author: LOVETT, District Judge.

text:
    In re GEORGIA, FLORIDA & ALABAMA R. CO.
    No. 89.
    District Court, M. D. Georgia, Thomasville Division.
    March 6, 1945.

      Harry S. Strozier and Wallace Miller, both of Macon, Ga., and Price & Poag, of Greenville, S. C., for trustee of Georgia F. & A. R. Co.
    Walter A. Harris, of Macon, Ga., and Jesse E. Waid, of New York City, for Bankers Trust Co. and R. Gregory Page, trustee, under First and Refunding Mortgage of the Georgia F. & A. R. Co.
    W. R. C. Cocke, of Norfolk, Va., Harold J. Gallagher, of New York City, and A. O. B. Sparks, of Macon, Ga., for Seaboard A. L. Ry. Co.
    A. O. B. Sparks, of Macon, Ga., and Leonard D. Adkins, of New York City, for Seaboard Reorganization Committee.
    A. A. Lawrence, of Savannah, Ga., for Fred L. Folk, preferred stockholder.
    Price & Poag, of Greenville, S. C., for W. H. B. Simpson.
   LOVETT, District Judge.

The first question, and a controlling one, now for decision in this case is one of jurisdiction.

The Georgia, Florida & Alabama Railroad Co., a Georgia corporation with its principal office in this district, the debtor in these proceedings, is the owner of a line of railroad the greater part of which lies in this district. For many years the Seaboard Air Line Railway Company operated this line of railroad under a long-term lease. Receivers were appointed for the Seaboard in the District Court of the United States for the Eastern District of Virginia, the court of primary receivership, with an ancillary receivership proceeding in the District Court of the United Stateá for the Southern District of Florida. Shortly thereafter the Seaboard receivers disaffirmed the lease, and since that time they have operated the line for the account of the debtor under what is called an operating agreement. For the purpose of reorganization, the G. F. & A. has filed its petition in this court under Section 77 of the Bankruptcy Act as amended, 11 U. S.C.A. § 205, and the court has approved the petition as filed in good faith and has appointed a trustee. The trustee now seeks to have certain of its bonds which have been purchased by the Reorganization Committee of the Seaboard adjudged to be the debtor’s property. He also seeks an accounting from the Seaboard receivers.

The relief is sought against the Seaboard’s Reorganization Committee and its receivers. All of them are residents of other states. They have moved to dismiss for lack of jurisdiction and on other grounds.

The history of the proceedings here and in the Virginia and Florida courts follows.

The action began in this court on the petition of Leon S. Dure, receiver of the Georgia, Florida & Alabama Railroad Company, against the Seaboard Reorganization Committee (consisting of Otis A. Glaze-brook, Jr., of New York, and Joseph France and Charles Marked, both of Maryland), and the receivers of the Seaboard Air Line Railway Company (Legh R. Powell, Jr., and Henry W. Anderson, residents of Virginia). The trustee appointed subsequently in these proceedings under Section 77 has been substituted in the place of the receiver.

Primarily the petition seeks an adjudication that $1,559,000 principal amount of bonds of the debtor purchased by the Reorganization Committee with funds furnished by the Seaboard receivers are held in trust by the Committee for the benefit of the debtor on the theory that the funds used for the purchase rightly belonged to it or that the Committee was acting in a fiduciary relation to it and should have used the funds in their hands in making the purchase and, failing to do so, breached the trust. The petition also prays that the Seaboard receivers be required to account to the trustee for the net income arising from their operation of the G. F. &■ A. properties, that they be required to pay over to him as such trustee the amount shown to be due by the accounting less the amount advanced to the Reorganization Committee for the purchase of the debtor’s bonds and that the trustee be authorized to employ an expert to go over the statements of account prepared by the staff of the Seaboard receivers in the hope that an agreement may be reached on the amount of credit in favor of the G. F. & A. and to advise the trustee as to the possibility of independent operation of the debtor’s line of railroad.

The issues to be determined here arise upon motions of the defendants to dismiss the petition, to vacate the order directing service and to quash the service on the grounds of lack of jurisdiction of the subject matter and of the parties and upon the ground that no claim was stated upon which relief may be granted.

The Seaboard Air Line Railway has been in receivership in the District Court for the Eastern District of Virginia since December 23, 1930. Ancillary receivership proceedings have been pending since the same date in the District Court for the Southern District of Florida.

The Seaboard receivers appointed at that time took possession of all railroad properties then operated by the Seaboard, including all the leased lines. Among the leased lines was the G. F. & A. which had been leased to the Seaboard in 1927 for a ninety-nine year term and which continually since that time has been and now is being operated by the Seaboard receivers with no separate organization and no physical separation of revenues.

The Seaboard receivers at first paid the rentals required under the G. F. & A. lease but shortly after their appointment they were directed by the courts having charge of the Seaboard receivership proceedings to discontinue payments. Thereafter, on November 7, 1931, under a general creditor’s bill, receivers were appointed for the G. F. & A. by this court, and on July 30, 1933, under a foreclosure bill, receivers were appointed by this court for the properties covered by the mortgage sought to be foreclosed. Each of the orders appointing receivers, however, directed them not to take possession of the G. F. & A. properties leased to the Seaboard until they were surrendered by the Seaboard receivers or until re-entry by the G. F. & A. receivers. In July, 1944, these proceedings under Section 77 were instituted.

In 1933, the Virginia court found the G. F. & A. lease burdensome and directed the Seaboard receivers to disaffirm it. This order was confirmed by the Florida court, and in its order the Florida court expressly reserved exclusive jurisdiction to determine all matters, including claims between the Seaboard receivers and the G. F. & A. interests, resulting from operation of the G. F. & A. by the Seaboard receivers. Pursuant to these orders the Seaboard receivers in 1934 served notice of disaffirmance upon the G. F. & A. and tendered back the property. The tender was refused. The receivers then applied to the Interstate Commerce Commission to abandon the operation of the G. F. & A. The G. F. & A. opposed the application, and it was denied.

Pending judicial determination of the terms upon which forced operation should he continued, a settlement was negotiated and approved by the Florida court and this court providing for adjustment of the account between the Seaboard receivers and the G. F. & A. up to and through 1934 and for continued operation of the G. F. & A. upon the following terms: (1) operation should be for the account of the G. F. & A. or its receivers, (2) the General Segregation Formula of the Seaboard for separation of earnings and expenses should be used in account for earnings and deficits , (3) the Seaboard receivers should have a paramount lien for any deficits and capital expenditures, (4) the agreement might be terminated upon six months’ notice and payment to the Seaboard receivers of the amount of any deficits or charges against the G. F. & A. properties or satisfactory security being given for such amounts, and (5) upon surrender of the property by the Seaboard receivers, termination of the Seaboard receivership, or upon request for repossession of the property by the G. F. & A. interests, all accounts between the parties. should be adjusted and immediately become payable to the party having a net credit. The receiver of the G. F. & A. was made a party in the proceedings in the Florida court at or before the time this operating agreement was approved.

In 1944, the Florida court, subject to approval of the Virginia court, entered an order confirming what is now known as the Kennedy Formula, a modification of the General Formula, as the basis for determining earnings or deficits of the operation of the G. F. & A. One of the prayers of the instant petition is that the proceeding to obtain the approval of the Kennedy Formula by the Virginia court be enjoined.

In 1939, the Seaboard courts appointed a Special Master to prepare and submit a plan for its reorganization. After hearing the various interested parties and considering the plans submitted by them, the Special Master submitted his report in 1943. It was adopted, with certain modifications, that same year, and no appeal was taken on behalf of the G. F. & A. or of any of its security holders. In drawing the plan, it was found that the sum allotted for the acquisition of the G. F. & A. in the new capitalization of the Seaboard was not sufficient to pay the principal of the G. F. & A. bonds, and, therefore, no provision was made for the First Preferred stock of the G. F. & A. to participate in the reorganization, and it was asserted that it had no value. The second preferred stock and the common stock, being junior to the first preferred, were, necessarily, also said to have no value. The Virginia court so adjudged. It was provided, however, that $750 cash could be paid for each $1,000 G. F. & A. bond .

Pursuant to the Special Master’s recommendation, also a part of the plan, a Reorganization Committee was appointed by the Virginia court with power to carry the plan into execution. It could act, however, only subject to the approval of the court and subject to its direction.

On February 8, 1944, the Virginia court entered an order authorizing the Reorganization Committee to purchase at 75 cents on the dollar (the treatment provided in the plan) all the G. F. & A. bonds which were tendered to them at that price. The order authorizing the purchase specified that the funds used were to be turned over to the Reorganization Committee by the Seaboard receivers and were to be taken out of the unused balance of a $15,000,000 fund which was available for the retirement of debt or for other purposes in connection with the reorganization. The order recited that any sum found to be due from the Seaboard receivers to the G. F. & A. receiver resulting from operation of the G. F. & A. should be paid out of another and different fund of $6,000,000 directed to be set aside for the payment of reorganization expenses. The order further provided that no part of the payments-used to acquire the G. F. & A. bonds should be charged against any amounts which might be determined to be due the G. F. & A. receiver from the Seaboard receivers. It further specifically provided that neither the G. F. & A. nor its receiver nor any holder of its bonds nor any other security holder or creditor of the G. F. & A. would have any interest in the bonds acquired pursuant to the order. Neither the G. F. & A., nor its receiver, was a party to the proceedings in the Virginia court, though notice of the proposed action was mailed to its receiver.

The Reorganization Committee was also authorized to employ the Bank of New York as its agent for purchasing the bonds. The Committee then requested the receivers to transmit the necessary funds to the Bank of New York. The bank took up all bonds tendered, amounting to $1,559,000, and has physical custody of them at the present time.

The total funded debt of the G. F. & A. consists of $1,750,000 of these bonds. The bonds acquired by the Reorganization Committee, therefore, represent over 89% of the entire debt. The Seaboard also owns all of the common stock of the debtor.

On the hearing in this court it was made to appear that, though for a long period of time the G. F. & A. was operated by the Seaboard receivers at a deficit, during the war period of increased traffic over the line it has become, temporarily at least, an earning line; as a result there is a large credit balance in its favor with the Seaboard receivers at this time. When the Virginia court authorized the purchase of debtor’s bonds at a discount from par, the credit balance is said by the debtor’s trustee to have been something in excess of $1,100,000. He estimates the balance owing by the Seaboard receivers at the end of the calendar year 1944, at approximately $1,600,000. An additional amount representing the proceeds of certain abandoned track sold as salvage is also claimed as owing by the Seaboard receivers.

These are the facts of the case. It is the judgment of this court, however, that it has no jurisdiction either to grant or deny the prayers of the debtor’s petition.

“A bankruptcy court has the power to adjudicate summarily rights and claims to property which is in the actual or constructive possession of the court. Thompson v. Magnolia Co., 309 U.S. 478, 481, 60 S.Ct. 628, 629, 84 L.Ed. 876. If the property is not in the court’s possession and a third person asserts a bona fide claim adverse to the receiver or trustee in bankruptcy, he has the right to have the merits of his claim adjudicated ‘in suits of the ordinary character, with the rights and remedies incident thereto.’ Galbraith v. Vallely, 256 U.S. 46, 50, 41 S.Ct. 415, 416, 65 L.Ed. 823; Taubel, Etc. Co. v. Fox, 264 U.S. 426, 44 S.Ct. 396, 68 L.Ed. 770. But the mere assertion of an adverse claim does not oust a court of bankruptcy of its jurisdiction. Harrison v. Chamberlin, 271 U.S. 191, 194, 46 S.Ct. 467, 468, 70 L.Ed. 897. It has both the power and duty to examine a claim adverse to the bankrupt estate to the extent of ascertaining whether the claim is ingenuous and substantial. Louisville Trust Co. v. Comingor, 184 U.S. 18, 25-26, 22 S.Ct. 293, 296, 46 L.Ed. 413. Once it is established that the claim is not colorable nor frivolous, the claimant has the right to have the merits of his claim passed on in a plenary suit and not summarily. Of such a claim the bankruptcy court cannot retain further jurisdiction unless the claimant consents to its adjudication in the bankruptcy court. MacDonald v. Plymouth County Trust Co., 286 U.S. 263, 52 S.Ct. 505, 76 L.Ed. 1093.” Cline v. Kaplan, 323 U.S. 97, 65 S.Ct. 155, 156.

Being bound by and also being in full agreement' with the quoted language of the above case decided by the Supreme Court in December 4, 1944, this court has only jurisdiction to determine the colorability of the movant’s adverse claim. I am not able to say that the claim is merely colorable or frivolous. I can not determine that the funds used for the purchase of the G. F. & A. bonds were rightly funds of the G. F. & A. and that any claim to the contrary is without substance because neither the physical property of the G. F. & A. nor the receipts arising from its operation are now nor were they at the date of the commencement of the Section 77 proceedings nor for some time prior to that date either actually or constructively in the possession of the G. F. & A. Instead they were in the possession and control of the Seaboard courts as are the bonds themselves now that they have been purchased .

I can not say that the acquisition of the bonds was in pursuance of some sinister purpose of the Seaboard receivers and the Reorganization Committee to take over the G. F. & A. with the G. F. & A.’s own earnings and without any actual outlay of Seaboard capital, because the order of the Virginia court authorizing the purchase expressly provided the source from which the funds used for the purchase of the bonds should be taken and provided that the money used should not be charged against money due the G. F. & A. but that any money due the G. F. & A. should be paid out of a different fund.

The jurisdiction of district courts in general bankruptcy is restricted by Section 23, sub. b, of the Bankruptcy Act, 11 U.S.C.A. § 46, sub. b, which provides: “Suits by * * * the trustee shall be brought * * * in the courts where the bankrupt might have brought * * * them if proceedings under this title had not been instituted * * The instant suit could not have been brought by an ordinary trustee in bankruptcy by reason of this section. The G. F. & A. receiver contends, however, that this limitation of the bankruptcy court’s jurisdiction does not apply when the proceedings are brought under Section 77 as amended, for there it is provided: “the court in which such order is entered shall * * * have and may exercise * * * all the powers-, not inconsistent with this section, which a Federal court would have had if it had appointed a receiver in equity * * *. Process of the court shall extend to and he valid when served in any judicial districtr 11 U.S.C.A. § 205(a). (Emphasis added.)

It has been held, however, that Congress by enacting Section 77 did not intend the bankruptcy court to take over all litigation between the debtor and third persons. The above quoted amendment to Section 77 added nothing to the jurisdiction, territorial or otherwise, already possessed by the reorganization court.

“To our minds that provision is more procedural than jurisdictional. We think it was intended to make certain that the bankruptcy court had the means for making the jurisdiction otherwise conferred upon it, with respect to the property in its custody, effective beyond the limits of the district.

* * * * * *

“To sustain the lower court’s jurisdiction of this suit would do violence to the general policy of Congress that persons shall not be subjected to civil suits except in the districts of which they are inhabitants. * * * The language used by Congress in Section 77, in conferring jurisdiction upon the courts of bankruptcy, does not, in our opinion, indicate any intention to abandon that policy with respect to such suits as this. * * * We think that the jurisdiction conferred by Section 77 upon the courts of bankruptcy is not to be regarded as general, plenary, nation-wide jurisdiction at law and in equity over all questions incident to the collection of the claims of the debtor against third persons, but it is to be considered as the traditional jurisdiction of such courts over the property of a bankrupt, wherever located, freed, however, from those limitations which made ancillary proceedings in other districts necessary, and with the powers 'which Federal equity courts exercise in receivership proceedings, so far as those powers may be necessary or appropriate in order to preserve and safeguard the property in the actual or constructive possession of debtors and in order to carry on their business pending reorganization.” Terminal Shares case, 104 F.2d 1, 8 and 9.

This construction of Section 77 is confirmed by the enactment of the Chandler Act, Bankruptcy Act, Chapter X, 11 U.S.C.A. § 501, superseding Section 77, sub. b. The Chandler Act specifically provided that Section 23 of the Bankruptcy Act, 11 U.S.C.A. § 46, should not apply to proceedings for corporate reorganization unless it was otherwise ordered by the court. 11 U.S.C.A. § 502. The Chandler Act did not affect Section 77, and there has been no such amendment with respect to Section 77; therefore, that section must still be held to be subject to the limitations contained in Section 23, and, except to protect property admittedly belonging to the debtor, a proceeding such as this can not be maintained in any court other than the one in which the G. F. & A. could have sued these defendants had bankruptcy not intervened.

The cases relied upon by the G. F. & A. receiver to establish the paramount jurisdiction of the bankruptcy court are Gross v. Irving Trust Co., 289 U.S. 342, 53 S.Ct. 605, 77 L.Ed. 1243, 90 A.L.R. 1215, and Taylor v. Sternberg, 293 U.S. 470, 55 S.Ct. 260, 79 L.Ed. 599. Neither case, however, is in point, for in neither case was there a bona fide adverse claimant. Furthermore, the Supreme Court has held in Warren v. Palmer, 310 U.S. 132, 60 S.Ct. 865, 84 L.Ed. 1118, that the rule of Gross v. Irving Trust Co. asserting the primary jurisdiction of the bankruptcy court was not adopted in Section 77 as to leased lines and that the “exclusive” jurisdiction of Section 77 over the properties of a lessor did not prevent the court having prior jurisdiction over the properties of the lessee, and which was operating the properties of the lessor, from determining and enforcing any liens for deficits resulting from the operation. It stands to reason also that the court of prior jurisdiction over the properties of the lessee should conversely have authority to determine any credits in favor of the lessor resulting from the court’s operation of the lessor’s property.

Aside from this decision, without so directing at this time, I suggest that the trustee herein intervene in the Virginia court, and seek such relief as he may be advised he is entitled to, involving either the modification of any operating agreement or contract between the said trustee and the Seaboard receivers, and for a payment on account of any balance owing by the Seaboard receivers to the trustee — the amount having already been discussed in conference with all parties — and for such further action as the G. F. & A. trustee may think necessary to protect the interests of that railroad.

The motions to dismiss should be granted. Orders may be presented on notice.

       The provision for a formula was necessitated by the fact that the G. F. & A. line is operated as an integral part of the Seaboard System. All revenues of the system are commingled and become part of the general funds in the hands of the Seaboard receivers. No current physical segregation would be possible without an entirely separate operation of the G. F. & A. line.

       Guaranty Trust Co. v. Seaboard Air Line R. Co., D.C., 53 F.Supp. 672, affirmed 4 Cir., 145 F.2d 40.

       Cf. Thompson v. Terminal Shares, 8 Cir., 104 F.2d 1, 5.

       Thompson v. Terminal Shares, supra, note 3.


source: Caselaw Access Project

author: GANEY, District Judge.

license: Public Domain

text:
    JONES v. WATERMAN S. S. CORPORATION et al.
    No. 1481.
    District Court, E. D. Pennsylvania.
    Jan. 31, 1945.
    Freedman & Goldstein and Paul M. Gold-stein, all of Philadelphia, Pa., for plaintiff.
    Rawle & Henderson, by Joseph W. Henderson, all of Philadelphia, Pa., for Waterman S. S. Corporation.
    Henry R. Heebner, of Philadelphia, Pa., for Reading Co.
   GANEY, District Judge.

This is an action for maintenance and cure.

The plaintiff, David E. Jones, was a seaman on the S. S. Beauregard, and after leaving the ship, proceeded toward the street on the pier of the Reading Company on which all the lights had been extinguished and he fell into an open ditch sustaining multiple injuries.

The plaintiff instituted a civil action, No. 1480, against the Reading Company, the third party defendant herein and at the same time instituted a civil action against Waterman Steamship Corporation for wages, maintenance and cure. The suit against the Reading Company was tried before a jury and a verdict rendered in the amount of $2,387.50 in favor of the plaintiff. Subsequently a motion for judgment n. o. v. was denied but the defendant’s motion for a new trial was granted. Jones v. Reading Company, D.C., 45 F.Supp. 566. Later, the plaintiff entered into a settlement with the Reading Company by giving it a release for the sum of $750 wherein he discharged the Reading Company of all claims and damages which he had or thereafter may have had of any matter, cause or things, “and particularly, but without limitation of the foregoing general terms, by reason of injuries and losses sustained as a result of a fall on Pier C, Port Richmond, Philadelphia, on or about January 16, 1941, while proceeding from the SS ‘Beauregard’ toward the street, to recover for which I brought suit in the U. S. District Court for the Eastern District of Pennsylvania against Reading Company, in Civil Action No. 1480, said suit to be marked settled, discontinued and ended of record”.

In the instant suit for maintenance and cure the defendant filed its answer to the complaint setting forth the aforesaid release which the plaintiff had executed with the Reading Company and brought in the Reading Company as a third party defendant on the ground that the defendant was entitled to indemnity from the Reading Company for any and all sums which the plaintiff might recover from the defendant.

The matter came to trial without a jury and the plaintiff, offered in evidence the testimony of the plaintiff, David E. Jones, as it was given at the time of the trial in Jones v. Reading Company, No. 1480, as well as the shipping articles which were in effect during the time of the plaintiff’s service on the S.S. Beauregard as well as the testimony of Dr. Louis S. Chaess and Ethel Mary Capelli also taken in the civil action No. 1480 of Jones v. Reading Company.

The defendant offered in evidence the complaint of the plaintiff in the civil action No. 1480 as well as a photostatic copy of the release and a photostatic copy of the shipping articles of the S.S. Beauregard dated February 5, 1941. It was agreed that maintenance be fixed at $75 per month.

The main issue in the case is whether the release given by the plaintiff to the Reading Company is a bar to his maintaining this action for maintenance and cure against the defendant, Waterman Steamship Corporation. This is not a: case of joint tort-feasors where the release of one is a bar to an action against the other, in which case the test is whether there was joint negligence by the party •released. Conway v. Pottsville Union Traction Company, 253 Pa. 211, 97 A. 1058. Here we have an action in tort for negligence against the Reading Company which is compromised and a release given to it upon payment of $750 and the plaintiff in this action offering the same testimony as was offered in the tort action, including his testimony, the doctor’s testimony, and his claim for wages, doctor and hospital bills as well as maintenance which was referred to in the trial as maintenance and cure. All the elements which the plaintiff could possibly obtain here by his action for maintenance and cure were made the subject of the civil action against the Reading Company, though pain and suffering and other items in addition were also recoverable. Accordingly, it seems to me that the plaintiff is attempting to recover twice for the same injury. True it is that the one action was in tort for negligence and the present action sounds in contract by reason of the implied contractual relationship which arises from the relation of the parties but the matter for which satisfaction is sought is common to both actions. That which is sought for in this case is wages, doctor bills and maintenance, which was part of the subject matter of the suit which was compromised by the release. It is so much identical that testimony seeking to prove the subject matter of the present action is the same testimony which was offered in the negligence action and therefore it seems to me to permit recovery here though in a different cause of action would be to enable the plaintiff to secure two satisfactions for the same injury. It seems to me that the doctrine laid down in Thompson v. Fox, 326 Pa. 209, 192 A. 107, 109, 112 A.L.R. 550, is clearly applicable in the instant case, where it was stated that, “the rule is that the injured person is given a legal remedy only to obtain compensation for the damage done to him, and when that compensation has been received from any of the wrongdoers, his right to further remedy is at an end.” This sound principle of law, it seems to me, should not be defeated merely because it is possible for the plaintiff to couch a recovery under a different cause of action. The plaintiff here relied on The Federal No. 2, 2 Cir., 21 F.2d 313, where a seaman wras injured while on the deck of his employer’s barge by the negligence of another adjoining vessel. His employer paid his cost of maintenance and cure during his disability and brought suit against the other vessel for reimbursement and the court held that the obligation to pay maintenance and cure rests on a contractual basis between the seaman and his employer and was not an element of damage for which the negligence of the third party would be responsible. This case merely holds that the law does not predicate liability upon a party occasioning a contingency contemplated in the contract of employment and the reasoning here used by the court would be a good defense to the third party plaintiff’s action against the Reading Company for indemnity, in the event the plaintiff were successful in holding the defendant in this action for maintenance and cure.

To permit the plaintiff to successfully prosecute this action as stated heretofore would be to enable him to obtain two satisfactions for the one injury by resort to two different causes of action.

Judgment is accordingly entered for the defendant.


author: GODDARD, District Judge.

text:
    BAKER CASTOR OIL CO. v. INSURANCE CO. OF NORTH AMERICA.
    District Court, S. D. New York.
    Dec. 30, 1944.
    Forrest E. Single, of New York City, for plaintiff.
    Bigham, Englar, Jones & Houston, of New York City (Martin Detels and Charles W. Harvey, both of New York City, of counsel), for defendant.
   GODDARD, District Judge.

This is a suit by the plaintiff, a cargo owner, against the defendant, a cargo underwriter, to recover freight charges of $39,249.58 paid by plaintiff for transportation by railroad to Bayonne, New Jersey, of cargo- discharged at New Orleans from three Brazilian vessels. The cargo consisted of 44,967 bags of castor beans loaded at various ports in Brazil aboard the vessels Commandante Pessoa, Lesteloide and Jaboatao in February, March and May, 1942, for carriage to New York Harbor; 9,405 bags on the Commandante Pessoa, 33,868 bags on the Lesteloide, and 1,694 bags on the Jaboatao. The several bills of lading named New York as the port to which the shipments were to be carried by the three vessels.

The defendant insured plaintiff under two open policies; One against marine risks which covered the castor beans from the shipper’s warehouse in Brazil to defendant’s warehouse in Bayonne; the other policy insured against war risks which covered only while cargo was aboard the overseas vessels from the port of loading in Brazil to the port of discharge in the United States. The marine policy and the war risk policy, although separate contracts, are issued together and reference must be made to the marine policy to ascertain general items which apply to both, such as description and value of the insured merchandise, the sum insured, the voyage, the carrying vessel and certain other elements of the insurance. The suit is upon the war risk policy, and the pertinent coverage clause is as follows:

“I. This insurance is only against the risks of capture, seizure, destruction or damage by men of war, piracy, takings at sea, arrests, restraints and detainments and other warlike operations and acts of kings, princes and peoples in prosecution of hostilities or in the application of sanctions under international agreements, whether before or after declaration of war and whether by a belligerent or otherwise, including factions engaged in civil war, revolution, rebellion or insurrection, or civil strife arising therefrom, and including the risks of aerial bombardment, floating or stationary mines and stray or derelict torpedoes; but excluding claims for delay, deterioration and/or loss of market, and warranted not to abandon [on any ground other than physical damage to ship or cargo] until after condemnation of the property insured. Also warranted not to abandon in case of blockade, and free from any claims for loss or expense in consequence of blockade or of any attempt to evade blockade; but in the event of blockade, to be at liberty to proceed to an open port and there end the voyage.”

The original complaint alleged:

“Eighth: That the aforesaid voyages of these vessels from Brazil to New York, due to the activity of German submarines off the coast of the United States, was interrupted, and the said vessels were ordered by the United States Government to proceed to the port of New Orleans for the purpose of protecting the aforesaid vessels and their cargoes from the danger of enemy action.”

Upon trial the complaint was amended by adding—

“Eighth (a) : That during the aforesaid voyage from Brazil to New York, the Government of Brazil, because of submarine activity on the route to destination, ordered these vessels into ports of refuge where they remained until satisfactory arrangements for protection en route to the United States had been made, and that the said vessels then proceeded but discharged their cargoes at the port of New Orleans instead of at the originally intended destination of the vessels at New York. The United States of Brazil at said time was a neutral in World War No. 2.”

The complaint, as amended, alleges that the three vessels previously referred to, were ordered to proceed to New Orleans, both by the Brazilian Government and by the United States Government.

The defendant’s answer, besides raising the general issue as to whether plaintiff sustained any loss by any peril insured against, alleges the three following affirmative defenses:

First: That the policy provides for the termination of the war risk insurance as soon as the merchandise is “discharged overside from an overseas vessel at the final port of discharge,” and also that where, in the exercise of any liberty granted to the shipowner under the contract of affreightment, that contract is terminated at a port other than destination named in the bill of lading, such port “shall be deemed the final port of discharge.” It then alleges that the Brazilian Government, which owned the three vessels, terminated the voyages at New Orleans in the exercise of liberties granted to it under the bills of lading, thereby substituting New Orleans as the port of discharge where the war risk insurance terminated.

Second: .Sets up the frustration clause (No. 2) of the policy which excludes “any claim based upon loss of, or frustration of, the insured voyage or adventure caused by arrests, restraints, or detainments,” and alleges that if the Government of the United States ordered these vessels not to go to New York, the voyages were frustrated by restraints, and as the claim for rail freight from New Orleans to New York was based upon such frustration of the voyage to New York, it .was barred by the frustration clause.

Third: That if the vessels were ordered by the United States Government to go to New Orleans instead of to New York, the orders were given while the vessels were moored in Brazilian ports and the losses claimed resulted from restraints by the United States Government for which defendant is not liable.

Simply stated the claim of the plaintiff is that there was a “restraint” by the Brazilian Government and/or by the United States Government, and that the resulting loss to the plaintiff was a peril insured against under Clause “I” of the policy.

The burden of proving a loss by a peril insured against is on the assured, the plaintiff. Richelieu & O. Nav. Co. v. Boston Ins. Co., 136 U.S. 408, 10 S.Ct. 934, 34 L.Ed. 398; Soelberg v. Western Assur. Co., 9 Cir., 119 F. 23, at page 31.

There is no dispute as to most of the facts and the first, and. I think the essential question for determination, is whether the facts constitute a sovereign “restraint” within the coverage of the policy.

In 1941, prior to the entry of the United States into the war, Lloyd Brasileiro, a department of the Brazilian Government, the owner of the three vessels, applied to what was then the United States Maritime Commission for “warrants” for them. Vessels holding warrants are entitled to priorities and facilities for loading, discharging cargo, procurement of bunker fuel or coal, etc. 50 U.S.C.A.Appendix § 1283. The ship owner, receiving a warrant, obligates himself or itself to adhere to the rules and regulations promulgated by the United States Maritime Commission, including the routes and voyages which the vessel shall undertake. Later, by Executive Order No. 9054, 50 U.S. C.A.Appendix § 1295 note, 7 F.R. 837, the functions of the United States Maritime Commission were transferred to the War Shipping Administration. Warrants were issued for the Commandante Pessoa and for the Jaboatao on October 27, 1941 and for the Lesteloide on December 3, 1941.

Several Brazilian vessels having been sunk by submarines, Lloyd Brasileiro on March 10, 1942, ordered all its vessels in port to remain in port and such of its vessels as were at sea to put into the nearest Brazilian port. There is no proof that Lloyd Brasileiro [or any department of the Brazilian Government] issued such orders to any Brazilian vessels other than to those owned and operated, by Lloyd Brasileiro. At the time the Commandante Pessoa was en route from Victoria, Brazil, to Para, Brazil; the Lesteloide was at Recife [Pernambuco] Brazil, where she remained until May 16; and the Jaboatao was at Rio, Brazil; but on the next day she sailed for Santos, Brazil, where she arrived on March 12th and remained until April 8th when she returned to Rio, where she remained from April 9th to April 30th, when she sailed for Recife, where she arrived on May 7th. On April 3rd, the Commandante Pessoa left Para to meet a convoy, but being unable to locate the convoy she returned to Para on April 5th where she remained until May 28th. The Jaboatao sailed for New Orleans May 12th, arriving there June 6th. The Command-ante Pessoa sailed for New Orleans on-May 28th arriving there on June 10th, and the Lesteloide sailed for New Orleans on June 8th and arrived there on June 14th.

On April 30, 1942, Mr. Azevedo, General Agent for Lloyd Brasileiro in the United States, wrote to the Wartime Insurance Committee of the United States War Shipping Administration, applying for hull war risk insurance on six specified vessels, four destined for New York, and two for New Orleans. The only vessel of the three now concerned, mentioned in his letter, was the Jaboatao The following day, according to Mr. Azevedo’s testimony, he had a telephone conversation with Mr. Chubb or Mr Mather of the Insurance Committee of the War Shipping Administration and was informed that his applications for insurance would be granted, provided that the vessels went to New Orleans instead of New York and that they should proceed to New Orleans “for the safety of the vessels and the cargoes.” Mr. Azevedo requested a telegram confirming the conversation and notified his home office by cable of these instructions, and on the same day called Rio on the telephone and talked with a director of his company [Lloyd Brasileiro] about this change of ports and the director ordered all Lloyd Brasileiro vessels to proceed to New Orleans. Accordingly, insurance was issued by the Wartime Insurance Committee on May 1st covering the Jaboatao and on May 14th covering the Command-ante Pessoa and the Lesteloide. The Hull War Risks binders contain the following;

“Special conditions

“The owner of the vessel irrevocably and unconditionally agrees that in consideration of granting War Risk Insurance by the War Shipping Administration to follow the direction of the Administrator as to the Port or Ports of discharge the nature and quantity of the cargo to be carried and as to freight rates. Any breach of this warranty shall automatically Void this insurance from inception.”

On May 22nd Mr. Azevedo, after repeated requests to the War Shipping Administration for written confirmation of Mr. Mather [or Mr. Chubb’s] telephone order of May 1st, received a telegram on May 22nd from Mr. King who was in charge of the traffic department of the War Shipping Administration, directing the six vessels [referred to in the application for insurance] to discharge their cargoes at New Orleans. It was apparently understood and accepted that the same directions should apply to the Commandante Pessoa and the Lesteloide which had received similar warrants and insurance. At the time this telegram was received the Jaboatao was on her way to New Orleans. Upon arrival of the Jaboatao, the Commandante Pessoa and the Lesteloide at New Orleans, the plaintiff procured and paid for carriage by rail of the castor beans to their factory in Bayonne, New Jersey. It is these payments for freight which is the loss claimed. Do these facts constitute “sovereign restraint” either by the Government of Brazil or by the United States Government?

Restraint of princes means the operation of the sovereign power by an exercise of vis major, in its sovereign capacity, controlling and divesting for the time, the dominion or authority of the owner over the ship. Bradlie v. Maryland Insurance Co., 12 Pet. 378, 37 U.S. 378, 9 L.Ed. 1123, and in marine and war risk policies restraint of princes applies only to acts done in the exercise of the sovereign power. Northern Pacific R. Co. v. American Trading Co., 195 U.S. 439, page 467, 25 S.Ct. 84, 49 L.Ed. 269; The Clavereak, 2 Cir., 264 F. 276, page 281.

It seems to me the evidence offered by the plaintiff, including the testimony of Mr. Azevedo, fails to establish that the Brazilian Government, in the exercise of its sovereign power, issued an order to the vessels in question as to their ports of destination, or to state it more precisely — that sovereign restraint was exercised by the Brazilian Government respecting these vessels. These merchant vessels were owned and operated by the Brazilian Government through a department, namely— the Lloyd Brasileiro, for the purpose of carrying privately owned cargoes in foreign trade for profit in competition with privately owned vessels. It was Lloyd Brasileiro which gave the orders to these vessels. It does not appear from the record that either Lloyd Brasileiro or Mr. Azevedo had any authority over Brazilian vessels other than those owned by Lloyd Brasileiro. The orders neither required nor evidenced an exercise of sovereign power; they were such orders as were within the powers of any privately owned and operated steamship company and were merely those which might be given by any cautious ship owner for the purpose of protecting his vessels, or to earn freight by the carriage of privately owned cargoes under ordinary bills of lading, such as any common carrier would issue and which gave them the contractual right, so far as the shippers and consignees of the cargo was concerned to do what was done.

It is also to be noted that this is a war risk policy and is limited to restraint of princes “in prosecution of hostilities.” Becker, Gray & Co. v. London Assurance Corporation, [1918] A.C. 101. Brazil was a neutral Government at the time these events occurred and it is a reasonable presumption that she did not exercise her sovereignty in prosecution of hostilities. Cf. Queen Ins. Co. v. Globe Insurance Co. (The Napoli), 263 U.S. 487, 44 S.Ct. 175, 68 L.Ed. 402.

Next is the question as to whether or not there was a sovereign restraint by the United States Government.

The United States Government is a sovereignty. Kohl et al v. United States, 91 U.S. 367, page 372, 23 L.Ed. 449; Liberty Mutual Ins. Co. v. Johnson Shipyards Corporation, 2 Cir., 6 F.2d 752, affirmed 269 U.S. 503, 46 S.Ct. 182, 70 L.Ed. 379; United States v. Sherwood, 312 U.S. 584, 61 S.Ct. 767, 85 L.Ed. 1058. The United States Government may and does delegate certain of its sovereign duties and powers to its agencies, and when such agencies act within the scope of their delegated power, they act for and represent the sovereign. Federal Land Bank v. Priddy, 295 U.S. 229, 55 S.Ct. 705, 79 L.Ed. 1408; Wagner v. McDonald, 8 Cir., 96 F.2d 273; United States v. Walker River Irr. Dist., 9 Cir., 104 F.2d 334; Riordan v. Ferguson, D.C., 42 F.Supp. 47; Banco de Espano v. Federal Reserve Bank, 2 Cir., 114 F.2d 438; City of Bisbee v. Cochise County, 50 Ariz. 360, 78 P.2d 982 at p. 986.

The War Shipping Administration, acting within the scope of its powers, was acting as the sovereign power of the United States Government under the authority of Executive Order 9054, 50 U.S. C.AAppendix § 1295 note.

Lloyd Brasileiro voluntarily entered into an agreement with the United States Government through the United States Maritime Commission when it applied for and received ship warrants in 1941. Under that agreement or contract Lloyd Brasileiro was to receive certain privileges and priorities as to docking facilities, etc., and in turn was to follow the routing prescribed by the United States Maritime Commission; later by the War Shipping Administration and other rules and regulations promulgated by it. Subsequently Lloyd Brasileiro applied to the Wartime Insurance Committee for hull insurance which it obtained. One of the conditions of this contract for insurance was that the vessel owner would follow such routes and proceed to such ports as the War Shipping Administration should direct. And, in accordance with this agreement, the ports of discharge were arranged after conferences in the United States between the general agent of Lloyd Brasileiro [Mr. Azevedo] and Mr. King of the traffic deoartment of the War Shipping Administration and the insurance department of the War Shipping Administration. No orders as to the port of discharge came from the United States Naval officers. When the vessels abandoned their originally intended voyages to New York and the owner decided to send them to New Orleans, the vessels were in Brazilian ports and they were not subject to the sovereign powers of the United States Government. The government of the United States could not and apparently did not attempt to exercise any sovereign rights over Brazilian vessels in Brazilian ports. The authority of the War Shipping Administration to give any instructions or advice with respect to the route or operation of these Brazilian vessels came not from the exercise of the sovereign power of the United States but from the Ship Warrant Act and the insurance contract.

According to Mr. Azevedo the telegram of May 22nd from Mr. King of the War Shipping Administration confirming the order of Mr. Chubb of the Wartime Insurance Committee, resulted from Lloyd Brasileiro’s application for insurance.

It does not seem to me that the facts in the case at bar show an exercise of vis major by the United States in its sovereign capacity, controlling and divesting for the time, the dominion or authority of the owner over these vessels.

There is no evidence indicating that had these vessels gone to New York instead of New Orleans they would have incurred any penalty other than forfeiting their right to the priorities which they gained from the ship warrants and voiding their insurance. It does not appear that these nor any vessels were generally prohibited by this Government from proceeding to New York. New Orleans, and not New York, was agreed upon as the port of discharge in consideration of issuing the ship warrants and the insurance.

The inducements offered to neutral vessel owners for the purpose of obtaining the latter’s consent indicate that the Government of the United States wished to avoid any attempt to exercise its sovereign power in the restraint of such vessels. Where the loss is occasioned by the voluntary conduct of the owner, however strong are the motives of the owner for so acting, it cannot be said that the loss is chargeable to the acts of the sovereign. Morgan v. United States, 14 Wall 531, 20 L.Ed. 738; Queen Insurance Co. v. Globe Rutgers Fire Insurance Co., 263 U.S. 487, 44 S.Ct. 175, 68 L.Ed. 402; Aktiebolaget M. Bank v. American Merchant Marine Ins. Co., 241 N.Y. 197, 149 N.E. 830; Cf. Standard Oil Co. v. United States, 267 U.S. 76, at page 77, 45 S.Ct. 211, 69 L.Ed. 519. This is so because such a loss is not occasioned by restraint of the sovereign.

In view of the conclusion that there was no sovereign restraint, neither by the Government of Brazil nor by the Government of the United States, it is unnecessary to consider the other questions that are raised.

The complaint is dismissed. Settle decree on notice.

Defendant to submit proposed findings of fact and conclusions of law on ten days notice.


author: NEVIN, District Judge

text:
    DINEEN, State Superintendent of Insurance, v. UNITED STATES.
    District Court, S. D. New York.
    Feb. 7, 1945.
    Samuel Markowitz, of New York City, for plaintiff.
    James B M. McNally, U. S. Atty., of New York City (Joseph C. Kenney, Asst. U. S. Atty., of New York City, of counsel), for defendant.
   NEVIN, District Judge

(sitting by designation).

In this action plaintiff seeks to recover from the United States of America, defendant herein, the sum of $126,576.12, on account of income taxes which plaintiff alleges were erroneously and illegally assessed and collected by the defendant from Lawyers Mortgage Company, for the calendar year 1931.

Plaintiff is the Superintendent of Insurance of the State of New York and, as such, is the liquidator of Lawyers Mortgage Company, a New York corporation, organized under the insurance law of the State of New York on February 9, 1893, and authorized to do a mortgage guarantee business. It is not a life or mutual insurance company.

Trial by Jury having been waived by written stipulation of the parties, the cause was heard by the Court. At the conclusion of plaintiff's case, defendant moved for dismissal of the complaint upon the grounds and for the reasons set forth in the record. The Court reserved decision .on this motion. It is here and now overruled.

The statute herein involved is Section 204 of the Revenue Act of 1928, c. 852, 45 Stat. 791, 26 U.S.C.A. Int.Rev.Acts, page 412.

The issue raised by the pleadings and at the trial is: Did the business carried on by Lawyers Mortgage Company during the year 1931 constitute that company an insurance company within the meaning of the Act just referred to ?

On the same day, to-wit, March 14, 1932, the Supreme Court of the United States decided two cases involving the question of what constitutes an insurance company other than life and mutual, within the meaning of the Revenue Act. ■

In one case, United States v. Home Title Insurance Co., 285 U.S. 191, 52 S.Ct. 319, 76 L.Ed. 695, the Supreme Court held that the company was taxable as an insurance company other than life or mutual and in the other, Bowers v. Lawyers Mortgage Co. 285 U.S. 182, 52 S.Ct. 350, 76 L.Ed. 690 the Court held that the company was not taxable as an insurance company.

In this latter case, the District Court found in favor of Lawyers Mortgage Company, and entered judgment accordingly, Lawyers Mortgage Co. v. Bowers, D.C., 34 F.2d 504. This judgment was affirmed by the Court of Appeals, Lawyers Mortgage Co., v. Bowers, 2 Cir., 50 F.2d 104. It was reversed by the Supreme Court in the case of Bowers v. Lawyers Mortgage Co. just above referred to. The defendant in error in. that (Supreme Court) case is the same company as the company for which the plaintiff in this proceeding is acting as liquidator.

In the Bowers case (285 U.S. at page 188, 52 S.Ct. 353, 76 L.Ed. 690) the Supreme Court holds that whether or not a corporation is taxable as an insurance company, is to be determined by the character of the business actually done in the tax years, saying: “While name, charter powers, and subjection to state insurance laws have significance as to the business which a corporation is authorized and intends to carry on, the character of the business actually done in the tax years determines whether it was taxable as an insuranee company. United States v. Phellis, 257 U.S. 156, 168, 42 S.Ct. 63, 66 L.Ed. 180; Weiss v. Stearn, 265 U.S. 242, 254, 44 S.Ct. 490, 68 L.Ed. 1001, 33 A.L.R. 520.” And the Court concluded that: “In the case before us respondent’s charter authority extended not only to the business of insurance but also to other lines including that of investment with or without guaranties as it might choose. As above shown, the element of guaranty involved in its transactions in the tax years was not sufficient to make it an insurance company.”

In the case of Home Title Insurance Co. (285 U.S. at page 195, 52 S.Ct. 321, 76 L.Ed. 695) the Court states: “The amounts received as compensation for insuring title, for guaranteeing that mortgages are first liens, and for guaranteeing payment, constitute the larger part of respondent’s income. And, when there are added the fees and charges for examination of title, appraisals, and other services incident to its insurance business, the total properly assignable to that business amounts to more than 75 per cent, of all respondent’s income. Undeniably insurance is its principal business. Indeed, it does not appear that any substantial part of its transactions was not connected with or the outgrowth of insurance.” And in that case the court concludes that: “The admitted facts clearly show that in the tax years above mentioned respondent was an ‘insurance company’ within the meaning of that phrase as commonly understood and as used in the Revenue Acts of 1921 and 1924. It was taxable under section 246 and therefore exempt from capital stock taxes.”

Plaintiff submits that the Supreme Court decision in the Bowers case covered the years 1922 and 1923 and that “we are now concerned with a situation almost ten years later”; that under the decisions in order to determine whether a company is taxable for any year as an insurance company, it is necessary first, to determine the character of the business transacted by it during that year, and that it is evident (from the decisions) that the determination of classification of an insurance company other than life or mutual under the Revenue Act, is based solely upon the proportion that the taxable income consisting of investment income, plus underwriting income, bears to the total gross income for the year involved, and plaintiff urges that: “During the year 1931, Lawyers Mortgage Company was engaged principally in the business of guaranteeing the payment of principal and interest of bonds secured by real estate first mortgages sold by it prior to that year, extending and renewing its guarantee bn mortgages which matured in that year, making new mortgage loans on real estate and guaranteeing the payment of the principal and interest on such mortgage loans upon their sale by it in that year, investing its capital funds in real estate mortgage loans, some to be held for its guaranty fund as required by the New York Insurance Law, and the remainder to be held for sale with its guarantee, and operating the real estate acquired upon foreclosure of mortgages guaranteed by it and the real estate used for its own office buildings.”

Plaintiff offered evidence by way of exhibits and otherwise, with respect to its income for the year 1931, which he asserts supports his contention that the company was' an insurance company other than life or mutual for the year 1931, whatever its classification may have been in any prior year.

It is the contention of the Government that the business of Lawyers Mortgage Company during the year 1931, varied in no substantial way from the years 1922 and 1923 and, therefore, that it was not in 1931, an insurance company within the meaning of the Revenue Act. Counsel for the Government stated in the record defendants’ claim as follows:

“It is true that the Supreme Court has in these cases (Bowers and Home Title Co. cases supra) stated in substance that the guarantee of principal and interest on mortgaged loans constitutes insurance. It is the Government’s contention, based on investigation of the books of Lawyers Mortgage Company, that the so-called guaranteeing done by Lawyers Mortgage Company did not, as a matter of fact, constitute insurance, and in fact did not even constitute a guarantee; that all that Lawyers Mortgage Company did was to assume, in every instance where it sold a certificate or a policy, a direct primary liability, totally independent of any mortgage, and in fact deprived the purchasers of the certificates of any rights which they might have had except interests in the mortgage as collateral security.

“The Government contends that if you take Section 204, the Revenue Act of 1928, and apply it to the figures in the income tax return filed by Lawyers Mortgage Company, in conjunction with the books of Lawyers Mortgage Company, and revise the figures so as to subtract, for example, from the premiums the proper deductions in accordance with that statute to determine the exact amount of underwriting income, it develops that even applying this statute under which this plaintiff believes Lawyers Mortgage Company should have paid, that a very minor percentage of the income of Lawyers Mortgage Company came from this so-called insurance business.”

The record in the instant case shows that Lawyers Mortgage Company in 1931, as in 1922 and 1923, “did not assign or apportion its assets to any particular part of the business” but used them indiscriminately in its different activities; that it kept on hand sufficient bonds and mortgages to maintain the guarantee fund required by the insurance laws; and that in the year 1931 as in the years 1922 and 1923 corporations organized under the New York Banking Laws and subject to the Banking Department of the State of New York carried on a business of the same or a similar general character as that carried on by Lawyers Mortgage Company. Compare Bowers case, supra, 285 U.S. 182 at page 186, 52 S.Ct. 350, 76 L.Ed. 690.

During the year 1931, Lawyers Mortgage Company never issued policies of guarantee on any mortgage liens which it did not itself make or sell.

Mr. Raynor, Secretary of Lawyers Mortgage Company, and himself a lawyer, called as a witness on behalf of plaintiff, testified that as between the years 1922 and 1923 and the year 1931 “in the general nature there was no difference * * * in the character of the business, the nature of the business,” of Lawyers Mortgage Company.

Substantially all of the facts were agreed to by the parties in a written stipulation filed herein. The stipulation provided that either party could introduce further competent evidence at the trial and some additional evidence was offered and admitted.

This evidence the court has considered along with the facts as stipulated. Having so done, the court has reached the conclusion that, as claimed by the Government, plaintiff has failed to prove that the business carried on by Lawyers Mortgage Company during the year 1931 constituted that company an insurance company within the meaning of Section 204 of the Revenue Act of 1928.

The Court has adopted the Facts as stipulated as part of its Findings of Fact herein (1 to 24, inc.,) adding thereto a further Finding, numbered 25.

Upon a consideration of the whole of the record, the briefs and arguments of counsel, and the applicable law, the Court has arrived at the following:

Findings oLFact:

1. This is an action at law for the recovery of $126,576.12 of income tax alleged to have been erroneously and illegally assessed and collected by the defendant from Lawyers Mortgage Company, (hereinafter referred to as the “Company”) for the calendar year 1931.

2. Plaintiff is the Superintendent of Insurance of the State of New York, duly acting as successor liquidator of the Lawyers Mortgage Company.

3. Lawyers Mortgage Company was, at all times herein mentioned, a domestic corporation organized and existing under the laws of the State of New York, to-wit, the then existing Article V of the Insurance Law of the State of New York, Consol. Laws 1909, c. 28, with its principal office and place of business in the Borough of Manhattan, New York City, in the Southern District of New York.

4. The Company was organized on or about February 9, 1893, as Lawyers Mortgage Insurance Company. Upon application by Lawyers Mortgage Insurance Company and by order of the Supreme Court of the State of New York, entered October 3, 1903, the name of the Company was changed to Lawyers Mortgage Company.

5. On or about January 10, 1905, the Company amended its charter to provide relative to its charter powers as follows: “To examine titles to real property and chattels real, to procure and furnish information in relation thereto, make and guarantee the correctness of searches for all instruments, liens or charges affecting the same, guarantee or insure the payment of bonds and mortgages and guarantee and insure the owners of real property and chattels real and others interested therein against the loss by reason of defective titles thereto and other incumbrances thereon.”

6. On or about December 18, 1913, the Company further amended its certificate of incorporation to read as follows:

“To examine titles to real property and chattels real, to procure and furnish information in relation thereto, make and guarantee the correctness of searches for all instruments, liens or charges affecting the same, guarantee or insure the payment of bonds and mortgages, or notes of individuals or partnerships secured by mortgages upon real property situated in this or any other state, and bonds, notes, debentures and other evidences of indebtedness of solvent corporations secured by deed of trust or mortgage upon real property situated in this or any other state, invest in, purchase and sell, with such guarantee or with guarantee only against loss by reason of defective title or incumbrances, bonds and mortgages, and notes of individuals or partnerships secured by mortgages upon improved and unincumbered real property situated in this or any other state worth fifth per centum more than the amount loaned thereon, and bonds, notes, debentures and other evidences of indebtedness of solvent corporations secured by deed of trust or mortgages upon improved and unincumbered real property situated in this state or outside of this state worth fifty per centum more than the amount loaned thereon, and guarantee and insure the owners of real property and chattels real and others interested therein against the loss by reason of defective titles thereto and other incumbrances thereon.”

Under the certificate of incorporation, as so amended, the Company was doing business during the year 1931.

7. From about May 4, 1931, to about May 10, 1935, George S. Van Schaick was Superintendent of Insurance of the State of New York, pursuant to appointment made under the New York Insurance Law, under which appointment he acted as Superintendent of Insurance of the State of New York.

8. On or about August 2, 1933, an order of the Supreme Court of the State of New York was made and entered in the office of the Clerk of the County of New York, wherein the said George S. Van Schaick and his successors in office, as Superintendents of Insurance of the State of New York, were authorized and directed to take possession of the property of the Company, conduct its business, rehabilitate the same pursuant to the provisions of the then Article XI of the Insurance Law of the State ■of New York, Laws 1932, c. 191, Consol. Laws, c. 28, and all other provisions of law applicable thereto, and deal with the property and business of the Company in its name, and thereupon the said George S. Van Schaick, as Superintendent of Insurance, took possession of the property and business of the Company and proceeded to rehabilitate its affairs and deal with its property in its name, as Rehabilitator.

9. On or about December 18, 1933, Richard A. Brennan was appointed and designated by the said George S. Van Schaick Special Deputy Superintendent of Insurance, to act as his Statutory Agent in the rehabilitation of the Company. Thereafter and until October 23, 1934, the said Richard A. Brennan acted as such Statutory Agent.

10. Louis H. Pink, the original plaintiff herein, became the Superintendent of Insurance of the State of New York on May 10, 1935, as successor to the said George S. Van Schaick, and by virtue of such appointment became the successor rehabilitator of the Company.

11. On or about November 17, 1937, an order of the Supreme Court of the State of New York was made and entered in the office of the Clerk of the County of New York, wherein it was ordered, adjudged and decreed that the Company be placed in liquidation. In and by said order it was further provided that Louis H. Pink, the original plaintiff herein, or his successors in office, as Superintendents of Insurance of the State of New York, forthwith take possession of the property and liquidate the business of the Company, pursuant to the provisions of the then Article XI of the Insurance Law of the State of New York and all other provisions of law applicable thereto; and by said order the said Louis H. Pink, or his successors in office, as Superintendents of Insurance of the State of New York, were vested with title to all property, contracts and rights of action of the Company and were directed to deal with the said property and business of the Company in the name of the Superintendent of Insurance of the State of New York. The original plaintiff, as such Superintendent of Insurance, upon the entry of the said order, took possession of the property, contracts, rights of action and business of the Company and proceeded to liquidate its affairs.

12. On or about November 17, 1937, Ralph B. Romaine was appointed and designated by the said Louis H. Pink Special Deputy Superintendent of Insurance, to act as his Statutory Agent in the liquidation of the Company, and until about October 15, 1941, the said Ralph B. Romaine was acting as such Statutory Agent.

13. Robert E. Dineen, the present plaintiff herein, became the Superintendent of Insurance of the State of New York on September 23, 1943, as successor to the said Louis H. Pink, and by virtue of such appointment became and now is the successor liquidator of the Company.

14. The defendant, at all times herein mentioned, was and now is a corporation sovereign and body politic.

15. Charles W. Anderson was Collector of Internal Revenue for the Third District of New York from April 1, 1923, until July 6, 1934.

16. On or about Márch 14, 1932, the Company filed with Charles W. Anderson, the then Collector of Internal Revenue for the Third District of New York, its income tax return for the calendar year 1931, on the official form prescribed therefor by the Treasury Department, showing total gross income of $3,865,414.66, total deductions of $1,593,579.71, net taxable income of $2,-271,834.95 and a total tax of $272,620.19. In said income tax return filed for the year 1931, the Company consolidated with its own income and deductions, the gross income and deductions of subsidiary companies.

17. During the year 1932, the Company paid to Charles W. Anderson, as Collector of Internal Revenue for the Third District of New York, the above amount of income tax of $272,620.19, for the calendar year 1931, in installments in the amounts and on the dates, as follows:

$68,155.05 March 14, 1932

$68,155.05 June 14, 1932

$68,155.05 September 14, 1932

$68,155.05 December 14, 1932

which amount the United States of America has received from the said Collector of Internal Revenue as in the usual course of his official business, and still retains.

18. Charles W. Anderson, to whom the aforesaid income tax of $272,620.19 was paid, is not now, and since July 6, 1934, has not been, in office as Collector of Internal Revenue.

19. Since the date of its incorporation in 1893 and including the year 1931, the Company always has been and is subject to examination by and supervision of the Superintendent of Insurance of the State of New York, has always been and is subject to the provisions of the Insurance Law of the State of New York applicable to title and credit guaranty corporations organized thereunder, has always been and is subject to the regulations of the Superintendent of Insurance of the State of New York, and has always been required to file and has filed annually (until the entry of the aforesaid rehabilitation order) with the Superintendent of Insurance of the State of New York, on forms approved by him, the statements required by him for each year.

20. The amount of mortgages and mortgage certificates guaranteed by the Company outstanding at the end of the year 1922 was $149,433,293, and outstanding at the end of the year 1931 was $434,870,083.

21. On September 13, 1934, the Company by the then Superintendent of Insurance of the State of New York, then acting as Rehabilitator of the Company, filed with the Collector of Internal Revenue for the Third District of New York, at New York City, for transmission to the Commissioner of Internal Revenue of the United States, a written claim for refund of $136,310.10 of income tax paid for the year 1931.

22. Although more than six months have elapsed since the filing of the written claim for refund, the Commissioner of Internal Revenue has neither rejected nor allowed the claim for refund, nor any part thereof.

23. No part of the aforesaid tax of $272,620.19 paid by the Company for the year 1931 to Charles W. Anderson, as Collector of Internal Revenue, has been refunded or credited to the Company, or the plaintiff, or his predecessors.

24. Plaintiff is the sole owner of the aforesaid claim as Superintendent of Insurance of the State of New York, as Liquidator of the Company, and since his appointment as Superintendent of Insurance of the State of New York he has been, as Liquidator of the Company, and prior thereto, his predecessors as Superintendents of Insurance of the State of New York, as Liquidator or as Rehahilitator of the Company, and the Company, were and always had been respectively the sole owners of the aforesaid claim, and neither he, nor his said predecessors, nor the Company, has or have ever assigned or transferred the whole or any part thereof, or interest therein, and he and his said predecessors and the Company have at all times borne true allegiance to the Government of the United States and have in no way voluntarily aided, abetted or given encouragement to rebellion against the said Government.

25. The business carried on by Lawyers Mortgage Company during the year 1931 was substantially as follows:

Upon receiving an application for a loan it caused an appraisal of the proposed real estate security to be made and procured a title insurance company to certify the property, make a report as to title and insure the same. The person borrowing money from the company, having executed and delivered a bond and mortgage to the company, received from it an amount specified therein, less charges for title insurance, survey, disbursements and recording taxes.

There was also subtracted from the amount given to the borrower by the company, a lending fee, some portion of which appears to have represented an appraisal charge. The appraisals were carried on by employees of the company, who worked on a salary basis.

The loan would be sold either in its entirety or in parts. When the loan was sold as a whole, Lawyers Mortgage Company delivered to the purchaser a contract called a “policy of mortgage guarantee.” When a part of the loan was sold, a participation certificate was given to the purchaser indicative of the amount which he had paid therefor and purporting to represent his interest in the whole mortgage.

The “policies” and the certificates by their terms required the holders thereof by accepting the same from the company, to assign to the company all the rights in which they might share as mortgagees or assignees of the mortgages. Each “policy” or certificate contained a so-called guarantee by which Lawyers Mortgage Company guaranteed the payment of the principal amount thereof, as and when collected, but in any event within eighteen months following written demand made after maturity of the “policy” or certificate. Almost invariably the maturity date of the “policy” or certificate coincided with the maturity date of the mortgage loan with which it was connected.

The company further guaranteed the payment of interest to the purchaser of the “policy” or certificate at regular periods and at an agreed rate. This rate was usually % of 1% less than that specified in the bond and mortgage, but in some instances at least, the rate paid to the person purchasing from Lawyers Mortgage Company was identical with the rate «received by Lawyers Mortgage Company from the original borrower. Where the differential of % of 1% existed between the interest rate paid by the borrower and the interest rate paid by Lawyers Mortgage Company to the purchasers of “policies” and certificates, the company retained the difference and called it “premium.” The company also retained the interest accruing between the making of loans on mortgage security and the sale of the “policies” and certificates. It also charged extension fees to the borrowers for the renewal of loans at the maturity dates of the bonds and mortgages.

The company made no assignment or apportionment of assets or income to the different parts of its business, but used them indiscriminately in its different activities. No part or portion of the expense of its various activities (e.g.) appraisement, bookkeeping, sales of certificates, preparation of documents, etc., was charged against any specific source of income.

The company at all times throughout the year 1931 owned first mortgages which were available for its guaranty fund pursuant to the then effective Section 173 of the Insurance Law of the State of New York, Chapter 290, Laws of 1929, Consol. Laws, c. 28. No specific mortgages were ever earmarked or segregated as being applicable to the guaranty fund. The statute in question did not require any segregation. No portion of the so-called “premium” described above was ever allocated under insurance risk.

Conclusions of Law:

1. This Court has jurisdiction of the subject matter of this action and the parties are properly before it.

2. The character of the business carried on by Lawyers Mortgage Company during the year 1931 did not differ from the character of the business carried on by Lawyers Mortgage Company during the years 1922 and 1923.

3. The contracts between Lawyers Mortgage Company and the purchasers of whole mortgages or mortgage certificates from that company, while they may have contained some element of insurance, did not constitute the business of the company, an insurance business.

4. Lawyers Mortgage Company during the year 1931 was not an insurance company within the meaning of Section 204 of the Revenue Act of 1928.

5. The complaint should be dismissed at plaintiff’s costs.

Judgment accordingly.


author: BYERS, District Judge.

text:
    THE HENRY E. THE WRESTLER. EXNER SAND & GRAVEL CORPORATION v. GALLAGHER BROS. SAND & GRAVEL CORPORATION. Petition of STEVENS.
    Nos. A-17084, A-17125.
    District Court, E. D. New York.
    April 12, 1945.
    See, also, 58 F.Supp. 271.
    Purdy & Lamb, of New York City (Edmund F. Lamb and Thomas J. Irving, both of New York City, of counsel), for Exner Sand & Gravel Corporation.
    Foley & Martin, of New York City (Christopher E. Heckman, of New York City, of counsel), for Gallagher Bros. Sand & Gravel Corporation.
    Krisel & Beck, of New York City, for petitioner Stanley Stevens.
   BYERS, District Judge.

Cause A-17084 was consolidated with A-17125, a limitation proceeding instituted by the owner of the tug Wrestler, and the issue of negligence on the part of the tug is the sole question for decision.

On February 16, 1944, the sand scow Henry E, owned by the libelant and then being under charter to Gallagher Brothers Sand & Gravel Corporation, while being towed in the Rahway River in New Jersey by the tug Wrestler (hired by Gallagher) fetched up on a rock in the river bed and later sank. To recover for the damage so occasioned, the libel was filed on May 18, 1944, in cause A-17084 by the owner of the scow against the charterer, for failure to redeliver her in as good condition, etc.

The answer alleged that the damage was due to the negligent navigation of the scow while in tow of the Wrestler, and that the owner of the latter had initiated a limitation proceeding, whereby an impleading petition was rendered unavailable.

In the limitation proceeding, exoneration was sought by Stevens, the owner and navigator of the tug, because the scow was said to have struck an unknown and uncharted rock lying in the bed of said Rah-way River.

The Rahway River is in effect a creek which empties into the Arthur Kill, and it has not been charted by the United States Coast and Geodetical Survey. Nevertheless, boats had been towed up to Lambert’s Wharf, Linden, N. J. (the destination of this scow) for a number of years, mostly scows and barges, drawing as much as ten feet when loaded; while care is required in the conduct of such navigation, it is not necessarily hazardous, when it involves vessels of that draft, at or just prior to flood tide. The testimony is convincing that it is customary for towing vessels to wait at the mouth of the stream until about an hour or more before high water, and then to proceed, provided (a) that the surface has risen to the third plank from the top of the parapet supporting the first railroad bridge to be encountered as the tow moves upstream, and (b) that strong westerly winds have not prevailed for more than one previous day to keep the tide from rising to its customary level.

The evidence in the cause yields the following factual summary:

(1) Ownership and operation of the respective vessels are found to be as alleged in the respective pleadings.

(2) On February 15, 1944, the scow Henry E was under the customary New York harbor charter by the owner, Exner Sand & Gravel Corporation, to Gallagher Brothers Sand & Gravel Corporation.

(3) The dimensions of the vessels involved were:

(a) Sand scow Henry E, 116.8 feet by 34.1 feet by 9 foot depth of sides.

(b) Diesel tug Wrestler, 42.8 feet by 12 feet by 5.2 foot depth of sides, with indicated horse power of 120.

(4) On February 15, 1944, the tug, being operated by her owner, Stanley Stevens (the petitioner seeking exoneration), took the scow in tow stern first on a bridle hawser so rigged that there was a 15-foot space between the stern of the tug and the forward end of the scow; the latter was partly loaded with sand, and drew 8 feet.

(5) At about 11:30 A.M. on that day, the tow as so made up entered the Rahway River; and when it had proceeded about 1% miles so that the scow was about 75 or 100 feet upstream of the second railroad bridge, the scow stranded in the channel as customarily understood, but which is uncharted, at about 1 P.M., when high tide occurred in that part of the river.

(6) At the place of said stranding, the Rahway River is about 350 feet wide from bank to bank, measured at the surface of the river at high water, and the channel as used is about 200 feet wide generally in the center but inclining to the northerly bank of the river. At other reaches the channel is as little as 75 feet wide.

(7) The said river runs generally from east to west, and follows a bending course, and the tow was proceeding in a westerly direction, with the north bank of the river on its starboard hand.

(8) Normal high water in the Rahway River is about 4 to 4% feet above mean low water.

(9) During the 24 hours ending at midnight of February 15th, the wind was blowing from the SW, W.SW, W, with a force rising at about 2:40 A.M. to 25 miles; and then to 33 at 11:30 A.M., and continuing in that range until 10:30 P.M.' On February 14th, beginning at about 3 P.M., the wind had been in the E, NE, E.NE, S.SE, SE and again E, with a velocity rising from 3 to 25 miles, with fresh and at times strong gusts, to midnight.

(10) The effect of a westerly wind of the force shown was to oppose the flood-tide moving into the river from the Kill, and thus to prevent it from reaching its normal height.

(11) Actual high water in the Rahway River was at about 2 A.M. on February 16, 1944, and it was lower than its predicted level by from 1.9 feet to 2.3 feet.

(12) Between 11.50 P.M. on February 15th and 12:30 A.M. on February 16th, the scow was released from the first strand by reason of the rising tide, and the tow proceeded up the river, in the said channel.

(13) At the end of approximately seven minutes and after it had covered a distance of approximately 600 feet, the scow struck a submerged rock lying in that portion of the bed of the Rahway River which constitutes the channel as used, nearer to the northerly shore than to the center, upon which the scow rested and from which it could not be moved; the rock caused a gouge in the bottom of the scow, and certain bottom planks were damaged, causing the vessel to make water so fast that eventually she sank.

(14) The said rock was pyramidal in shape and from 4 to 6 feet in diameter at the base, having an apex on the upstream side rising approximately 3% feet from the bed of the river; on the downstream side, the rock sloped gradually for a distance of approximately 7 feet, tapering down to a base which was approximately one foot above the river bed; the rock was serrated, and pieces of it could be scaled off, and an examination of the fragments of its surface proved them to be oyster shells.

(15) Rahway River is not shown upon any chart issued by the United States Coast and Geodetical Survey.

(16) Soundings of the Rahway River, approaching the rock from east to west in a 100-foot strip centered upon the rock, show an inshore depth of 6.5 feet and an outshore depth of 7.7 feet at mean low water, as at the time of this second stranding.

(17) The stern mud log, which struck the rock, showed that the point of impact was 27.1 feet from the inshore side of the scow, and at that side there would have been a depth of 7.4 feet at mean low water.

(18) The tide had risen 1% feet at 12:15 A.M. of February 16th, above mean low water.

(19) There was a depth of water of not less than 8.9 feet at this place, except for the rock.

(20) The said rock was not shown upon any chart, nor was its presence known to the navigator of the tug Wrestler, nor to the two experienced navigators of other tugs who testified in this cause.

(21) As the Wrestler proceeded with the scow after the first stranding, a deckhand from the tug, stationed on the scow, took soundings from time to time, and found depths of 9 and 10 feet until the impact of the scow upon the said rock.

(22) The navigator of the Wrestler during the six months preceding this disaster had previously towed not less than forty-five similar vessels up the Rahway River to said Lambert’s Wharf with no incidents save an occasional stranding in shallow portions of the river, which are not shown to have caused damage.

(23) The navigator of the Wrestler was competent, and was not guilty of negligence in failing to know of the presence of the said rock.

Under the foregoing facts it will be seen that the argument relied upon to demonstrate failure on the part of the tug to meet the burden of exculpating explanation arising from the fact of stranding the tow (The Arlington, 2 Cir., 19 F.2d 285, 54 A.L.R. 101. The Reichert Line, 2 Cir., 64 F.2d 13, and cases therein cited) is to the effect that the tug was negligent primarily in taking the tow into the Rahway River at all on February 15th since the requisite tidal conditions for safe passage were not to be apprehended under the known conditions of wind. This main contention is of a kind of delayed action type of negligence, since the first stranding did not cause any damage, because it was the cause of detention at a time of high water which was in fact lower by 2.1 feet than would have been the case if the tide had then attained its predicted height of 4.2 feet above mean low.

Incidentally, a rise of 3.5 feet above mean low water on February 15th would have enabled the scow to pass safely over this rock, which means that the failure of the tide to reach its expected level, if reasonably to have been anticipated, cannot be relied upon to demonstrate that the tug was operated with the requisite skill of her calling.

It seems that this becomes the decisive aspect of the case, since neither reason nor authority charges the tug with knowledge of a rock in the bed of the channel as frequented by all vessels plying these waters, which was uncharted and unknown in fact to Stevens, or to the only other navigators who testified, and whose experience was much greater and more comprehensive than his.

It is urged by the barge owner that the tug must be held to the same measure of responsibility as though the navigation had been conducted outside the channel lines, as in The Arlington, supra, apparently upon the theory that ignorance of expectable tidal conditions is roughly equivalent to the departure beyond channel lines, and should visit the same measure of responsibility upon the tug which offends in that respect.

That contention is probably based upon the following language in White v. Upper Hudson Stone Co., 2 Cir., 248 F. 893, 895, where it is said in speaking of the motor boat that did the towing: “She assumed the ordinary obligation of a towing vessel; inter alia, to know the recognized channel, the tides, the draft of the tow, and with reasonable skill to judge the weather.” That expression must be understood, of course, in connection with the facts that gave rise to it.

Stevens, the navigator of this tug Wrestler, showed that he met the first and third requirements (the fourth is unimportant here), and the second, the tides, in a general way; he did not demonstrate that he appreciated the necessity for calculating an allowance for the effect of the westerly winds which had prevailed for nearly twelve hours before he entered the river on the 15'th, nor did he claim to have estimated the probable effect of that condition as opposed to the easterly winds which had been effective for about nine hours ending at midnight of February 14th.

Schmidt’s testimony concerning the tow-age of loaded barges to the Lambert Wharf, drawing nine feet or so, may be accepted as to the knowledge with which Stevens was chargeable on this 'subject:

“A. Wind conditions is the thing we practically depend upon.

“Q. That is the determining factor in your mind? A. Yes. If you get a northwest wind, your water does not come into the creek. On the second day you are taking a chance. On the third day you can’t go in at all. Lots of times you can’t go in there two or three days at a time.

“Q. Do you consider the first day of such a blowing as making it fairly safe to enter the river? A. Yes, that is as safe as it could be.

“Q. If I told you that a southeasterly wind was blowing the day before the wind shifted to the southwest or westerly, would that change your opinion any? A. Yes. Then you get so much more water in there ; the tide will be so much greater.”

The foregoing was undisputed and hence is accepted as indicating the understanding which is chargeable to Stevens, who was towing a scow drawing only eight feet.

Since the actual performance of the tide contradicted Schmidt’s version of the ex-pectable, based upon his own observation and experience, it becomes apparent that Gallagher and Exner are trying to hold the tug, not for what was reasonably to be anticipated, but for a contrary actual happening, thus again paying the conventional tribute to hindsight, which is much favored in diverse branches of advocacy — and elsewhere.

If the tug is to be held, not because the tide acted according to expectations as understood by experienced navigators in these waters, but because it did the reverse, justification for such a result must be found in decisions upon which the interests adverse to the tug rely:

Pelham — Seaboard No. 91, 1933 A.M.C. 1096: Here the navigator of a tug, having two scows in tandem tow, entered Eastchester Creek about six minutes earlier than actual high tide at that place, which was one hour and thirteen minutes earlier than predicted high water; and the rise above mean low water was about 2*4 feet less than normal (7.1 feet) because a high northwest wind (36, 40, 62 miles) had been blowing for about twelve hours. The tug expected, according to the tide calendar, about 1% hours of rising tide in which to conduct the tow to destination in a westerly direction. The changed conditions caused the tug to buck an ebb tide for about 2 miles at the end of which one of the scows grounded, apparently outside the channel, in waters lower than they would have been under normal tidal conditions.

The court found negligence on the part of the tug in that: (a) Arrival at the point of entrance was too late since one hour of rising tide would be required to safely pass the place of striking.

(b) Proceeding against an ebb tide meant that the-tug could not anticipate sufficient depth of water at the critical place.

(c) There was a failure to follow the channel.

Evidently the combination of these elements resulted in the decision, and since at least the last two are lacking here, the case is not controlling. Moreover, what the opinion says was well-known to masters navigating in Eastchester Creek is one thing, and Schmidt’s quoted testimony here is quite another.

White v. Upper Hudson Stone Co., supra, does not make clear whether the towing vessel was held because the tide was too low to enable a scow drawing &/z feet to cross an 8-foot bar, or because the sea was too rough to avoid pounding during the attempted passage. That explains the reference to the necessity for showing “reasonable skill to judge the weather”.

That strand occurred in daylight, while this was just after midnight. It is said in the opinion that the scow, while in care of the towing vessel, “pounded and stranded, either because her draft was too great for the bar, or the swell was such that even at highest tide she pounded when in the trough. No matter which story is true, the Ono is liable. If the water was insufficient when calm, her master inexcusably misjudged the tide; if the swell was such as to let the tow pound, he ought to have perceived that such would be the case, for it was daylight and fine weather, and there was no necessity of going over the bar on that particular tide.”

The Scipio, 1938 A.M.C. 1207. Here a tug was held for causing a loaded scow in her tow to strand outside the channel lines in the Kill van Kull. It was said that the burden rested upon the tug of showing that the obstruction which caused the stranding (if indeed there was one) was inside the channel lines, and unknown to navigators, and that the burden had not been borne.

In this present case the obstruction lay within the channel lines, and was also unknown to navigators.

For lack of factual similarity, the foregoing cases are not deemed to point the way to decision here.

The only criticism of Stevens that survives a consideration of the evidence as a whole is that he entered the Rahway River on February 15th with a tow drawing 8 feet, without seeking advice, or taking into consideration the force and direction of the wind during the then preceding eleven hours. Since it appears, however, from Schmidt’s uncontradicted testimony (and that of Van Pelt by consent) that, had he done both of these things, he would have come to the conclusion that the projected trip could be safely made, it is not perceived thus far how it can be concluded that the tug has failed to demonstrate that the stranding at about 12:30 A.M. of February 16th could not have been avoided by the tug in the exercise of proper care and skill.

It is true that Stevens’ testimony, as to whether the surface of the water was up to the bottom of the third plank on the bridge parapet when he entered the river, is less than convincing, for at best it comes down to his belief that he must have looked, and must have observed that such was the fact, otherwise he would not have proceeded even with a scow drawing but 8 feet. Had there been any evidence that in fact the tide did not rise so far by 11:30, I should have been inclined to disregard his somewhat anemic testimony on this point, but there is none.

He says he did know as the tow proceeded, that the tide probably would not reach its normal height, but it was then not feasible to turn around and go back. That, however, does not justify the inference that, when he entered the river, he had indeed observed that more than the three top planks of the parapet were in view.

It is also said in the Exner brief that, once the scow came afloat a little after midnight of the 15th and about 600 feet below the place of the second strand, she should have been anchored in the stream to await full floodtide in order to assure her safely passing over the rock that no one knew to be there.

It is not surprising that there is no expert opinion evidence in the record to fortify that contention, if it is indeed pressed; nor does it appear whether the scow carried an anchor.

It does appear, however, that there was no scowman on board, and that a deckhand from the tug was on the scow, at the forward end as she was towed, taking soundings at both sides as the tow proceeded in the dead of night, up the river; and that not less than 9 feet was found until the instant of striking.

It is thought that the argument fails of necessity because of the undisputed fact that the presence of this rock was unknown not only to Stevens but to Schmidt and Van Pelt, the only other navigators called.

Stevens had to deal with the situation as he and the others knew it, not as it has since been revealed. But for this rock, there was sufficient depth of water for him to bring the scow to Lambert’s Wharf on this rising tide, for all that the evidence shows to the contrary. He was having soundings taken to assure a safe passage through these shallow waters as he knew and had experienced them, but not in the expectation that a new and hitherto unknown peril might develop.

The arguments against the tug, if allowed to prevail, would place her in the category of an insurer, a result which all cited authorities disclaim.

It results that, in the limitation proceeding, the Petition for Exoneration must be granted, with costs.

The libel of the Exner Sand & Gravel Corporation, as owner, against Gallagher as charterer, must be disposed of on the theory that the charterer Gallagher has gone forward with proof of freedom from negligence which would otherwise be presumed from the failure to return in good order and condition, since the only negligence attempted to be shown was that of the Wrestler. Her negligence would be attributed to Gallagher (White v. Upper Hudson Stone Co., supra; The E. T. Halloran, 2 Cir., 111 F.2d 571), and since her freedom from the negligence specified is deemed to have been established, such a finding necessarily operates to exonerate Gallagher from the prima facie showing arising from failure to redeliver, etc. Thus the libelant Exner has failed to sustain the burden necessary to the maintenance of its cause, and the respondent Gallagher is entitled to a decree of dismissal with costs. See: Alpine Forwarding Co. v. Pennsylvania R. Co., 2 Cir., 60 F.2d 734; The Roslyn, 2 Cir., 93 F.2d 278 at page 281.

Settle decree in accordance with foregoing.