author: CAMPBELL, District Judge.

text:
    THE J. R. BALDWIN et al. THE W. N. BAVIER. THE CORNELL 21.
    No. 13727.
    District Court, E. D. New York.
    March 17, 1934.
    Macklin, Brown, Lenahan & Speer and Carl F. Vander Clute, all of New York City, for libelant.
    Kirlin, Campbell, Hiekox, Keating & Mc-Grann and Robert S. Erskine, all of New York City, for claimant.
   CAMPBELL, District Judge.

The libelant seeks in this suit to recover for the barge Baldwin and her cargo- of hay as a total loss, from the steamtugs Bavier and Cornell 21, because of their alleged negligence in towing the barge Baldwin, in the Hudson river, through ice.

In the month of December, 1932, the libelant was the owner, and her husband, Stephen P. Miller, was the captain of the barge J. R. Baldwin, which was loaded with a cargo of hay at Castleton and Coxsackie, about two weeks being consumed in the loading.

The captain had charge of the operation of the boat.

On Tuesday, December 13, 1932, Capt. Miller, of the barge J. R. Baldwin, called up the Waterford office of the Cornell Steamboat Company, and after asking them if it would be safe for Thursday, and receiving the reply “sure,” made arrangements to be towed on Thursday.

On Thursday, December 15,1932, the tug W. N. Bavier left Albany with two light boats, a stick lighter and a manure scow in tow. At about 9:30 p. m. on that day, the assisting tug Cornell 21 picked up the Baldwin, at Coxsackie, and placed her in the tow of the Bavier as the starboard boat of the head tier. The Bavier had the tow on two short hawsers, one from the port bow comer of the stick lighter to the stem of the Bavier, the other from the middle bow bitt of the Baldwin. About thirty minutes after the Baldwin was placed in the tow, the Cornell 21 placed the loaded brick scow Empire 15 in the tow, under the stem of the Baldwin. The Empire 15 was placed in the tow off Pine Grove, which is on the west side of the Hudson river, about midway between Coxsackie and Athens. The captain of the Baldwin and his assistant Finkel were clearly wrong when they fixed the time of the placing of the brick scow Empire 15 in the tow as about 9 o’clock the next morning.

At the time the Baldwin was placed in the tow there was no ice in the river at Coxsackie.

After the Empire 15 was placed in the tow, the Bavier proceeded down the river with her tow on hawsers, the two light scows in tow on the port side and two loaded scows in tow on the starboard side, the Baldwin being the starboard hawser boat. When not engaged in taking out of, or putting boats in the tow, the Cornell 21 pulled alongside of the port side of the Bavier, and the Bavier slackening her port hawser brought the Bavier ahead of the Baldwin, and the CorneE 21 ahead of the stick lighter. When the CorneE 21 was not puEing alongside the Bavier, the Bavier with her hawsers even was ahead of both of the hawser boats, her stem being in the center of the two boats.

The next morning, December 16, 1932, after daylight, when above Kingston, the tug with her tow encountered broken ice that had formed that night in bunches, as is the eus'tom with the first ice that freezes, as the tide will carry it, and it is formed together by the tide.

The captain of the Bavier saw nothing in the ice condition at that time that caused him to believe there was danger in continuing down as they were going.

One of the light boats on the port side was taken out at Kingston and another light boat was put in the tow on the port side, thus leaving the tow as it was before, two loaded boats on the starboard side and two light boats on the port side.

When between Poughkeepsie and the Meadows Light, the witness Finkel, who was employed on the Baldwin, went forward and sounded her and found 11 inches of water in her.

The Baldwin was then in the ice.

He hád sounded the Baldwin about a couple of hours before that and found only 3 inches, which would be about the ordinary sounding.

He went into the hold and found a seam, the oakum, and the plank cut.

In order to get at it, he had to cut a hole in the lining. He went aft and fetched an ax, saw, and auger to cut out the ceiling.

Finkel having reported the leak to him, Miller, the captain of the Baldwin, called the tug Bavier, with the result that the No. 2L was sent back alongside the Baldwin.

About 1 o’clock p. m¡, Master Tucker, Pilot Tucker, Deckhands Hines and Van Wagner, and the cook of the No. 21 went aboard the Baldwin and down in her hold. The master of the No. 21 found a crack right close to the seam, and there were two wedges, each about 10 to 11 inches long by about 3 inches wide, made of wood, which had been driven in. Finkel, of the Baldwin, testified that he drove the wedges in when he discovered the leak.

They did not fill up the crack, so they pulled them out, filed up the crack, where the seam was open, with a lot of old rags and other stuff, and put a board patch on with a piece of timber across the patch, and drove wedges over that to the ceüing to hold it.

This was better than a brace, as there was no place to put a brace. This practically stopped the leak.

AE who worked on the patch and Finkel of the Baldwin, whose captain, Miller, did not go down and look at the patch, thought that the boat was all right, as she could easEy take care of the little water she would make, and neither the captain of the Baldwin, nor Finkel, requested that any change be made in the position of the Baldwin in the tow.

When the tow arrived off Poughkeepsie, the No. 21 put a boat in the tow.

While there is a conflict in the evidence, I am convinced that the captain of the Baldwin did not teE the No. 21 that the Baldwin was leaking again, and that it would be better to drop her astern of the other boat; on the contrary, the Baldwin could take care of any water that came in, and was aE right.

The tow continued on down the river below Poughkeepsie and the ice disappeared.

Later, Finkel found considerable water in the sounding pipe and went below and discovered that the patch had broken off, and that the water was coming in in the same place.

He sounded her and found about 14 or 15 inches of water, and tried to pump her. He then sounded again and found 18 inches. He then pumped for 10 minutes, and went into the hold and found 2 feet of water.

The gasoline pump was running all the time and the water was gaining on the pumps. Finkel then went aft and packed up his satchel in readiness to go ashore, if it became necessary. The Baldwin then took a list to starboard and the Bavier blew an, alarm, blowing 4 or 5 minutes, and rounded up and called the captain of the Bavier, and he jumped on the Baldwin and dropped the brick scow from behind the Baldwin, so that when they got into the dock they could puE the Baldwin out of there.

No signal was given by any one on the Baldwin to the Bavier.or the No. 21, when the patch came off, and those on the Bavier and the No. 21 knew nothing about the patch coming off or the Baldwin making water untE the Baldwin took a sudden list.

It was then too late to use a siphon.

The Bavier hung up the rest of her tow at MEton, and took the Baldwin to Marlboro, where she tied the Baldwin up at the Rosoff dock.

The Baldwin had listed and dumped part of her cargo before that time, and when tied up at Marlboro she had listed well over on her side, but some of the hay was not wet, and neither boat nor cargo was a total loss.

In tying up the Baldwin at Marlboro, the Bavier acted in the best interest of the barge, and left her in the best and only place available.

From the time the patch came off, the captain and his helper Finkel, of the Baldwin, in effect did nothing to in any way minimize or prevent further damage and after the barge was landed at Marlboro, they abandoned both boat and cargo.

The place of the break on the Baldwin was about 3 inches below the water line.

The errors in the evidence of the captain and his helper, of the Baldwin, as to the time the brick boat was landed in the tow, the thickness of the ice, and the requests to change the position of the Baldwin in the tow, materially affect the weight of their evidence.

The mere fact that the Baldwin was damaged is not sufficient to render the tug liable, as negligence on the part of the tug must be shown, and the burden rested on the libelant to prove that the damage complained of resulted from the specific acts of negligence alleged. The Bear (D. C.) 11 F.(2d) 607, affirmed without opinion, Clark v. The Bear (C. C. A.) 11 F.(2d) 608.

That the damage was caused by ice is but an inference, as no shock, no grinding sound, and no other indication of ice contacting with the Baldwin is shown.

"With the tugs on short hawsers as described, they certainly by their quick water broke a larger lane through the ice than their width.

The place of the cut out seam and plank on the Baldwin was not immediately on the bow but a short distance aft of the round of the bow a place where there would have been the same danger from ice wherever towed.

This was a fleet tow and in sending the Baldwin in such a tow, the owner assumed some risk.

The Baldwin was an old boat 68 or 69 years old, but apparently in good shape and no notice of any weakness of the boat was given to the tugs.

The libelant contends that in the ice the boats should have been singled out, but with the beam of the Bavier 21.5 feet, and the Baldwin 32 feet, it would seem to me that the Baldwin would not have been in a safer position.

The ease of Daly v. Pennsylvania R. Co. (D. C.) 257 F. 761, cited by libelant, is not in point, as it involved towage of a fleet through heavy solid ice, the tugs not being side by side.

The following eases cited by libelant, The Bern (C. C. A.) 213 F. 630, The Tug Bear (D. C.) 11 F.(2d) 607, 1925 A. M. C. 443, and The Rambler (D. C.) 66 F. 355, are not in point, as they involve the towage of single boats alongside the tug in heavy ice, or at night, and are thus distinguished.

I can see no reason for criticizing the navigation of the tugs by men of long experience, who thought that the tow was properly made up. The Edwin Terry (C. C. A) 162 F. 309, The Hercules (C. C. A.) 213 F. 615; The R. G. Townsend (C. C. A.) 278 F. 726.

Those on the Baldwin and the No. 21 thought it safe to continue the Baldwin in the head tier of the tow after the patch was put on, and judged in the light of all that transpired, and the failure of those on the Baldwin to signal the Bavier when the patch came off, it was fortunate that the Baldwin was where the Bavier could see her take the list.

The cases cited by the libelant to support her contention that the Baldwin, after first springing a leak, was entitled to more than ordinary care, are not in point, as there was nothing more the tugs could do, and notwithstanding the absolute lack of diligence and care by those on the Baldwin, it was due solely to the observation and care of those on the Bavier that the Baldwin did not sink but was beached.

In fact all that was done by any one connected with, or owner of the barge Baldwin, after the patch came off, was a little pumping and the taking of a casual glance at her by her captain, from the dock, two days after the Baldwin was left at Marlboro.

The captain of the Baldwin never went below to see the extent of the damage to his boat, and both he and his helper abandoned the barge at Milton.

It seems clear to me that no liability can rest on the tugs for anything that happened after the patch came off, as due diligence on the part of the captain and his helper of the Baldwin required the giving of immediate notice to the tugs which would have given them an opportunity to put a siphon in her and keep her afloat, and certainly the tugs cannot be liable for any damages that happened after the Baldwin was landed at Marlboro, as she was abandoned by her captain and his assistant, who faded to exercise any care over her. The J. G. Rose (C. C. A.) 9 F.(2d) 917.

I conclude that the libelant has failed to show by a fair preponderance .of the evidence that the steamtugs W. N. Bavier and Cornell No. 21 were guilty of any negligence, and that they are wholly without fault.

A decree may be entered in favor of the claimant of said steamtugs against the libelant, dismissing the libel with costs.

If this opinion is not considered a sufficient compliance with rule 46% of the Rules in Admiralty (28 USCA § 728), proposed findings of fact and conclusions of law in accordance with this opinion may be submitted for the assistance of the court, as provided by the rules of this court.


source: Caselaw Access Project

author: KIRKPATRICK, District Judge.

license: Public Domain

text:
    BELBER TRUNK & BAG CO. v. UNITED STATES.
    No. 16874.
    District Court, E. D. Pennsylvania.
    Jan. 26, 1933.
    Chase Morsey, of St. Louis, Mo., and Milton H. Belber and Robert T. McCracken, both of Philadelphia, Pa., for plaintiff.
    Thomas J. Curtin, Asst. U. S. Atty., and Edward W. Wells, U. S. Atty., both of Philadelphia, Pa., and Ralph E. Updike, Atty. in General Counsel’s Office, and E. Barrett Prettyman, Gen. Counsel, Bureau of Internal Revenue, both of Washington, D. C., for the United States.
   KIRKPATRICK, District Judge.

This is a suit to recover-an alleged overpayment, amounting to $60,016.86, of income and excess profits taxes for the taxable year 1918. The tax was assessed and paid after the expiration of the statutory period of limitation, and the plaintiff bases its claim upon section 607 of the Revenue Act of 1928 (26 USCA § 2607), which provides that any tax assessed after such time shall be considered an overpayment.

The first defense is that the plaintiff by written agreement waived the limitation period, and the first question is as to the validity of the waivers. The second defense is that the plaintiff, subsequent to the assessment, gave bond to stay immediate collection of the tax by distraint, and the second question is whether the giving of the bond extinguished any right the plaintiff may have had at that time.

The facts are substantially as follows:

The plaintiff’s return for the taxable year 1918 was filed on June 16, 1919'. The period of'limitation under the law at that time with-m which the assessment could legally be made by the government expired at the end of five years or on June 16,1924. Before that date the period was extended for another year, or to June 16,1925, by what may be referred to as the first waiver, admittedly valid and effective.

The limitation period so extended expired without any new waiver having been filed and without any assessment having been made. Two months after its expiration on August 18,1925, in response to a letter from the Commissioner of Internal Revenue, the plaintiff filed a second waiver extending the period to December 31,1926. On January 13,1926, in response to another letter from the Commissioner, the plaintiff filed a third waiver which by its terms also extended the period of limitation to December 31,1926, the same date as fixed by the second waiver, already filed.

On December 18,1926, and within the limitation period covered by the second and third waivers, the Commissioner assessed additional income and profits taxes and interest against the plaintiff for the year 1918 in the total amount of $84,467.27. $24,450.41 has been either abated or collected by means of credits and is not involved in this suit.

On April 20, 1927, the plaintiff, under threat of immediate proceedings to collect the balance or $60',016.86, gave bond to the collector and obtained an extension of the time for payment, agreeing to make payment in monthly installments of $5,000 each, which payments were duly made and the total amount paid on or before September 20, 1928.

In January, 1929, the plaintiff filed claims for refund, which claims were rejected in March, 1929'. Thereupon this suit was brought.

The fact that the second waiver was given after the expiration of the statutory period (as extended by the first waiver) does not impair its validity. Stange v. United States, 282 U. S. 270, 51 S. Ct. 145, 75 L. Ed. 335. If obtained by duress or fraud, it would be void. The plaintiff does not suggest that there was any duress, but does contend that it was obtained by suggestions amounting to fraudulent misrepresentations contained in the Commissioner’s letter of August 14, 1925, in reply to which it was sent. This contention calls for further findings of fact which I make as follows:

The letter of the Commissioner in response to which the second waiver was sent was as follows:

“Reference is made to your income and profits tax returns for the calendar years 1917 to 1919, inclusive.”

“The appraisal submitted by you to establish the March 1, 1913, value of your plant for depreciation purposes is under consideration and it is not believed that the examination of the appraisal nor the audit of your returns will be completed prior to the statutory period of limitation. In the event the final audit of your returns discloses overassessments, in order to protect your interests it will be necessary that you immediately file claims for refund with the Collector of Internal Revenue for your district.”

“In the event deficiencies in tax are disclosed in order that the interests of the Government may not be jeopardized you are requested to execute and return to this office within ten days from the date of this letter, the enclosed form of waivers.”

When the plaintiff received this letter, it was engaged in a dispute with the government about its 1918 taxes. It had had an appraisement made of all its property with a view to showing its value as of March 1,1913. In its brief the plaintiff says: “Plaintiff thought that this appraisement contained sufficient information to convince the Government that its contentions were correct that there was no additional tax due. The appraisement was so complete in every detail that as a matter of fact it was thought that there might be a refund coming to plaintiff on account of having overpaid its taxes for this year. This was the state of plaintiff’s mind in August 1925.”

There is no doubt that the second sentence of the Commissioner’s letter strongly suggests that the statutory period of limitation had not expired when the letter was written, and it is not unlikely that the Commissioner knew that it had. But the plaintiff also knew it. Even if the president of the company, who signed the second waiver, was ignorant of the date of the filing of the return, he certainly knew that he had already filed the first waiver which extended the statutory period to June 16 1925, and no longer, because he himself had signed and sent it. He may have failed to keep a copy, and he may have forgotten all about it. That is quite a different thing, however, from saying that it was a fact of which he had no knowledge. A deliberate waiver cannot be invalidated by the party signing it because of fraudulent misrepresentations if the fact alleged to have been misrepresented was one of which he had full and accurate knowledge, and particularly where it related to the date of something which he himself did.

I therefore make the following finding of fact: The plaintiff's president, when he signed and sent the second waiver, knew that the period of limitation for the assessment of his 1918 taxes had expired.

In spite of the somewhat evasive character of his testimony on this point, I am inclined to think that the plaintiff's president was acting under legal advice when he filed the second waiver. At any rate he was at that time represented by counsel who were “filing additional protests to their assessments “ * * and asking for recomputation of * * * tax.” If, as the brief suggests, the plaintiff, advised by counsel, felt that there was a reasonable prospect of a refund, that might be a very good reason why it should wish to keep the controversy open rather than cut it short by standing upon its legal rights.

The conclusion reached as to the second waiver makes it unnecessary to consider the validity of the third waiver, but it may be pointed out that the letter in response to which the third waiver was given is entirely free from anything which might be called misleading. Assuming that the second waiver was valid (a matter entirely of law), the statement that “the statutory period within which the Commissioner may assess any additional taxes * * * will expire presently” could scarcely have caused any prejudicial misunderstanding. The letter sets out quite fully four points in' which the appraisal reports submitted by the taxpayer were believed by the Commissioner to be insufficient. I can find no misrepresented fact in it.

As to the bond- — the second defense: When the bond was given, the Commissioner was in a position to proceed at once to collect the entire tax. Even assuming that such action would have been illegal, the taxpayer would have been compelled to pay and would have been relegated to an action at law. By filing the bond the taxpayer obtained an extension of time which enabled it to pay in installments. As was pointed out in McCaughn v. Philadelphia Barge Company (D. C.) 37 F.(2d) 628, 639: “However, as soon as the bond was executed, the taxpayer assumed a second and entirely distinct obligation, and became subject to a new and entirely different kind of liability. * * * ” In U. S. v. John Barth Company, 279 U. S. 370, 49 S. Ct. 366, 367, 73 L. Ed. 743, the Supreme Court said: “The making off the bond gives the United States a cause of action separate and distinct from an action to collect taxes which it already had. The statutes now pleaded to bar the suit cannot be extended by implication to a suit upon a subsequent and substituted contract. The postponement of the collection of the taxes returned was a waiver of the statutory limitation of five years that would have applied had the voluntary return of the taxpayer stood and no bond been given. * * * To avoid the result usually ensuing from the return which he himself made, the taxpayer was permitted by a bond temporarily to postpone the collection and to substitute for his tax liability his contract under the bond.”

This taxpayer, or its authorized agent, after the statutory period of limitation had expired, on three different occasions and by three different instruments, waived the bar of the statute, and it is not an unfair assumption from his testimony that he was advised by counsel throughout. The first waiver was filed at a time when he expected that by keeping the controversy alive it might result in an abatement of some of the tax liability disclosed by his return. The second waiver was made while the controversy was still in progress, but in the face of definite advices from the government that his showing so far was insufficient. The third waiver took the form of a bond by which he obtained an extension of time for payment. So far as this record discloses, the only reason upon which he could be entitled to a return of the sum asked is that it was assessed too late. In view of his successive waivers, I do not think that he is in a position to recover.

The facts stated in the foregoing opinion may be taken as special findings of fact, together with the facts stated in the defendant’s requests, all of which are affirmed. The court denies the plaintiff’s request for findings of fact and conclusions of law, and exceptions are allowed.

Judgment may be entered for the defendant.


author: WAY, District Judge.

text:
    THE TYNEBRIDGE. NORTH OF ENGLAND S. S. CO., Limited, v. MUNSON S. S. CO.
    No. 5563.
    District Court, E. D. Virginia, Norfolk Division.
    Feb. 14, 1934.
    Hughes, Little & Seawell, of Norfolk, Va., for Munson S. S. Line.
    Kirlin, Campbell, Hickox, Keating & MeGrann, of New York City, and Baird, White & Lanning, of Norfolk, Va., for the Tynebridge and North of England S. S. Co.
   WAY, District Judge.

This controversy arises out of operations under a voyage Charter dated July 20, 1932, between the owners of the British Steamship “Tynebridge” and the Munson Steamship Line by which the Munson Line chartered that vessel for “One West Indies Round Voyage” from Norfolk or Newport News, Virginia. The Tynebridge is a vessel of 4,-360 gross, 2,711 net, tons, is 360 feet long, with a 52% feet beam and 27.6 feet draught.

A libel was filed by the Munson Steamship Line on September 24, 1932, which was after the expiration of the Charter, against the Tynebridge, seeking to recover back an over-payment of $560., made to the owners of the vessel on account of the Charter, which amount is admitted to be due and owing. On the 12th. day of December, 1932, the owners of the Tynebridge filed a cross-libel against the Munson Line seeking to recover for damages alleged to have been sustained by the Tynebridge as a result of the Charterer’s sending the vessel to an alleged unsafe berth at Benito Juarez wharf, Progreso, Mexico, to take on a cargo of 11,550 bales of sisal hemp, destined for South Plymouth, Massachusetts. The pertinent provisions of the Charter Party here under consideration, are:

“Vessel * * * to be employed, in carrying lawful merchandise, * * * between safe port and/or ports in the United States of America, and/or West Indies, and/or Central America, and/or Caribbean Sea, and/or Gulf of Mexico and/or Mexico and/or South America, not south of Cayenne, but excluding * * * all unsafe ports; * * *

“6. That the cargo or cargoes be laden and/or discharged in any dock or at any wharf or place that the charterers or their Agents may direct, provided the vessel can safely lie .always afloat at any time of tide, except at such places where it is customary for similar size vessels to safely lie aground.”

The Tynebridge arrived off Progreso, from Martinque, August 26, 1932> in ballast, and was boarded by an official Pilot. At the time of arrival the vessel was drawing about 14 feet of water. The official Pilot before attempting to take her to Benito Juarez wharf, some two or three miles distant, inquired of the Master of the Tynebridge as to her draught, and upon the Master’s informing him that it was about 14 feet, advised the Master that it would be necessary to pump out ballast, so as to reduce the vessel’s draught before she could safely proceed to the wharf. Following that advice by the official Pilot, the Master caused ballast to be pumped out until the vessel’s draught was reduced to 11 feet 8 inches. The Tynebridge under the guidance of the Pilot, then proceeded to the wharf and tied up, without grounding or sustaining any injury as a result of that movement.

The loading of sisal was thereupon commenced and continued, with short interruptions, until about 3:40 P. M., August 31st, at which time the Tynebridge had taken on 9,679 bales. While the Tynebridge was tied up at the wharf soundings were taken by her Chief Officer, pursuant to the Master’s orders, twice and sometimes three times, daily, and the lowest depth shown by any of the soundings was 12 feet 6 inches. It was customary for vessels of 2,500 tons and over safely to lie aground at low water, while loading at Benito Juarez wharf. During the time the Tynebridge was tied up at the wharf she was shifted by her crew on two occasions, along the wharf for short distances seaward, apparently without grounding.

The tonnage and draught of the Tynebridge was slightly in excess of that of any other vessel shown to have loaded at the wharf in question, the next largest being of 4,301 gross tons and a draught of 23.6 feet. Two other vessels of 4,155 gross tons each, and numerous vessels of between 3,000 and 4,000 gross tons are showji to have safely loaded cargo at that wharf. However, I do hot consider the fact that the Tynebridge was slightly larger than the other vessels as at all decisive of the ease, since, whether a vessel of her size and tonnage went aground or remained afloat at Benito Juarez wharf, depended almost entirely upon the quantity of ballast and cargo which it had aboard.

It was contemplated by the representative of Munson Line at Progreso and the Master of the Tynebridge that as much of the cargo as could be safely loaded at the wharf would be taken on there and that the vessel would then proceed to the anchorage outside to finish loading. I think it is clear from the circumstances disclosed by the testimony that the quantity of cargo which could be taken on safely by the Tynebridge at the wharf, was left to the judgment of the Master and officers of that vessel, although in his testimony the Master denies that.

At 3:40 P. M., August 31st. when the Tynebridge stopped loading at the wharf, her draught had increased from 11 feet 8 inches to 12 feet 1 inch forward and 11 feet 11 inches aft, as indicated by soundings taken by her First Officer. The tide was then ebb and the Master of the Tynebridge, not considering it safe at that time to attempt to undock and proceed to the anchorage outside the harbor, postponed that maneuver awaiting higher water.

The official Pilot went aboard the Tynebridge shortly after four o’clock on the morning of September 1st. for the purpose of piloting the vessel from the wharf to the anchorage where she was to finish taking on cargo, but the representative of the Munson Line did not go to the wharf until 6:30 or 7 o’clock that morning.

When the vessel’s engines were first started, which occurred about 4:20 A. M., it became apparent almost immediately that the Tynebridge was partially aground forward, so that instead of backing out from the wharf her stem was merely swinging away from and then towards the wharf while the bow remained stationary. The tide was then rising and the depth of water at the wharf increasing, and it was or should have been apparent to the Master of the Tynebridge that if he waited until later in the day when the tide was high the work of getting his vessel away safely, would be greatly simplified and danger of damaging the vessel’s machinery and hull by such movement eliminated. However, the Master, without waiting longer for higher water and on his own responsibility, undertook to force the vessel off ground, by use of her engines and continued such efforts for approximately two hours. It appears from the Master’s testimony that as early, as 6:40 A. M., the official Pilot advised him to discontinue his efforts to get the vessel off, until the water was higher. With respect to that the Master testified : “The pilot asked me to stop. He said, 'Captain, its no use. You will have to wait now until about twelve or one o’clock until the water comes up.’ ” In disregard of the official Pilot’s advice, the Master thereafter worked his engines from 9:05 until 9:30', from 11:05 to 11:15 and again at 11:30. At 12:20, which was about the time indicated by the official Pilot, the vessel was floated and proceeded safely to the anchorage grounds. There the vessel finished taking on cargo, and later proceeded to South Plymouth, Massachusetts, discharged her cargo, and from South Plymouth proceeded to Newport! News, Virginia, and was placed in drydock for overhauling, which cross-libelant contends was rendered necessary as a result of the vessel’s being aground at Progreso.

It appears from the testimony of crosslibelant’s witnesses that the Tynebridge was, prior to going in drydock at Newport News, left in drydock at Barry, England, in February, 1932; that after leaving drydock at Barry the Tynebridge took on a cargo in England and proceeded to Martinque, where the cargo was discharged; from.Martinque to the Port of Spain, Trinidad; from Trinidad to Galveston, Texas; Galveston to Patras, Greece, thence to Suda Bay and Salónica; from Salónica to Poti, a Russian port in the Black Sea; from Poti, to Baltimore; from Baltimore, to Norfolk; from Norfolk to Martinque, and thence to Progreso, Mexico.

In his testimony, the Master of the Tynebridge claims that on September 2, 1932, before leaving Progreso, he delivered a written protest to the representative of the Munson Line with regard to the alleged damages, notifying Munson Line that it would be held responsible therefor. The Munson Line representative at Progreso emphatically denies that any protest or claim was made by the Master. It is significant that the alleged written protest which the Master testifies he handed to the Munson Line representative at Progreso on September 2, 1932, was still in the Master’s possession and was offered as an exhibit with his deposition taken at Baltimore January 26, 1933. Under all the circumstances, the Court has concluded that the alleged protest is the result of an afterthought, and that no protest, either oral or written, was ever made at Progreso by the Master.

In the testimony and arguments some stress has been laid upon the fact that Benito Juarez wharf was completely exposed to wind and weather. While that is a fact appearing in the case, it is also equally true that the weather was calm while the Tynebridge was at Progreso and that no damage was occasioned as a result of the exposed position of the wharf.

It is urged by cross-libelant, in substance, that the berth at Progreso was unsafe and that as a result of the Tynebridge’s being aground there and of efforts necessary to get her afloat, her engines were strained and fouled, her machinery damaged, and her hull scarred and dented, and that under the provisions above quoted from the time Charter, libelant is responsible for such damage. I think it is clear that her being partially aground did not in itself occasion any damage, but that the damage, if any, both to engines and machinery and to the hull, resulted from the efforts of the Master to get her afloat.

Some of the authorities relied on to support cross-libelant’s contention will be reviewed.

In Carroll v. Holway (D. C.) 158 F. 328, a schooner was damaged as a result of resting on the bottom at low tide. It was found that the bottom of the dock was hard, and that where the vessel’s ’midships came, the water was 5 feet deeper than at her stem and 4 feet deeper than at her stem, and in Sterns Lumber Co. v. John H. Rice Co. (D. C.) 260 F. 434, it was disclosed that the .schooner at low water had rested on a gravel, hard bottom, containing many cobble stones and a boulder about a foot in diameter. The water where the bow had rested was 8.5 feet deep and where the stem had rested, 7.8 feet deep, while it was 10.9 feet deep at ’midships.

In Crisp v. U. S., etc., S. S. Co. (D. C.) 124 F. 748, the Charter Party provided that the wharf for discharging must be “where the ship can always safely lie afloat” at any time of tide. While passing through a draw bridge in approaching the dock, the vessel struck upon some obstructions under the water, causing delay and expense, which it was held should be borne by the Charterer and not by the owners.

In Constantine, etc., S. S. Co. v. West India Co. (D. C.) 199 F. 964, the Charter Party provided that the vessel was to be taken to docks where she could “lie always afloat,” and the vessel was injured because of the shallowness of the water.

In Merritt v. Sprague (D. C.) 191 F. 627, the agreement required the Charterer to “guarantee a safe and suitable berth for loading and discharging, with sufficient water for reaching it and lying therein safely.” The testimony as to the condition of the berth’s being highly conflicting, an expert was appointed by the Court to examine the berth and reported that the bottom was very hard and stoney, and that the bed of the river uncovered at low tide both above and below the berth, was so thickly covered with cobble stones that 50 feet away, it looked like an old fashioned gutter with cobble stones. A diver employed by the expert found in the berth at a point where the vessel had rested a boulder estimated to be 4 feet by 6 feet at the top with a rise of from 18 to 24 inches, and in addition numerous smaller boulder-like rocks.

.In Look v. Portsmouth, etc., Ry. (D. C.) 141 F. 182, the owner of the dock, as agent for the consignee, a street railway company, had charge of discharging a cargo of coal from the vessel damaged. During that work, to avoid expense, he moved the vessel to such a position that its headgear projected over feed wires of the street railway. Neither the Master nor the consignee’s agent had actual knowledge of the danger. While so moored, the vessel’s chains came in contact with the feed wires and the vessel was thereby set afire.

It seems to me that the facts of the instant case are clearly distinguishable. Here, the Master of the Tynebridge knew before he left anchorage on August 26th, that the water at Benito Juarez wharf was shallow, and he remained constantly advised, while there, of its depth through frequent soundings taken by his First Officer. The increase in the vessel’s draught as she continued to load was known to him, and the quantity of sisal which could safely be taken on at the wharf left to his judgment. Apparently more cargo was taken on than was advisable, unless the Master intended to wait until flood tide was at its maximum before attempting to leave the wharf. He knew almost immediately after the engines were first started (about 4:20 on the morning of September 1st.) that the water was still too shallow for the Tynebridge, with the cargo she had aboard and with due regard to her safety, to attempt at that time to shift to the anchorage grounds, and admits that the official Pilot advised him to that effect as early as 6:40 A. M. Certainly, no one could have been more aware than the Master was, of the danger of damaging and fouling the vessel’s engines and machinery, and injuring the hull, incident to such efforts. Upon the whole ease, I am of the opinion that the damages alleged did not result from taking the Tynebridge to an unsafe berth, but that they are clearly referable to the action of the Master, initially in loading too much cargo to move from the wharf safely, except at high tide, and afterwards in failing or refusing to wait until the water was of sufficient depth to enable him to move in safety.

A decree in favor of Libelant for $566. and dismissing the cross-libel will be entered upon presentation.


author: McCLINTIC, District Judge.

text:
    DEITZ v. UNITED STATES.
    No. 2690.
    District Court, S. D. West Virginia.
    Dec. 12, 1933.
    Price, Smith & Spilman, E. J. Goodrich, and Frederick L. Thomas, all of Charleston, W. Va., for petitioner.
    Okey P. Keadle, Asst. U. S. Atty., of Huntington, W. Va., and J. W. Hussey, of the Department of Justice, of Washington, D. C., for the United States.
   McCLINTIC, District Judge.

Petitioner, T. A. Deitz, on the 30th day of January, 1930, filed his petition, alleging his citizenship and residence to be in Charleston, Kanawha county, W. Va.; that his claim was for the recovery and refunding of certain income taxes, amounting to $5,568.99, which he claimed were improperly and illegally assessed against and collected from him in excess of his true and correct liability for the year 1920, and in addition claimed interest on such sum; that he had filed a correct return on or about the 14th day of April, 1921, and paid in full the correct amount of taxes due on his income for 1920; that the Commissioner of Internal Revenue, on the 13th day of April, 1926, made an additional assessment of the amount claimed by petitioner, as set out above, and he paid that sum under protest on the 29th day of July, 1926; that petitioner filed his claim for a refund thereof, which claim was rejected; that no part of said sum has been repaid; that petitioner is the sole owner of said claim; that he has at all times borne true allegiance to the government of the United States in every way; and that this action was instituted within five years after the payment of the moneys herein sought to be recovered. The respondent demurred to petitioner’s petition and the demurrer being overruled, respondent pleaded the general issue.

The additional assessment sought to be recovered, resulted from the inclusion in petitioner’s taxable income, for the year 1920, of the sum of $20,000 claimed by respondent to have been received by petitioner as a cash dividend from Lake & Export Coal Corporation, a West Virginia corporation, the circumstances being as follows:

Deitz, at some date prior to the 1st day of April, 1920, had subscribed and paid for 100 shares of the capital stock of said' Lake & Export Coal Corporation, of the par value of $100 per share. This company was engaged in the coal sales business. According to the testimony, it was doing a very large business for its small capital. To those of us who remember the hectic year 1920, when the prices of coal went beyond all reason, up to the latter part of November, 1920, when the inevitable crash came, it is easy to grasp the fact that capital and credit were needed for the business that this colnpany was doing.

Witness Hyman graphically described this business and the 'amount thereof, and likewise the sad ending of this “Mississippi bubble.”

On the 1st day of April, 1920, or at some time near that, a stock dividend was declared in the amount of $200,000 thus increasing the capital stock to a gross amount of $300,000. There were filed as exhibits Nos. 1 to 5, inclusive, with the evidence of witness Hyman, certain alleged copies of the minutes of the stockholders’ and directors’ meetings of the company. Most of the resolutions of these minutes relate to the question of salaries or compensation of the officers and employees of the company; but one, that is, a meeting of the board of directors, purported to authorize this stock dividend and a certificate for 200 shares was sent to petitioner Deitz. Later, he gave his daughter, Eva Deitz Sydnor, 165 shares of this stock, and to her husband, witness L. W. Sydnor, 120 shares thereof, and only retained 15 shares for himself. Witness Hyman, treasurer of the company, employed a claimed expert from some tax division in Washington to advise and write iip the books of the company. According to the testimony, this expert had no difficulty in getting three different, full, and complete statements from the books, each of which could be justified by the entries on the books.

It is conclusively shown by the evidence that while certain checks were written (including one for $20,000, to petitioner Deitz), it was never intended that they should be delivered or paid, and none of them were ever actually in good faith delivered. A check to Deitz was sent to him by witness and Treasurer Hyman solely for the purpose of having the same indorsed by petitioner with specific instructions that if Deitz should refuse to indorse the cheek, it was to be returned to Hyman without indorsement. This method was somebody’s idea of declaring a stock dividend. It seems that after the declaration of the stock dividend, the transaction was set up on the books of the company by crediting each stockholder’s account with his respective amount thereof. In order to balance these accounts, some one conceived the idea of having cheeks of the company written in the respective amounts of the credits so made, requiring the cheeks to be indorsed and returned to the company. The sham was carried further by putting these “make-believe” cheeks through the bank in some way so as to show the same on these three-way books.

Certain facts stand out clearly: (1) The Lake & Export Coal Corporation never paid a cash dividend to any of its stockholders during its existence; (2) the transaction involving the issuance of the cheek in plaintiff’s name was merely a poor bookkeeping method of consummating the issuance of a stock dividend; and (3) plaintiff Deitz never got a red cent from the company as a cash dividend or in any other form, and in addition lost the $10,000 he originally invested in the stock of the concern.

From the- evidence, I have found the following facts, to wit:

First. The allegations in petitioner’s petition filed herein have been proven and are true.

Second. That the petitioner is a resident of the city of 'Charleston, Kanawha county, W. Va., a citizen of said state and of the United States, and has at all times borne true allegiance to the government of the United States, and has not in any way voluntarily abetted, aided, or given encouragement to rebellion against the said government.

Third. That said petitioner paid to the collector of internal revenue at Parkersburg on July 29,1926, an additional assessment of income tax assessed against him for the year 1920 in the amount of $5,459.79', and interest thereon amounting to $109.20 making a total payment of $5,568.99'; that said payment was made under protest, and a claim for refund therefor filed by petitioner at the time of payment, which claim for refund was rejected by the Commissioner of Internal Revenue on the 18th day of September, 1926; that said claim for refund is in proper form, filed within the proper time, and this suit brought to recover said payment within five years from the date the same was made, and all other steps in connection with said payment, necessary to enable petitioner to bring suit for the recovery thereof, were duly and regularly taken and had in conformity with the laws, rules, and regulations governing the same.

Fourth. That said additional assessment of income tax, so paid by petitioner, was determined by the Commissioner of Internal Revenue of the United States because of his inclusion, in petitioner’s taxable income for the year 1920, of the sum of $20,000 alleged to have been received by petitioner as a cash dividend from the Lake & Export Coal Corporation, a corporation organized and then doing business under the laws of the state of West Virginia.

Fifth. That petitioner did not receive a cash dividend from the said Lake & Export Coal Corporation in the amount of $20,000, nor in any other amount, during the year 1930, and did not receive from said corporation any other taxable income or other thing of value upon which said additional assessment of income tax sought to be recovered in this cause could have been made, and the amount so paid by petitioner and herein sought to be recovered was erroneously assessed by said Commissioner of Internal Revenue against the petitioner, and erroneously collected from him.

My conclusion of law from the foregoing finding of facts is that petitioner is entitled to judgment for the amount stated above, $5,568.99, with interest at the rate of 6 per cent, per annum from July 29, 1926, until paid, according to law. I find that the evidence of Deitz, Hyman, and Sydnor is admissible to prove what actually took place, and that the alleged minutes and books are very materially, if not entirely, discredited.


text:
    UNITED STATES v. HARDY et al.
    No. 1403.
    District Court, S. D. West Virginia.
    Nov. 21, 1933.
    Okey P. Keadle, of Huntington, W. Va., and R. S. H. Dyer, of Washington, D. C., for plaintiff.
    Hawthorne D. Battle, of Charleston, W. Va. (Price, Smith & Spilman, of Charleston, W. Va., on the brief), for defendants.
   McCLINTIC, District Judge.

This is a suit filed by the United States of America to recover the sum of $19,962.52, together with interest thereon, from the defendants, Waller C. Hardy, Henry L. Terrie, James R. Harris, and C. Drummond Jones. The cause of action arises out of the alleged failure of the Harris-Hardy Company, a West Virginia corporation in which these defendants were stockholders, to pay certain income and profits taxes assessed against it for the year 1918. The facts are as follows:

Early in September, 1916, Waller C. Hardy, a resident of the city of Charleston, W. Va., and James R. Harris, a resident of the city of St. Louis, Mo., through certain business and social connections, secured from the Annheuser-Buseh Brewing Association the exclusive sales agency for “Bevo,” a new near beer malt beverage recently put on the market, for all counties in West Virginia, excepting only the counties of Wayne, Cabell, Putnam, Lincoln, Mason, Jackson, Roane, Marshal, Ohio, Brooke, and Hancock. In order to acquire this contract, Harris and Hardy agreed to provide the sum of $100,000 to finance the business. Whereupon, on September 26, 1916, these parties caused to be organized, under the laws of the state of West Virginia, the Harris-Hardy Company, with an authorized capital stock of $200,000, composed of 2,000 shares of common stock of a par value of $100 per share. Of the capital stock of the company, $69',900 was immediately subscribed for at its par value by parties other than Mr. Hardy and Mr. Harris. These subscriptions were later paid in cash.

At a meeting 'o'f the stockholders of the Harris-Hardy Company held on September 26, 1916, and at a meeting of the directors of the company held on October 4, 1916, the company agreed to purchase this exclusive sales contract for “Bevo” owned by Harris and Hardy for the sum of $100,000 to be paid for by the issuance and delivery to each of them of $50,000 par value of the common stock of the company. This purchase was consummated immediately, and the agency contract was set up upon the books of the company at $100,009. The fair market value of this agency contract, which was assignable, at the time it was transferred to the Harris-Hardy Company by James R. Harris and Waller C. Hardy, was at least the sum of $100,000.

In the early part of the year 1918, the Harris-Hardy Company also purchased, for a cash consideration of $15,000, a similar agency contract with Annheuser-Buseh Brewing Association for the sale of “Bevo” in certain counties in Southwest Virginia.

From its inception, the sole business of the company was the sale and distribution of “Bevo.” Its business proved highly profitable until September, 1918; $80 a share being returned to the stockholders. During the period of its operation, the company’s gross sales and gross profits were as follows:

The expenses of operation of the company from March 4, 1919, to June 9, 1919, were $4,481.96.

The stock of the company was closely held. However, some of it was sold for as much as $160 a share prior to September 1,1918.

On September 16, 1918, acting under the authority of the Lever Act (40 Stat. 276), the President of the United States issued a proclamation prohibiting the making of malt liquors, including near bear, for beverage purposes on and after December 1, 1918. The immediate effect of this proclamation was to destroy completely the value of the agency contracts of the Harris-Hardy Company with the Annheuser-Buseh Brewing Association for the sale of “Bevo,” which was a near beer. The issuance of this proclamation rendered these contracts unmarketable and destroyed the sole business of the company. Whereupon, on October 18, 1918, the board of directors of the company, by resolution duly adopted, declared that the contracts of the company with the Annheuser-Buseh Brewing Association had become valueless by virtue of the President’s proclamation, and directed that the entire value thereof be charged off the books of the company as a loss. At the time this was done, the President’s proclamation was for an indefinite time, and it appeared to the officers of the company that its contracts were permanently terminated. Such condition continued through the remainder of the year 1918.

During the month of December, 1918, the company sold no “Bevo,” nor engaged in any other business of any kind or character. This condition continued until March 4, 1919, at which time the President of the United States rescinded his proclamation prohibiting the making of malt liquors, including near beer, for beverage purposes. Whereupon, the company again sought to market “Bevo” and continued to do so at a financial loss until June 9, 1919, when the company sold its agency contracts to John S. Dana for the sum of $15,000, and thereupon wound up its affairs and was duly dissolved under the laws of the state of West Virginia on June 9,1919.

On March 10, 1919, Waller C. Hardy, the president of the Harris-Hardy Company, completed its tentative tax return for the year 1918, and mailed the same to S. A. Hayes, collector of internal revenue for the collection district of West Virginia, at Parkersburg, W. Va., with a cheek for $600, being one-fourth of the estimated tax due, as shown on the tentative return. The tentative return was stamped “Received” in the collector’s office, March 11, 1919.

On April 12,1919, Waller C. Hardy, president, and Henry L. Terrie, treasurer, of the company, signed and swore to the final income and profits tax return of the company for the year 1918 before F. W. Johnstone, notary public. On said date, i. e., April 12, 1919, this final return, together with a letter of transmittal and a cheek for the sum of $2,786.20, representing the full amount of the balance due on the tax, as shown on the return, each dated April 12, 1919, were duly and properly mailed to S. A. Hayes, collector of internal revenue at Parkersburg, W. Va. At this time at least five trains, leaving Charleston at intervals over the 24-hour period, carried mail from Charleston to Parkersburg daily. Due to the fact that most of the returns for the year 1918 were not filed until the middle of April, 1919, there was at the time a large accumulation and congestion of the mail in the collector’s office at Parkersburg, so that it was impossible for the collector’s office force to open all the mail for several days. The return of the Harris-Hardy Company was stamped “Received” in the collector’s office on April 18, 1919, and was stamped by the cashier as “Received” on April 19, 1919. However, it is very significant that the cheek of the Harris-Hardy Company accompanying the return was deposited in the Parkersburg National Bank by the collector on April 18, 1919. The collector, though called as a witness, does not deny that this return was received in Ms office prior to April 18, 1919. The court finds as a fact that this final return of the Harris-Hardy Company was filed with the collector of internal revenue for the collection district of West Virginia, on April 13, 1919.

The subpoenas, which are a part of the record herein, were issued by the clerk of tMs court on April 14, 1924. The return of the Marshal for the Southern district of West Virginia shows that a subpoena was delivered to him at Charleston on April 17, 1924, and was, on said date, served on Waller C. Hardy and Henry L. Terrie. The return of the Marshal for the Eastern division of the Eastern judicial district of Missouri shows that a subpoena, issued in this proceeding, was executed on the 21st day of April, 1924, by the delivery of a true copy thereof to C. Drummond Jones personally, and that the defendant James E. Harris could not be found.

It was stipulated in this proceeding that the four defendants in this suit were stockholders of the Harris-Hardy Company at the time of its dissolution on June 9, 1919; and received from the assets of the corporation, as liquidating dividends, the following amounts: Waller C. Hardy, $10,514; Henry L. Terrie, $6,836 ; James E. Harris, $9,896; and C. D. Jones, $7,754. It was further stipulated that the net ineome of the Harris-Hardy Company for the year 1918 was the sum of $40,269.98, upon which the tax would be $15,622.95, subject, however, to the claim of the defendants of a loss of $115,000 asserted by them herein, which claim, if sustained herein, would wipe out the entire amount of the tax claimed by the plaintiff.

Upon the foregoing findings of fact the following questions are presented:

1. Whether the Harris-Hardy Company suffered a loss deductible from its ineome for the year 1918 on account of the alleged destruction of the value of its contracts with Annheuser-Buseh Brewing Association.

2. If such loss did not occur in the year 1918, whether or not the Harris-Hardy Company suffered such a loss in the year 1919 upon the sale of its said contracts in June, 1919, as to entitle it to deduct such loss from its ineome for the year 1918.

3. Whether or not the claim asserted herein by the United States is barred by the statute of limitations.

I shall now consider these contentions separately in their order:

The provision of the Eevenue Act of 1918 pertinent to the first contention is section 234

(a), 40 Stat. 1077, which provides as follows:

“That in computing the net ineome of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions: * * *

“(4) Losses sustained during the taxable year and not compensated for by insurance or otherwise.”

.The Treasury Department, in article 143 of regulations 45, relating to income tax and war profits tax under the Revenue Act of 1918, has construed this section of the act as follows: “Loss of Useful Value. — When through some change in business conditions the usefulness in the business of some or all of the capital assets is suddenly terminated, so that the taxpayer discontinues the business or discards such assets permanently from use in the business, he may claim as a loss for the year in which he takes such action the difference between the cost or the fair market value as of March 1, 1913, of any asset so discarded (less any depreciation sustained) and its salvage value remaining. This exception to the rule requiring a sale or other disposition of property in order to establish a loss requires proof of some unforeseen cause by reason of which the property must be prematurely discarded, as, for example, where an increase in the cost of or other change in the manufacture of any product makes it necessary to abandon such manufacture, to which special machinery is exclusively devoted, or where new legislation directly or indirectly makes the continued profitable use of the property impossible.”

In the case of Dean, Collector, v. Hoffheimer Brothers Co. (C. C. A. 6, 1928) 29 F.(2d) 668, 669, the facts showed that, as a result of the passage of the Pood Control Act (40 Stat. 273) and the imminence of prohibition, the taxpayer was compelled to close its distillery in September, 1917. Later, on May 2,1918, it decided to discontinue its business, the value of which was at that time $223,631.11. On June 29th of the same year, it charged off its books the sum of $140,152.32. The property was sold in April, 1919, for $25,000. In its ineome tax return for the year 1918, the appellee claimed as a loss the sum of $140,152.32 so charged off its books. This loss was disallowed by the Commissioner of Internal Eevenue, who contended that the loss, if suffered at all, occurred in the year 1919. The Circuit Court of Appeals in this proceeding affirmed the judgment of the District Court which sustained the action of the taxpayer in charging off such amount as a loss in the year 1918. The court in its opinion said: “The applicable Revenue Acts are the Act of 1916 (39 Stat. p. 756), as amended by the Acts of 1917 (40 Stat. p. 300) and 1918 (40 Stat. p. 1057). All of these acts permit a corporation to deduct from its gross income losses sustained during the taxable year not compensated for by insurance or otherwise if incurred in trade or business. We have been cited to no court decision construing these provisions with reference to a ease like this, but the Treasury Department, in article 143 of Regulation 45, quoted in the margin, has construed them as applicable to a loss resulting from new legislation which has made the continued profitable use of the property impossible. This, we think, is a fair interpretation. The regulation is even more authoritative as to methods of ascertaining the loss, since they are administrative functions with which the statute does not deal. And neither under the language of the regulation nor under the decisions of the Board of Tax Appeals (Dilling Cotton Mills, 2 B. T. A. 127, and Automatic Transportation Co., 3 B. T. A. 505) is it necessary that the fact or amount of loss be ascertained by sale. It may be ascertained by other means; and when so ascertained, as here, is, in our opinion, a completed loss deductible from the gross income for the year in which it was sustained. * * * ”

In the ease of Liberty Baking Co. v. Heiner, Collector (C. C. A. 3, 1930) 37 F.(2d) 703, 705, the right of the taxpayer to deduct as losses, under the Revenue Act of 1918, two separate items which are pertinent in the instant case, were considered by the court. The taxpayer had, in the year 1917, purchased an exclusive license for the use of a certain process for treating flour at a cost of $10,000. After some experiments, the process was permanently abandoned by the taxpayer in the year 1919. However, the taxpayer had in the year 1918 temporarily stopped the use of the process, but had again continued it in the year 1919. In regard to this item, the court held that the loss was sustained in the year 1919. It is to be noted that the loss so allowed was an intangible right which became useless. However, no sale thereof occurred.

The facts in regard to the second item considered were that in the early part of the year 1918 the plaintiff purchased a quantity of paper bread wrappers for use on loaves of the size prescribed by the United States Food Administrator during the war. In November, 1918, after the aimistice, the food regulation, prescribing the size of loaves of bread, was canceled, and plaintiff was compelled to enlarge the size of its loaves, with the result that the wrappers were too small, it being necessary to use two wrappers on each loaf of bread. The plaintiff charged off 50 per cent, of the cost of the wrappers on December 31, 1918, as a loss in the abandonment of wrappers. The District Court [34 F.(2d) 513] held that there was no deductible loss under the statute. However, the Circuit Court of Appeals reversed the finding in the District Court and sustained the action of the taxpayer in charging off 50 per cent, of the cost of the wrappers on December 31, 1918. The court, in its opinion, said: “The wrappers were purchased of the size prescribed by the government. Later the food regulations were canceled, which was a matter far beyond the control of the plaintiff. It was natural that the normal size of the loaf thereafter should govern, and a clear loss resulted to the plaintiff by reason of the change of conditions. It would seem to us correct for the plaintiff to charge off 50 per cent, of the cost of the wrappers on hand December 31, 1918, as a loss which it had sustained in that year.”

The right of the taxpayer to charge off as a loss the value of such intangible property as leases, copyrights, patents, and franchises has been frequently recognized. Greever v. Commissioner, 6 B. T. A. 587; Appeal of Adams Motor Co., 4 B. T. A. 589; Klein, Federal Income Taxation, page 494 and page 517.

A loss may be complete enough for deduction without the taxpayer’s establishing that there is no possibility of eventual recoupment. The Taxing Act does not require the taxpayer to be an incorrigible optimist. United States v. S. S. White Dental Mfg. Co., 274 U. S. 398, 47 S. Ct. 598, 71 L. Ed. 1120; Wheeling Tile Co. v. Commissioner (C. C. A. 4, 1928) 25 F.(2d) 455.

It clearly appears to the court that the contracts of the Harris-Hardy Company with the Annheuser-Buseh Brewing Association were of no value on December 31, 1918. At that time, the proclamation of the President which prevented the manufacture of “Bevo,” being the sole subject-matter of such contracts, was effective for an indefinite period. Under such conditions, clearly there would be no market whatever for a franchise right to distribute this product.

The contracts, although assignable, could not be sold for any price. The company recognized that such was the case, and, acting under the authority of its board of directors, charged off its books in October, 1918, the sum of $100,000. The contracts cost the company $115,000, of which amount $100,000 was charged off as a loss in 1918. This course was entirely justified, and, except for the unexpected rescission of the President’s proclamation, even the remaining part of the cost would never have been realized. In view of this situation, I am of opinion that the Harris-Hardy Company is clearly entitled to the deduction of the sum of $100,000 as,a loss in the computation of its income tax for the year 1918. Since the company’s net income for the year 1918, as stipulated herein, was $40,219‘.98, without this deduction, it necessarily follows that the allowance of this loss, in the amount of $100,000, wipes out such net income completely, and the tax based thereon.

In reaching this conclusion, I am not unmindful of the decisions of the Supreme Court of the United States holding that the destruction of the good will of a brewing concern resulting from the passage of the Eighteenth Amendment, and other prohibition legislation, does not create a deductible loss in the purview of the act. See Clarke v. Haberle Crystal Springs Co., 280 U. S. 384, 50 S. Ct. 155, 74 L. Ed. 498; Renziehausen v. Lucas, 280 U. S. 387, 50 S. Ct. 156, 74 L. Ed. 501. The basis of these decisions was that good will was not such property as is embraced in section 234 (a) (7) of the Revenue Act of 1918 allowing as deductions “a reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence.” In these eases, the taxpayer contended that the good will had become obsolete. The court held that the word “obsolescence” is limited by the phrase “exhaustion, wear and tear,” which latter phrase relates only to property having separate existence, distinct from the business itself; that good will was not subject to wear and tear, hence was not subject to obsolescence and was not within the purview of this section of the act. That these cases are so limited is shown by the later decision of Burnet v. National Industrial Alcohol Co., 282 U. S. 646, 51 S. Ct. 265, 75 L. Ed. 592, in which the Supreme Court sustained the allowance for obsolescence of buildings caused by the imminence of national prohibition. The eases consider solely the question of obsolescence, and, therefore, are hot pertinent to the facts under consideration in the instant case.

In view of my conclusion as to the first question of law involved, it becomes unnecessary to consider the second question relating to the right of the taxpayer to credit on its 1918 income the loss, if any, suffered by it in the year 1919. Of course, if the loss was suffered in the year 1918, as I have so found, it could not have occurred again in the year 1919. However, in passing, I call attention to the ease of Auburn & Alton Coal Co. v. United States, 61 Ct. Cl. 438, in which it was held that a loss for the sale of capital assets in the year 1919 could not be deducted from taxpayer’s income for the year 1918. Certiorari denied, 273 U. S. 714, 47 S. Ct. 107, 71 L. Ed. 854. To the same effect, see, also, Appeal of Manhattan Brewing Co., 6 B. T. A. 952.

The third question involved in this case is whether or not this suit is barred by the statute of limitations. Section 250 (d) of the Revenue Act of 1921 (42 Stat. 265) provides that “no suit or proceeding for the collection of any such taxes due under this Act or under prior income, excess-profits, or war-profits tax Aets, * * * shall be begun, after the expiration of five years after the date when such return was filed. * * * ” In view of my finding of fact that the income tax return of the Harris-Hardy Company was filed on April 13,1919, it clearly appears that the five-year statute of limitations contained in this act had expired when the praecipe was filed with the clerk of this court on April 14, 1924. No waivers were filed by any parties.

It has been stipulated in this proceeding that, if the court should be of opinion to uphold any of the contentions of the defendants herein, there is no sum due to the plaintiff by the defendants. It necessarily follows, therefore, from my views hereinbefore expressed, that there should be judgment for the defendants that there is no sum due to the plaintiff from the defendants.


author: GODDARD, District Judge.

text:
    THE VENUS. THE EMPIRE NO. 5. NEW YORK TRAP ROCK CORPORATION v. CORNELL STEAMBOAT CO.
    District Court, S. D. New York.
    Feb. 28, 1934.

      Bigham, Englar, Jones & Houston, of New York City (Andrew J. McElhinney, of New York City, of counsel), for libelant.
    Kirlin, Campbell, Hiekox, Keating & MeGrann, of New York City (Robert S. Erskine and Henry P. Elliott, both of New York City, of counsel), for respondent.
   GODDARD, District Judge.

This action was brought by the libelant, the New York Trap Rock Corporation, as charterer of the two deck scows Venus and the Empire No. 5, to recover damages sustained as a result of the scows breaking from their moorings at a dock at Rockland Lake Landing on the early morning of October 13, 1827, going adrift and fetching up against some ice breakers located nearby. The scows 'were each about 100 feet long and 40 feet wide and were light.

The respondent, the Cornell Steamboat Company, had been engaged by the libelant to tow the scows "which were then lying at Tarrytown to Tompkins Cove and Verplaneks Point some miles up the river. The libelant was aware that respondent frequently, in making up its tows, moored the scows temporarily at the dock of Rockland Lake Landing while a full tow was being gotten together. This dock is one that was formerly used by the New York Trap Rock Corporation when it was carrying on operations but had not been used for several years by it and was somewhat out of repair.

On the afternoon of October 12,1927, the scows Venus and the Empire No. 5 were moved over by the respondent’s shifting tug Mould from Tarrytown on the east side of the river to Rockland Lake Landing to remain there to await the arrival of the upriver tug and the rest of the tow. The Mould, with the Venus and the Empire No. 5, reached Rockland Lake Landing at 5:45 p. m. The light brick scow, Charlotte, was lying moored to the upper or northern end of the dock; another brick scow which was loaded was moored to the south end of the Charlotte, and an iron boat was made fast to the south end of the brick scow. The Mould hung up the Venus and the Empire No. 5 outside the Charlotte, the Venus being next to the Charlotte. The Charlotte had been made fast at her upper and lower ends by lines around mooring posts on the dock which led back to cleats on the Charlotte. There is no proof of any inspection of the Charlotte’s lines by any one on the Mould, except one of her deck hands testified that “so far as he could see they were in good condition.” After the scows were tied up the Mould left for Haverstraw for the night, which is 3 or 4 miles above Rockland Lake Landing.

From the records of the United States Weather Bureau at New York City, and from the testimony of Mr. Scarr, an official of that Bureau, it appears that on the morning of the 12th storm warnings were hoisted and many of the companies engaged in shipping in the vicinity of New York were warned by telephone, including the respondent, although it does not appear that the respondent communicated with its Haverstraw office to which the tug Mould was attached. During the forenoon, the barometer began to drop and continued to do so throughout the day. The wind gradually increased from 35 miles an hour to 48 miles from the south. Dming the afternoon to upwards of 40 miles an hour, and between 6 and 7 p. m. the wind shifted to the southeast and reached the velocity of 50 miles an hour, and steadily increased’ until around 1 o’clock in the morning when it reached the average force of 64 miles an hour and the maximum of 70. Mr. Scarr testified that the storm originated in the vicinity of Lake Superior and moved in this direction and that the wind velocities in the vicinity of Rockland Lake Landing would be about the same as in New York City, and from his testimony and the testimony of others who were in the vicinity of Rockland Lake Landing, I am convinced that the weather conditions there and in New York City were practically the same. The dock at Rockland Lake Landing on the west side of the river is exposed in a southeasterly storm and the wind caused a rough choppy sea in the vicinity of the dock. High tide in this locality was 11:33 p. m.

Between midnight and 1 a. m. the lines of the lower or southerly end of the Charlotte parted and the three scows then swung around up-stream. Shortly thereafter these lines slipped off the mooring post on the dock and the three scows were carried up against a supply boat which lay 50 to 66 feet above the landing. As they came alongside the supply boat, the captain of the Venus boarded the supply boat and put a line around a cleat on the supply boat, but while one end of this line was being made fast on the Venus the cleat on the supply boat broke off and the three boats went adrift again and finally fetched up on some ice breakers two or three hundred feet away. The Venus and the Empire No. 5 pounded against the ice breakers and received some damage before they were brought back and again made fast to the dock at Rockland Lake Landing in the morning.

There is some testimony that the mooring post around which the northerly lines of the Charlotte had been placed broke off when her lower lines parted and the three scows swung around, subjecting the mooring post to the added strain, but the testimony is overwhelming to the effect that the post did not break. In view of the fact that the post did not break and that the line was found intact the following morning with both ends fast to the Charlotte, it seems to me that the only rational conclusion is that the line slipped over the top of the post, for at high tide the deck of the Charlotte and the top of the post would have been just about on a level, and with the pitching and tossing of the scows it would be natural and likely to slip off.

The libelant makes several charges of fault against the respondent including those of mooring the scows where they were exposed to dangerous winds, and of its failure to inspect the lines of the Charlotte and to see that they were sufficient to meet weather conditions reasonably to be anticipated.

The respondent was not an insurer of the scows, but it was charged with the duty of exercising reasonable care while they were in its custody. The mere fact that the tow was in good order when received by the tug and in damaged condition when redelivered by it does not raise the presumption of negligence against the tug. Stevens v. The White City, 285 U. S. 195, 52 S. Ct. 347, 76 L. Ed. 699. This duty continued when it tied up the scows at Rockland Lake Landing, while they were waiting there, and until the towage was completed. Doherty v. Pennsylvania R. R. Co., 269 F. 959 (C. C. A. 2); The Atlas No. 5 (D. C.) 272 F. 171, affirmed 272 F. 175 (C. C. A. 2).

The question to be determined in the case at bar is, as I see it — what was the proximate cause of the scows going adrift — for it was their going adrift that resulted in their damage. It is not, it seems to me, a question of scows being swamped or pounded in a berth which was unsafe “pro se” in heavy weather. If the berth had been unsafe, the other scows in an equally exposed condition would have been affected also but they were not; neither was the Venus nor the Empire No. 5 damaged until they went adrift. The respondent had been using this dock for several years to hang up scows and barges while getting together a full tow for a trip up the river. The damages resulted not from the place where they were moored but from their moorings giving way and their going adrift, and the question is, Who is responsible for the failure to see to it that they were properly moored to meet the conditions?

It is the duty of a tug master, who adds his tow to a moored flotilla, to inspect the lines with reference to their ability to bear the added weight under conditions of tide and weather which are to be anticipated. Cleary Bros. v. Port Reading R. Co. (C. C. A.) 29 F.(2d) 495. Even if the master of the Mould did not know that storm warnings had been sent out by the United States Weather Bureau, it seems to me that the steadily increasing winds and the rapid falling of the barometer and other conditions were such as to warn a competent and experienced tug master that a severe storm was on its way and that extra precautions should be taken by him to protect those scows in the exposed position in which he had placed them and particularly to see that the fasts of the Charlotte were sufficient.

Judge Campbell said in The Mary Ethel (D. C.) 290 F. 458, at page 461, where a tug made fast a barge outside of another moored to the dock:

“The master of the Mahanoy (tug) owed a duty to the Thomas Bulger (barge) when he made her fast outside the Dutch Boy (moored tug) to see that the lines between the inside boats were sufficient and proper to hold her in the berth he selected, and, if in doubt, to have made her fast by proper lines to the bulkhead. * * * ”

It was also the duty of the tug to see that the Charlotte was made fast in such a manner that with the rising tide and high winds her lines would not slip over the top of the mooring post, and Judge Ward in The Ganoga (C. C. A.) 257 F. 720, at page 721, in which a tug was held liable where a tow which she had moored broke loose, said:

“The negligence, if any, was in the failure to foresee that the Bessie, tossing and surging in such wind and weather, with her deck higher than the top of the pile, would be likely on the rising tide to slip the line over the pile. Under these circumstances we think ordinary care required that a better fast than the usual slip fast should have been made, and that the tug was at fault for not seeing to it, whereas boatmen could not be held at fault for want of such nautical skill.”

So in the ease at bar the tug master should have foreseen that at high tide, which would occur at a little before midnight, the deck of the Charlotte would be on the level with the top of the mooring posts and with the rough water causing her to toss and surge the line was likely to slip over the top of the post, as it did. While the southerly line of the Charlotte to the dock may have been and probably was sufficient to hold her, when the tug master added the strain of two large scows in a threatened gale, he should have been careful to see that the existing line was sufficient to stand it and, if not, to put out other lines. He failed to do either of these and the line broke.

There are certain obligations upon the part of barge masters, but under the circumstances here I do not think the masters of the Venus or the Empire No. 5 can be responsible for the conditions. Their own lines held. Their scows were brought in when it was getting dark; they had not been there long enough to be chargeable with notice of the conditions. It does not appear that at midnight or a little after when the southerly line of the Charlotte parted and the three scows swung around, they could have gotten ashore to do so or had the opportunity of putting out other lines in time to save them from going adrift.

Moreover, “In determining the duty of the captain of a barge, we must remember that he is not a navigator, but only a deck hand and keeper of the barge, and not hold him responsible for the performance of a duty which the master of a tug boat, due to his superior knowledge as a seaman, should have known to be necessary.” The Mary Ethel (D. C.) 290 F. 458, page 461.

I think that the master of the Mould was negligent in leaving the Venus and the Empire No. 5 as he did under the circumstances and that his failure to use reasonable care in mooring them was the proximate cause of their going adrift and being damaged. Such a conclusion is in accord: with The Mary Ethel, supra; Pennsylvania R. R. Co. v. James McWilliams Towing Line, 277 F. 798 (C. C. A. 2); O’Boyle v. Cornell Steamboat Co., 298 F. 95 (C. C. A. 2); Rice v. Erie R. R. Co. (D. C.) 272 F. 130; The Ganoga, supra ; Doherty v. Pennsylvania R. R. Co., supra.

Libelant may have a decree with the usual reference as to damages.


author: WATSON, District Judge.

text:
    MUTUAL LIFE INS. CO. OF NEW YORK v. STROEHMANN et al.
    No. 973.
    District Court, M. D. Pennsylvania.
    May 17, 1934.

      O’Malley, Hill, Harris & Harris, of Scranton, Pa., for plaintiff.
    Snyder, Miller, Hull & Hull and Carl B. Shelley, all of Harrisburg, Pa., for defendants.
   WATSON, District Judge.

The Mutual Life Insurance Company of New York, on October 11,1932, filed a bill in equity against Carl F. Stroehmann and Lycoming Trust Company, trustee, to reform three policies of insurance issued by it on the life of Carl F. Stroehmann. One policy is No. 2,646,105, for the face amount of $5,000, and is dated September 20,1919. This policy I shall refer to as policy No-, 1. Another policy is No. 2,677,078, for the face amount of $5,000', and is dated December 9,1919'. This policy I shall refer to as policy No. 2. The other policy is No. 4,361,192, for the face amount of $40,000, and is dated June 30', 1930. This policy I shall refer to as policy No. 3. It is'alleged in the bill that the said Carl F. Stroehmann made false answers to the questions of the medical examiners as to his physical condition at the time of his examinations, and that the plaintiff issued the policies on the strength of these answers. Copies of the policies are attached to the bill of complaint. Each policy provides that the Mutual Life Insurance Company of New York will pay the face amount at the death of the insured, and double that amount if the insured’s death is accidental. Each policy also provides for the payment of a monthly income to the insured in ease of total and permanent disability of the insured, and for the waiver of payment of premiums in case of the permanent disability of the insured. Policies Nos. 1 and 2 contain the following provisions as to incontestability: “This Policy shall be incontestable after two years from its date of issue except for non-payment of premiums.” Policy No. 3 contains the following provision as to incontestability: “Except for non-payment of premiums and except for the restrictions and provisions applying to the Double Indemnity and Disability Benefits as provided in sections 1 and 3 respectively, this Policy shall be incontestable after one year from its date of issue unless the Insured) dies in such year, in which event it shall be incontestable after two years from its date of issue.” The relief prayed for is the rescission and cancellation of the provision for disability benefits in the policies, and the restraining of the defendants from bringing any action at law, or otherwise, upon the policies for the payment of disability benefits until the hearing in this ease and the final deeree therein.

The defendants moved the court to dismiss the bill of complaint for the following reasons:

“1. The bill of complaint shows upon its face that Carl F. Stroehmann, the insured named in the policies of insurance pleaded therein, has made demand upon the plaintiff for the payment of disability benefits, and, unless restrained will bring an action at law upon said policies to recover the same. By defense to such action the plaintiff has a full, complete and adequate remedy at law for all of the matters complained of in its bill of complaint.

“2. The bill of complaint shows upon its face that the plaintiff has no cause of action against the defendants.”

The questions, therefore, for the court, are: First, whether the bill of complaint shows that the plaintiff has a canse of action against the defendants; and, second, whether the plaintiff has a full, complete, and adequate remedy at law for all the matters complained of in the bill of complaint.

I shall consider the questions in the order stated.

The question as to whether the bill of complaint shows that the plaintiff has a cause of action against the defendants should, in my opinion, be answered in the affirmative. It is urged by the defendants that the words in the incontestable clause in policy No. 3 do not exclude from the incontestable clause the obligation to pay disability benefits but relate only to the particular limitations and provisions contained in sections 1 and 3 of the policy; that they were inserted to assure to the company the right to insist upon those limitations and provisions after the contestable period had expired; and that they were not intended to permit any contest of the obligation to pay on the ground of fraud after the expiration of the contestable period. In Mutual Life Insurance Co. v. McConnell et ux., 20 D. & C. (Pa.) 250, the same question arose on exactly the same incontestable clause. There the court said: “The question for consideration of the court is whether the incontestability clauses in these policies preclude the insurer from avoiding the disability benefits on account of fraud if more than 1 year has expired since the policies were issued. It is dear that the policies are incontestable after 1 year from the date of issue, except for ‘the restrictions and provisions applying to the double indemnity and disability benefits as provided in sections 1 and 3, respectively.’

“Section 3 is entitled: ‘Benefits in event of total and permanent disability before age of 60.’ It would appear, therefore, that the incontestability clauses do not apply to the disability benefits, and the action here seeks only the cancellation of the disability provisions. The defendants, however, contend that the incontestability clauses in the policies bar the suit of the plaintiff, notwithstanding the exceptions of section 3 relative to the disability eases. It is contended that the purpose of the clause in the policy is to preclude defenses to the policy after 1 year unless the defense is nonpayment of premium, or one of the defenses incident to double indemnity or disability necessary to protect the company from injustice, which defenses axe all suggested in sections 1 and 3 of the policy. It is argued that the plaintiff company cannot now go back to the inception of the policy and allege fraud on the part of the insured in answering the questions set forth in the application.

“It is true the alleged fraud goes back to the obtaining of the policy, but why should that interfere with the operation of the exception as to disability? We have had very few eases cited by counsel relative to the question before the court, but we have given careful examination to these and made further investigation as to the law on the subject. We are of the opinion that it was the intent of the contracts to exempt from their incontestability clauses its operation in the disability provision. In other words, the incontestability clauses do not apply to the disability benefits, and the action now before the court seeking only the cancellation of the disability provisions-is therefore brought in time.”

In Connecticut General Life Insurance Co. v. Jos. F. Brandstein, 233 App. Div. 723, 249 N. Y. S. 1018, the same questions were raised as are raised here. The incontestable clauses in the policies were as follows: “Incontestability. This policy shall be incontestable after it shall have been in force during the lifetime of the Insured for two years from its date except for non payment of premiums and except as to provisions and conditions relating to benefits in the event of total and permanent disability and those granting additional insurance specifically against death by accident; but if the age of the insured be misstated, the liability of the Company shall be the amount of insurance which the premium would have purchased at the correct age.” The defendants moved to dismiss the bill of complaint on the ground that on its face it did not state facts sufficient to constitute a cause of action. The decision held that a bill of complaint to cancel the disability clauses in the insurance policy was not barred by the fact that more than two years had expired since the date of the policy inasmuch as the disability clauses were excepted from the incontestability clauses.

In a very recent case, New York Life Insurance Co. v. Davis et al., District Court, Western District of Pennsylvania, 5 F. Supp. 316, 319, Judge Schoonmaker, in the opinion, said:

“The three policies of insurance involved in this suit would have been voidable in their entirety for fraud by reason of false answers by the insured to questions in the medical piart of his application for insurance, but for the incontestable clause contained in each policy.

“This clause is as follows:

“ ‘This policy shall be incontestable after two years from its date of'issue, except for non-payment of premium and except as to provisions and conditions relating to disability and double indemnity benefits.’

“The plaintiff contends that by reason of this clause, it has expressly reserved to itself the right to contest this policy in so far as the provisions and conditions therein contained relating to disability and double indemnity benefits. The defendant, on the other hand, contends that the policies in their entirety are incontestable on account of this clause.

“Our view is that this clause expressly reserves to the insurance company the right to contest its liability for disability and double indemnity benefits accruing under the policy. No other ruling would give effect to the agreement of the parties. After two years, the regular life insurance liability of the company may not be contested, but the disability and double indemnity provisions always remain open to contest. There is no difficulty in canceling the insurance contract as to the two items, and leaving it in force as to the regular life insurance factors.”

In my opinion, the bill of complaint shows that the plaintiff has a cause of action against the defendants.

The remaining question is, whether the plaintiff has a full, complete, and adequate remedy at law for all matters complained of in the bill of complaint.

The general rule is that equity will not ordinarily take jurisdiction of a suit for cancellation of a policy of insurance for fraud in its procurement, for the reason that the insurance company has an adequate remedy at law in its right to defend on the ground of fraud in an action instituted on the policies. Brown v. Pacific Mutual Life Insurance Co. (C. C. A.) 62 F.(2d) 711, 712, and many eases there eited. And it has been held in a number of cases that, except for the presence of the incontestable clause in the policy, a court of equity would not have the right to assume and try the issue whether the policy was fraudulently procured. New York Life Insurance Co. v. Seymour (C. C. A.) 45 F.(2d) 47, 73 A. L. R. 1523; Phoenix Mutual Life Insurance Co. v. Bailey, 13 Wall. 616, 20 L. Ed. 501; and Cable v. United States Life Ins. Co., 191 U. S. 288, 24 S. Ct. 74, 48 L. Ed. 188. In the ease at bar, policy No. 3 contains no incontestable provision which applies to the disability benefits. Mutual Life Insurance Co. of N. Y. v. McConnell et ux., supra.

In those eases where the courts have held that a court of equity is without jurisdiction of a suit for cancellation of a policy of insurance for fraud in its procurement, the policies have been policies of life insurance. In the ease at bar, the plaintiff is not seeking the cancellation of the life insurance policies, but the cancellation of the disability provisions only. Policies Nos. 1, 2, and 3 each contain two separate contracts, one of life insurance, and the other of indemnity against total and permanent physical disability and for double indemnity. Penn Mutual Life Ins. Co. v. Hartle et al., 165 Md. 120, 166 A. 614. On life insurance policies procured by fraud, there is but one cause of action, for a person dies but once. Disability policies procured by false representations and fraud create a continuous liability. It must be clear that the relief sought could not be obtained by defending an action instituted at law for recovery under the disability features of the policies, for an action at law might terminate in such a way as not to decide the issue of fraud. In Brown v. Pacific Mutual Life Insurance Co., supra, in which there was a motion to dismiss the suit similar to the motion in this ease, the court said: “In the case at bar, the insured is living and there is consequently no possible way in which complainant can secure the full relief to which it is entitled except in equity. It is argued that relief might be obtained at law by defending the action instituted for recovery under the disability feature of the policy. But it is clear that this remedy would not be full, complete, or adequate. In the first place, the action at law might be terminated in such a way as not to decide the issue of fraud at all and in the meantime the policy might have become incontestable. In the second place, the judgment in that action would not be binding upon the beneficiary. See New York Life Ins. Co. v. Halpern (D. C.) 47 F.(2d) 935, 936. In addition to this, it is well settled that equity jurisdiction existing at the commencement of the suit is not lost because after the filing of the bill*an adequate legal remedy has become available. Dawson v. Kentucky Distilleries & Warehouse Co., 255 U. S. 288, 296, 41 S. Ct. 272, 65 L. Ed. 638; N. Y. Life Ins. Co. v. Seymour, supra. We think that both on reason and authority, therefore, the jurisdiction of equity in a case such as this is thoroughly established.”

I conclude, therefore, that the plaintiff does not have a full, complete, and adequate remedy at law for all of the matters complained of in the bill of complaint.

The questions raised as to policies Nos. 1 and 2 have not been discussed in this opinion, but the bill certainly presents a case for relief, and it is well settled that a bill will not be dismissed if it presents a case for relief. U. S. v. Railway Employes’ Department, American Federation of Labor et al. (D. C.) 286 F. 228; Ralston Steel Car Co. v. National Dump Car Co. (D. C.) 222 F. 590.

Defendants’ motion to dismiss is denied.


author: KNIGHT, District Judge.

text:
    In re BECKMAN.
    No. 19590.
    District Court, W. D. New York.
    May 24, 1934.
    Kavinoky & Simon, of Buffalo, N. Y., for bankrupt.
    Lewis & Carroll, of Buffalo, N. Y., for objecting creditor.
   KNIGHT, District Judge.

Objections to the discharge of the bankrupt were filed by one of his creditors. The grounds set forth were that the bankrupt failed to keep books of account or records from which his financial condition and business transactions might be ascertained; that at a time subsequent to the first twelve months immediately preceding the filing of the petition, he transferred, and removed and permitted to be transferred and removed and concealed certain of his property, with intent to hinder, delay, and defraud his creditors ; and that he failed to explain satisfactorily his losses of assets and the deficiency of assets to meet his liabilities. The matter was referred to the referee as special master who found that all three objections were sustained by the evidence presented and recommended that the bankrupt be denied a discharge.

A motion having been made for confirmation of the report of the special master, bankrupt objects to such confirmation. The objection is made that the special master erred in ruling under section 14 of the Bankruptcy Act (11 USCA § 32) that reasonable grounds had been shown for believing that the bankrupt had committed acts which would prevent his discharge and that the burden was thereupon transferred to the bankrupt to show that he had not committed such acts. To set forth the testimony adduced would unduly extend this opinion. It is sufficient to say that the record discloses ample grounds for believing that the bankrupt had committed the acts or omissions set forth in the objections. It is not necessary for the objecting creditor to do more than show reasonable grounds for believing that the bankrupt has committed acts barring his discharge to throw upon the bankrupt the duty of proving the contrary. In re Holzman (C. C. A.) 69 F.(2d) 828.

Bankrupt asserts that no actual intent to defraud his creditors has been proved under the second objection. He drew only $10 to $15 weekly from the business, while paying his wife $50 per week or a total of $2,600 for the year. He also provided a sister with merchandise for her store and money to the extent of $2,000. Other relatives were the beneficiaries of gifts amounting to $1,500. Altogether about $6,000 was taken out of the business for the benefit of relatives. Bankrupt states that his intent was to assist his relatives who were in poor financial circumstances. The record clearly shows that a part of these gifts were made subsequent to the time when he became insolvent.

The following language from In re Julius Bros. (C. C. A.) 217 F. 3, 7, L. R. A. 1915C, 89, points the decision in this ease:

“There are two classes of transfers under the act: (1) Those which have been entered into with actual fraudulent intent. (2) Those where, from the terms of the agreement or the nature of the transaction itself, the fraudulent intent is presumed to exist as an inference of law.
“In the one class the fraudulent intent is always a question of fact, and in the other it is a question of law. Thus if one who is insolvent makes a voluntary transfer of his property, receiving no valuable consideration therefor, the law will infer the intent, even though he may have made the transfer with an honest motive. In such eases no evidence of intention can be received to change that presumption. Such a conveyance necessarily operates to hinder, delay, or defraud the creditors, and the grantor will in such a ease be presumed to intend the natural and necessary consequences of his acts.” See, also, In re Finder (C. C. A.) 61 F.(2d) 960; In re Richter (C. C. A.) 57 F.(2d) 159; Bailey v. Ross (C. C. A.) 53 F.(2d) 783; and In re Hirsch (D. C.) 4 F. Supp. 708. In the present ease there was a voluntary transfer of property with no benefit or return consideration to the bankrupt’s estate. The only conclusion to be drawn therefrom is that the bankrupt intended to hinder, delay, and defraud his creditors.

As to the third objection, the bankrupt asserts that he has made a satisfactory explanation. To explain away a large portion of his loss he has stated that he sold goods at less than the wholesale cost over a period of a year because it was necessary to meet competition and that $5,000 was lost in this manner. The only basis for arriving at this amount was that the bankrupt concluded he had lost about 20 to 25 per cent, on the $28,-000 worth of goods which he turned over during the year. In view of the fact that at best this can be regarded only as an estimate by the bankrupt, founded upon nothing which in any way verifies or affirms it, the explanation cannot be regarded as satisfactory. In re Shapiro & Ornish (D. C.) 37 F.(2d) 403, and Brenner v. Gaunce (C. C. A.) 28 F.(2d) 606, are eases involving somewhat similar situations.

The report of the special master is confirmed.