Diamond. Each policy provided that “double the face of this policy” should be paid if the insured’s death “resulted directly and independently of all other causes from bodily injury effected solely through external, violent and accidental cause.” A provision also appeared in each policy to the effect that “this double indemnity benefit will not apply if the insured’s death resulted * * * from any violation of law by the insured.” While the policies were in force, the insured, upon being convicted of having murdered his wife, was electrocuted pursuant to the judgment of an Indiana state court.

This action was brought to enforce the double indemnity provision in each policy. Defendant did not dispute its liability for the face of the policy, but challenged a liability for double indemnity.

The case was tried by the court without a jury, and resulted in findings and a judgment'for appellee. Disposition of the appeal turns upon two controverted issues: (a) Did the insured’s death result from “any violation of law by the insured”? (b) Did the insured meet his death from “bodily injury effected solely through external, violent and accidental cause”?

Most of the facts were agreed upon. Therefore, only two questions of law are raised.

In fact, in view of our conclusion respecting query (b), hereinafter discussed, there is only one question of law which we need consider, viz., the admissibility of the evidence offered by appellee to show that Diamond’s death resulted from a violation of law by Diamond. In the stipulation of facts, the parties reserved the right to object to the competency or relevancy of any fact set forth in the stipulation. Pursuant thereto, appellants objected to the proffered proof that the insured was indicted in the criminal court of Lake county, state of Indiana, upon the charge of murder in the first degree, and entered a plea of not guilty to said indictment ; that trial was had in a court of competent jurisdiction in Indiana; that the jury rendered its verdict finding said insured guilty of murder in the first degree, as charged in the indictment, and fixed his punishment at death; that thereafter judgment on the verdict was rendered, which judgment directed the warden of the Indiana State Prison to pass through the body of said insured a current of electricity of sufficient intensity to cause death; that, pursuant to such judgment, the warden of the Indiana State Prison did cause the insured to suffer death by passing through his body a current of electricity.

Appellants’ position is that such evidence was not admissible as between appellants and appellee to prove that the death of the insured resulted from any violation of law by him.

Por the purposes of this argument, and that we may narrow the issue to meet squarely the question presented by appellants, we have assumed that appellants’ proof made out a prima facie ease of the accidental death of the insured. Likewise we have accepted their contention that the burden was upon appellee to show that such death resulted from a violation of law by the insured. With these issues removed, only a question of law —the admissibility of certain evidence — is left for our determination.

Appellants’ position, briefly stated, is that proof of conviction of murder in the first degree is not admissible in a civil action to establish the fact that the accused committed the murder for which he was convicted. In other words, appellants argue that the verdict in the criminal case, finding the insured guilty of murder, is not competent proof in a civil action between different parties that the insured murdered his wife, or committed a violation of law, which resulted in his death.

On the other side, it is argued that the general rule, to the effect that a verdict or judgment in a criminal proceeding is not competent proof to establish a fact necessarily determined in a civil action, has certain exceptions, or rather is not applicable, where the judgment in the criminal action per se supplies an indispensable link in the material evidence showing either the cause of action or the basis of the defense.

The general rule for which appellants contend is to be found in many eases. State v. Slack, 200 Ind. 241, 162 N. E. 670, 163 N. E. 21; Montgomery v. Crum (Ind. App.) 150 N. E. 393; Id., 199 Ind. 660, 161 N. E. 251; Lillie v. Modern Woodmen of America, 89 Neb. 1, 130 N. W. 1004; Cammarano v. Gimino, 234 Ill. App. 556; Chamberlain v. Pierson (C. C. A.) 87 F. 420; Interstate Dry Goods Stores v. Williamson, 91 W. Va. 156, 112 S. E. 301, 31 A. L. R. 258; Liverpool & London & Globe Ins. Co. v. Wright, 166 Ky. 159, 179 S. W. 49; Sklebar v. Downey, 220 Mo. App. 5, 285 S. W. 148; Marceau v. Travelers’ Ins. Co., 101 Cal. 338, 35 P. 856, 36 P. 813. Neither the rule nor the reasons back of it can be questioned. It is only in reference to its exceptions, or to its nonapplieability, that we need concern ourselves.

Jones’ Commentaries on Evidence (1st Ed.) vol. 3, par. 590, states the rule and its exceptions in the following language:

“Although, where the parties to the suit are not the same or in privity, the record of the former suit cannot be introduced to establish the facts on which it was rendered, yet there are, in addition to the exceptions referred to, certain incidental purposes for which such records may be introduced. A judgment may be offered in evidence for two purposes: 1. To establish the mere fact of its own rendition and the legal consequences which result from that fact; 2. In addition to the first purpose, for the further purpose of proving some other fact as found by that verdict or upon whose supposed existence the judgment is based.”

Illustrations of the instances where judgments or convictions were received in evidence to establish an essential fact upon which the judgment was based are: Actions on contracts for rewards offered for evidence leading to the capture and conviction of offenders: York v. Forscht, 23 Pa. 391; Brown v. Bradlee, 156 Mass. 28, 30 N. E. 85, 15 L. R. A. 509, 32 Am. St. Rep. 430; Arkansas Southwestern R. Co. v. Dickinson, 78 Ark. 483, 95 S. W. 802, 115 Am. St. Rep. 54. Actions in tort for malicious prosecution, where the acquittal of the plaintiff is essential: Western Union Tel. Co. v. Thomasson (C. C. A.) 251 F. 833; Wilson v. Vassar, 214 Ala. 435, 108 So. 250. Actions to recover fines, where the foundation of the action is the existence of a conviction: Parish of Orleans v. Morgan (La.) 6 Mart. (N. S.) 3. Actions of mandamus to compel issuance of a license to relator, where respondent justified on grounds the relator has been convicted of abusing such license: Cooke v. Loper, 151 Ala. 546, 44 So. 78.

The essence of appellants’ ease resided in the proof of accidental death. This proof was supplied when they showed that the insured was forcibly placed in a certain chair against his will, strapped there, and, against his protest, electrocuted by W.

Such proof, however, admitted of denial and also of explanation. Appellee’s explanation lay in the proof that the individual, W., who forcibly placed the insured in the chair, was the warden of the Indiana State Prison; that he acted pursuant to a judgment based upon a conviction of murder in the first degree.' This conviction inferentially established the defense upon which appel-lee relied.

It was not only Diamond’s death, but his accidental death, which appellants were under the necessity of proving. Rebuttal or explanation of appellants’ prima facie case of accidental death brought out all the facts surrounding such death. In other words, appellants proved (a) Diamond’s death, and (b) cause of death due to external forces and by instrumentalities over which Diamond had no control. To meet this proof, appellee admitted death, but showed the circumstances which produced it. Those circumstances, which were receivable on the issue of death, also established a fact which in turn established a defense upon which appellee relied.

The decision in Burt v. Union Central Life Insurance Co., 187 U. S. 362, 23 S. Ct. 139, 141, 47 L. Ed. 216, settles the question. While there is much in that opinion which deals with an issue not present in the instant case, the question of the admissibility of this judgment and the verdict upon which it was based was squarely presented and decided.

The court there said:

“But the stress of the plaintiffs’ contention rests on the allegation that the insured was unjustly convicted and executed; that he did not in fact commit the crime of murder or participate therein, and that if he did it was while he was insane and not responsible for his actions. * * * It is said that the adjudication in the criminal ease is not, as to these plaintiffs, conclusive of the insured’s guilt; that they may show in this independent action facts which would satisfy a jury that the outcome of those legal proceedings was unjust because the insured did not participate in the crime, or, if he did, that he was legally irresponsible therefor by reason of insanity. It is not doubted that the criminal prosecution was an adjudication of the insured’s guilt, his sanity and legal responsibility for the crime, but the principle of res judicata is that a judgment is conclusive only as between the parties and their privies, and these plaintiffs say they were not parties to the criminal action and are not privies to either party thereto.
“If the ease turned on the applicability of the principle of res judicata there would be little difficulty in reaching a conclusion. There is no identity of parties, nor are the two parties to this action privies to those in the criminal proceeding. A judgment in a criminal prosecution for assault and battery cannot be invoked as res judicata in a civil action by the party injured to recover damages. But there the two actions run along parallel lines, and the relief sought in each is the direct and natural result of the wrong complained of. Here the civil .action is founded upon the result of the other — cannot be maintained but for the fact of that result. If the insured had been acquitted, there would have been no cause of action on the policy, while the fact that the defendant in the illustration given was acquitted of the criminal offense would not bar the civil action to recover damages.”

Counsel for appellants have made vigorous attacks on this opinion in an effort to avoid its controlling effect upon the disposition of the case before us. They have failed, not because of a lack of industry, but because of inability to escape the similar fact situation.

It is true that the holding of the Burt Case is somewhat modified by the later holdings of the Supreme Court. Northwestern Mutual Life Insurance Co. v. Johnson, 254 U. S. 96, 41 S. Ct. 47, 65 L. Ed. 155; Northwestern Mutual Life Insurance Co. v. McCue, 223 U. S. 234, 32 S. Ct. 220, 56 L. Ed. 419, 38 L. R. A. (N. S.) 57. But its modification does not affect the force of the holding which admitted this evidence. The later cases, above cited, hold that the federal courts will apply the rule of the proper state court respecting the forfeiture of a life insurance policy on the life of one who meets his death as a result of the infliction of capital punishment for the commission of murder. That question is not involved in the instant case, because the policy expressly provides that the double indemnity provision would not apply in case the insured met his death as a result of his violation of the law. In the absence of such a provision, the federal court would apply the law of Indiana, where the insured resided and where the contract was executed. But, with the forfeiture provision inserted in the policy, there is no room for conflict of opinion between courts. The only question is one of proof. The Burt Case is therefore an authoritative and binding holding that the evidence objected to was competent and relevant.

It is unnecessary to discuss the other questions presented by appellants except to say that we have considered the effect of article 1, § 30, of the Indiana State Constitution (Burns’ Ann. St. 1926, § 82), which provides that “No conviction shall work corruption of blood or forfeiture of estate,” and we are satisfied that it has no application to the facts of this ease. Obviously a successful defense to an alleged cause of action for double indemnity does not work a forfeiture of estate. Moreover, there was no cause of action to be forfeited, for the parties agreed by their contract of insurance that there should be no double liability if the death of the insured occurred as a result of his violation of law.

The judgment is affirmed.


author: BINGHAM, Circuit Judge.

text:
    COMMISSIONER OF INTERNAL REVENUE v. ANGIER CORPORATION. ANGIER CORPORATION v. COMMISSIONER OF INTERNAL REVENUE.
    Nos. 2516, 2517.
    Circuit Court of Appeals, First Circuit.
    May 28, 1931.

      W. E. Davis, Sp. Atty., Bureau of Internal Revenue, of Washington, D. C. (G. A. Youngquist, Asst. Atty. Gen., Sewall Key and F. Edward Mitchell, Sp. Assts. to Atty. Gen., and C. M. Charest, General Counsel, Bureau of Internal Revenue, of Washington, D. C., on the brief), for the Commissioner of Internal Revenue.
    George T. Weitzel, of Washington, D. C., for Angier Corporation.
    Before BINGHAM, ANDERSON, and WILSON, Circuit Judges.
   BINGHAM, Circuit Judge.

No. 2516 is an appeal from an order or decision of the Board of Tax Appeals reversing a decision of the commissioner determining the liability of the Angier Corporation, transferee of the Angier Mills, for an additional income and profits tax for the year 1918, assessed against the Angier Mills.

The question presented is whether the deficiency or additional tax assessed by the commissioner for the year 1918 against the Angier Mills was barred by the statute of limitations and therefore uncollectible from the Angier Corporation, to which all the property of the Angier Mills had been transferred.

The statutes involved are the Revenue Aet of 1918, ch. 18, § 250 (d), 40 Stat. 1083; the Revenue Act of 1921, ch. 136, § 250 (d), 42 Stat. 265; Revenue Act of 1924, ch. 234, § 277 (a) (2), (b), 26 USCA § 1059 note and section 278 (c) (d) (e), 26 USCA §§ 1060 note, 1061 note and 1062; and the Revenue Aet of 1926, ch. 27, § 280, (a) (1), (b) (1) and (2), and (e) and (d), 26 USCA § 1069 (a) (1), (b) (1, 2), (c) and (d).

The Angier Corporation is a Massachusetts corporation organized in 1920, with its principal place of business at Framingham, Mass. Edward H. Angier is its president and treasurer and has been from its inception.

The Angier Mills is also a Massachusetts corporation, organized in 1904. From 1907 to 1921 it had its place of business at Ash-land, Mass. Edward H. Angier was its treasurer in 1917; and was its'president, treasurer, and a director in 1918, 1919, and 1920. His last election as director, president, and treasurer was February 14,1920. Since then no election of officers or directors of this corporation has been had.

Edward H. Angier owned all the stock of the Angier Mills, but on .December 31, 1920, the Angier Corporation acquired all of this stock in exchange for its own capital stock. December 30, 1921, Angier Mills transferred to the Angier Corporation all of its property and after that date ceased to hold meetings or do business, and on March 31, 1923, on the application of the Angier Corporation, its sole stockholder, it was dissolved under a statute of Massachusetts authorizing such dissolution but continuing the corporation in existence for three years for the purpose of winding up its business and suing and being sued. Gen. L. Mass. c. 155, §§ 50, 51. The transfer on December 30, 1921, of the property and assets of the An-gier Mills was in liquidation of its capital stock and the property transferred was of a net value in excess of the tax here involved.

The Angier Mills filed its tax return for the year 1918 on April 11, 1919. The tax shown by this return was paid on or before December 15, 1919. Thereafter the commissioner examined the return and on October 31, 1924, pursuant to section 274 (a) of the Revenue Aet of 1924 (26 USCA § 1048 note), mailed a deficiency notice addressed to Angier Mills, Framingham, Mass., notifying it of an additional tax of $25,797.34. On this notice no action was taken by the taxpayer, and in March, 1925, the commissioner assessed an additional tax in the amount of $25,797.34, which he thereafter reduced to $18,876.19. January 20, 1923, a written waiver, consenting to a determination, assessment, and collection of the amount of the tax due under any return made by Angier Mills for the years 1917 to 1921, inclusive, under the Revenue Act of 1921, or prior acts, without limitation as to time, was signed, “Angier Mills, Taxpayer, E. H. Angier, President, D. H. Blair, Commissioner.” January 31, 1924, a like waiver for the year 1918, to “remain in effect for a period of one year after expiration of the statutory period of limitation, or the statutory period of limitation as extended by waivers already on file,” was signed “Angier Mills, E. H. Angier, Treasurer, Taxpayer, D. H. Blair, Commissioner.” And on January 25, 1924, a like waiver was executed for the year 1917, to “remain in effect for a period of one year after expiration of the statutory period of limitation or the statutory period of limitation as extended by any waiver already on file.” The originals and photostatie copies of these waivers bear the corporate seal of the Angier Mills.

February 9,1927, the commissioner, pursuant to section 280 of the Revenue Act of 1926 (26 USCA § 1069), mailed a notice to the Angier Corporation, transferee of the assets of the Angier Mills, notifying it of his determination of its liability for the 1918 tax of the Angier Mills.

From the foregoing it appears that, as to the 1918 tax, the period of limitation, provided for in section 250 (d) of the Act of 1918 (40 Stat. 1083), section 250 (d) of the Act of 1921, 42 Stat. 265, and section 277 (a) (2) of the Act of 1924 (26 USCA § 1057 note), for assessing the tax against the An-gier Mills had expired before the act of 1926 was passed. This being so, the period of limitation for assessing the Angier Corporation, transferee, on its liability for said tax, is governed by section 280 (b) (2) of the Revenue Act of 1926, 26 USCA § 1069 (b) (2), which provides:

“(b) The period of limitation for assessment of any such liability of a transferee * * * shall be as follows:
* * *
“(2) If the period of limitation for assessment against the taxpayer expired before the enactment of this Act but assessment against the taxpayer was made within such period [the 5 year period, or such period extended by waiver], — then within six years after the making of such assessment against the taxpayer, but in no case later than one year after the enactment of this Act.”

It also appears from the facts above set forth that the period of limitation for assessing the liability of the Angier Corporation as transferee, for the 1918 tax, under the above-quoted statute, had expired before February 9, 1927, when the commissioner mailed the notice to the Angier Corporation, unless the tax against the Angier Mills was seasonably assessed by virtue of the extension of time granted by the waivers of January 20, 1923, and January 31, 1924. And the latter question depends upon whether either of the signatures of the Angier Mills, appearing upon the waivers, as made by Edward H. Angier in the capacity of president, or treasurer, was valid.

As above pointed out, Mr. Angier was the treasurer of the Angier Mills in 1917. He was de jure and de facto president, treasurer, and director of that corporation in 1918, 1919, and 1920. March 27, 1918, he filed with the commissioner the tax return of the Angier Mills for the calendar year of 1917. April 11, 1919, he filed its tax return for the calendar year 1918; and on March 14, 1921 (more than a year after his last election), he filed a like return for the year 1920, and, although he may have ceased to be a de jure officer on or about February 14,. 1921, he nevertheless continued to act as a de facto officer thereafter, for the record also shows that, on December 30, 1921, he effected, in behalf of the Angier Mills, the transfer of all its property and assets to the Angier Corporation, and thereafter continued to act in its behalf, for on January 20, 1923, he signed a waiver in its behalf as president, and on January 25, 1924, and on January 31, 1924, he signed two other waivers in its behalf as treasurer, and affixed the seal of the corporation to all three. He undoubtedly acted as de facto officer of the Angier Mills during a period of about two years preceding its dissolution in 1923, and thereafter during the winding up of its affairs; and, as such, exercised and had authority to sign the waivers, for these acts were'but steps in the liquidation of the corporation. See United States v. Kemp (C. C. A.) 12 F.(2d) 7; Hudson v. Parker Mach. Co., 173 Mass. 242, 53 N. E. 867; Stratton Mass. Gold Mines Co. v. Davis, 222 Mass. 549, 111 N. E. 375; Brinkerhoff v. Jersey City, 64 N. J. Law, 225, 46 A. 170.

It is argued that the notices of determination sent to the Angier Mills at Framing-ham, Mass., should have been sent to the Angier Mills at Ashland. Little reliance can be placed on this contention. When the letters were sent the Angier Mills had ceased doing business at Ashland. Its property and assets had all been transferred to the Angier Corporation. Its stock was then all owned by that corporation. Its president and treasurer was then the president and treasurer of the Angier Corporation located at Framingham, and it would have b^en an empty thing to have sent the notices to Ash-land.

No. 2517 is an appeal from an order or decision of the Board of Tax Appeals modifying a decision of the commissioner determining the liability of the Angier Corporation, as transferee of the Angier Mills, for an additional income or profits tax of the latter company for the year 1920, claimed to have been assessed against the Angier Corporation.

It appears that on March 14, 1921, the Angier Mills filed a consolidated tax return for itself, the Angier Mechanical Laboratories, the Mansfield Company, and the Van de Carr Paper Company for the year 1920, and the tax thereon was duly paid. Thereafter the commissioner examined the return, and January 2,1926, pursuant to section 274 (a) of the Revenue Act of 1924 (26 USCA § 1048 note), mailed a 60-day deficiency notice addressed to the Angier Mills, Framingham, Mass., notifying it of an additional consolidated tax liability of $13,800.86 for the fiscal year 1920. No appeal was taken by the taxpayer and no further action was taken by it in respect to the additional tax. February 23, 1926, the commissioner mailed a 60-day notice to the Angier Mills, Framing-ham, Mass., of an additional assessment against it of $13,800.80 and stating that “this letter supersedes Bureau letter dated January 2, 1926.”

On March 8, 1926, the five-year period having nearly elapsed, a jeopardy assessment of the additional tax of $13,800.86 was made by the commissioner. See section 279', chap. 27 of the Revenue Act of 1926 (26 USCA §§ 1051, 1063). This assessment was later reduced to $11,336.25.

On April 12, 1926, pursuant to section 279 (b) of the Revenue Act of 1926, 26 US CA § 1051 (b), the commissioner mailed a 60-day letter of deficiency notice to the An-gier Mills, Framingham, Mass., notifying it of an assessment against it in the amount of $13,800.86 and of its right of appeal to the Board of Tax Appeals, and stating that, “This letter supersedes Biireau letter dated February 23, 1926.”

The consolidated tax for the year 1920 was assessed against the Angier Mills alone, instead of being assessed against the affiliated companies on the basis of the net income properly assignable to each. There was no agreement that this should be done and there was no notice to the commissioner to so assess the tax.

On February 9, 1927, the commissioner, pursuant to section 280 of the Revenue Act of 1926, mailed a 60-day notice to the Angier Corporation, the transferee of the assets of the Angier Mills, for the tax year 1920, as well as the years 1917 and 1918.

The Board of Tax Appeals held that the commissioner properly asserted the deficiency for 1920 against the Angier Corporation, as transferee, but only for $7,526.33, or so far as the tax was assessable to the Angier Mills based on the net income properly attributable to it. In redetermining the amount of the tax of the Angier Mills as $7,526.33, the board acted in pursuance of section 240 (b) of the Act of 1926 (26 USCA § 993 (b).

In this petition to review the holding of the Board of Tax Appeals, affirming the decision of the commissioner as to the liability of the Angier Corporation, as transferee, for the additional tax of the Angier Mills, the petitioner, the Angier Corporation, is not questioning the power of the board to cut down the tax of the Angier Mills to $7,526.-33, but complains that the board erred in affirming the commissioner’s determination of the liability of the Angier Corporation for such deficiency tax.

It is difficult to determine the precise nature and scope of the errors assigned by the petitioner, but they apparently are: (1) That the Board erred in not holding that the deficiency notice to the Angier Corporation of February 9, 1927, was invalid, for the reason that the notice included a deficiency tax against the Mansfield Company for 1918 and the first three months of 1920; (2) in holding that the liability of the Angier Corporation for the deficiency tax of the Angier Mills for the year 1920 existed and may be enforced, (a) for the reason that the deficiency notice of April 12,1926, to the Angier Mills was invalid, in that it was not sent within the five year period, and (b) for the further reason that no valid tax for 1920’ was assessed against the Angier Mills within five years of its tax return; and (3) that it erred in not holding that section 280 of the Revenue Act of 1926 (26 USCA § 1069) is unconstitutional.

The petitioner takes nothing by the first assignment above specified. The deficiency notice to the Angier Corporation of February 9, 1927, contained a complete statement showing what tax had been determined against the Angier Mills for 1920, and fixing the amount of the tax at $11,336.25. The Angier Corporation, therefore, received definite notice of the tax for 1920 for which it, was to be held liable as transferee, and we are unable to see wherein it could have been more definitely notified of the nature and the amount of the tax, for which it was to be held liable, had the notice contained no reference to its liability for other years.

The second assignment of error, subdivision (a), is apparently based on the assumption that the notice of April 12, 1926, to the Angier Mills is the notice upon which the jeopardy assessment of March 8,1926, or any other assessment against the Angier Mills for the year 1920, was predicated, and, not having been mailed within five years from the filing of its tax return, it was invalid as a deficiency notice and as a basis for the assessment of a tax against'the Angier Mills for that year. It seems to us that the difficulty with this contention is that the notice of April 12, 1926, is not the notice upon which the commissioner relies as a determination of the deficiency tax against the Angier Mills. There seems to have been an abundance of notices in this case, for the commissioner notified the Angier Mills of the deficiency tax on January 2,1926, and again on February 23, 1926, both of which notices were given within five years from the filing of its tax return. The fact is that the letter of April 12, 1926, was sent after the jeopardy assessment of the additional tax was made on March 8, 1926, and section 279 (b) of the Revenue Act of 1926, 26 USCA § 1051 (b) provides:

“(b) If the jeopardy assessment is made before any notice in respect of the tax to which the jeopardy assessment relates has been mailed under subdivision (a) of section 274, then the Commissioner shall mail a notice under such subdivision within 60 days after the making of the assessment.”.

It thus appears that the notice of April. 12, sent after the jeopardy assessment, was given out of abundant caution, for, previous to the jeopardy assessment, two deficiency notices, such as are called for under subdivision (a) of section 274 (26 USCA § 1048 note), had been seasonably sent to the Angier Mills determining its tax. It is of no consequence that the notice of April 12, 1926, was not given within five years of the date of the tax return. It was given within 60 days after the assessment (section 279 (b)). The only assessment made was under section 279 (a), 26 USCA § 1051 (a) which provides:

If the commissioner believes that the assessment or collection of a deficiency will be jeopardized by delay, he shall immediately assess such deficiency. * * * ”

This means that he may, in such ease, make an assessment although previous notice of a deficiency has not been given. The deficiency notice was seasonably given.

The position taken in the second assign-mezzt, subdivision (b), that the assessment against the Angier Mills of March 8, 1926, is invalid as not having beezi made within five years after its tax return was filed, is without merit, for it was made within five years.

The only objection that could be urged against that assessment would seem to be that the amozznt was too large, due to the fact that it was based in part upon income which should have been apportioned to the other affiliated companies. If the Angier Mills was not satisfied with the amount of the tax assessed against it, it could have appealed, but it didn’t; and whether it was open to the Angier Corporation to question the amount of the tax before the Board of Tax Appeals, it is not open here, for the Board of Tax Appeals, in determining the liability against it as transferee, has determined its liability to be for a tax based only on the proportion of income properly attributable to the Angier Mills for 1920.

The petitioner has failed to point out wherein section 280 of the Act of 1926 is unconstitutional. The reasonable construction and application of that section does not call for the exei-eise of unwarranted power and, as here construed and applied, no such power has been exercised. It apparently thinks that when the letter of February 9,1927, was sent notifying it of its liability for the tax, no liability for the tax existed against the Angier Mills, but, as we have above pointed out, such liability then existed. In its brief the petitioner states that “the better reasoning seems to be in favor of the validity of the section,” and we are of that opinion.

The Angier Corporation has filed a motion to dismiss the petition for review in No. 2516, claiming that its liability has been extinguished, and, therefore, the question raised is moot. It bases this contention on the ground that the recital in a certificate of discharge of a lien, recorded in the registry of deeds, in Massachusetts, to the effect that the tax in question had been paid was conclusive of that fact. In support of this contention it relies upon subdivision (d) of section 613 of the Revenue Act of 1928, 26 US CA § 115 (d), amending section 3186 o£ the Revised Statutes, which reads:

“(d) A certificate of release or of partial discharge issued under this section shall he held conclusive that the lien upon the property covered by the certificate is extinguished.”

While this section makes the certificate conclusive that the lien is extinguished, it does not make the recital that the tax .has been paid conclusive, and there is no contention here that the tax in question has been paid. The question of the liability of the Angier Corporation for the tax is not moot.

Furthermore, the certificate in the registry was filed before any further tax had come into existence, and the release of the lien was filed in the registry under a complete misapprehension of the situation. But whether a lien for the tax did or did not exist at the time the certificate was filed, and .whether the release was or was not given and filed under a misapprehension, is of no consequence in the matter here under consideration.

The motion to dismiss the petition for review is denied.

In 2516, the order or decision of the Board of Tax Appeals is vacated, and the ease is remanded to that board for further proceedings not inconsistent with this opinion.

In No. 2517, the order or decision of the Board of Tax Appeals is affirmed.


author: MOORMAN, Circuit Judge.

text:
    TENNESSEE R. CO. v. THOMPSON.
    No. 5729.
    Circuit Court of Appeals, Sixth Circuit.
    June 9, 1931.
    S. F. Fowler, of Knoxville, Tenn. (J. A. Fowler, of Knoxville, Tenn., on the brief), for appellant.
    W. T. Kennerly, of Knoxville, Tenn. (R. L. Pope, Kennerly & Key, and Pope & Pope, all of Knoxville, Tenn., on the brief), for appellee.
    Before DENISON, MOORMAN, and HICKENLOOPER, Circuit Judges.
   MOORMAN, Circuit Judge.

The material facts in this case are stated in the opinion of this court on the first appeal. 33 F.(2d) 18. Upon the retrial there was a judgment for plaintiff. On this appeal it is contended that there was no evidence of negligence on the part of the defendant, that the plaintiff assumed the risk of his injury, and that the court erred in refusing to instruct the jury that he assumed the risks arising from the nearness of the side track to the main track.

It is insisted by appellant that there is a difference in the evidence on the two trials, in that on the second trial/it appeared that the defective car had been standing on the side track only a day or day and a half, and not for two days, as stated in the former opinion. This difference in the evidence seems to us immaterial. In the former opinion it was pointed out that the defendant allowed its “switch track to be obstructed with a car known by it to be so defective as to constitute an unusual danger to passengers and employees.” To permit this to exist for a single day presented a question of negligence for the jury, for whatever might have been the duty of the lumber company to repair the car, the defendant cannot escape responsibility for failing to perform its duty of exercising ordinary care to furnish plaintiff a reasonably safe place in which to work. The evidence fails to show that defendants had any reason to expect prompt removal of the ear by the lumber company not advanced on the former hearing — certainly no such reason as to acquit it of responsibility for failing itself to push the ear back on the track a sufficient distance to avoid danger to trainmen.

On the second trial plaintiff stated, on redirect examination, that he was two or three car lengths, to the best of his judgment, from the south switch point at the time he looked ahead. This evidence, with his further testimony that what he meant when he asked the conductor at Devonia whether the Tioga side track was clear was whether there was room on the track to put other ears, is said by defendant to distinguish the case, on the question of assumption of risk, from that presented on the former record. While this statement of plaintiff as to the distance he was from the south switch varies from what was thought by this court to be the distance on the former hearing, we do not regard the difference as requiring a determination of assumption of risk in favor of defendant as a matter of law. The statement was of course an estimate, as was the further statement as to the lapse of time, about a minute. If the latter be accepted, the distance was five or six hundred feet. Besides, the condition of the standard was an unusual one, and, as said in the former opinion, “it does not follow that one seeing tíie ear. must have noticed how far the standards were projecting.” In this View of the situation it is not important what plaintiff had in mind in making the inquiry at Devonia. Whether he assumed the risk of injury from unusual conditions remained, in our opinion, a question for the jury.

Counsel for defendant requested the court to instruct the jury that plaintiff assumed all risks of injury arising from the proximity of the main track to the side track. This the court did, adding that if, by the application of the law theretofore given, the jury should find that such condition was or constituted an ordinary and usual risk, and plaintiff knew of such condition or by the exercise of ordinary care could have known of it, there would be no liability for injury proximately resulting therefrom. The instruction as thus modified did not correctly state the law applicable to usual conditions, Boldt v. Pennsylvania R. Co., 245 U. S. 441, 38 S. Ct. 139, 62 L. Ed. 385; but we do not think the error was prejudicial, for the court told the jury specifically, elsewhere in the charge, that plaintiff assumed the risk of injury resulting from ordinary and usual conditions, and it was shown without dispute that the location of the tracks was a usual condition which appellant was bound to know. As the injury was caused by the projecting standard, an unusual condition, the jury could not .have been misled by the addenda to the requested charge.

The judgment is affirmed.


author: HICKS, Circuit Judge.

text:
    DOMHOFF & JOYCE CO. v. COMMISSIONER OF INTERNAL REVENUE.
    No. 5718.
    Circuit Court of Appeals, Sixth Circuit.
    June 11, 1931.
    John Weld Peek, of Cincinnati, Ohio (Prank Brandon, of Lebanon, Ohio, and Peck, Shaffer & Williams, of Cincinnati, Ohio, on the brief), for petitioner.
    J. P. Jackson, of Washington, D. C. (G. A. Youngquist, Asst. Atty. Gen., and Sewall Key, C. M. Charest, and Prank M. Thompson, all of Washington, D. C., on the brief), for respondent.

      Before MOORMAN, HICKS, and HICKENLOOPER, Circuit Judges.
   HICKS, Circuit Judge.

Petition to review a decision of the Board of Tax Appeals. The case involves income and profit taxes for the fiscal year ended December 31, 1920, in the sum of $92,619.24. The question is whether petitioner was entitled to charge off a claim against the' Hamilton Furnace Company in the sum of $174,-565.33. The facts were covered by stipulation. The Commissioner disallowed the deduction, and the Board sustained him.

Petitioner, as agent of the Citizens’ Gas Company, herein called the gas company, sold the Hamilton Furnace Company, herein called the furnace company, a quantity of coke. In April and May, 1920, the gas company delivered a portion of the coke in the aggregate value of $174,565.33. The furnace company refuted to pay upon the ground that the gas company had breached the contract. Petitioner was not responsible for the fulfillment of the contract, but under its agreement with the gas company it paid the gas company for the coke shipped without regard to whether it had actually collected from the furnace company. Under this arrangement petitioner paid the gas company the said sum of $174,565.33, and, the furnace company having failed to pay petitioner, petitioner stopped further shipments and instituted suit in a court of common pleas of Ohio against the furnace company for the recovery of the aforesaid sum. Petitioner was defeated both in the court of common pleas and the Court of Appeals, but upon a writ of error to the Supreme Court the judgments of both lower courts were reversed and the cause remanded to the court of common pleas. 108 Ohio St. 25, 140 N. E. 485. In the meantime the furnace company had brought suit against the gas company in the United States District Court for the Southern District of Indiana for damages for a breach of the contract. These suits were pending until October, 1928.

On December 2, 1920, petitioner charged this account off upon the recommendation of its president, who reported to petitioner’s directors that the claim was in litigation, that the ease would not be reached for trial until 1921, and that its determination was indefinite and uncertain. The president made no suggestion that the claim was worthless. The gas company declined to credit petitioner upon the account and continued to carry it as a charge against petitioner. On August 17, 1922, petitioner, conceiving that it was within its legal rights, and over the protest of the gas company, deducted the amount of the claim from its current settlement with the gas company and carried it in an account called “Suspense.” Thus matters stood until in October, 1928, when all parties settled their differences. The lawsuits were dismissed and the gas company canceled and abandoned its claim to the fund petitioner was withholding.

The law applicable follows:

Revenue Act of 1918, c. 18, 40 Stat. 1057, 1078, “See. 234 (a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions: * * *

“(5) Debts ascertained to be worthless and charged off within the taxable year.

We think the Board was right. The burden was upon petitioner on the hearing before the Board to show that the Commissioner had erroneously disallowed the deduction. Before it was allowable, petitioner was required to establish (1) that its claim was a debt; and (2) that it was ascertained to be worthless and charged off within the taxable year.

It was charged off, but, assuming without deciding that the claim was a valid debt, there was no evidence that it was worthless. There was no suggestion that the furnace company was at any time unable to meet its obligations. Petitioner never lost anything. It protected itself in 1922 by withholding the amount from the gas company, and -its right so to do was definitely determined in 1928.

The decision of the Board of Tax Appeals is affirmed.


author: HUTCHESON, Circuit Judge.

text:
    KENNINGTON v. DONALD, Collector of Internal Revenue.

    No. 6026.
    Circuit Court of Appeals, Fifth Circuit.
    June 22, 1931.

      Marcellus Green and Garner W. Green, both of Jackson, Miss., and Henry J. Richardson, of Washington, D. C., for appellant.
    Ben F. Cameron, U. S. Atty., of Jackson, Miss., and Wright Matthews, Atty., Bureau of Internal Revenue, of Washington, D. C., for appellee.
    Before BRYAN, SIBLEY, and HUTCH-ESON, Circuit Judges.

      Rehearing: denied September 4, 1931.

   HUTCHESON, Circuit Judge.

Having unsuccessfully urged before the Commissioner and before the Board of Tax Appeals (8 B. T. A. 1030) that the Union Department Store Company was entitled to deduct under section 234 (a) (1), Revenue Act of 1918 (40 Stat. 1077), as additional compensation to certain employees sums due them under the terms of a contract upon which they received stock in the company from Kennington, the incorporator and sole owner of it, and having thereafter paid the amounts assessed and had- his claim for refund rejected, appellant filed this suit in the District Court of the United States for the Southern District of Mississippi to recover the sums paid.

The case was tried before the court without a jury, and resulted in a judgment against plaintiff. The trial court took the same view of the matter as the Commissioner and the Board of Tax Appeals had done, finding in effect that the company had made no contract with the employees for additional or incentive compensation, and was not obligated to them in any way for such; that the contract which was made was a contract with Kennington individually dealing with his own stock as he had the right to do, and that the sums which the employees under the contract were allowed came to them not as compensation from the company, but as returns on the stock which they owned.

The facts are set out with some detail in the opinion of the Board, 8 B. T. A. 1030, and it is necessary to say here only that we think the facts fully sustain the finding of the trial court that no company contract to pay additional compensation ever existed, and that the sums allowed to the employees on their certificates of stock in their final settlement with Kennington represented sums due them because of their ownership of the stock, and their contract with Kennington about it, and not at all because of any obligation of the company to pay them compensation.

The record shows without contradiction that none of these sums were ever paid by the company. That they were sums arrived at and paid when, upon its sale to another company, Kennington took back from the employees the stock which he had directed the company to issue to them from his shares, “as a gratuity for the purpose of stimulating the efforts of party of the second part as an employee in said corporation.”

It is claimed by Kennington that all that he did was for and on behalf of the company, and that in effect the transaction amounted to an agreement by the company in form to give to these employees the profits of the company in proportion to the stock which they held, but in fact to pay them additional compensation; the form having been adopted to furnish the additional incentive of apparent ownership in the corporation, and as a measure by which the amount to be paid should be determined. He argues that not form but fact in matters of taxation determines the treatment which should be accorded particular items, citing Corn Exchange Bank v. U. S. (C. C. A.) 37 F.(2d) 34, 35; Doyle v. Mitchell, 247 U. S. 179, 38 S. Ct. 467, 62 L. Ed. 1054.

The Commissioner opposes the claimed deductions on two grounds: (1) That not only in form, but in fact the sums claimed as deductions are not salaries or additional compensation, but returns upon stock; and (2) that, if they should be regarded as additional compensation, they are so excessive as not to be allowable under the statute.

We agree with appellee that the sums in question accrued to the employee stockholders as a result of their ownership of the stock under the terms of their contract with Kennington, that there never was any company liability undertaken or assumed to these stockholders to pay them additional compensation, and that the form which the transaction took truly represents the facts which it purports to reflect.

The ease is one simply of fact. Not only have the facts been resolved against appellant by the Commissioner [Wickwire v. Rein-ecke, 275 U. S. 101, 48 S. Ct. 43, 72 L. Ed. 184; Austin Co. v. Commissioner (C. C. A.) 35 F.(2d) 910] and by the Board, but, on a record which amply sustains its findings, they have been dearly and completely found against appellant by the court below.

1 Under these circumstances, it is neither necessary nor profitable to consider what the rights of the company would have been had they done what they now seek to claim they did do.

Finding no error in the judgment of the court below, the same is affirmed.