text:
    THE SEABOARD NO. 21. SEABOARD SAND & GRAVEL CORPORATION v. MORAN TOWING CORPORATION et al.
    No. A-17024.
    District Court, E. D. New York.
    April 9, 1945.
    Foley & Martin, of New York City (Christopher E. Heckman, of New York City, of counsel), for libellant.
    Macklin, Brown, Lenahan & Speer, of New York City (Leo F. Hanan, of New York City, of counsel), for respondent.
    Hill, Rivkins & Middleton, of New York City (Thomas H. Middleton, of New York City, of counsel), for respondent-impleaded.
   MOSCOWITZ, District Judge.

Libellant’s scow Seaboard No. 21, hereinafter referred to as No. 21, was damaged on March 9, 1944, at about 4:30 a.m. due to overturning while alongside the SS. Schoharie at Pier 33, East River. The li-bellant instituted this action against the Moran Towing Corporation, the respondent, to recover damages sustained by the No. 21. The respondent has impleaded the Terminal Stevedoring Company, Inc. under a petition which alleged that the respondent-impleaded improperly loaded the scow.

The libellant in its libel charged that the respondent had breached the contract for the chartering and hiring of the scow by failure to return the scow to the libellant in the same condition as when received. When the scow was returned it was found to be damaged due to the negligence of the respondent.

Prior to March 6,1944, libellant chartered the No. 21 to the Christie Scow Corporation under the usual form of harbor charter for an indefinite period of time. The Christie Scow Corporation agreed to supply a man who would act as watchman on the scow. Such person was the agent, servant and employee of the libellant.

On March 6, 1944, the respondent chartered the scow No. 21 from the Christie Scow Corporation. When the charter was made the Christie Scow Corporation was acting as a principal and was not acting as an agent or for the account of the libellant. There was no contractual relationship between the libellant and the respondent. Had the Christie Scow Corporation been a party (and it is not clear why that was not done) there would have been the usual presumption that there was a burden upon the charterer, the Christie Scow Corporation, to establish freedom from negligence as the No. 21 was returned in a damaged condition. In view of the fact that there was no contractual relationship between the libellant and respondent there can be no such presumption here. Even assuming that there was such a presumption, the testimony of the libellant, the respondent and the respondent-impleaded establish beyond peradventure that there was no negligence on the part of the respondent.

It is the position of the respondentimpleaded that the scow having careened in a quiet slip creates a presumption of her unseaworthiness and the burden of proof is upon her owner to rebut the presumption and to show her seaworthiness at the time she was loaded with the ballast at the Schoharie. Assuming that that statement of law is correct and that is indicated in The Harper No. 145, 2 Cir., 42 F.2d 161, the libellant has more than met its burden by showing conclusively that the No. 21 was in all respects seaworthy at the time of the accident.

At the time the No. 21 was chartered by the respondent she was in all respects tight, strong, staunch and seaworthy. In June 1942 she had been thoroughly searched and caulked, and in March 1943 certain repairs were made which placed her in a good seaworthy condition. Immediately prior to March 6, 1944, she had been in continuous service carrying various types and quantities of cargo. On February 17, 1944 she had been thoroughly examined and found seaworthy by libellant’s employees.

On March 6, 1944, the No. 21 was towed to SS. Lieutenant Delatour at the south side of Pier 16, East River where she remained until March 8, 1944, at 11 a.m. She was loaded with approximately 600 tons of sand ballast by employees of the respondent-im-pleaded. The ballast from the SS. De-latour was loaded on the No. 21 to the port of the center line and when completed the No. 21 had an 18 inch list to port on which side she drew only 8 inches of water and every seam on that side of the No. 21 was submerged. During the afternoon on March 8, 1944 respondent was informed that the scow North River, which had been sent to the Schoharie at Pier 33, East River to receive all the slag ballast from that ship, would not be able to carry all of it and another scow was required. At about 5 :30 p.m. respondent’s runner visited the scow at Pier 16, East River, and observed that she was listed to port, however there was no water in her. It was further reported to respondent that the No. 21 should be sent to the Schoharie at Pier 33, that she could take about 100 tons. At that time-the respondent’s representatives knew that slag would be loaded on the pile of sand ballast already on board the No. 21, which had not been trimmed. On March 8, 1944, at about 8 p.m. the No. 21 was towed alongside the Schoharie at Pier 33, East River to receive the slag ballast. At that time the No. 21 was still listed to port when she arrived at the side of the Schoharie.

The libellant claims fault on the part of the respondent in not seeing to it that the list was corrected and fault on the part of the respondent-impleaded in dumping slag ballast from the Schoharie on the No. 21 without any trimming of either the slag or the sand. There is no charge of fault in the libel against the respondent-im-pleaded as to any act performed by the respondent-impleaded prior to the arrival of the No. 21 alongside of the Schoharie. It having not been alleged in the libel the Court will assume as between the libellant and the respondent-impleaded that there was no negligence upon the part of the respondent-impleaded prior to the arrival of the No. 21 alongside of the Schoharie.

The testimony concerning the conditions which existed prior to the arrival of the No. 21 alongside the Schoharie was accepted against the respondent only but such testimony shows no fault on the part of the respondent or the respondent-impleaded. The captain of the No. 21 — evidently a man of some experience with boats — could not have considered the situation dangerous because he was in his cabin at the time when the No. 21 turned over. When the No. 21 was alongside of the Schoharie prior to the unloading of the slag ballast from Scho-harie, although she had a list, there was no danger and she was in good order and condition.

The accident was caused without any fault on the part of the Moran Towing Corporation ; it is absolved of all liability. There was no fault on the part of the libellant. The No. 21 was staunch and seaworthy and the evidence is convincing that the accident was caused solely through the fault of the respondent-impleaded and the Court would be justified in making a decree against the respondent-impleaded based upon its own testimony because it affirmatively appears from the testimony of the respondent-impleaded that its negligence was the sole cause of the accident. Libellant’s and respondent’s testimony is to the same effect.

The employees of the respondentimpleaded were incompetent and inexperienced. The man in charge of dumping the buckets by which the slag ballast was transferred had little experience and was incompetent. The time-keeper who supervised the work had been working a great many hours and was in the habit of sleeping during the progress of the operation. The employee who actually dumped the buckets had about eight weeks experience. He did not know how to trim the load or to load the No. 21 properly. An experienced man would have distributed the load more evenly. One of the employees of the respondent-impleaded worked continuously for 48 hours. While the Court will take judicial notice of the manpower shortage, and such condition should be considered by the Court, the shortage can not excuse negligence. This condition can not relieve the respondent-impleaded of its obligation to use reasonable care. Employees of the respondent-impleaded loaded the slag ballast on the untrimmed piles of sand ballast. The sand ballast did not serve as a proper foundation for the heavier slag ballast. There was extreme danger of the sand sliding and thus permitting the slag to slide and run to one side. The slag ballast varied in size from powder to lumps of about 8 inches square. The No. 21 was loaded with the slag ballast for about four hours transferring between 35 to 39 tons per hour. Had the No. 21 cargo been properly stowed and trimmed she could have carried about 750 tons. While loading the No. 21 the work was suspended to repair a winch. During this time the scow overturned and the captain was drowned.

The conclusion is inescapable that the cause of the accident was due to the improper loading of slag ballasts on the untrimmed piles of sand in an excessive quantity without trimming either the slag ballast or the sand ballast to avoid the danger of sliding and running of the load.

Upon the evidence it has been determined that the libellant is entitled to a decree against the respondent-impleaded, and the respondent is entitled to a decree dismissing the libel.

The Court has accepted some of the libellant’s, the respondent’s and respondent-impleaded’s proposed findings of fact. The Court specifically makes the following findings of fact and conclusions of law:

Findings of Fact.

1. Libelant a New York Corporation was at all material times the owner of the scow Seaboard No. 21, which prior to. March 6, 1944, had been chartered to Christie Scow Corporation under the usual form of harbor charter for an indefinite period of time. Libelant was to furnish a man to act as watchman of the scow.

2. Prior to March 6, 1944, respondent,. Moran Towing Corporation, a New York Corporation, chartered the scow Seaboard No. 21 from Christie Scow Corporation agreeing to pay Christie Scow Corporation a higher daily rate. The charter was the usual harbor one for an indefinite period of time, Christie Scow Corporation agreeing to supply a man to act as watchman of the scow. That the bargee in charge of the scow Seaboard No. 21 at all times involved herein was the servant, agent and employee of the libellant.

3. On March 6, 1944, respondent, Moran Towing Corporation, a New York corporation, chartered the scow Seaboard No. 21 from Christie Scow Corporation, agreeing, to pay Christie Scow Corporation a higher daily rate of charter than Christie Scow Corporation was 'paying to libellant. The charter was the usual harbor charter for an indefinite period of time, and when the Christie Scow Corporation made the charter it was acting as a principal for and on its own account and was not acting as an agent or for the account of the li-bellant herein.

4. The Seaboard No. 21 entered the charter service of the respondent, Moran Towing Corporation, on March 6th, 1944 at which time she was tight, strong, staunch and seaworthy. She had been thoroughly searched and caulked in June, 1942 and in March of 1943 such repairs as were then necessary to put her in good condition had been made. Prior to entering the service of respondent, Moran Towing Corporation, the scow had been in continuous service carrying various types and quantities of cargo. On February 17, 1944, she had been thoroughly examined and found seaworthy by two of libelant’s employees.

5. There was no contract of charter between the libellant, Seaboard Sand & Gravel Corporation and the respondent, Moran Towing Corporation, and the libel-lant by reason of its charter with the Christie Scow Corporation did not have possession of the scow and could not deliver or bail the scow to Moran Towing Corporation.

6. Under and by reason of its charter with Christie Scow Corporation respondent, Moran Towing Corporation on the afternoon of March 6, 1944, took the said scow and began to use it in its business.

7. On March 6, 1944, respondent, Moran Towing Corporation, had the Seaboard No. 21 towed to the S. S. Lieutenant Delatour at the south side of Pier 16, East River where until 11:00 A.M. on March 8, 1944, she was loaded with approximately 600 tons of sand ballast by the employees of respondent, Terminal Stevedoring Co., Inc., a New York Corporation.

8. The ballast from the S. S. Delatour was loaded on the Seaboard No. 21 to port of the center line and when completed-the scow had an 18 inch list to port on which side she drew only 8 inches and every seam on that side of the vessel was submerged.

9. On the afternoon of March 8, 1944, respondent, Moran Towing Corporation, received advices that the scow North River, which it had sent to the Steamer Scho-harie at Pier 33, East River to receive all the slag ballast from that ship, would not be able to carry all of it and that another scow was required.

10. At about 5:30 P.M. on March 8, 1944, Berg, a runner for Moran Towing Corporation, visited the scow Seaboard No. 21 at Pier 16, East River, and observed that she was listed to port because of the way the sand ballast had been loaded. There was no water in the Seaboard No. 21. Berg reported to the respondent, Moran Towing Corporation, that the Seaboard No. 21 should be sent to the Schoharie at Pier 33 and that she could take about 100 tons. At that time, both Berg and Johnson, the despatcher for Moran Towing Corporation, knew that slag would be loaded on the pile of sand ballast already on board the Seaboard No. 21, which had not been trimmed.

11. At about 8:00 P.M. on March 8, 1944, respondent, Moran Towing Corporation, caused the Seaboard No. 21 to be towed to a position alongside the S. S. Schoharie at Pier 33, East River to receive the slag ballast. The Seaboard No. 21 was still listed to port when she arrived at the side of the Schoharie.

12. Safety required that the 600 tons of sand ballast already on board the Seaboard No. 21 be trimmed by the stevedores to correct the list before that scow be sent to receive slag ballast.

13. The transfer of the slag ballast from the Schoharie to the Seaboard No. 21 was performed by the respondent, Terminal Stevedoring -Co., Inc.

14. The slag ballast was removed from the hold of the Schoharie by tubs, the contents of which were dumped on the sand on the Seaboard No. 21 without any trimming of either the slag or the sand.

15. The employees of respondent, Terminal Stevedoring Co., Inc., in charge of loading the Seaboard No. 21 at the Steamship Schoharie considered that the Seaboard No. 21 could receive all of the ballast remaining in the S. S. Schoharie which exceeded 100 tons, the amount Moran Towing Corporation’s runner, Berg, had told the scow man would be loaded at the Schoharie.

16. The man in charge of dumping the buckets by which the slag ballast was transferred from the Schoharie to the Sea^ board No. 21 had little experience and was incompetent. The time keeper who supervised the operation of loading the scow had been working a great many hours and was in the habit of sleeping during the progress of the work.

17. It was improper and negligent for the respondent, Terminal Stevedoring Co., Inc., to load slag ballast on the untrimmed piles of sand ballast — 600 tons — which had been so loaded that the Seaboard No. 21 was listed heavily to port. The sand ballast did not serve as a proper foundation for the heavier slag ballast and there was danger of the sand sliding thereby permitting the slag to slide and run to one side. The slag ballast varied in.size from powder to lumps of about 8 inches square.

18. Respondent, Terminal Stevedoring Co., Inc., loaded the Seaboard No. 21 with slag ballast for about 4 hours transferring an average of about 35 to 39 tons per hour.

19. If the cargo on the Seaboard No. 21 had been properly stowed and trimmed she could have carried from 730 to 750 tons but could not have done so if the cargo were not properly stowed and trimmed.

20. Before the Terminal Stevedoring Co., Inc, had finished loading the Seaboard No. 21 and while work was suspended to repair a winch the scow overturned and the scow man was drowned.

21. The agents and servants of respondent-impleaded started transferring ballast material from the S. S. Schoharie to the scow No. 21 at 10:00 p.m. of March 8, 1944, and continued until midnight, when loading was stopped for supper. Loading of the scow was resumed at 1:00 a.m. of March 9, and continued until 3:00 a.m., at which time further loading had to be discontinued because the ship’s winch broke down.

22. The scow turned turtle, dumping her. deck cargo in the slip, and sustained hull damages and also drowned her captain, at 4:30 a.m. of March 9, 1944.

23. The overturning of the Seaboard No. 21 was due to the loading of slag ballast on the untrimmed piles of sand in an excessive quantity without trimming either the sand ballast or the slag ballast to avoid the danger of sliding and running of the load.

24. The respondent, Terminal Stevedor-ing Co., Inc., was negligent in loading an: excessive quantity of slag ballast on the-Seaboard No. 21 when she was listed and without trimming the sand ballast already on board.

25. The libelant and man in charge of' the Seaboard No. 21 were without fault.

26. That the careening of the scow Seaboard No. 21 was not caused or contributed to by the respondent, Moran Towing Corporation.

27. The respondent-impleaded, Terminal Stevedoring Co., Inc., were not the servants,, agents or employees of the respondent,. Moran Towing Corporation as they had. been employed by the representatives of the S/S Schoharie to perform the stevedor-ing services.

28. The respondent, Moran Towing Corporation was without fault and caused no damage to the scow Seaboard No. 21.

Conclusions of Law.

1. The charter of the scow Seaboard No-21 by Seaboard Sand & Gravel Corporation! to Christie Scow Corporation was a demise-charter, but the bargee remained the servant, agent and/or employee of the libellant; herein.

2. That when the scow Seaboard No. 21Í was chartered by Christie Scow Corporation to Moran Towing Corporation the bargee remained the servant, agent and/or employee of the libellant herein.

3. That the libellant herein was responsible for the acts of the barge of the scow. Seaboard No. 21.

4. There was no privity of contract between the libellant and the Moran Towing-Corporation, and the libellant did not have-such possession of the scow Seaboard No.. 21 as to enable it to either make a contract with Moran Towing Corporation or to-deliver or bail the scow to said respondent.

5. The libellant has failed to sustain its. burden of proof as to proving negligence against the respondent, Moran Towing Corporation.

6. The Moran Towing Corporation has shown every act performed in connection with the scow Seaboard No. 21 and that none of the acts caused any damage to the scow Seaboard No. 21.

7. That the respondent, Moran Towing ^ Corporation was without fault.

8. That the overturning of the Sea"board No. 21 was not due to any act of the respondent, Moran Towing Corporation.

9. That the respondent, Moran Towing Corporation is entitled to a decree dismissing the libel and petition as to it, together with costs.

10. Respondent, Terminal Stevedoring Co., Inc., was negligent in that its employee was inexperienced and incompetent and in that it loaded on the Seaboard No. .21, already in a badly listed condition, more •slag ballast than she could safely receive without trimming of the piles of sand already on board.

11. Libelant was without fault.

12. The scow Seaboard No. 21 was ■seaworthy when delivered to respondent, Moran Towing Corporation.

13. Libelant is entitled to a decree against the Terminal Stevedoring Co., Inc. Settle decree on notice.


source: Caselaw Access Project

author: MEANEY, District Judge.

license: Public Domain

text:
    UNITED STATES v. SCHENLEY DISTILLERS CORPORATION et al.
    Cr. 2440.
    District Court, D. New Jersey.
    July 19, 1945.
    William Rubin, Esq. of Bayonne, N. J. (Milton, McNulty & Augelli, by John Milton, all of Jersey City, N. J., of counsel), for petitioner F. & A. Distributing Co.
    Thorn Lord, U. S. Atty., of Newark, N. J., Charles A. Stanziale, Asst. U. S. Atty., of Newark, N. J., and Fleming James, Jr., Director, Litigation Division, and Charles Rembar, Chief, Office of Price Administration, both of Washington, D. C., for respondent.
   MEANEY, District Judge.

Defendant, with other persons and corporations, was indicted on April 28, 1944, under Title 18, section 88 of the United States Code Annotated, for wilfully, knowingly and feloniously conspiring to commit offenses against the United States. The indictment charged the defendants with conspiring to engage in the business of wholesale liquor dealers and with offering to sell distilled spirits in quantities of five wine gallons and more, to the same person at the same time, and to make false entries in the records of the distilled spirits received and disposed of, in violation of the regulations promulgated by the Collector of Internal Revenue.

The second offense charged is conspiracy by the defendants to sell distilled domestic spirits, in violation of section 4(a) of the Emergency Price Control Act of 1942, 50 U.S.C.A.Appendix, § 904(a), and the regulations issued by the Administrator of the Office of Price Administration, in cases of pints, quarts, and four-fifths of whiskey at prices that were in excess of maximum prices as authorized by the provisions of the -Emergency Price Control Act, 50 U.S. C.A.Appendix, § 901 et seq., and the provisions of the Maximum Price Regulation 193, section 1420.13, and Maximum Price Regulation 445, section 5.4.

This matter is now before the Court on defendant’s application for leave to file a complaint in the Emergency Court of Appeals against the Administrator, setting forth objections to the validity of regulations under the Emergency Price Control A.ct.

The application is made by the defendant under the provisions of section 204(e) of the Act as amended by the Stabilization Extension Act of 1944, 50 U.S.C.A.Appendix, § 924(e), the pertinent parts of which are here set forth:

“Section 204(e) (1) Within thirty days after arraignment, or such additional time as the court may allow for good cause shown, in any criminal proceeding, and within five days after judgment in any civil or criminal proceeding, brought pursuant to section 205 involving alleged violation of any provision of any regulation or order issued under section 2 or of any price schedule effective in accordance with the provisions of section 206, the defendant may apply to the court in which the proceeding is pending for leave to file in the Emergency Court of Appeals a complaint against the Administrator setting forth objections to the validity of any provision which the defendant is alleged to have violated. The court in which the proceeding is pending shall grant such leave with respect to any objection which it finds is made in good faith and with respect to which it finds there is reasonable and substantial excuse for the defendant’s failure to present such objection in a protest filed in accordance with section 203(a).”

The portion of the section above quoted provides that application for leave to file a complaint may, under certain conditions, be made in a proceeding brought pursuant to section 205 involving alleged violation of any provision of any regulation or order issued under section 2 or of any of the provisions of section 206.

The indictment in this case charges the defendants with conspiracy under Title 18 U.S.C.A. § 88 to violate section 2857 of the Internal Revenue Code, 26 U.S.C.A. Int.Rev.Code, § 2857, and section 4(a) of the Emergency Price Control Act. The precise question presented is whether a conspiracy having for its object the commission of an offense prohibited by the Emergency Price Control Act 'is in itself an offense arising under that act and “brought pursuant to section 205” within the meaning of section 204(e) thereof.

It has consistently been held by the United States Supreme Court that a prosecution for conspiracy is not a prosecution under the statute whose violation is in its object. Thus, in United States v. Rabinowich, 238 U.S. 78, at page 85, 35 S.Ct. 682, 683, 59 L.Ed. 1211, that court stated:

“It * * * has been repeatedly declared in decisions of this court, that a conspiracy to commit a crime is a different offense from the crime that is the object of the conspiracy.”

And further, quoting from an earlier opinion in United States v. Hirsch, 100 U.S. 33, 25 L.Ed. 539, the court in the Rabinowich case stated:

At page 89 of 238 U.S., at page 685 of 35 S.Ct., 59 L.Ed. 1211: “Specific acts which are violations of the laws made to protect the revenue may be said to be crimes arising under the revenue laws, * * *; but a conspiracy to defraud the government, though-it may be directed to the revenue as its object, is punishable by the general law against all conspiracies, and can hardly be said, in any just sense, to arise under the revenue laws.”

The Supreme Court in the recent case of Braverman v. United States, 317 U.S. 49, at page 54, 63 S.Ct. 99, 102, 87 L.Ed. 23, reiterated its earlier decisions in stating that:

“A conspiracy is not the commission of the crime which it contemplates, and neither violates nor ‘arises under’ the statute whose violation is its object.”

It is the most reasonable interpretation that criminal proceedings “brought pursuant to section 205 involving alleged violation of any provision of any regulation or order issued” under the Emergency Price Control Act are limited to offenses created by that Act. “For as stated by the Court in the Rabinowich case, supra, at page 88 of 238 U.S., at page 684 of 35 S.Ct., 59 L.Ed. 1211:

“We * * * have attributed to Congress a tacit purpose — in the absence of any inconsistent expression — to maintain a long-established distinction between offenses essentially different, — a distinction whose practical importance in the criminal law is not easily overestimated.”

It is my conclusion that a proceeding for conspiracy to violate the Emergency Price Control Act is not itself an offense arising under, nor brought pursuant to, section 205 thereof. Hence, the defendant is held not within the provisions or contemplation of section 204(e) and this application to file a complaint against the Administrator must be denied. There is further compelling reason for the denial of this application upon which the court will take this occasion to comment.

The Stabilization Act of 1944, which added Section 204(e) to the Emergency Price Control Act and under the provisions of which this application is made, became law on July 1, 1944. The arraignment in this proceeding was had on May 10, 1944. Thus, even were the court to find that the offense charged was within the purview of Section 204(e) and brought pursuant to section 205, which the court specifically does not find as heretofore stated, the defendant is not within the provisions of the Amended Act. Arraignment was had some 51 days prior to the date upon which the Act became law, and there is nothing from which the Court may conclude that this Act has other than a prospective effect.

No do I find that the defendant falls within the provisions of section 204 (e) which provide that application may be made thereunder within “such additional time as the court may allow for good cause shown.”

The amended act under 201(e) above quoted provides that application shall be made within 30 days after arraignment or within such additional time as the court for good cause shown may allow. This provision has evidently been construed by the defendant to mean that he may come before the Court at any time after arraignment and after the prescribed 30 days have expired, if only he accompanies his out of time application with a showing of good cause why his application was not made within the 30 days prescribed. This I do not conceive to be the proper construction.

The Act prescribes a specific period within which an application may be made and provides further that such application may be made within such enlarged period as the Court may allow on good cause shown. Thus it seems to me to be evident that before an application to file a complaint may be made beyond the 30 day period, good cause must first be shown and the defendant receive from the Court an allowance of a specified period on or before which application to file such complaint may be made. It seems to me, moreover, that not only must good cause be shown in order to entitle the defendant to additional time, but such good cause must be shown within the 30 day period initially prescribed.

In the instant case the defendant could not make application for leave to file his complaint in the Emergency Court of Appeals within the prescribed 30 day period nor could he seek to make such application out of time on a showing of good cause. As heretofore stated, allowance of additional time may only be had where good cause is first shown, within 30 days after arraignment, why application for leave to file in the Emergency Court cannot be made within that time, and the allowance by the Court of such additional time as may be consonant.

For the reasons set forth, the defendant’s application is denied.


author: LEIBELL, District Judge.

text:
    KOGAN v. SCHULTE et al.
    District Court, S. D. New York.
    June 20, 1945.
    Nathan B. Kogan, of New York City, for plaintiff.
    Ernst, Gale, Bernays, Falk & Eisner, of New York City (Edwin A. Falk and Edgar A. Samuel, both of New York City, of counsel), for defendant David A. Schulte.
    Hirson & Bertini, of New York City (Max L. Rothenberg, of New York City, of counsel), for defendant Park & Tilford, Inc.
    Roger S. Foster, Sol., Milton V. Freeman, Asst. Sol., and W. Victor Rodin, Atty., all of Philadelphia, Pa., for Securities and Exchange Commission, amicus curiae.
    Francis M. Shea, Asst. Atty. Gen., John F. X. McGohey, U. S. Atty., and John B. Creegan, Asst. U. S. Atty., for the United States.
   LEIBELL, District Judge.

Plaintiff, Marjorie D. Kogan, purchased 50 shares of Park & Tilford, Inc., common stock on the New York Stock Exchange on March 10, 1944. She sold 25 shares on April 28, 1944. The remaining 25 shares she registered in her own name on the transfer records of the corporation on May 3, 1944. Since March 10, 1944, she has been an owner of Park & Tilford common stock, and since May 3, 1944, she has been a stockholder of record. The corporation, Park & Tilford, Inc., is a Delaware corporation and its common stock is listed on the New York Stock Exchange.

On April 28th, 1944, her attorneys notified the corporation, Park & Tilford, Inc., that David A. Schulte had realized profits from purchases and sales of the stock of the corporation in violation of the Securities Exchange Act of 1934 (§ 16(b) and that the profits were recoverable by the corporation. Her attorneys requested that appropriate action be taken against Mr. Schulte within sixty days or else plaintiff would begin suit. On June 19th, as a result of that demand, the defendant Schulte submitted to the corporation a statement of his profits, pursuant to said section 16(b) of the Act, and enclosed his check for $264,580.50 “representing a sum equal to such profits”. His letter of transmittal also added that no one participated with him in any of the transactions and that no brokerage account was maintained by him in the name of anyone but himself. Thereafter Mr. Schulte repaid an additional sum of $247.07, making a total of $264,827.57. Apparently this additional payment followed an examination of his statement by an accountant for plaintiff, but just what it represented is not clear.

The statement accompanying Mr. Schulte’s payment of $264,580.50 covers sales made by him of stock which he purchased between October 20, 1942, and January 20, 1944. I have examined that statement and there are no records before me from which I can determine its accuracy, or whether the rule for computing profits as set forth in Smolowe v. Delendo Corporation, 2 Cir., 136 F.2d 231, 239, 148 A.L.R. 300, has been followed. Dates of purchases are given but no dates of sales and no prices for specific transactions. A footnote to the statement reads: “The Proceeds as above shown are from the highest priced sales within a six months period before and/or after the dates of the purchases.” The rule laid down in the Smo-lowe case is stated as follows: “The only rule whereby all possible profits can be surely recovered is that of lowest price in, highest price out- — -within six months.”

For 7,100 shares purchased between October 21, 1941, and September 22, 1942, the statement lists “no applicable sales”. For purchases of 1,000 shares on December 10, 1942, 500 shares on December 18, 1942, 200 shares April 1, 1943, 343 shares April 2, 1943, 800 shares April 24, 1943, and 59 shares May 28, 1943, there is also the notation “no applicable sales”, although there do appear sales for stock purchased between the dates of October 20, 1942, and June 2, 1943. I am not called upon to inquire further into those transactions on this motion because the motion is limited in its scope and seeks a partial summary judgment in relation to certain other transactions which admittedly are not included in the computations submitted by Mr. Schulte with his letter to the corporation dated June 19, 1944 enclosing the check for $264,580.50, nor are they covered by the later check of $247.07.

The present motion is for “* * * an order allowing the plaintiff to have partial summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure, against the defendant David A. Schulte, to the extent that the said David A. Schulte be directed to account for all profits made by him as a result of the purchase on January 31st, 1944, of 342 shares of $1.00 par common stock of the defendant Park & Tilford, Inc. on the conversion of 274 shares of 6% cumulative preferred stock of the said defendant Park & Tilford, Inc., and the subsequent sale or sales of 342 shares of common stock by the defendant David A. Schulte within a period of six months after the acquisition thereof on January 31st, 1944 and directing the defendant David A. Schulte to pay over the profits realized thereon together with interest to the defendant Park & Tilford, Inc. and for a severance of the action as to the other matters alleged in the complaint”.

Park & Tilford, Inc., opposes plaintiff’s motion on the grounds that the transactions for which summary judgment is requested are not embraced by the complaint, and that the motion threatens to prejudice the rights and interests of Park & Tilford, Inc. in a pending suit for $500,000 which the corporation has brought against the David A. Schulte Trust and which involves legal issues raised by the present motion.

Paragraph 12 of the complaint alleges that as a result of defendant Schulte’s trading, and that of his 1924 corporation, in stock of Park & Tilford, Inc., between 1942 and 1944, during the six months’ periods referred to in Title 15 U.S.C.A. § 78p (b), § 16(b) of the Securities Exchange Act of 1934, he earned profits at least in the sum of $1,000,000 to which Park & Tilford, Inc., is entitled under the provisions of the statute. And paragraph 15 charges that the representations by Schulte that his profits were $264,580.50 plus the $247.07 (a total of $264,827.57) were false and that he had derived additional undisclosed profits. It is also charged that the defendants Eisner and Pheifer, directors of Park & Tilford, Inc., conspired with Schulte to conceal such facts from the stockholders and to prevent the defendant, Park & Tilford, Inc., from instituting any action to recover the additional profits and failed and refused to have such action instituted. It is also alleged that the individual defendants were directors of Park & Tilford, Inc. and constituted a majority of the Board. Mr. Schulte’s answer pleads as a special defense that he paid $264,827.-57 to Park & Tilford, Inc., “in full of all money owing” said corporation. In my opinion the transactions, on which partial summary judgment is sought, are embraced within the broad allegations of the complaint, but if the complaint were not sufficiently broad, it might be deemed amended to include the essential allegations of the affidavits as to these particular transactions. Seaboard Terminals Corporation v. Standard Oil Co., 2 Cir., 104 F.2d 659.

I fail to see how the decision of this motion would prejudice the issues involved in the suit brought by the corporation against the Schulte Trust, which was instituted November 17, 1944. It appears that the Schulte Trust owned 6,604 shares of preferred stock of Park & Tilford, Inc. which the Trust converted into 8,255 shares of common stock on January 19, 1944. The Schulte Trust served an amended answer March 9, 1945, in that action, raising certain special defenses; and at least one of them is not involved in this litigation. The private arrangement with David A. Schulte to abide by the result of the suit against the Schulte Trust does not meet the requirements of section 16(b), which permits suit by an owner of a security against the insider for the profits if the issuer (Park & Tilford, Inc.) “shall fail or refuse to bring such suit within sixty days.”

The individual defendants in the case at bar urge that partial summary judgment should not be granted because there is an issue of fact as to whether the demand the plaintiff made on Park & Til-ford, Inc., to sue the defendant Schulte was broad enough to include the sale of the 342% shares, and as to whether plaintiff’s claim that further demand upon the corporation would be futile is well founded. I believe that the demand was broad enough. Further, the composition of the Park & Tilford’s board of directors, their close business and family relationship to David A. Schulte, their failure to take any action against the defendant Schulte until demand was made by plaintiff, although some of them probably knew of his stock operations, and their failure to take any action against the Schulte Trust until one of the directors, Mr. Pheifer, received a letter from the Securities and Exchange Commission calling his attention to the conversion by the Trust of preferred stock into common stock on January 19, 1944, and its sale of the common stock at a profit within six month's thereafter — all that presents a situation which in my opinion would excuse a further demand, if plaintiff’s first demand were not broad enough.- In the usual stockholder’s derivative action against directors, a showing of such facts would support an allegation in the complaint that a demand on the directors to bring the suit in the name of the corporation would be futile. Cohen v. Industrial Finance Corporation, D.C., 44 F.Supp. 491, at page 495.

The defendant Schulte contends that the transactions on which partial summary judgment is sought are not covered by section 16(b) of the Securities Exchange Act of 1934.

The following facts appear to be undisputed: That on or prior to May 10, 1942, the defendant, David A. Schulte, became the owner of 274 shares of preferred stock of Park & Tilford, Inc.; that the board of directors of the corporation at a meeting held on November 29, 1943, decided to call for redemption its outstanding preferred stock as of March 20, 1944; that notice of intention to redeem was served December 20, 1943, and the redemption price was fixed at $55 a share, plus any arrears of dividends; that the preferred stock contained a privilege to the holder thereof to convert his preferred shares into common stock of the corporation at any time prior to the redemption of the preferred stock; that on January 31, 1944, David A. Schulte made this conversion and received 342% shares of Park & Til-ford common stock in exchange for the 274 shares of preferred stock; that on said date, January 31, 1944, the 342% shares of common stock he thus received had a market value of 76%e per share; that thereafter and within a six months’ period he sold thousands of share of Park & Tilford common stock at prices in excess of 76%6 and realized profits on said sales; that David A. Schulte’s relationship to Park & Tilford, Inc., was such that he may properly be classed as an “insider”. He was the dominant figure in its aifairs.

Section 16(b) of the Securities Exchange Act of 1934 provides: “For the purpose of preventing the unfair use of information which may have been obtained by such beneficial owner, director, or officer by reason of his relationship to the issuer, any profit realized by him from any purchase and sale, or any sale and purchase, of any equity security of such issuer (other than an exempted security) within any period of less than six months, unless such security was acquired in good faith in connection with a debt previously contracted, shall inure to and be recoverable by the issuer, irrespective of any intention on the part of such beneficial owner, director, or officer in entering into such transaction of holding the security purchased or of not repurchasing the security sold for a period exceeding six months. Suit to recover such profit may be instituted at law or in equity in any court of competent jurisdiction by the issuer, or by the owner of any security of the issuer in the name and in behalf of the issuer if the issuer shall fail or refuse to bring such suit within sixty days after request or shall fail diligently to prosecute the same thereafter; but no such suit shall be brought more than two years after the date such profit was realized. This subsection shall not be construed to cover any transaction where such beneficial owner was not such both at the time of the purchase and sale, or the sale and purchase, of the security involved, or any transaction or transactions which the Commission by rules and regulations may exempt as not comprehended within the purpose of this subsection.”

There are two exemptions specified in Section 16(b); one is an exemption of equity securities “acquired in good faith in connection with a debt previously contracted”, and the other “any transaction * * * where such beneficial owner was not such both at the time of the purchase and sale, or the sale and purchase, of the security involved.” The first exemption will be hereinafter discussed. The second exemption above mentioned would not apply, because Mr. Schulte was the beneficial owner of the common stock both on January 31, 1944, and on the dates of the sales thereafter made.

There is also a third class of exemptions mentioned in general terms in section 16 (b), namely, “any transaction or transactions which the Commission by rules and regulations may exempt as not comprehended within the purpose of this subsection.” The Securities and Exchange Commission has not by any rule or regulation exempted from this subsection 16(b) the acquisition of equity securities, where the beneficial owner has obtained them by the exercise of the right of conversion of preferred stock into common stock of the issuing corporation. In fact, the Commission has taken just the opposite view on this motion, and in connection with some similar transactions of the Schulte Trust.

It has been urged on Mr. Schulte’s behalf that the acquisition of the 342% shares of common stock by him was not a purchase nor was it an exchange, but on the contrary it was a discharge by the corporation of its obligation to him as a preferred stockholder. The corporation’s obligation would not be in the nature of “a debt previously contracted”. There is no debt involved here, only an “equity security”. The first exemption of section 16(b) would not apply.

Prior to January 31, 1944, Mr. Schulte possessed a right to exchange his preferred stock for common stock of the corporation. The corporation could not force the exchange. Some voluntary act on Mr. Schulte’s part was required to bring about tlie exchange of his preferred stock for the common stock. He could have continued ■on as a preferred stockholder until the corporation redeemed the preferred stock for cash on March 20, 1944, at the price specified in the notice of redemption. The certificate of incorporation as amended July 22nd, 1937, provided that “the foregoing right to convert may be exercised with respect to the preferred stock so called for redemption at any time prior to said redemption date.” On January 31st, 1944, he ■exercised that right and that is the date from which the six months’ period is •measured under section 16(b).

A basic question presented is -whether the conversion of the 274 shares ■of preferred stock into 342% shares of common stock of Park & Tilford, Inc., on January 31, 1944, was a “purchase” of the -common stock within the meaning of the Act. Under Section 3(a) (13) of the Act, 15 U.S.C.A. § 78c(a) (13), “The terms ■‘buy’ and ‘purchase’ each include any contract to buy, purchase, or otherwise acquire.” The above quoted definition supplements and adds to the ordinary interpretation of the word “purchase”, so as to include not only any actual purchase but also any contract to buy, purchase or otherwise acquire. In the exercise of the conversion privilege on January 31, 1944, David A. Schulte acquired 342% shares of common stock from the treasury of Park & Tilford, Inc. He paid for it, not in cash but by delivering to Park & Tilford, Inc., 274 shares of its preferred stock. In my opinion, the transaction constituted a “purchase”. The consideration need not be cash.

The provision for the conversion of preferred into common stock at 'the option of .a stockholder is not any thing new or un-nsual. It is fairly common in securities of ■that type. Nothing has been called to my attention which would indicate any intention on the part of Congress to exempt from the provisions of Section 16(b) of the' Act any common stock acquired in an exchange for preferred stock. Indeed, it appears to have been the intention of Congress to strike down any means by which insiders, because of their special knowledge ■of the affairs of the corporation or the plans of its board of directors, might realize for themselves a “short swing” profit, which would be denied the other stockholders or the investing public, not enjoying such inside information.

We must not lose sight of the purposes of the statute. Judge Clark in Smolowe v. Delendo Corporation, supra, gives us a standard of interpretation which is applicable to the facts of the present case. He states (136 F.2d at page 239) : “The statute is broadly remedial. Cf. Wright v. Securities and Exchange Commission, 2 Cir., 112 F.2d 89. Recovery runs not to the stockholder, but to the corporation. We must suppose that the statute was intended to be thorough-going, to squeeze all possible profits out of stock transactions, and thus to establish a standard so high as to prevent any conflict between the selfish interest of a fiduciary officer, director, or stockholder and the faithful performance of his duty. Cf. Woods v. City Nat. Bank & Trust Co. of Chicago, 312 U.S. 262, 61 S.Ct. 493, 85 L.Ed. 820; In re Mountain States Power Co., 3 Cir., 118 F.2d 405; Otis & Co. v. Insurance Bldg. Corp., 1 Cir., 110 F.2d 333; In re Republic Gas Corp., D.C.S.D.N.Y., 35 F.Supp. 300.”

Another quotation from that opinion is applicable here: “It is naive to suppose that their knowledge of their own plans as officers did not give them most valuable inside knowledge as to what would probably happen to the stock in which they were dealing. It is difficult to find this use ‘unfair’ in the sense of illegal; it is certainly an advantage and a temptation within the general scope of the legislature’s intended prohibition.”

I believe that it would be running counter to the purpose of the Congress to say that the acquisition of the common stock by Mr. Schulte in exchange for the preferred stock on January 31, 1944, was not a purchase within the language, spirit and purpose of section 16(b) of the Securities Exchange Act of 1934.

Another contention of the defendant Schulte is that the particular transaction by which the conversion of the preferred into the common stock was made, took place in the State of Delaware at the main office of Park & Tilford, Inc., and that it was not a transaction in interstate commerce within the meaning of Article 1, Section 8, Clause 3 of the Constitution of the United States under which the Congress is granted power to regulate commerce among the several states. Admittedly Mr. Schulte was a resident of New York City. If Mr. Schulte had sent funds from New York to the corporation in Delaware to purchase common stock from the Treasury of the corporation, that would have been a transaction in interstate commerce. I believe that when a preferred stockholder sends to the main office of the corporation in another state his shares of preferred stock for the purpose of having them converted into the common stock of the corporation, a transaction in interstate commerce is had.

Finally the defendant Schulte attacks the constitutionality of section 16(b) of the Act as applied to the securities involved in the transactions which are the basis of plaintiff’s motion for partial summary judgment. He contends that if the exchange of his preferred stock for common stock comes within the purview of section 16(b) of the Securities Exchange Act of 1934 as a purchase, then the section is in that respect unconstitutional. The claim is made that the application of section 16(b) of the Act would constitute an impairment of the rights of the preferred stockholder and an impairment of the obligation of the corporation to its preferred stockholder:

The contract clause of the United States Constitution (Article 1, Section 10) prohibits any State from passing a law impairing the obligation of contracts. That is a limitation on the powers of the States, not on those of Congress. “Freedom of the people to enter into and carry out contracts in respect of their property and private affairs * * * is protected by the due process clauses of the Fifth and Fourteenth Amendments.” Restraints that are clearly unreasonable and arbitrary would be repugnant to the Amendments. See Highland v. Russell Car & Snowplow Co., 279 U.S. 253, at page 261, 49 S.Ct. 314, at page 316, 73 L.Ed. 688. But when contract rights are collaterally or incidentally impaired or destroyed by an Act of Congress, duly enacted pursuant to the powers conferred on Congress by the Constitution, the injured party may not complain. Continental Illinois Nat. Bank & Trust Co. of Chicago v. Chicago, Rock Island & Pacific Ry. Co., 294 U.S. 648, at page 680, 55 S.Ct. 595, 79 L.Ed. 1110. To regulate commerce among the several states (Art. 1, Sec. 8, Clause 3) is one of the powers thus conferred upon Congress, and in the exercise of that power contract rights may be collaterally or incidentally impaired or destroyed. Section 16(b) of the Securities Exchange Act of 1934 is a proper exercise of the Congressional power to regulate inter-state commerce. Smolowe v. Delendo Corporation, supra.

The fact is that the application of section 16(b) did not impair Mr. Schulte’s right to exchange his preferred stock for common stock of Park & Tilford, Inc. Not only did he have the right, but he exercised it. He made the exchange and he received the common stock on January 31, 1944. Neither his right to make the exchange of the preferred stock, nor his title to the common stock, was affected by the provisions of the Act. Nor did the statute prevent him from selling the common stock. Only the right to retain a profit on the sale of common stock within the six months’ period is affected by section 16(b).

Whether or not such statutory control is a violation of the due process guaranties of the Fifth Amendment was considered in Judge Clark’s opinion in the Smolowe case, supra. He said that the statute in effect “was but a new approach to the common-law attitude which had long recognized the reasonableness of enforcing a level of conduct upon fiduciaries ‘higher than that trodden by the crowd.’ See Mein-hard v. Salmon, 249 N.Y. 458, 464, 164 N.E. 545, 546, 62 A.L.R. 1.”

Defendants argued in their briefs that plaintiff lacked the capacity to sue in that she was not a stockholder of record at the time any claim might have arisen from the transactions in relation to the 342% shares of common stock. Mr. David A. Schulte, in an affidavit dated April 3, 1945, had stated:

“(2) The following is a statement showing the dates of sale and the proceeds received by me with respect to the 342% shares of common stock of Park & Tilford, Inc., sold by me within six months prior or subsequent to January 31, 1944. The prices set forth are the highest sales prices after eliminating the sales previously used in computing the amount of my payment to Park & Tilford, Inc., in the sum of $264,-827.57.
Daté of Sale No. of Shares Proceeds
March 23, 1944 42-1/2 $ 3,479.78
March 25, 1944 200 16,699.60
March 29, 1944 100 8,162.77
Total $28,342.15
“(3) The average market quotation of Park & Tilford, Inc. common stock on January 31, 1944 was 76-5/16, which figure multiplied by 342% amounts to $26,137.03. The difference, therefore, between the value of the common stock received by me in conversion and the prices allocable to the sales thereof is $2,205.12.”

All that section 16(b) requires is that the plaintiff be “the owner of any security of the issuer” (Park & Tilford, Inc.). She was thus qualified to act under section 16(b) at all times since March 10, 1944. I sought additional information as to Mr. Schulte’s transactions, especially as to these 342% shares.

In two later affidavits made by J. Donovan Pheifer (who states that he is familiar with the accounts of David A. Schulte including the accounts relating to the conversion of the preferred stock, the purchase of common stock and the sale of common stock for the period January 1, 1944 to July 31, 1944 in Park & Tilford, Inc., stock) the following sales are given: 42 shares of common at 91%, 100 shares at 91% and % shara at 89%, all on May 19, 1944. In an affidavit dated June 11, 1945, Mr. Pheifer states: “(2) Of the 342% shares of common stock of Park & Tilford, Inc. received by Mr. David A. Schulte in January, 1944 upon conversion of the 274 shares of preferred stock of that company, Mr. Schulte sold 142% on May 19, 1944. The remaining 200 shares are still owned and held by Mr. Schulte.”

Schedule A annexed to Mr. Pheifer’s affidavit of April 30," 1945, shows that on January 1, 1944, Mr. David A. Schulte owned 274 shares of preferred stock and 37,510 shares of common; that he purchased 1400 shares between January 17th and January 20th, 1944; that he converted his 274 shares of preferred into 342% shares of common on January 31, 1944 — a total of 39,252% shares; and that between January 20, 1944, and May 29, 1944, he sold 36,842% shares, and that he held from May 29, 1944, to July 31, 1944, the balance of 2410 shares.

I have tried to reconcile the data given in Mr. Schulte’s affidavit and in Mr. Pheifer’s affidavits, with the statement Mr. Schulte submitted to Park & Tilford, Inc., June 19, 1944, when he delivered to 'the corporation his check of $264,580.50, but I am unable to do so. But the effort has had at least this result that it convinced me that it would be unwise to attempt to dispose of this case piecemeal, granting partial summary judgment as to the 342% shares, and severing the balance of plaintiff’s claim for trial at a later term of the Court. While awaiting the additional data, set forth in Mr. Pheifer’s affidavits, I gave consideration to the briefs of counsel and I reached certain conclusions which I embodied in the draft of an opinion. I think I should make them a matter of record. Further, by filing this opinion it will be made clear that the plaintiff’s motion is denied, not because I believe her claim to be without merit, but because the best interests of the plaintiff and the corporation will be served by trying all the issues, especially as to the defendant Schulte’s profits, at one time. Motion denied; submit order on two days’ notice.


text:
    PINKUS v. WALKER et al.
    No. 5616.
    District Court, D. New Jersey.
    July 18, 1945.

      Fast & Fast and Louis Fast, all of Newark, N. J., for plaintiff.
    Thorn Lord, U. S. Atty., and Roger M. Yancey, Asst. U. S. Atty., both of Newark, N. J., for defendants.
   MEANEY, District Judge.

This action is brought by the plaintiff against Frank C. Walker, as Postmaster General, and Louis A. Reilly, as Postmaster of the City of Newark, to enjoin them from carrying into effect a fraud order made by the Postmaster General, excluding from the mails matter addressed to plaintiff, trading as American Health Aids Company.

The Postmaster General charged the plaintiff with conducting a scheme for obtaining money through the mails by means of false and fraudulent pretenses, representations and promises, in violation of sections 259 and 732 of title 39, U.S.C.A. ajid subsequently, after a hearing,' issued an order to the Postmaster at Newark, New Jersey, where plaintiff carried on its business, instructing the Postmaster at Newark to return to the senders any mail directed to the plaintiff, with the words, “Fraudulent: Mail to this address returned by order of Postmaster General”, stamped thereon, and further forbidding him to pay any money orders drawn to the plaintiff’s order.

A special appearance was made through the United States Attorney to dismiss the suit as to Frank C. Walker, as Postmaster General, for want of jurisdiction, on the ground that valid service of process upon the said defendant could not be made outside the territorial limits of this court; and for the reason that the court is without jurisdiction on the grounds that the Postmaster General is a necessary and indispensable party. Defendants move to dismiss as well against Louis A. Reilly, as Postmaster of the City of Newark, for the reason that the court is without jurisdiction over Frank C. Walker, a necessary and indispensable party defendant.

Plaintiff, alleging that the order is arbitrary, capricious and unwarranted, filed his complaint in this court against Frank C. Walker, as Postmaster General, and Louis A. Reilly, as Postmaster of the City of Newark, praying that defendants and their agents be permanently enjoined from obeying the order.

Prior to any determination as to the propriety of the fraud order, it is necessary that the court determine first whether there was a valid service of process upon the defendant, Frank C. Walker, as Postmaster General, bringing him within the jurisdiction of this court; and, secondly, wheth-i er the Postmaster General is an indispensable party to this action.

It is an established principle under the general rules of jurisdiction that the jurisdiction of a district court in an in personam action is limited to the district of which the defendant is an inhabitant or in which he can be found and, further, in a civil suit in personam, jurisdiction over the defendant, as distinguished from venue, implies, among other things, either voluntary appearance by him or service of process upon him at a place where the officer serving it has authority to execute a writ of summons. Robertson v. Railroad Labor Board, 268 U.S. 619, 45 S.Ct. 621, 69 L.Ed. 1119; Pine Hill Coal Co. v. Gusicki, 2 Cir., 261 F. 974.

In the instant case, it nowhere appears that a valid service of summons was made on the Postmaster General within the jurisdiction of this Court and hence no jurisdiction has been obtained. The consensus of cases holds that unless there are special statutory provisions authorizing service on an officer of the government outside the district where the suit is brought, such service may not effectively be made and no jurisdiction over the officer may be obtained. This is true unless the officer voluntarily appears and consents that the court take jurisdiction over him. In Transcontinental & Western Air v. Farley, 2 Cir., 71 F.2d 288 it was held that service of process on the Postmaster General in the District of Columbia was not good service against him in a suit in the District Court of the Southern District of New York.

I am satisfied that the defendant, Frank C. Walker, as Postmaster General, was not brought into this Court by any service admitted to be regular and valid, and accordingly the motion for dismissal as to him is granted.

The second motion raises a point considerably more difficult to determine. Is the Postmaster General an indispensable party to this action ?

The law on this point is not settled and there is much diversity of judicial opinion. Jarvis v. Shackelton Inhaler Co., 6 Cir., 136 F.2d 116. There have been several recent cases on this subject, in several of which an extensive examination of authorities was undertaken. See Neher v. Harwood, 9 Cir., 128 F.2d 846. Jarvis v. Shackelton, 6 Cir., supra. Varney v. Warehime, 6 Cir., 147 F.2d 238; Peoples Loose Leaf Tobacco Warehouse Co., et al. v. Cline, D.C.E.D.Ky., 58 F.Supp. 612. Compare also National Conference on Legalizing Lotteries v. Goldman, 2 Cir., 85 F.2d 66; Wheeler v. Farley, D. C., 7 F.Supp. 433.

It will be of no particular moment for this court to undertake a further analysis of the decisions, for as stated in the Jarvis case, supra [136 F.2d 121]: “The task of harmonizing these decisions is almost, if not altogether, impossible, and * * * we are reluctant to undertake it.”

Under such circumstances, I am compelled to follow the decisions that in my opinion embody the sounder reasoning and which will be most likely to best conform to the exigencies of the situation.

In Varney v. Warehime, supra, the court, in holding a superior official not to be a necessary and indispensable party, stated [147 F.2d 242]: “Matters of convenience and necessity are entitled to consideration. Citizens should not be compelled to seek a distant forum for litigation of their controversies with the Government, and likewise, public officials should not be compelled to neglect their duties to answer charges of usurpation of power in a distant forum.”

The court in the Varney case furthei pointed out that the right of intervention is available to a superior official in any suit where the subordinate is made a party defendant. In that case the court declared itself as adhering to the rule that where the plaintiffs in an action are not seeking to prevent subordinates from executing a discretionary order of their superior, but are challenging the power of the superior to make the regulation, it is not necessary to have the superior officer before the court. State of Colorado v. Toll, 268 U.S. 228, 45 S.Ct. 505, 69 L.Ed. 927; Brooks v. Dewar, 313 U.S. 354, 61 S.Ct. 979, 85 L.Ed. 1399; American School of Magnetic Healing v. McAnnulty, 187 U.S. 94, 23 S.Ct. 33, 47 L.Ed. 90; Jarvis v. Shackelton Inhaler Co., supra. Compare Appleby v. Cluss, C.C.N.J. 160 F. 984.

A similar decision is found in' the Jarvis case, supra, where the court said: “The dismissal of the bill would have been disastrous to appellee and the expense incident to new litigation hundreds of miles from home would have been equally crushing. * * * It would have been unjust and inequitable to have dismissed the bill for no other or better reason than adherence to a formal, and what we regard as an inapplicable, rule of equity pleading.”

It is my conclusion that the Postmaster General is not a necessary and indispensable party. In arriving at this determination, I have not been unmindful of the position in which the defendant may find himself. I do not conceive, however, that the fears expressed in National Conference on Legalizing Lotteries v. Goldman, supra, are of sufficient moment to compel a different result.

Accordingly, the motion as to Louis A. Reilly is denied.

The power of this court sitting in equity to review the order is limited to a determination of whether from the evidence adduced at the hearing there is substantial evidence of actual fraud in fact, and not the result of opinion, to support the fraud order.

If there is not such evidence, plaintiff has suffered irreparable injury by the mistaken act of the Postmaster General in issuing the order, and is entitled to the injunction he seeks. American School of Magnetic Healing v. McAnnulty, 187 U.S. 94, 23 S.Ct. 33, 47 L.Ed. 90. Jarvis v. Shackelton Inhaler, supra.

The plaintiff, trading as American Health Aids Company, is engaged in the business of distributing through the mails and in his store a formula known as Dr. Phillip’s Kelpidine Reducing Plan, which has for its purpose reducing of excess fat. Plaintiff advertised in many periodicals to the effect that adherence to the reducing plan will reduce fat without discomfort, exercise or restriction to any special dietary regimen, except as set forth in the plan.

The Solicitor, in his “Memorandum for the Postmaster General embodying a finding of fact and recommending the issuance of a fraud order”, has set forth in full, examples of plaintiff’s advertising in various newspapers and magazines, as well as scripts taken from radio advertising.

The advertisements appearing in print contain a picture of a shapely young woman standing beside scales. Each advertisement contains a blank order form in. which there is set forth an offer to refund any monies paid, to any dissatisfied user, under what is called a “Money Back Guarantee”. The advertisements in substance suggest that a user of Kelpidine will lose from three to five pounds a week, without exercise, the use of drugs or adherence to a strict reducing diet. The suggestion is that if the user merely cuts down on fatty and starch foods, and takes a half teaspoon of Kelpidine with any meal, the desired results will be obtained. There are also excerpts from letters of satisfied users, describing the satisfactory results obtained. In essence, all of the advertising contains the same material.

Additional evidence was adduced from two medical witnesses for the government, as well as one for the defense. The testimony of these experts was to the effect that such reduction of weight as might be accomplished would result from the diet or plan which it was suggested be followed, rather than from the beneficial qualities of the kelp. The expert testimony on the value of kelp as a reducing agent was in some dispute. It was not disputed that a reduction in weight of obese persons might be accomplished under the plan prescribed, though the amount would vary and the possibility of ill effects upon certain persons was present.

Also offered in evidence were testimonials from persons who had used the Kelpidine diet, none of which were shown to be untrue, and all of which indicated satisfactory results by those users.’

There was no indication that any of the advertisements held out the suggestion that the reducing plan would effect miraculous results for all corpulent persons, or that all would be similarly benefited. The advertisements in every case contained a money back guarantee which of itself indicated that this was not a universal remedy for all rotund figures. It is noted that the plaintiff did not undertake the marketing of his product without prior consultation and approval of medical authorities of good repute.

A careful examination of the Solicitor’s memorandum and of all the evidence adduced at the hearing leads me to the conclusion that there was insufficient evidence from which the Postmaster General could find actual fraud in fact on the part of the plaintiff. The evidence showed a divergence of opinion as to the effectiveness of the Kelpidine reducing plan and of the inherent values of kelp as employed therein. Such a showing is insufficient.

In American School of Magnetic Healing v. McAnnulty, supra, 187 U.S. 94, at page 105, 23 S.Ct. 33, at page 37, 47 L.Ed. 90, the Court stated: “As the effectiveness of almost any particular method of treatment of disease is, to a more or less extent, a fruitful source of difference of opinion, even though the great majority may be of one way of thinking, the efficacy of any special method is certainly not a matter for the decision of the Postmaster General within these statutes relative to fraud.”

And further, 187 U.S. 94, at page 106, 23 S.Ct. 33, at page 38, 47 L.Ed. 90, that court said: “* * * these statutes were not intended to cover any case of what the Postmaster General might think to be false opinions, but only cases of actual fraud in fact, in regard to which opinion formed no basis.”

If as a matter of fact, the course suggested by the complainant in his advertising is deleterious to health, it would appear that the remedy lies in other fields than those governed by postal regulations. Too frequently attempts are made to accomplish by indirection that which should be effected straightforwardly and directly. Surely the powers of government to protect the health and well being of its citizens can better be met by supervising agencies within the actual scope of medical control and by expert regulation, than by more or less arbitrary prohibition by the Post Office Department.

It is my conclusion that the fraud order was void. Accordingly, an order may be entered permanently enjoining the defendant, Louis A. Reilly, Postmaster of the City of Newark, from carrying into effect the fraud order heretofore issued by the Postmaster General.


author: KALODNER, District Judge.

text:
    BOWLES, Administrator, Office of Price Administration, v. BIBERMAN BROTHERS, Inc.
    Civil Action No. 3710.
    District Court, E. D. Pennsylvania.
    July 19, 1945.

      Robert J. Callaghan, Dist. Enforcement Atty., and Sydney M. Friedman, both of Philadelphia, Pa., for plaintiff.
    Shapiro & Shapiro, of Philadelphia, Pa., for defendant.
   KALODNER, District Judge.

This action for injunctive relief and treble damages was brought by the Administrator of the Office of Price Administration pursuant to Sections 205(a) and 205(e) of the Emergency Price Control Act of 1942, 56 Stat. 23, as amended, 50 U.S.C.A.Appendix § 925(a) and (e).

It is alleged that the defendant, Biberman Brothers Inc., a dress manufacturer, has engaged in acts and practices which constitute a violation of Section 4(a) of that Act, 50 U.S.C.A.Appendix'§ 904(a), in that it has violated Maximum Price Regulation No. 287 (7 F.R. 10460), as amended and revised, which establishes, inter alia, maximum prices for women’s and misses’ dresses sold by manufacturers other than at retail. The specific provision of the Regulation (hereinafter referred to as MPR 287) which is involved here is set out in the margin.

The cause came on to be heard by the Court without a jury, and, at the conclusion of the plaintiff’s case, defendant moved to dismiss reserving the right to proceed in the event the motion is denied. Rule 41(b), Federal Rules of Civil Procedure, 28 U.S.C.A. following section 723c.

The broad issue raised by the action is whether the defendant violated MPR 287. This question involves the construction of a written agreement entered into by and between the Philadelphia Waist and Dress Manufacturers’ Association, of which defendant is a member, the International Ladies’ Garment Workers' Union, and the Joint Board of Waist and Dressmakers’ Union of Philadelphia.

Asserting that the defendant overcharged on certain garments, plaintiff seeks injunc-tive relief as well as treble damages. The legal argument on the collateral issue relating to injunctive relief is, as I said in Bowles v. Katz, 61 F.Supp. 333, addressed to the exercise by the court of its discretion to grant or refuse the relief prayed for. The matter of damages, in this case, depends upon the construction of Section 10(b) of MPR 287, hereinafter referred to as Rule 2.

The plaintiff’s evidence and the stipulations of the parties disclose the following circumstances.

For several years prior to June, 1943, the defendant, as a member of the Philadelphia Waist and Dress Manufacturers’ Association, had been paying to its employees wage rates pursuant to a contract entered into by the Association and certain unions on September 12, 1940. In June, 1943, a dispute arose between the parties to the agreement regarding the right of the employees to a higher set of wage rates. Under the provisions of this agreement, the dispute was referred to the Impartial Chairman for the Industry, who rendered a de-cisión in writing on June 28, 1943. The Impartial Chairman held that because of a shift in the price lines of garments manufactured by the industry covered by the agreement, the employees were entitled to an additional amount of compensation for their work, and this amount was fixed at 8% per cent of the basic wage rates. Defendant thereafter paid its employees pursuant to the decision of the arbitrator, and considered the 8% per cent in its calculation of “direct labor costs” under the provisions of Section 30(a) (10) of MPR 287, set out in footnote 2, thus passing it on to the ultimate consumer.

The propriety of this action is strongly contested by the Administrator. He contends that the 8% per cent adjustment or increase may not be included as an item of “direct labor costs,” on the grounds that (1) the contract under which the new rate was granted did not provide for an unconditional increase of a fixed amount or per cent, and (2) the arbitrator erred in his construction of Clause 44, which, it is asserted, does not provide for an increase on the ground on which the Impartial Chairman acted.

The defendant is willing to admit that, if the 8i/2 per cent wage adjustment or increase is not allowable as an item of “direct labor costs”, then it has violated the Regulation. It contends, however, that, as a matter of law plaintiff may not recover the damages he seeks because he cannot show the maximum selling price for the garments which are alleged to have been sold above the ceiling prices; therefore it contends, plaintiff may obtain, at most, an injunction, but it is asserted, plaintiff’s evidence does not disclose facts which would warrant this Court in exercising its discretion to grant that relief.

Taking up the determinative issue in this case, whether there was a violation of the Price Control Act, it must be noted at once that under the Pennsylvania law, both common and statutory, “An arbitrator, in the absence of any agreement limiting his authority, is the final judge of both law and fact, and his award will not be reviewed or set aside for mistake in either.” Goldstein v. International Ladies’ Garment Workers’ Union, 1938, 328 Pa. 385, 389, 196 A. 43, 46; accord, Britex Waste Co., Ltd., v. Nathan Schwab & Sons, Inc., 1939, 139 Pa.Super. 474, 480, 12 A.2d 473; Pierce Steel Pile Corp. v. Flannery, 1935, 319 Pa. 332, 339, 179 A. 558, 104 A.L.R. 706; Patriotic Order Sons of America Hall Ass’n v. Hartford Fire Insurance Co., 1931, 305 Pa. 107, 116, 157 A. 259, 78 A.L.R. 899; see also Moyer v. Van-Dye-Way Corp., 3 Cir., 1942, 126 F.2d 339. There can be no doubt, therefore, that the arbitrator’s decision here involved was, and is, as binding upon the defendant as though it were a final, unappealable judgment. Whether Clause 44 of the contract actually did provide for an increase in wage rates for the reason given by the Impartial Chairman, and whether the facts warranted the rate granted, are questions forever closed to the parties to the agreement.

To my mind, a construction of Clause 44 here and now is unnecessary and inappropriate. The arbitrator’s construction is, by the express terms of the contract, and by law, now a part of the contract itself. His construction is a final declaration as to the meaning of the Clause as intended by the parties to the agreement, which intention should control the process of interpretation by this Court.

The immediate question, however, is not whether Clause 44 was construed correctly, but whether the increase granted by the Impartial Chairman may be considered as an item of “direct labor costs” within the meaning of Section 30(a) (10) of MPR 287. Insofar as increases subsequent to March 31, 1942, are concerned, that Section sets up four conditions which must be satisfied in order that an increased wage rate be considered an item of direct cost: the increase must be made (1) pursuant to a collective bargaining contract or other wage agreement, (2) which was entered into on or before July 1, 1942, and which provides (3) for an unconditional increase (4) of a fixed amount or per cent.

It is not disputed that the collective bargaining contract here in controversy was entered into before July 1, 1942. Moreover, I think there can be no doubt that the increase or adjustment was granted pursuant to a collective bargaining agreement— whether it was granted rightly or wrongly by the arbitrator is irrelevant.

Although the plaintiff asserts that the agreement does not provide for an increase unconditional in nature, his argument is, in truth, directed to whether or not- Clause 44 embraces the ground on which the new rate was granted. However, as found by the Impartial Chairman, Clause 44 contemplates a change in wage rates coincident with a transfer of product or type of work during the life of the contract. Moreover, the clause makes it an obligation on the part of the defendants to pay, and on the part of its employees to accept, rates applicable to the product they now produce, which rates they would have been required to pay, and accept, had they produced such products, in the manner they now produce them, at the time the contract went into effect. In addition, he determined that the wage rates for the different price lines had been established for years in the industry. In my opinion, therefore, the collective bargaining agreement here involved does provide for an unconditional change in wage rates under the circumstances of this case, and the change which it contemplates was, and is, obligatory and without reservation.

Finally, plaintiff contends that the agreement does not provide for an increase of wage rates of a fixed amount or per cent. The agreement, however, specifically provides that the wage scale for garments other than those for which the instant agreement was intended should be governed by the provisions of the agreements for such other garments. As construed by the Impartial Chairman, the parties intended this provision to apply in the situation which exists here. Further, he determined that there was established in the industry a definite wage differential which the manufacturers had agreed to maintain and that that rate had long been established at 15%. It is true that Qause 44 does not state explicitly the fixed amount or per cent of the increase or adjustment, but it accomplished the same result by reference. The fact that the Impartial Chairman fixed a rate lower than 8%% is, in my opinion, not decisive. If defendants were required to pay 15% rather than 8%'%, and could include that amount in their computation of “direct labor costs”, certainly they could include the lesser amount. It is interesting to note that the arbitrator fixed a lower percentage than that established in the industry solely because the Union desired a market-wide, uniform result, and therefore was willing to sacrifice part of that which it might have otherwise obtained.

For the reasons stated, it is my opinion that the additional Sy¿% wage rate granted by the Impartial Chairman was includable as an item of “direct labor costs” within the meaning of Section 30(a) (10) of MPR 287.

Because of the view I have taken, it is not essential that this Court rule on the collateral questions relating to injunctive relief and damages. However, since these matters have received so much attention from the parties, I am constrained to discuss them briefly. I am moved to consider the question of damages particularly, for it involves an interpretation of Rule 2 and is of great importance to the efficient enforcement of the Price Control Law. I do so also because in my opinion this section as presently stated imperatively requires clarification and implementation by the Administrator so that those who function under it, the enforcement officials and the manufacturers alike, may have a clear and concise understanding of the requirements the Rule imposes and its legal effect.

As to the injunction:

Even assuming that the adjustment ordered by the Impartial Chairman is not an item of “direct labor costs” and assuming that therefore the defendants have violated the Regulation, it is my opinion that the circumstances would not warrant this court in issuing an injunction. Plaintiff’s case does not disclose evidence of violations of such character and degree of wilfulness, nor of such continuity and duration as to justify the conclusion that the defendant will, in the future, violate the Price Control Law unless the injunctive relief sought is granted. Brown v. Standard Oil Co., D.C., 52 F.Supp. 1022. Moreover, there is a failure of plaintiff’s evidence to show that the inclusion of the 8%% item by the defendant in its computation of direct costs was done with any intention inconsistent with the spirit of price controls; there is no evidence of an attempt on the part of the defendant to evade the law, nor is there evident a negligent failure oil its part to conduct its business in accordance with the law. It is conceded that the dress manufacturers of Philadelphia and their employees have been operating under contracts and practices which have established the Impartial Chairman as the virtual “czar” of the industry with powers akin to those exercised by the “czar” of baseball. As already stated, under the facts and the law, the decision of the Impartial Chairman was final and absolutely compelling on both the employer and labor. Moreover, it is admitted by the plaintiff that failure of the defendant and other employers to pay the rate ordered by the arbitrator would probably result “in a strike in the industry with the resultant chaos”. Furthermore, defendant, being bound to pay the new rate, in good faith and on the advice of counsel, considered that it was a proper item of “direct labor costs.” Although the increase was ordered on June 28, 1943, it was not until September 11, 1943, that the members of the Association were advised by the Office of Price Administration not to include the rate in their calculations, and not later than January 29, 1944, the defendant stopped the practice. In the face of these facts, for the Court to rule that the defendant was guilty of wilful intent to violate the Price Control Laws would be utterly contrary. As additional evidence of the good faith of the defendant plaintiff’s evidence discloses that one style was sold by it substantially below the maximum price as computed by the Office of Price Administration.

As to damages:

With respect to plaintiff’s claim for damages under Section 205(e) of the Act, it is obvious that, in order to assess damages — in order to fix the amount of the alleged overcharges — it is essential to know, or to be able to determine, the maximum selling prices. Plaintiff contends that Rule 2 provides a method for determining a maximum selling price while defendant urges that the Rule cannot be used for such a purpose.

Upon full consideration of the parties’ contentions, I am of the opinion that Rule 2 was designed to provide a method for ascertaining a minimum allowable cost, and that only, and was intended to cover only a case where a manufacturer, having established price lines filed with the OPA, exercised his option to sell at an intermediate price line. No such situation exists here, and Rule 2 is inapplicable.

Consequently, damages cannot be calculated or awarded, since plaintiff has conceded that there is no other regulation applicable to the facts of this case, under which a maximum selling price (an indispensable element in the fixing of damages) may be determined or ascertained.

For the reasons stated, the defendant’s motion to dismiss is granted.

       MPR 287 (8 F.R. 9122), as amended, 2 Pike & Fischer, OPA Consumers’ Goods Desk Book, Page 28, 101.

       Section 10(b) is as follows:
      “Rule 2: Sales at selling price lines different from those listed on the pricing chart. A manufacturer may, at his option, sell a garment in a selling price line different from those listed on his pricing chart: Provided, the garment contains the minimum allowable cost for the selling price line: And provided also, That the selling price line is not higher than the highest selling price line listed on his pricing chart in effect on the date of delivery for a garment of the same category number. The maximum allowable margin for the optional selling price line is the maximum allowable margin listed on the pricing chart for a garment of the same category number in either the next higher or the next lower selling price line, whichever margin is lower. The minimum allowable cost is calculated by multiplying the optional selling price line by the lower maximum allowable margin thus selected and subtracting the result from the optional selling price line.
      “If the manufacturer selects a selling price line lower than the lowest selling price line listed on his Spring Pricing Chart for a garment of the same category number, he must use, as his maximum allowable margin, the maximum allowable margin of that lowest selling price line.”
      Section 30(a)10 reads, in part, as follows:
      “ ‘Direct labor costs’ shall be calculated on the basis of wage rates paid by you on March 31, 1942, plus any subsequent increase thereto pursuant to a collective bargaining contract or other wage agreement, which contract was entered into on or before July 1, 1942, and provides for an unconditional increase of wage rates of a fixed amount or per cent. If you paid wage rates at the time of cutting in excess of the above basis, proper downward adjustments shall be made in calculating the labor costs for the garments.”

       Clause 44, the pertinent provision here, provides:
      “The wage scales, hours and prices on garments or articles manufactured by the members of the Association other than those for which this agreement is intended shall be governed by the provisions of the Union agreements in the respective industries for such other garments or articles. The present special arrangement concerning rayon garments shall continue.
      In the event of any dispute under this paragraph, the matter shall be referred to the Impartial Chairman, whose decision shall be binding.”