author: COXE, District Judge.

text:
    SUN-HERALD CORPORATION v. DUGGAN. NEWS PUB. CO. OF BALTIMORE CITY v. SAME.
    District Court, S. D. New York.
    July 25, 1945.

      DeForest & Elder, of New York City (Neil P. Cullom and Eli J. Blair, both of New York City, of counsel), for plaintiffs.
    John F. X. McGohey, U. S. Atty., of New York City (Laurence H. Axman, Asst. U. S. Atty., of New York City, of counsel), for defendant.
   COXE, District Judge.

. These are separate actions brought by Sun-Herald Corporation (hereinafter referred to as “Sun-Herald Co.”) and News Publishing Company of Baltimore City (hereinafter referred to as “News Co.”) for the refund of income taxes alleged to have been illegally collected for the year 1930. Both actions were commenced on| August 6, 1942. In the Sun-Herald Co. action, a recovery of $15,073.18, with interest, is sought, represented by a tax payment of $14,193.57 on September 22, 1931, and interest payments of $876.61 on October 18, 1932, and $3 on January 26, 1933. In the News Co. action, the prayer is for $39,809.-79, with interest, represented by a tax payment of $16,153.92 on September 22, 1931, an interest payment of $1,001.10 on October 18, 1932, and a tax and interest payment of $22,654.77 on January 27, 1933.

The actions grow out of the administration of the estate of Frank A. Munsey, who died on December 22, 1925, leaving his entire residuary estate to the Metropolitan Museum of Art in the City of New York. The complaints allege that the income upon which the taxes were assessed and collected belonged to the Museum, and was exempt from taxation. The defendant in his answers not only denies that the income was exempt from taxation, but alleges that the claims for refund are insufficient to support the actions.

The actions involve substantially the same facts, and were tried together. They will accordingly be disposed of in one opinion.

Mr. Munsey’s will was admitted to probate on January 11, 1926, and letters testamentary were thereupon issued to William T. Dewart, Richard H. Titherington and Guaranty Trust Company of New York. By his will, Mr. Munsey, after making provision for a number of general legacies and some trusts, left his entire residuary estate to the Metropolitan Museum of Art in the City of New York. After the probate of the will, and on December 28, 1927, the Museum caused Museum Estates, Inc., to be incorporated in New York for the purpose of taking over and liquidating Mr. Munsey’s residuary estate. It is conceded by the defendant that both the Museum and Museum Estates, Inc., are corporations exempt by law from the payment of income taxes under the Revenue Act of 1928.

During his lifetime, Mr. Munsey’s assets were, for the most part, held in the names of various corporations, the stock of all such corporations, including that of the plaintiffs, being held by the Frank A. Munsey Company, a New York corporation, all of the stock of which was in turn held by Mr. Munsey.

The Sun-Herald Co. was organized in New York on January 28, 1920, with an authorized capital of 1000 shares without par value, and for a time it operated the New York Herald and the New York Sun, newspapers published in New York City. By the end of 1924, the corporation had disposed of the New York Sun, and was continuing the operation of the New York Herald. On December 31, 1924, it sold the New York Herald to the New York Tribune, Inc., receiving in payment ten promissory notes, each for $450,000, aggregating $4,500,000. These notes carried interest at the rate of 5% per annum, and were payable serially over a period of years to and including March 18, 1939.

The News Co. was organized in Maryland on February 28, 1908, with an authorized capital of 20 shares of a par value of $50 each, and for some years it operated the Baltimore News and the Baltimore American, newspapers published in Baltimore. During the year 1923, the corporation sold both newspapers to Mr. Hearst, and on December 31, 1923, received in payment ten promissory notes of the Evening News Company, each for $180,000, aggregating $1,800,000, and ten promissory notes. of the Baltimore Publishing Company, each for $120,000, aggregating $1,-200,000. All of these notes were endorsed by Mr. Hearst, carried interest at the rate of 6% per annum, and were payable serially over a period of years to and including March 31, 1935.

On the sale of the newspaper properties, News Co. made a taxable profit of $685,-048.46, which was set up on its books as a deferred profit to be returned in ten annual installments at the rate of $68,504.-84 a year. The account on the books shows deductions of $68,504.84 for each year from 1925 through 1930, with an unrealized balance of $342,524.23 at the end of 1930, which was later transferred to Museum Estates, Inc., as of December 18, 1930. This transfer closed the transaction with respect to the notes, and the Bureau accordingly proposed a substantial additional tax to cover the unreturned profit, which was protested by News Co. on the asserted ground that the fair market value of the notes at the time of the transfer on December 18, 1930, was considerably less than their face value. A conference was thereafter held on November 18, 1932, between Mr. Thorne, attorney for News Co., and representatives of the Bureau, at which an adjustment was reached, and an agreement entered into in which News Co. consented to an additional tax for 1930 of $20,492.91 on account of the deferred profit on the notes. This amount of $20,492.91, with interest of $2,161.86, constituted the payment of $22,654.77 on January 27, 1933,

In the administration of Mr. Munsey’s estate, the executors generally disregarded the corporate entities of the different corporations, and treated the assets largely as the personal assets of Mr. Munsey. By the end of 1927 the liquidation of the estate had proceeded to such an extent that the executors were ready to transfer to the Museum the entire residuary estate upon receipt of indemnity with respect to the outstanding indebtedness. At that time, the unpaid Tribune notes held by Sun-IIerald Co. aggregated $3,150,000 face amount, and the unpaid Evening News and Baltimore Publishing notes held by News Co. aggregated $2,400,000 face amount. The News Co. also owned a parcel of real estate in Baltimore known as the Centre Street property, which it carried on its books at $206,195.13, before depreciation.

On February 29, 1928, a meeting was held at the office of the attorneys for the individual executors, which was attended by the executors, their attorneys, and by the Museum and its representatives and attorneys. At this meeting all of the property comprising the residuary estate was transferred to the Museum. An agreement was then entered into between the executors and the Museum, in which the Museum receipted for the securities and properties turned over, as specified in an attached schedule marked Schedule A. Sheet 2 of this schedule lists 1000 shares of Sun-Herald Co. stock at $3,150,000, and 20 shares of News Co. stock at $3,148,434, but the notes payable to the two corporations are neither specified nor referred to in any way. These notes were, however, delivered unendorsed to R. E. Cocks, treasurer of Museum Estates, Inc., and receipted for by him; on the following day, March 1, 1928, they were placed in a safe-keeping account in the name of Museum Estates, Inc., in the Guaranty Trust Company, where they remained until paid.

Soon after February 29, 1928, the New York Tribune, Inc., sent to Frank A. Mun-sey Company two checks aggregating $141,-202.41 to apply on the Tribune Notes. One of these checks was made payable to Sun-Herald Co. and the other to Frank A. Munsey Company. The checks were immediately endorsed to the order of Museum Estates, Inc., and forwarded to Mr. Cocks, the treasurer of the corporation. At the same time, the New York Tribune, Inc., was advised by Frank A. Munsey Company to make future checks “payable to the Museum Estates Inc., and deliver them to Mr. Cocks.” This was followed a few days later by a letter from Mr. Cocks to the New York Tribune, Inc., advising that the Tribune notes were being held by the Guaranty Trust Company for Museum Estates, Inc., and that “future communications relating to these notes should be addressed to Museum Estates, Inc.” In accordance with these instructions, the next check on account of the notes was made payable to Museum Estates, Inc., but subsequent checks were made payable to Sun-Herald Co. and immediately endorsed by that corporation and turned over to Museum Estates, Inc.

On April 5, 1928, Mr. Cocks advised the makers of the notes payable to News Co. that the “balance due on .these notes has been assigned to the Museum Estates, Inc.,” and requested that future communications relating thereto be sent “in care of our Personal Trust Department.” This notice was apparently ignored, for subsequent payments on the notes were made by checks to News Co., which were promptly endorsed by that corporation and turned over to Museum Estates, Inc.

All payments of principal and interest on the Tribune notes after February 29, 1928, and until December 18, 1930, are recorded in the books of Sun-Herald Co. The books of Museum Estates, Inc., likewise show that all of such payments were received during that period from Sun-Herald Co. Moreover, the books of Sun-Herald Co. (Installment Notes Receivable Account) show that the notes were carried as assets of the corporation until December 18, 1930, when the notes remaining unpaid were endorsed over to Museum Estates, Inc. The income tax returns of Sun-Herald Co. for 1928, 1929 and 1930 record the interest payments on the notes for those years as having been received by Sun-Herald Co., and the inventory figures appearing in the returns include the amounts unpaid on the notes. The books of News Co. similarly record the receipt of all payments of principal and interest on the Evening News and Baltimore Publishing notes to December 18, 1930, and these entries are in turn supported by the books of Museum Estates, Inc., which show the receipt of the various items during the period from News Co. The income tax returns of News Co. for 1928, 1929 and 1930 likewise record the interest payments on the notes as having been received by News Co., and include in the inventory figures the amounts unpaid on the notes.

On December 18, 1930, the directors of Sun-Herald Co. passed a resolution reciting that “the sole assets of the Sun-Herald Corporation consist of certain notes of New York Tribune, Inc., amounting to two million two hundred and fifty thousand dollars ($2,250,000), with interest accrued thereon, and certain indebtedness owed to the corporation by Museum Estates Inc.,” and that “it is desired to dissolve the Sun-Herald Corporation and to turn over its assets to Museum Estates, Inc.,” and directing that the corporation be dissolved and that all of the notes of the New York Tribune, Inc., aggregating $2,250,000, with accrued interest, be assigned and transferred to Museum Estates, Inc. Following this action, the notes were endorsed to Museum Estates, Inc., and appropriate entries to that effect were made on both the Sun-Herald and the Museum Estates books.

The directors of News Co. also met on December 18, 1930, and passed a resolution similar to that adopted by the directors of Sun-Herald Co. This resolution recites that the assets of News Co. consist of

Notes of Evening News Company .................... $ 900,000.00

Notes of Baltimore Publishing ..................... 600,000.00

Real Estate at Centre St., Baltimore, valued at...... 206,195.13

5 shares Merchants & Manufacturers Association Building Inc. preferred stock ................... 500.00

Owed by Museum Estates, Inc...................... 2,700,765.06

and, further, that “it is desired to turn over to Museum Estates, Inc., the said notes of the Evening News Company and of the Baltimore Publishing Company,” and that “the remaining assets of the Corporation will be amply sufficient to take care of its liabilities.” It was then resolved that there be assigned and transferred to Museum Estates, Inc., “all the said notes of the Evening News Company, aggregating $900,000, and all the said notes of the Baltimore Publishing Company, aggregating $600,000, with accrued interest.” The notes were thereupon endorsed to Museum Estates, Inc., and the necessary entries were made on the books of News Co. and Museum Estates, Inc., to reflect the transaction.

During the period from February 29, 1928, to December 18, 1930, Sun-Herald Co. had no employees or salaried officers, and was for all practical purposes out of business, except insofar as it was necessary to handle the payments on the Tribune notes. The income tax return of the corporation for 1930 shows net income of $118,279.75, upon which a tax of $14,193.-57 was assessed. This tax, with interest, was paid by Museum Estates, Inc. The situation with respect to News Co. during the period was similar to that of Sun-Herald Co., except that News Co. continued to own the Centre Street property in Baltimore, from which it derived some revenue. The 1930 return of the corporation shows net income of $134,615.96, upon which a tax of $16,153.92 was assessed. This tax, with interest, and the additional tax of $20,492.91, with interest, were also paid by Museum Estates, Inc.

Separate claims for refund of the taxes were filed by the two corporations, respectively, on May 23, 1933, and it is conceded that these claims were timely filed. Neither claim was, however, allowed or disallowed, and on March 30, 1936, after the time for filing claims for refund had expired, additional claims, each labelled “Amended claim,” were filed. The defendant insists that these later claims are not proper amendments of the original claims, and should be ignored.

There is little to distinguish between the claims for refund of the two corporations, and it will be sufficient for the present purpose merely to refer to the claims filed by Sun-Herald Co. The pertinent parts of the original claim of that corporation are as follows:

“The late Frank A. Munsey * * * owned all of the stock of the above named corporation, * * * through the medium of the Frank A. Munsey Co., a holding company wholly owned by him. He left his entire residuary estate to the Metropolitan Museum of Art, and on March 1, 1928, all of the said stock * * * was transferred and turned over * * * to Museum Estates Inc. * * * On and after said date, March 1, 1928, it had no property or assets of any kind whatsoever, except notes which had been received by it on the sale of its newspaper property, of which there were outstanding on March 1, 1928, $3,150,000. On and after the said date, March 1, 1928, the sole function and activity of the said corporation was to collect the interest and principal of the said notes and turn over the same to the Museum Estates, Inc. * * *; its officers had no function or duty except to endorse over to the Museum Estates Inc. the checks received by it * * *. It was merely a conduit through which the Metropolitan Museum received the income of the holdings which actually belonged to the Museum Estates Inc. * * *, The Sun-Herald Corporation was, therefore, an exempt corporation.”

The so-called amended claim of Sun-Herald Co. eliminates the allegation of the original claim that after March 1, 1928, Sun-Herald Co. “had no property or assets of any kind whatsoever, except notes * * *, of which there were outstanding on March 1, 1928, $3,150,000 ” and substitutes in its place an allegation that on or about February 29, 1928, the executors turned over to Museum Estates, Inc., all of the stock of Sun-Herald Co. “and at that time the Museum Estates, Inc. received the notes * * * pursuant to an agreement and understanding that the Sun-Herald Corporation would collect the interest and principal of the notes for the use and benefit of the Metropolitan Mweum of Art and its holding company, Museum Estates, Inc.” There is a further allegation that after February 29, 1928, Sun-Herald Co. “was in substance and effect acting as trustee * * * and a mere conduit * *

1. The first question is whether the so-called amended claims are proper amendments of the original claims. These amended claims were filed on March 30, 1936, after the two year limitation period had expired, Rev. Act of 1928, § 322(b) (1), 26 U.S.C.A. Int.Rev.Acts, page 436; they cannot, therefore, be sustained as independent claims. I do not think, either, that they can be upheld as proper amendments of the original claims. United States v. Andrews, 302 U.S. 517, 58 S.Ct. 315, 82 L.Ed. 398; Pink v. United States, 2 Cir., 105 F.2d 183; Socony Vacuum Oil Co. v. United States, 2 Cir., 146 F.2d 853. The original claims are specific and allege that the plaintiff corporations owned the notes which produced the taxable income. The amended claims omit this allegation and allege that on February 29, 1928, the Mun-sey executors turned over to Museum Estates', Inc. all of the stock of the two corporations, and at the same time the Museum Estates, Inc., received the notes held by the respective corporations pursuant to an agreement and understanding that each corporation would collect the interest and principal of the notes for the use and benefit of the Museum. It will thus be seen that the amended claims allege entirely new facts which were not present in the original claims. Whether a second claim for refund may be treated as an amendment of a pending original claim “depends upon the facts which an investigation of the original claim would disclose.” Pink v. United States, supra, 105 F.2d at page 187; Socony Vacuum Oil Co. v. United States, supra, 146 F.2d at page 854. Here, an investigation of the original claims would not have disclosed the new facts alleged in the amended claims, but, on the contrary, would have shown from the books, records and income tax returns of the plaintiff corporations, as well as from, the books of the Museum Estates, Inc., that the notes were owned by the plaintiff corporations.

2. The next question concerns the tax and interest payment of $22,654.77 made-on January 27, 1933, on account of the closing of the installment deferred profit on the notes received by News Co. on the sale of the newspaper properties in 1923. The amount of this tax was determined by adjustment on November 18, 1932, and News Co. at that time entered into an agreement consenting to the assessment and collection of an additional tax for 1930 of $20,492.91, together with interest. I think this was a binding agreement on the part of News Co.; but in any event I am satisfied that .there can be no recovery of the payment inasmuch as the claim for refund failed to set forth any facts to substantiate the claim.

3. The question remains whether the actions can be maintained on the basis of the original claims for refund. It is the contention of the plaintiffs on this branch of the cases that the income from the notes belonged to the Museum and was exempt from taxation; and, further, that the plaintiffs were mere conduits through which the income flowed to the Museum. This same contention was pressed by Sun-Herald Co. in the former litigation involving the taxes for 1928 and 1929, and was rejected by the Circuit Court of Appeals. Sun-Herald Corporation v. Duggan, 2 Cir., 73 F.2d 298, certiorari denied 294 U.S. 719, 55 S.Ct. 546, 79 L.Ed. 1251. In that case, the claims for refund were identical with the original claims in the present actions, and it was held (1) that Sun-Herald Co. was not entitled to exemption under section 103(14) of the Revenue Act of 1928, 26 U.S.C.A. Int.Rev.Code, § 101(14), as a corporation “organized for the exclusive purpose of holding title to property,” and (2) that there was no warrant for treating the income of Sun-Herald Co. as that of Museum Estates, Inc. The part of the opinion dealing with the second ground of the decision is as follows at page 300 of 73 F.2d:

“It is argued by the taxpayer that Slocum v. Bowers, D.C., 15 F.2d 400, affirmed, C.C.A., 20 F.2d 350, and Edwards v. Slocum, 264 U.S. 61, 44 S.Ct. 293, 68 L.Ed. 564, and Lederer v. Stockton, 260 U.S. 3, 43 S.Ct. 5, 67 L.Ed. 99, govern the present case, and that because the Sun-Herald Corporation was a holding company for the Metropolitan Museum of Ar.t (an organization itself exempt from tax) it falls within section 103(14) of the statute. But 'in both Slocum v. Bowers and Lederer v. Stockton it was the income of estates which had accumulated in the hands of executors or trustees that was held to be free from taxation. Here, however, we do not have the case of a fiduciary and a beneficiary who is the equitable owner of income of a trust, but of the Sun-Herald Corporation, a business corporation that is an entity entirely separate from Museum Estates, Inc. We are not justified in treating the two as identical or the income of Sun-Herald Corporation as that of Museum Estates, Inc. The income of the Sun-Herald must be regarded as that of any corporation organized to conduct a newspaper business.”

This decision was later qualified in Roche’s Beach, Inc., v. Commissioner, 2 Cir., 96 F.2d 776, insofar as it held that the word “organized” as used in the statute meant “incorporated,” but the decision in other respects was left undisturbed. Indeed, it was expressly stated at page 778 of 96 F.2d of the opinion in the Roche’s Beach case that: “The decision in the Duggan case was correct, for the real issue was whether a subsequently formed purpose to hold the property of a business corporation for an exempt institution to which all its stock had been given entitled it to exemption under section 103(14).” I think, therefore, that the Sun-Herald case is controlling on both grounds of decision with respect to the issues in the present actions.

It is, however, insisted by the plaintiffs that the record in the present actions differs from that in the former case in that it shows that after February 29, 1928, the notes which produced the taxed income were actually owned by Museum Estates, Inc., and not by the plaintiff corporations. There are, I think, two answers to this contention. In the first place, the original claims for refund in the present actions are identical with the claims for refund involved in the former case, and these claims allege that the ownership of the notes was after March 1, 1928, in the plaintiff corporations. In the second place, the evidence in the present actions was that the unendorsed notes were physically delivered to Museum Estates, Inc., on February 29, 1928, but that no actual transfer of ownership was made until after the resolutions directing the transfer were passed by both corporations on December 18, 1930. I do not believe that it was mere inadvertence that the notes were not endorsed to Museum Estates, Inc., on February 29, 1928, for the failure to list the notes in the schedule attached to the agreement of that date, and the subsequent book entries, cannot be reconciled with any theory other than that it was intended at the time of the transfer of the residuary estate to Museum Estates, Inc., on February 29, 1928, to leave the ownership of the notes in the plaintiff corporations. I find as a fact, therefore, that in 1930 the ownership of the notes which produced the taxed income was in the plaintiff corporations just as alleged in the original claims for refund.

There may accordingly be a judgment for the defendant in each of the actions dismissing the complaint, with costs.


source: Caselaw Access Project

author: BARKSDALE, District Judge.

license: Public Domain

text:
    WALLING, Administrator, Wage and Hour Division, U. S. Dept. of Labor, v. MOORE MILLING CO., Inc.
    No. 241.
    District Court, W. D. Virginia, at Roanoke.
    July 25, 1945.
    Lemuel H. Davis, Regional Atty., and William R. Allcott, Senior Atty., U. S. Department of Labor, both of Richmond, Va. (Douglas B. Maggs, Solicitor of Labor, and Archibald Cox, Associate Solicitor of Labor, U. S. Department of Labor, both of Washington, D. C., on the brief), for plaintiff.
    Frank G. Davidson, Jr., of Lynchburg, Va., for defendant.
   BARKSDALE, District Judge.

On April 23, 1945, the plaintiff, L. Met-calfe Walling, Administrator of the Wage and Hour Division of the Department of Labor, filed his complaint against Moore Milling Company, Inc., alleging that defendant, a resident of this District, was engaged in the production, sale and distribution of flour, meal, and similar products, in interstate commerce, was subject to the provisions of the Fair Labor Standards Act, 29 U.S.C.A. § 201 et seq., and had violated the provisions thereof as to wages and hours of labor in its employment of three of its employees. In the complaint, plaintiff prayed for a preliminary and permanent injunction. Plaintiff filed an affidavit supporting the allegations of his complaint, and upon plaintiff’s motion, I entered an order requiring the defendant to show cause why a preliminary injunction should not issue restraining it from further violations of the Act. On the return day of the show cause order, a hearing was had, and defendant moved to quash the order to show cause, upon the ground that such a procedure was not sanctioned by the Rules of Civil Procedure, 28 U.S.C.A. following section 723c. This motion was overruled, and evidence was introduced both in support of and against plaintiff’s motion for a preliminary injunction.

At the conclusion of the testimony, brief arguments of counsel were'heard. The respective contentions of counsel raised three questions for determination:

(1) Was the entry of an order to show cause a proper procedure?

(2) Were the three employees in question employed in a bona fide executive capacity under Section 13(a) of the Act and Section 541.1 of the Regulation promulgated by the Administrator defining the meaning of “bona fide executive * * * capacity”, as used in the Act ?

(3) Whether or not the three employees in question were employed in violation of the Act, if the court should find that they were not employed in a bona fide executive capacity.

Both parties asked for leave to file briefs, and having now maturely considered the evidence and the briefs filed, I set forth my findings of fact and conclusions of law, as required by Rule 52(a), as follows:

Findings of Fact.

It is conceded, and I find as a fact, that the defendant and its employees in question were engaged in interstate commerce.

The employees in question were Rosa B. Williams, Rufus Boles, and Rufus Altice. Miss Williams was secretary of the corporation, and received $30 a week as compensation. She customarily worked a maximum of 54 hours a week, that is, she went to work at 8 a.m., took an hour off for lunch, and quit at 6 p.m. every day, except Saturday, when she quit at noon if she had finished her work. If she had not, she stayed until she had finished her work, or until 6 p.m. The president of the defendant corporation, Mr. Moore, was in general charge of all defendant’s operations. Under his supervision, Miss Williams was in general charge of the defendant’s office, and in complete charge whenever Mr. Moore was absent. There were four other employees in the office over whom Miss Williams exercised supervision and direction. Although she did not sign checks, she wrote all checks, paid all invoices and filed them away, she bought all office supplies, made the 'bills of lading, filed all claims for shortages on trains and cars, kept the general ledger, answered the telephone when the operator was absent, and waited on the trade when called upon. She attended to some of the correspondence on her own initiative, looked after gasoline coupons for the trucks, and obtained the necessary feed stamps. She estimated that her work on the general ledger would not take over 15% of her time, “or not over 20 anyway”. She had the authority to hire and ’fire other employees, or certainly her suggestions and recommendations as to hiring and firing were given particular weight.

The duties of Rufus Boles and Rufus Al-tice were similar. Boles was assistant superintendent of the mill, his duties being primarily those of a shipping clerk or head of the shipping department, during the day time, and Altice was shipping clerk or head of the shipping department, at night. Both worked a maximum of 63 hours a week, and both were paid, first, $40, and then $45, a week. Boles had under his control and direction from six to eleven men who actually loaded the trucks and cars; Altice had from two to five. Both had the right to hire and fire such employees. Both were in entire charge of the shipping department while they were at work. The invoices or bills were prepared in the office and turned over to these employees. They then became accountable and responsible for the shipment of the merchandise as billed. It was thoir duty, and within their discretion, to determine what should constitute the loads of the respective trucks, to see that they were properly loaded, and go over the bills or invoices with the drivers and instruct them as to the routes to be taken and the order of delivery of the merchandise. It was also their duty to procure from the milling department the merchandise which was billed out, and to see that such merchandise as was not on hand was produced by the milling department in time to be promptly shipped out. Both these employees occasionally helped in an emergency with the actual loading, but neither worked as much as 20% of his time as a loader or driver.

The terms of employment of Miss Williams and Altice prior to May 17th were set out in a letter dated May 10, 1945, to each employee, and agreed to by each, which are as follows:

“Salem, Virginia “May 10, 1945
“Miss Rosa B. Williams “Salem, Virginia
“Dear Miss Williams:
“As some question has been raised by the Wage and Hour Division of the United States Department of Labor as to your contract of employment with the Moore Milling Company, Inc. since May 1,1943, we are setting forth herein what we understand to be the terms of the contract under which you were employed by us on May 1, 1943, and which contract has continued in force until the present time.
“You were employed to work 54 hours per week at a salary of $30.00 per week, said salary of $30.00 per week to be your total compensation for 54 hours work and no additional compensation was to be paid you for any week in which you did not work in excess of 54 hours, and the sum of $30.00 is a minimum guaranteed weekly salary.
“Will you please sign the original of this letter and return same to us in order to evidence the fact that you worked on the above basis from May 1, 1943 until the present time. The extra copy of the enclosed letter is your copy of the contract of employment.
“Thanking you' for your attention to this matter, we are
“Very truly yours,
“Moore Milling Company, Inc.
“By [s] R. A. Moore,
Its President.”
“May 10, 1945.
“Receipt of the above letter is hereby acknowledged by the undersigned and the terms therein set out are the terms of the contract under which I was employed by Moore Milling Company, Inc., on, to-wit, May 1, 1943.
[s] Rosa B. Williams.”
“Salem, Virginia “May 10, 1945.
“Mr. Rufus Altice “Salem, Virginia
“Dear Sir:
“As some question has been raised by the Wage and Hour Division of the United States Department of Labor as to the terms of the contract by which you were employed by Moore Milling Company, Inc. on September 8, 1944, we are setting forth in this letter what we understand to be the terms of said contract and which contract has continued in force until the present time.
“You were employed to work 63 hours per week at a salary of $45.00 per week, said salary of $45.00 to be your total compensation for 63 hours work and no additional compensation was to be paid you for any week in which you did not work in excess of 63 hours, and that the sum of $45.00 was a guaranteed minimum weekly salary.
“Will you please sign the original of this letter and return same to us in order to evidence the fact that the terms of your contract of employment of September 8, 1944, and which contract of employment has continued in force until the present time, are correctly set forth in this letter. The extra copy of the enclosed letter is your copy of the contract of employment.
“Thanking you for your attention to this matter, we are
“Very truly yours,
“Moore Milling Company, Inc.
“By [s] R. A. Moore.”
“May 10, 1945.
“Receipt of the above letter is hereb}' acknowledged by the undersigned and it is hereby agreed that the terms of the contract of employment of September 8, 1944 are correctly set forth in said letter.
“[s] R. H. Altice.”

A new arrangement was entered into on May 17, 1945, as shown by the following letters to Miss Williams and Altice dated May 17, 1945, and agreed to by each, and which are as follows:

“Salem, Virginia “May 17, 1945-
“Miss Rosa B. Williams “Salem, Virginia
“Dear Miss Williams:
“As some question has been raised by the Wage and Hour Division of the United States Department of Labor as to the method in which you are paid, and as the Company desires to have its contract of employment with you conform in all respects to the requirements of the Wage and Hour Law, this is to advise that all prior contracts of employment, whether oral or written, which the Company has with you are hereby terminated and from and after this date your basic rate of pay will be 49-1/4$ per hour for the first 40 hours which you work each week, and that for time over 40 hours each week you will receive for each hour of work not less than one and one-half times such basic rate above mentioned, with a guaranty on our part that you will receive weekly, for regular time and for such overtime as the necessities may demand, a sum not less than $30.00.
“Will you please sign the original of this letter and return same to us in order to evidence the fact that the contract of employment as hereinbefore set out is agreeable to you. The extra copy of the enclosed letter is your copy of the contract of employment.
“Thanking you for your attention to this matter, we are
“Very truly yours,
“Moore Milling Company, Inc.
“By [s] R. A. Moore “Its President.”
“May 17, 1945
“Receipt of the above letter is hereby acknowledged by the undersigned and the terms of employment as herein set out are hereby agreed to and accepted.
“[s] Rosa B. Williams.”
“Salem, Virginia “May 17, 1945
“Mr. Rufus Altice “Salem, Virginia
“Dear Mr. Altice:
“As some question has been raised by the Wage and Hour Division of the United States Department of Labor as to the method in which you are paid, and as the Company desires to have its contract of employment with you conform in all respects to the requirements of the Wage and Hour Law, this is to advise that all prior contracts of employment, whether oral or written, which the Company has with you are hereby terminated and from and after this date your basic rate of pay will be 60-1/4$ per hour for the first 40 hours which you work each week, and that for time over 40 hours each week you will receive for each hour of work not less than one and one-half times such basic rate above mentioned, with a guaranty on our part that you will receive w.ekly, for regular time and for such overtime as the necessities may demand, a sum not less than $45.00.
“Will you please sign the original of this letter and return same to us in order to evidence the fact that the contract of employment as hereinbefore set out is agreeable to you. The extra copy of the enclosed letter is your copy of the contract of employment.
“Thanking you for your attention to this matter, we are
“Very truly yours,
“Moore Milling Company, Inc.
“By [s] R. A. Moore
“Its President.”
“May 17, 1945.
“Receipt of the above letter is hereby acknowledged by the undersigned and the terms of employment as herein set out are hereby agreed to and accepted.
“[s] R. H. Altice.”

Boles relinquished his position as shipping clerk some two or three weeks before the hearing, and became a truck driver for defendant. The terms of his employment were never set out in writing, but the evidence indicates that the terms of his employment were similar to those of Altice.

None of these employees was ever employed for a longer work week than the maximum hereinbefore set out, and there was no agreement between these employees and the defendant that they might be required to work any longer hours.

Conclusions of Law.

First, I conclude that the defendant and the employees in question were subject to the provisions of the Act.

Upon the question of whether or not it was proper to bring plaintiff’s motion for a preliminary injunction to a hearing upon an order to show cause, upon consideration I am satisfied that such a procedure was improper. I overruled defendant’s motion to quash the order to show cause, and I think such motion was properly overruled because the service upon defendant of the order to show cause, accompanied by a copy of the complaint and supporting affidavit, took the place of notice to defendant that a motion would be made for a preliminary injunction against it at the time and place stated in the order to show cause, and defendant was in no wise prejudiced by this unusual procedure.

However, I do not think that I should have adopted the procedure of substituting an order to show cause in place of the procedure set out in the Federal Rules of Civil Procedure in Rules 7(b) and 65. These Rules are perfectly clear, and set out the standard procedure for bringing on for hearing a motion for a preliminary injunction. I can see no useful purpose to toe served by deviating from this standard procedure. In legal effect, I do not see where either the plaintiff or the defendant is helped or hindered by the entry of an order to show cause. However, from a practical standpoint, the procedure by way of a show cause order imposes upon the plaintiff the additional burden of appearing before the court with his motion for a show cause order; it also imposes upon the court the 'burden of hearing the motion for a show cause order and determining from the complaint and supporting affidavit, if such be filed, whether or not a prima facie case for an injunction is made out. In my opinion, no useful purpose is accomplished thereby. A plaintiff, who desires a preliminary injunction, need only give his notice of such motion, as provided in the Rules.

The only authority cited to me on the subject is United States v. Rollnick, D.C., 33 F.Supp. 863. Although this case was not an injunction case, the following observation made therein is pertinent here (33 F. Supp. at page 865) : “Furthermore, with regard to the rule to show cause, since the effective date of the New Rules of Civil Procedure, rules to show cause have not been properly a part of civil practice. Rule 7(b) provides that all applications to the Court for orders shall be by motion. The rules and forms then clearly indicate that motions are brought before the court by means of ‘notice of motion’ which serves the purpose of a rule to show cause, and obviates the necessity for obtaining such a rule.”

It is therefore my conclusion that, although defendant has not been prejudiced and therefore the issuance of the rule to show cause against it was harmless error, nevertheless, the entry of the rule to show cause was improper, and plaintiff’s motion for a preliminary injunction should have been brought to a hearing in the manner prescribed by the Rules of Civil Procedure.

Were the de'fendanfs employees, Williams, Boles and Altice, employed in a "bo-na fide executive * * * capacity”?

Numerous cases have been cited toy counsel declaring the general principles applicable to this determination: for instance, that the Act is beneficent in character and should be liberally construed in order to confer its benefits upon employees, Ralph Knight, Inc., v. Mantel, 8 Cir.,. 135 F.2d 514, that the regulation of the Administrator defining the meaning of “employee employed in a bona fide executive * * * capacity”, has the force of law, Walling v. Yeakley, 10 Cir., 140 F.2d 830, 831, that the six qualifications set out in the Regulation as necessary to qualify an employee as an executive are in the conjunctive, and all six must be found present to determine that the employee is an executive, Fanelli v. United States Gypsum Co., 2 Cir., 141 F. 2d 216, Helliwell v. Haberman, 2 Cir., 140 F.2d 833, that the title given to an employee, or the designation given to his employment, is not conclusive, but that the actual duties which he performs, and all the circumstances of his employment, must be looked to in order to determine whether or not he is an executive. George Lawley & Son Corporation v. South, 1 Cir., 140 F.2d 439.

These principles are well established, and admitted toy counsel for' both parties. But assuming these principles to be applicable, counsel do differ sharply as to how the Regulation should be applied to the three employees here involved. Applying the Regulation, fairly construed, to the employees here in question, the conclusion seems to me inescapable that each of the three employees in question was employed in a bona fide executive capacity:

(A) The primary duty of each consisted of the management of a customarily recognized department of defendant’s business. It was the primary duty of Miss Williams to manage the office, the primary duty of Boles to manage the shipping department in the day time, and the primary duty of Al-tice to manage the shipping department in the night time. The office and shipping department were customarily recognized departments of defendant’s business.

(B) All three customarily and regularly directed the work of other employees within their departments.

(C) All three had the authority to hire or fire other employees, or certainly their suggestions and recommendations as to hiring and firing were given particular weight.

(D) All three customarily and regularly exercised discretionary powers.

(E) All three were compensated on a salary basis at not less than $30 per week.

(F) None of the three employees here in question performed work of the same nature as that performed by nonexempt employees, as much as 20% of the number of hours they worked.

It is therefore my conclusion that Miss Williams, Boles and Altice were all employees employed in a bona fide executive capacity, and not subject to the provisions of Sections 6 and 7 of the Act. It therefore follows that I conclude that it has not been shown that defendant violated the provisions of the Act.

If the three employees were not employed m a bona fide executive capacity, were their hours of labor and compensation in violation of the Act?

Since I have concluded that the three defendants in question were employed in a bona fide executive capacity, the determination of this question is not necessary for a decision of the matter before me. However, since I have studied the question, I will make some observations, obiter, for my own guidance, should the question again arise, even though such observations should serve no other useful purpose.

Miss Williams was employed for a definitely fixed maximum work week of 54 hours, at weekly compensation of $30. More frequently than not, she worked less than 54 hours, as she customarily quit on Saturdays around lunch time. She was never required to work more than 54 hours in any week, and under her agreement with her employer, it had no right to require her to work any more than 54 hours in any one week.

Altice and Boles worked 63 hours per week, and received compensation of $45 per week. They were never required to work longer than 63 hours per week, nor was there any understanding that the employer had any right to require them to work any longer hours.

Plaintiff concedes, if I understood counsel correctly, that the arrangment set out in defendant’s letter to Miss Williams and Altice of May 17th follows the formula approved in Walling v. A. H. Belo Corporation, 316 U.S. 624, 62 S.Ct. 1223, 86 L.Ed. 1716, and is therefore in compliance with the Act. However, plaintiff contends that the employment contracts, as set out in the letters to Miss Williams and Altice of May 10; 1945, which was the arrangement in force at the time of the institution of this action and theretofore, constituted violations of the Act, because of the holding in Overnight Motor Co. v. Missel, 316 U.S. 572, 62 S.Ct. 1216, 1218, 86 L.Ed. 1682. Plaintiff contends that, inasmuch as this arrangement provided for no definite hourly rate, the formula set out in Overnight Motor Co. v. Missel, supra, should be applied, and that if this formula were applied, the three employees would have been underpaid. That is to say, the plaintiff contends that, in order to determine their regular hourly rates, the fixed weekly wage of each employee should be divided by his or her regular hours of work. Plaintiff contends that each employee would be entitled to this regular hourly rate for the first forty hours, and would be entitled to one and one-half times this rate for the hours in each instance worked over and above 40 hours, during any work week. Applying this formula, each employee would have been underpaid; for instance, in Miss Williams’ case, by dividing the number of hours of her work week, 54, into her weekly salary, $30, her regular hourly rate would be determined at 55% cents per hour. At this rate, for 40 hours, she would be entitled to $22.20. She would also be entitled to compensation at one and one-half times her regular hourly rate (1% x 55% cents) or 83% cents per hour for 14 hours, which is $11.65. Therefore under this formula her weekly compensation for a work week of 54 hours should have been $22.20 plus $11.65, or $33.-85, instead of the $30 which she got.

Defendant contends that the facts of the instant case differ from those obtaining in the Missel case, and therefore do not justify the application of the formula set out in the Missel case. The principal difference in the factual situation is that here, the employee’s maximum number of hours per week was definitely fixed, whereas in the Missel case, the hours of the work week were highly irregular. There, the court said: “The work for which he was employed involved wide fluctuations in the time required to complete his duties.” His average work week was 65 hours, with a maximum of 80 hours for two weeks, and 75 hours in each of three weeks.

Defendant contends that the instant case is controlled by the Belo case, although no regular hourly rate was fixed in the contract between employer and employees in the instant case. It seems to me that this is a fatal difference. All the cases which I have been able to find on the subject seem to hold that whether the number of hours in the work week are regular or irregular, unless the regular hourly rate is fixed by contract between employer and employee, the court will apply the formula of the Mis-sel case and determine the regular hourly rate to be the quotient of the weekly rate of pay divided by the number of hours actually contracted for or actually worked. Patsy Oil & Gas Co. v. Roberts, 10 Cir., 132 F.2d 826; Adams v. Union Dime Savings Bank, 2 Cir., 144 F.2d 290; Seneca Coal & Coke Co. v. Lofton, 10 Cir., 136 F.2d 359. In this latter case, the court said (136 F. 2d at page 362) : “It is now settled beyond dispute that where a ‘regular rate’ is not expressly provided in the employment contract, or where the agreed compensation is not so allocated to a statutory work week and to overtime hours so as to make the regular rate explicit in the contract, the court will not supply the deficiency by implication, but will determine the regular rate by dividing the total weekly compensation by the total hours worked.”

I would therefore conclude that, if the three employees in question were not employed in a bona fide executive capacity, prior to May 17, 1945, they have not been compensated as required by Sections 6 and 7 of the Act.

However, as I have found that the employees in question were bona fide executives, it follows that an order will be entered overruling plaintiff’s motion for a preliminary injunction.


author: SYMES, District Judge.

text:
    In re DENVER & R. G. W. R. CO.
    No. 8669.
    District Court, D. Colorado.
    Nov. 1, 1944.

      See also 38 F.Supp. 120.
    Wilham V. Hodges, of Denver, Colo. (F. C. Nicodemus, Jr., of New York City, Hodges, Vidal & Goree, of Denver, Colo., and Pierce & Greer, of New York City, on the brief), for Denver & Rio Grande Western R. Co., and Denver, Salt Lake Western R. Co.
    Edward E. Watts, Jr., of New York City, and Milton J. Keegan, of Denver, Colo. (Peter H. Holme, of Denver, Colo, and Mitchell Capron, Marsh, Angulo & Cooney, of New York City, and Pershing, Bosworth, Dick & Dawson, of Denver, Colo., on the brief), for appellant City Bank Farmers Trust Co.
    H. H. Larimore, of St. Louis, Mo. (J. W. Preston, of Pueblo, Colo., and R. L. Dearmont, of St. Louis, Mo., on the brief), for appellant Guy A. Thompson, Trustee.
    George D. Gibson and Henry W. Anderson, both of Richmond, Va. (Grant, Sha-froth & Toll, of Denver, Colo., and Hun-ton, Williams, Anderson, Gay & Moore and Nan Ross McConnell, all of Richmond, Va., on the brief), for appellees Insurance Group Committee.

      Norma L. Comstock, of Denver, Colo. (Alexander M. Lewis and Rathbone, Perry, Kelley & Drye, all of New York City, on the brief), for appellee Central Hanover Bank & Trust Co., Trustee.
    Edwin S. S. Sunderland, of New York City (Dines, Dines & Holme, of Denver, Colo., and Davis Polk, Wardwell, Sunder-land & Kiendl, Thomas O’G. Fitzgibbon, and Judson C. McLester, Jr., all of New York City, on the brief), for appellee Guaranty Trust Co. of New York, Trustee.
    James L. Homire, of Washington, D. C. (James A. Marsh, of Denver, Colo., and Emmet McCaffery, of Washington, D- C., on the brief), for appellee Reconstruction Finance Corporation.
    Lindsey & Larwill and Daniel K. Wolfe, all of Denver, Colo. (Stewart & Shearer, of New York City, on the brief), for ap-pellee United States Trust Co. of New York, Trustee.
    Lewis & Grant, of Denver, Colo. (Mil-bank, Tweed & Hope and Arthur A. Gam-mell, all of New York City, on the brief), for appellee Chase Nat. Bank of City of New York, Trustee.
   SYMES, District Judge.

By order of March 23, 1944, the Interstate Commerce Commission on April 26, 1944, submitted for acceptance or rejection by creditors of Classes 6, 7, 8, 10a, 10b and 11, 12a and 12b of the Denver & Rio Grande Western Railroad Company, the above debtor, and by creditors of Classes 1 and 2 of the Denver & Salt Lake Western Railroad Company, as therein provided, a plan for the reorganization of the debtor, the Denver & Rio Grande Western Railroad Company and of the Denver & Salt Lake Western Railroad Company — a subsidiary debtor — approved by the Commission in its Third Supplemental Report and Order of June 14, 1943, and approved by this court October 25, 1943.

Under date of July 4, 1944, the Commission has certified to this court the results of the vote on the submission of the plan of reorganization to the creditors of the Denver & Rio Grande Western Railroad Company, debtor, et al., as aforesaid, showing that said plan had been accepted by more than two-thirds in amount of the total of such claims voting, except that creditors of Class 11, holding $1,332,050 principal amount of Denver & -Rio Grande Western Railroad Company General Mortgage Bonds, constituting 20.67% of the total amount of allowed claims of said class, voted for the plan, and creditors of said class holding $5,111,100 principal amount, or 79.33% of allowed claims of that class, voted to reject the plan.

Thereafter objections to the confirmation of the plan were filed by the debtor, the Denver & Rio Grande Western Railroad Company, by Guy A. Thompson, Trustee of the Missouri Pacific Railroad Company, and by the City Bank Farmers Trust Company of New York, Trustee of the General Mortgage aforesaid. Said objections were set down for, and came on for hearing on August 30 and 31, 1944, pursuant to notice to all parties. Full argument and hearing were had. Briefs were filed on behalf of said objectors, and in reply thereto by other trustees and interested parties.

The claim of the General Mortgage Bonds on the effective date of the plan aggregated $43,500,000 — about one-fourth of the debtor’s entire debt. It is claimed that when the capitalization of the new company was fixed at $155,173,127 on the basis of consolidation with the Denver & Salt Lake, and $143,528,027 for the debtor alone, if consolidation is not carried out, the Commission took care of every bond issue ahead of the General Mortgage (a junior issue), for 100% of their claims in new securities, and what was left over went to the General Mortgage. At that time the so-called Junction Bonds were in the hands of the public and in the plan the Commission provided that the Rio Grande Junction 5s — whose claim amounted to $2,758,333 — should receive 77% thereof in First Mortgage Bonds, $2,123,916 par, and 23% in Income Bonds, or $634,417 par, and that after all the creditors ahead of the General Mortgage bondholders were taken care of, there was only enough common stock left over to give the General mortgagees 10% of their claim in par value common stock.

That thereafter the wartime earnings of the property were so large that the cash jumped from $10,000,000 to $20,000,000, or better, and counsel says the court very appropriately in September, 1943, instructed the Trustees to buy the Junction Bonds at par and accrued interest and reduced the senior debt by that amount. That by reason thereof the trustee of the General Mortgage Bonds now asks, not for any change whatever in the valuation or capitalization of the debtor, but simply an adjustment such as it says the Commission authorized to be made within the framework of the plan by a redistribution of the new securities that the plan allots to the Junction Bonds, and in so doing maintain the same priority as before between the various issues. That it is simply a matter of accounting.

It is argued that in several other railroad reorganizations, that between the time the Commission put down a plan and the time it got to the court for action, the surplus cash of the respective debtors increased very much so the senior debts could be reduced. That in cases that have come down from the Interstate Commerce Commission since last September it has been said if the surplus cash is used to reduce the senior debt and stops there, for practicable purposes the capitalization of the new company is reduced below that authorized and what the Commission has found the debtor should and can reasonably support. That the way to adjust is to take the new securities allotted to the senior bonds or debt thus paid off and redistribute them, keeping everybody’s position relatively the same. That this would shove everybody up a little and give the junior issues better treatment.

It is further urged by this mortgage trustee that the reorganization committee or court should make this adjustment on the basis of the distribution the Commission has followed, and distribute the $2,758,333 bonds set aside to exchange for the Junction Bonds in the plan, keeping the same priorities.

In support of this theory attention is directed to the New Haven reorganization, In re New York, N. H. & H. R. Co., D.C., 54 F.Supp. 595, and Id., D.C., 54 F.Supp. 631. In that case there were certain first and refunding mortgage bonds up as collateral to secure six bank loans aggregating $26,000,000.

The court took $18,000,000 of surplus cash resulting from wartime earnings and with the Commission, decided they could apply it to reduce the claims of the banks by paying the accumulated interest thereon. The problem then was to make a redistribution of the $18,250,000 in bonds provided for in the plan for that purpose, and the court held it should be redistributed along the line that counsel are contending should be done here.

Judge Hincks says by paying off the accumulated interest thereon the secured claims were reduced, so that only $84,-800,000 in fixed interest bonds was required, this resulting in a capital structure with a bonded indebtedness less than that which the Commission had found the railroad could reasonably support. Thus a block of $6,000,000 in fixed interest bonds and $11,680,000 in income bonds became available to sweeten the treatment previously proposed for all mortgage creditors. And this was done. Judge Hincks, however, adds that all creditors agreed that these excess securities should be distributed to all secured creditors not already awarded the full value of their claims in fixed interest bonds.

Judge Hincks then went further and paid the bank loans in full out of surplus cash and said, I quote (54 F.Supp. at page 608) :

“I doubt whether these conclusions require that the plan be returned to the Commission. I incline to believe that the necessary correction can be accomplished within the framework of the plan in complete conformity with all the valid findings of the Commission.”

By analogy counsel argue that in the Rio Grande situation the $2,123,916 Fixed Interest Bonds and $634,417 of Income Bonds allocated to the Junctions should be used to sweeten the treatment previously proposed for all mortgage creditors who have not already been awarded the full value of their claims in Fixed Interest Bonds.

What Judge Hincks did was to pay the bank loans off in full out of surplus cash, stating he believed this action could be accomplished by the court within the framework of the plan without returning it to the Commission, and that his action was based upon the findings of the Commission and was consistent with its limitations and within the power of the judge to make. Later the Commission filed a report approving everything Judge Hincks had done in this respect.

Judge Hincks, however, after expressing doubts whether his action required the plan be returned to the Commission, stated, 54 F.Supp. at page 608:

“I incline to believe that the necessary correction can be accomplished within the framework of the plan in complete conformity with all the valid findings of the Commission.”

In view of the sharp division between the functions of the district courts and the Commission in § 77, 11 U.S.C.A. § 205, reorganizations announced by the Supreme Court (Ecker v. Western Pacific R. Corporation, 318 U.S. 448, 63 S.Ct. 692, 87 L.Ed. 892 and Group of Institutional Investors v. Chicago Milwaukee S. P. & P. R. Co., 318 U.S. 523, 63 S.Ct. 727, 87 L.Ed. 959), the action of Judge Hincks is hardly authority — at least until approved by an appellate court. What he really did was to make his ruling and then ask the Commission to approve.

In the final analysis, however, what Judge Hincks really did in the New Haven case was to pay off an obligation of the estate, while here the court in its treatment of the Junction Bonds did not pay off a debt, but only purchased securities, thereby giving the debtor control of another railroad property, to wit, the Rio Grande Junction Railroad Company — a necessary part of its system.

The plan itself does not contemplate the capitalization of the new company be absolutely static, but subject to change, because it provides, as Mr. Gibson well points out (p. 10142 of the printed court record and p. 66 of the court reprint) :

“The capitalization of the new company, as of January 1, 1943, after consummation of the plan, including the merger or consolidation of the Salt Lake, shall consist substantially of the following securities, excluding those to be pledged, the amounts stated being subject to reduction to the extent, if any, that matured interest proposed to be funded in the plan is paid, and as equipment obligations or other liabilities are paid or reduced, * *

Frankly, I do not believe the court has the power to make the reallocation requested by the General Mortgage trustee because it would, in effect, change the allotment of every security dealt with in the plan.

Counsel argue that the court has the power asserted under § T, p. 105 of the printed plan, where the Commission says:

“The court may cure any defect, supply any omission, or reconcile any inconsistency, in such manner or to such extent as may be necessary or expedient to carry out the plan effectively”.

The Commission, however, has no power to delegate powers or duties to the court. It is not claimed there is a defect in the plan, nor that there is any omission or inconsistency.

The modification in the Milwaukee case referred to is contained in “Summary of Second Supplemental Report of the Commission” dated December 6, 1943, and says:

“This report approves certain adjustments of the plan of reorganization of the Chicago, Milwaukee, St. Paul & Pacific Railroad Company approved * * * June 4, 1940.”

Furthermore it appears in said report that the Commission itself distributed $52,-038,036 of cash on account of interest accruing during the trusteeship, not authorized by the court. Next the Commission stated that in view of the payment of a bank loan and the reduction in amount of the claim of the Reconstruction Finance Corporation since the date of the plan, and the distribution to creditors of $5,000,000 of first mortgage bonds previously set aside for new money, approximately $7,096,336 of first mortgage bonds will be issued to the Milwaukee & Northern first mortgage bondholders, Milwaukee & Northern consolidated mortgage bondholders and the debtor’s general mortgage bondholders “in addition to the amounts of such bonds allotted to them in the plan previously approved.” In other words, the Commission itself made an allocation, which in the case at bar it is urged the court make.

Next the objectors in support of their objections complain of a too low capitalization of the new company. In view of the past history of this property it is hard for this court to take stock in any such argument. The court has attempted to dispose of it in previous opinions, and it has been rejected by the Supreme Court, infra. The permissible capitalization is a matter entirely under the jurisdiction of the Interstate Commerce Commission. Ecker v. Western Pacific R. Corporation, supra, 318 U.S. at page 483, 63 S.Ct. at page 712, 87 L.Ed. 892.

In the Milwaukee case, supra, 318 U.S. at page 541, 63 S.Ct. at page 738, 87 L.Ed. 959, the Supreme Court said:

“Certainly there is no constitutional reason why earning power may not be utilized as the criterion for determining value for reorganization purposes. And it is our view that Congress when it passed § 77 made earning power the primary criterion.”

A factor that cannot be overlooked in capitalizing earnings is the steady and material reduction in average revenue per ton mile — the basic index of the gross yield from transportation service. The average revenue of this road per ton mile declined from 1.765 cents in 1921 (Rio Grande annual report 1936, p. 27), to 0.994 cents in 1943 (annual report 1943, p. 29), a decrease of almost 50%.

Other factors which dampen optimism as to the continuation of higher earnings in the future are income taxes which this road has not been liable for since 1930, except 1942 and 1943, and very large increases in operating expenses, as shown in the Commission’s 1939 report on a plan. This shows greatly increased operating costs, such as wages, fuel, materials and supplies of all kinds, and more than offsets the economies effected by the Improvement Program. Dividends have not been paid on either class of Rio Grande stock since 1911.

A study of the traffic gains of the railroads of the country indicates that in the third year of complete wartime prosperity the western carriers will be the most out standing beneficiaries of the increase in railroad gross earnings. For many years before the war the western carriers suffered sharply reduced revenues, wholly inadequate to cover bond interest and fixed charges. Most of the bankrupt railroads are located west of the Mississippi River.

In the early upswing of business in 1940 and 1941 the western group failed to match the operating improvement made by the eastern carriers, and it was not until 1942 that an abrupt change in operating conditions resulted in the western roads reaping the harvest of profits comparable to the gains of the eastern roads.

The reasons for this are the tremendous increase in transcontinental traffic due to the war in the Pacific, restrictions on shipping, and the closing of the Panama Canal. Also the lessening of truck competition, which in the past played havoc with the western carriers, but has largely ceased as a competitive factor since 1942. Also passenger business has returned to the railroads in large volume due to these wartime limitations on motor transportation. The Southern Pacific, for instance, shows an increase in passenger revenues from $24,-000,000 in 1940 to $124,000,000 in 1943 and may reach $150,000,000 in 1944. The St. Louis & San Francisco shows an increase in passenger revenue from $3,000,-000 in 1940 to $23,000,000 last year. The expected shift in war equipment to the Pacific combat area may sustain these increased earnings of western railroads for a few years after the war.

Another favorable factor is: Normally eastbound railroad traffic of the western and eastern carriers is heavier. War traffic demands have, however, brought about a divergent shift for the two groups, and there are indications that this factor will last as long as the war with Japan. But the end to the war will undoubtedly result not only in a sharp contraction of freight tonnage but also restore the former unfavorable balance of train movements.

It is estimated that 60% of the inflated earnings of the debtor for the last three or four years is due to Government and war business both freight and passenger, but as has already been pointed out by this court, as well as the Supreme Court, war earnings are not a sufficiently stable basis for new capitalization.

Counsel refers to new industries located along the line of this debtor, but does not list them or state whether they are permanent or not. Of the few plants located along the line known as war industries, Camp Hale — a training camp at Leadville, Colorado — has been abandoned and practically no personnel left. The Kalunite plant, located in the Roper Yards outside of Salt Lake — which treats alunite ores — is still operating, but it is anticipated it will not survive the war. The Remington Arms plant at Salt Lake has been closed and is now used only as a storage depot. The activities of the Remington plant at Denver are greatly curtailed. The Kearns Replacement Center in Utah, while still fairly active, will eventually be closed. Camp Carson at Colorado Springs is already greatly reduced in size. The Naval Supply Depot at Clearfield, Utah, and the Columbia Steel plant at Geneva, Utah, are the only ones promising any permanency as business producers for this property.

The plan gives the old Junction Bonds $2,123,916 in the new First Mortgage Bonds and $634,417 in new 'Income Bonds. Under the priority rule of the Boyd case, Northern Pac. R. Co. v. Boyd, 228 U.S. 482, 33 S.Ct. 554, 57 L.Ed. 931, in any reallotment of these senior securities they would mostly go to the First Trust 4s and the Western Consolidateds, and the so-called sweetening process would increase the General Mortgage Bonds’ allotment very little, if any. The most they would get would be more common stock which has little or no value, and would only dilute the value of the common stock they now get. True they might get more stock — -that is, more pieces of paper — the total value of which would be little, if any more, than of that they now get.

It is said the debtor’s income available for interest during trusteeship aggregated $28,700,000, which, according to counsel, was used by the Trustees to carry out an improvement program, and that this expenditure is reflected in greatly increased earnings that would well support an increased capitalization.

The net operating income of this property available for interest, as restated under the plan, for the year 1941 was $3,428,000; 1940, $1,966,878; 1939, $1,235,209, and in 1938 and 1937 there was a deficit. The net after interest accruals and other charges under the new plan for 1941 was $683,082. In 1939 there was a deficit for said purpose of $502,808, and for 1938 there was a deficit of $2,172,128; in 1937 a deficit of $3,840,548.

From the calendar year 1932, up to and including the calendar year 1940, there was only one year, 1933, when there was available for interest on the new Income Bonds the amount the plan calls for, and then only by disregarding the cumulative interest provision of the plan. This was at a time when every economy was practiced by the debtor at the expense of maintenance of the property. In addition this was one of the years in which money was borrowed to pay current taxes and interest not earned on the Denver & Rio Grande First Consolidated and the Rio Grande Western First Trusts.

The court in its plan of March 6, 1941, gave the General Mortgage bondholders more common stock than does the approved plan. The Commission, however, could not agree with our views, and it would seem to be a useless gesture for the court to make the same error again, assuming we had the, power.

A basic requirement of any reorganization, according to the Supreme Court, “is the determination of a capitalization which makes it possible not only to respect the priorities of the various classes of claimants but also to give the new company a reasonable prospect for survival. * * * Only ‘meticulous regard for earning capacity’ * * * can afford the old security holders protection against a dilution of their priorities and can give the new company some safeguards against the scourge of overcapitalization(Emphasis ours.) Group of Institutional Investors v. Chicago, Milwaukee, St. P. & P. R. Co., supra, 318 U.S. at pages 540, 541, 63 S.Ct. at page 738, 87 L.Ed. 959.

Boiling the argument down, in the final analysis it is the old one of security holders having made an unwise investment and now look to the bankruptcy court to restore values by some sleight of hand or legerdemain, which never existed or have been wiped out by mismanagement. A § 77 bankruptcy reorganization proceeding, however, contemplates the scaling down of all claims and that the security holders may take a substantial loss. The procedure is not one designed to recoup losses.

The $25,000,000 or more the Trustees have expended in the Improvement Program inures to the benefit of the common stock. If the latter is worth anything it is as much due to these expenditures as to any other factor. This, with the increase in current assets and wartime earnings which counsel seem to believe are permanent, constitute the only equity behind the preferred and common stock.

No security holder is getting what he thinks he should. All have, suffered losses. The plan is not the best imaginable — it is the only one of several that have come before the court with the practically unanimous approval of all interested parties. And in the court’s opinion, any further delay or resubmission to the Commission would prejudice the successful and speedy consummation of the reorganization of this debtor and its removal from the court — a consummation devoutly desired.

For the reasons stated the court does not believe the objections under consideration are tenable, and the plan having been accepted by two-thirds in amount of the total voting of the allowed claims of each class voting, except the one, such acceptances not having been made or procured by any means forbidden by law, the court, after full hearing, hereby finds it makes adequate provision for fair and equitable treatment for the one class of creditors rejecting it, to wit, the holders of the General Mortgage Bonds, and their rejection is not reasonably justified in the light of the respective rights, and all of the relevant facts and interests of those rejecting it. And furthermore, that it conforms with all provisions of subsection e of § 205, 11 U.S.C.A.

A recapitulation of the vote on the plan indicates that 40.77% of the total outstanding claims in the hands of the public voted to accept the plan, only 4.99% voted against. It would seem inequitable to reject this plan, approved, as it is, by all except a small minority of the total securities voting, especially if we consider the length of time the property has been in the hands of the court, and the exhaustive hearings on these same objections that have been had both before the Interstate Commerce Commission and this court.

But even if the petition of the City Bank were granted the so-called Insurance Group which approves this plan would, in any reallocation, receive the senior securities that the objecting trustee refers to. This because Mr. Justice Douglas in the Milwaukee opinion, supra, states that compensation must be given to the senior creditors for their sacrifice of their senior position in taking junior securities, and it is only after their claim is fully satisfied that anything can be allocated to junior liens.

The General Mortgage bondholders say, in effect, that the $2,700,000 in new First Mortgage and Income Bonds thus released would go to the senior creditors; that this in turn would free an equal amount of junior securities now allotted to senior bondholders, which would, in turn, go to the second lienors, thus freeing finally the most junior securities, that is stock, to the General Mortgage Bonds. In the opinion of the court such a reallocation of securities can only be made by the Commission. The net result would be that the senior creditors would receive a larger amount of senior securities than they do now.

The only class of creditors who have failed to assent are the most junior in this picture who, as a condition of their assent, ask for an increase in the total capitalization. But, for reasons stated and authorities cited, this is a matter clearly within the power of the Commission, which has rejected the argument more than once.

As to the non-assenting classes the language of the statute is:

“if the plan has not been so accepted by the creditors and stockholders, the judge may nevertheless confirm the plan if he is satisfied and finds, after hearing, that it makes adequate provision for fair and equitable treatment for the interests or claims of those rejecting it.” And: “that such rejection is not reasonably justified in the light of the respective rights and interests of those rejecting it and all the relevant facts.” And finally: “that the plan conforms to the requirements of clauses (1) to (3), inclusive, of the first paragraph of this subsection (e)”.

I am satisfied, and find after hearing, that all the requirements of the statute have been met; that it makes adequate provision for fair and equitable treatment for the interests or claims of those rejecting it, and it is hereby confirmed.

Proper findings and order as required may be prepared and submitted by counsel.


author: DAWKINS, District Judge.

text:
    AKIN v. UNITED STATES et al.
    Civil Action No. 1488.
    District Court, W. D. Louisiana, Shreveport Division.
    Aug. 9, 1945.

      Findings of Fact.
    1. The plaintiff was not, as a matter of fact, on June 1, 1935, bona fidely engaged in common carrier operations by motor truck, within the meaning of that term as defined by the Motor Carrier Act of 1935, 49 U.S.C.A. § 301 et seq.
    2. Neither has he shown such operation since June 1, 1935.
    Conclusions of Law.
    1. The burden was on plaintiff to prove by a fair preponderance of the evidence that he was, independently of contract operations, engaged in interstate transportation by motor truck of general commodities to have entitled him to a certificate of convenience and necessity under the “grandfather clause” of Sec. 206(a) of Part II of the Interstate Commerce Act. 49 U.S.C.A. § 306(a).
    2. The Commission correctly excluded documentary and other evidence of contract carrier operations in the determination of plaintiff’s status as a common carrier by motor vehicle on the decisive date of June 1, 1935.
    3. There was substantial basis to support the conclusion of the Commission that plaintiff had failed to discharge the burden of proving that he was entitled to a certificate of convenience and necessity under the “grandfather clause” of the Act. Chicago, St. Paul, Minneapolis and Omaha Ry. Co. v. U. S., 1944, 322 U.S. 1-4, 64 S.Ct. 842, 88 L.Ed. 1093; Gregg Cartage & Storage Co. v. U. S. 316 U.S. 74, 62 S.Ct. 932, 86 L.Ed. 1283; Rochester Tel. Corporation v. U. S., 1939, 307 U.S. 125, 59 S.Ct. 754, 83 L.Ed. 1147.
    Culbertson, Morgan, Christopher & Bailey, of Fort Worth, Tex., and H. B. Barrett, of Shreveport, La., for plaintiff.
    M. E. Lafargue, U. S. Atty., of Shreveport, La., and Wendell Berge, Edward Dumbauld, David O. Mathews, Allen Cren-shaw, and Daniel W. Knowlton, all of Washington, D. C., for defendants.
    Before LEE, Circuit Judge, and DAW-KINS, and CAILLOUET, District Judges.
   DAWKINS, District Judge.

Plaintiff seeks the annulment of an order of the Interstate Commerce Commission denying him a certificate of convenience and necessity for operation as a common carrier by motor truck over certain highways between, points in Texas and Louisiana. He claims that right under the “grandfather clause” of Section 306(a), 49 U.S.C.A., Section 206(a) of Part II of the Interstate Commerce Act.

The grounds of attack on the order are as follows:

1. That the Commission considered a part only of the evidence offered to show that, before the effective date of the Motor Carriers Act of 1935 (now Part II of the Interstate Commerce Statute), to-wit, June 1, 1935, he was and has since heen bona fidely engaged in interstate commerce as a common carrier by motor truck.

2. That it failed to determine whether he was a contract or common carrier within the meaning of said Act, but carved his operations up “into unrelated parts in a misconstruction of the statute and an erroneous application of statutory standards in determining the application”; and,

3. That there is no substantial evidence to support the Commission’s order denying the application.

Copies of the opinion and order are attached and made part of the hill of complaint. It was found that the plaintiff commenced trucking operations in 1932, and, was, in 1934, registered under a “code of fair competition” when his real operations began; that on October 20, 1934, the Railroad Commission of Texas issued to plaintiff contract carrier permit No. 11,186, authorizing operation, which restricted it (1) to the transportation of packing house products that required refrigeration, for Swift and Co. from Fort Worth, Texas, to the Louisiana state line through Dallas, Terrell and Marshall, Texas, over Texas Highway 114 and U. S. Highway 80, and (2) the use of equipment owned by him but not exceeding two trucks; and that no authority was required in Louisiana for interstate operations until 1938, at which time plaintiff complied with the law of that state. Further, that since 1934, plaintiff has been engaged in this service as a contract carrier for Swift and Co., covering some 250 articles, the bulk of the transportation being from Fort Worth and Dallas, Texas to New Orleans, Louisiana; that in “grandfather clause” application No. MC — 18267, he was, on October 12, 1938, granted by the Commission a contract carrier permit to transport packing house products “over irregular routes (1) from Fort Worth and Dallas to Donaldsonville, Shreveport, Alexandria and Baton Rouge, Louisiana, and (2) between Fort Worth and Dallas on the one hand and on the other, from New Orleans.” It was also found that while plaintiff had carried packing house products fof other companies, his principal operations-were for Swift and Co.; that he had obtained three additional permits extending this contract carrier service to other points and has continued to use all of said permits.

The application in question in this case was filed February 12, 1936, was designated as No. MC 52459, and sought either a certificate of convenience and necessity or a permit under Sections 306(a) and 309(a) of the Act. The first hearing on this application was held on June 22, 1940, before joint Board No. 32, at which time plaintiff sought to amend his application so as to ask for a certificate of convenience and necessity as a common carrier only. This was rejected by the Board, but on further hearing, before Division Five of the Commission, on December 12, 1942, that ruling was reversed and an order entered allowing the amendment and authorizing the issuance of a certificate of convenience and necessity, upon condition that, within sixty days, the applicant should notify the Commission of “his election to receive such certificate as a common carrier”, dismiss the application for and surrender the contract carrier permits. Within the delay allowed, plaintiff elected to accept the common carrier’s certificate. In the meantime, however, certain other common carriers by motor truck and railroad had intervened and opposed the granting of the certificate and, on March 13, 1943, the case was reopened. Plaintiff was directed to file “an amended application setting forth fully and completely his claim for the right to continue operations as a common carrier by motor vehicle of general commodities between Fort Worth and New Orleans over an irregular route.” On May 3d following the amendment was filed, in which certain changes were made in the routes covered by the first report.

Further hearings were had before the Joint Board on June 24 and 25, and November 22 and 23, 1943. At the June hearings, the Board ordered the applicant to separate his documentary evidence “so as to clearly show what operations were conducted as a common carrier under specific contracts with certain shippers and what operations were performed as a common carrier for the general public”, and that these documents or exhibits be placed with the Commission’s supervisor at New Orleans “for inspection by protestants prior to the continued hearing in November 1943.” In scheduling the documentary evidence, applicant numbered those applying to his common carrier operations as exhibits No. 26 and those covering his contract business as No. 27. Several of the protestants appeared at the hearings and attacked the authenticity of the documentary evidence and the credibility of the applicant and his witnesses. The Board found against the applicant and recommended the previous report “granting this application should be reversed.” Plaintiff failed to file “timely” exceptions, but his “late-filed” exceptions were accepted as a brief and protestants were permitted to file a reply. Protestants attacked the application for the common carrier’s certificate on the ground that it was “Merely a duplicate copy of the original application filed in No. MC — 18267”, in which the applicant simply struck out the number and inserted a higher one and it should not be treated as an application under the “grandfather clause,” but as a new application. This contention was overruled by the Commission and the application considered on its merits.

The Commission considered all the evidence offered in support of the common carrier status but refused to include, as a part thereof, the documents and other evidence covering the contract carrier portions. It required a separation because, as it held, and had the power to hold under the statute that, it was not to the best interest of the public that plaintiff should be permitted to conduct both types of operations, that is, as contract and common carrier at the same time, because of the possibility of discrimination in rates, one of the principal evils the Act was intended to remedy. It was shown, rather conclusively, as the Commission found, that by far the major portion of plaintiff’s operations, prior to the important date of June 1, 1935, were as' a contract carrier by motor for Swift and Co., and that such items as were carried on a common carrier basis were transported on the same trips and in the same vehicles as the common carrier goods.

Taking up the grounds of attack upon the order enumerated under the three headings in the beginning of this opinion, we find as follows:

1. As we understand it, the basis for the contention that the Commission considered only a part of the relevant evidence on the question of common carrier status, is that it refused to include the documents on exhibit 27 covering contract carrier operations ; that it failed to give any weight to .oral testimony as to shipments in which there were no supporting documents, and rejected evidence of witnesses on the testimony of others offered by protestants, which was insufficient to constitute impeachment.

The law itself, in giving to operators the benefits of the “grandfather clause,” requires that the applicant, prior to June 1, 1935, should have been engaged “in bona fide operations as a common carrier * * *y> Sec. 306(a). This, it would seem, necessarily committed to the Commission the question of fact as to whether any applicant had been operating in good faith and with the genuine intention of holding himself out to the general public as willing to carry, to the extent of his ability, with the equipment in hand, the goods of any and all who might wish to ship by his line; or, whether his main business was that of transporting by special and private contracts the goods of particular shippers, carrying only as a sort of sideline or fill in, when space was available the property of the general public. It would be very easy for one whose principal business was that of contract carrier, to take advantage of the fact that he had occasionally carried general commodities of small consequence, to claim a common car^ rier right, especially where the applicant, because of the passage of this Act, with its limitations, had found it possible to assign or lease the route over a period of years to others, who were willing to pay therefor rentals which ran into hundreds or even thousands of dollars per month. As a matter of fact, the plaintiff has, while his application was pending before the Commission and with its approval, leased or assigned his common carrier rights to another for a period of four years, beginning at $350 per month and increasing to $750 per month for the fourth year, with optional renewal for three years additional at $950 per month, subject, of course, to the granting of the present application. For this reason, we agree with the Commission, that in the determination of whether the applicant was, at the crucial date, acting as a common carrier, should be determined by those operations alone, and exclusive of such as were conducted as a contract carrier. Crescent Express Lines v. United States, 1943, 320 U.S. 401, 410, 64 S.Ct. 167, 88 L.Ed. 127. We are not unmindfuh of the difficulties confronting one in making such proof, after the lapse of many years; hut it must not be forgotten, that, in attempting to secure the benefits of the “grandfather clause” all operators were put on notice by the very terms of the statute itself, passed in 1935, that they would have to be able to show bona fide or substantial operations as a common carrier when they filed their applications before the deadline in February 1936. McDonald v. Thompson, 1938, 305 U.S. 263, 59 S.Ct. 176, 83 L.Ed. 164; Alton Railroad Co. v. United States, 1942, 315 U.S. 15, 62 S.Ct. 432, 86 L.Ed. 586. It would further seem that common prudence would have suggested that they collect and preserve the documents and other proofs necessary for this purpose when they were comparatively fresh and available, and not wait until the expiration of a long period of some five or six years which intervened between that time and the hearings before the Commission in this case. In view of the course pursued by this plaintiff in obtaining permits as a contract carrier, both from the State Railroad Commission and the Interstate Commerce Commission, and his operating thereunder for several years, the decision to claim a certificate has the appearance of an afterthought.

When the Commission first held, in 1942, that the applicant was entitled to a certificate, there was little opposition, but when that decision was made, the whole issue of fact was thrown open, and after full investigation, it was decided that the weight of the evidence was against the bona fides of the claim that plaintiff had really intended to operate or hold himself out as a common carrier. Like a jury in a case at law, the Commission is the judge of the credibility of the witnesses and the weight of the evidence, and we can not disturb its findings of fact, if supported by substantial proof. It has analyzed in detail both the documentary and oral evidence, giving its reasons for acceptance or rejection, and we can not say there is no substantial basis for its rulings and findings, but on the contrary, believe they are supported by the record.

2. As to the second ground for the attack-upon the Commission’s orders, that it failed to determine whether the applicant was a contract or common carrier, we think it sufficient to quote the following from the opinion itself, to-wit:

“Discussion and conclusions. — Applicant takes the position that only a few of the shipments allegedly transported prior to June 1, 1935, have been controverted and that these few shipments may be disregarded as of no probative value without affecting the grant of the application. He proceeds on the assumption that the remaining shipments are entitled to full faith and credit because they have not been disproved. This assumption is invalid, however, since the burden of proof rests upon applicant to establish the authenticity of the documentary evidence upon which he relies. Protestants discredited much of this evidence and applicant admitted that he could not separate the supporting documents to show the originals from the copies. In view of the doubt cast upon the authenticity of the documentary evidence, this evidence was given little weight by the joint board which conducted the hearing and observed the demeanor of the witnesses. We agree with the joint board that applicant has failed to establish that he was engaged in ‘bona fide’ operations as a common carrier on and prior to June 1,1935.
“Even if we assume that applicant’s documentary evidence is authentic, his showing for the period immediately following the statutory date remains deficient. In the 13 month period from June 1, 1935, to July 1, 1936, only five common carrier shipments are shown on Exhibit No. 26 whereas 75 such shipments are shown in the 8 month period from October 1, 1934, to June 1, 1935. Such a large decline in the number of shipments transported subsequent to the statutory date indicates a virtual cessation of applicant’s claimed common carrier operations during this critical period. These few shipments, obviously are insufficient proof of a good-faith service over the 539 mile route between Fort Worth, Dallas, Shreveport, and New Orleans as these four cities, respectively, have populations of approximately 178,000, 295,-000, 98,000, and 495,000. No explanation is offered for this lack of substantiality and continuity of service and hence, this defect alone would warrant denial of the application even if the evidence for the prior period was unquestioned.
“Furthermore, the manner in which applicant’s common carrier operations were conducted tends to negative his claim of a good-faith service. These operations were so small in comparison with applicant’s principal service as ■ a contract carrier of packing-house products as to warrant the conclusion that they were merely a “side line”, particularly since many of the shipments shown for the prior period consisted of commodities purchased by his drivers under personal arrangements with the shippers. Although applicant claims a “holding out” to serve the general public, he did not advertise his service or have a business telephone or terminal in his own name where ordinary shippers could obtain his service. On the contrary, most of his common carrier shipments were transported for only two or three shippers in 1937, 1938, and 1939, the only years in which any appreciable number of such shipments was transported since the statutory date.
' "Upon consideration of the manner in which applicanfs common carrier operations were conducted and the aforementioned defects in his documentary evidence for the periods immediately prior and subsequent to June 1, 1935, we do not believe that he was engaged in “bona fide" operations as a common carrier during these critical periods. Our authorisation of suck operations in the prior report was based on applicanfs evidence, standing alone-, but this evidence has been discredited by protestants as. discussed herein. We conclude, therefore, that our prior findings should be reversed and that the application should be denied.
“Findings. — Upon further hearing, we find that applicant has failed to establish the right to a certificate under the "grand-fatherclause of section 206(a) of the Interstate Commerce Act, authorising operation, in interstate or foreign commerce, as a common carrier by motor vehicle, of general commodities between the points claimed in the amended application, and that such application should be denied."

(Italics are by the writer of this opinion.)

The only question at issue was as to whether the applicant should be granted a certificate of convenience and necessity as a common carrier by motor vehicle. It already had and is said to be using the permits as a contract carrier. What has been said with respect to No. 1 above, indicates, we think, that the Commission found the applicant’s proof as to operations both before and since the crucial date of June 1, 1935, were not such as to establish that he was bona fidely engaged in the business of a common carrier. As the Commission held, the burden was on him to show that he was so engaged, and not that the opposing evidence should establish the negative fact that he was not. We cannot say that the Commission was wrong in its conclusion and since we can disturb its rulings on questions of fact only where there Í9 no substantial proof to sustain them, it follows that we must find against the plaintiff on this score, also.

3. As already indicated, the evidence offered by plaintiff was not sufficient to sustain his contention of bona fide common carrier operations over periods designated in the statute. Hence the question is not one of lack of substantial proof that he was not so engaged, but a failure to discharge the burden which the law placed upon him.

Proper decree should be prepared and presented.