author: WEBER, District Judge.

text:
    PENNBANK and First Seneca Bank, Plaintiffs, v. The UNITED STATES of America, and its agencies, the Environmental Protection Agency and the Farmers Home Administration of the United States Department of Agriculture, Defendants.
    Civ. A. No. 84-24 ERIE.
    United States District Court, W.D. Pennsylvania.
    Jan. 9, 1985.

      Lawrence A. Demase, Rose, Schmidt, Dixon & Hasley, Pittsburgh, Pa., for plaintiffs.
    Craig R. McKay, Asst. U.S. Atty., Pittsburgh, Pa., Donald Lewis, Asst. U.S. Atty., Erie, Pa., for United States.
    Ray Spears, U.S.E.P.A., Washington, D.C., David Oblich, Farmers Home Admin., Harrisburg, Pa., for defendants.
   OPINION

WEBER, District Judge.

This dispute flows from an unpleasant situation facing certain residents of Crawford County, Pennsylvania. The dwellings of North and South Shenango Townships are tapped into a sewage system that does not work. The system’s defects allegedly were caused by faulty construction. That issue, however, is not before us. The question here is whether two agencies of the federal government are liable for construction expenses advanced by plaintiff banks for failing to discover the defects before the system was completed.

The North and South Shenango Joint Municipal Authority (“Authority”) was formed in 1974 to provide sanitary sewer service for area residents. The Authority hired an engineering firm that same year to plan construction. To obtain financing, the Authority submitted these plans to the Environmental Protection Agency (“EPA”), the Farmers Home Administration (“FmHA”) (also referred to collectively as “the Agencies”) and the Pennsylvania Department of Environmental Resources (“DER”). These bodies reviewed the plans and in September 1976 the EPA awarded a grant of $8,600,000 to the Authority. The DER also awarded a grant totalling $165,-000. The FmHA approved a long term loan for the project for $3,200,000 in January 1977 contingent upon satisfactory completion of the project.

Because FmHA regulations prevented closing of the loan before construction was complete, the Authority arranged for interim financing. In January 1977, plaintiff Pennbank agreed to extend up to $6,000,-000 credit to the Authority, to be repaid in three years. Plaintiff First Seneca Bank obtained a participating interest in the interim loans through a separate agreement with Pennbank (referred to collectively as “the Banks”).

Construction of the sewage system began in mid-1977. Estimated costs of the project totalled more than $13,000,000. In April 1979 construction of approximately 77 miles of sewer, 22 pumping stations, and a 1.2 million gallon per day sewage treatment plant was completed.

The Banks ultimately extended by one year the time for loan repayment, to January 1981. Certain residents of North and South Shenango sued the Authority in this court in 1979 for violating the Clean Water Act, 33 U.S.C. § 1251 et seq. (1976) a suit specifically based on the faulty condition of the sewage system. Pymatuning Water Shed Citizens for a Hygienic Environment v. Eaton, 506 F.Supp. 902 (W.D.Pa. 1980). This case eventually reached the Court of Appeals for the Third Circuit. See 644 F.2d 995 (3d Cir.1981). The suit and its appeal stretched into early 1981; the Authority could not close the FmHA loan and repay the Banks with legal action pending against it. On April 3, 1981 the Authority received notice from the FmHA that it would not close the loan under the conditions stirred up by the litigation: action in the court of appeals, an investigation by the FmHA’s inspector general, and a DER order restricting use of the sewage system.

On April 21,1981 a bank officer attended a meeting with members of the Authority, its solicitors, and an engineer independently retained by the Authority to inspect the ■sewage system. The Banks claim this as the occasion when they first learned of serious defects in the system. In subsequent meetings between the Authority, the Banks, and the Agencies, the FmHA refused to close its loan and the EPA refused to make its final grant payment. The Banks seized the Authority’s operating funds then on deposit, but those were not nearly enough to cover the outstanding interim loans for which the expectation of long term federal financing had dissolved. On February 7, 1983, the Banks filed administrative claims with the Agencies to satisfy the requirements of the Federal Tort Claims Act (“FTCA”) 28 U.S.C. §§ 2671-80 (1976). These claims were denied on July 27, 1983 and the Banks filed this suit on January 20, 1984. They contend that the Agencies were negligent in failing to discover any defects in construction of the sewage system during the course of Agency development inspections. The Banks seek $3,600,000 in damages, the amount of outstanding loans to the Authority which the Agencies initially agreed to cover through federal funding.

Following their answer, the Agencies filed a motion to dismiss, or, in the alternative, for summary judgment on April 30, 1984. They argue that the Banks’ claim is time barred; that it is barred by the misrepresentation exception to the FTCA; that the claim is one for interference with contract rights not subject to suit under the FTCA; that the Banks have failed to state a cause of action under Pennsylvania law upon which relief can be granted; and that the claim is barred by the discretionary function exception to the FTCA. The Banks responded by brief to the motion to dismiss and moved to strike the Agencies’ alternative summary judgment motion. Both parties have since submitted briefs and evidentiary materials supporting their respective positions on the Agencies’ motion. Since we have considered evidentiary matters outside the bounds of the pleadings we will treat this motion as one for summary judgment. See J.M. Mechanical Corp. v. HUD, 716 F.2d 190, 196-97 (3rd Cir.1983).

1. The Statute of Limitations.

Defendants raise the statute of limitations as their first defense. All tort claims against the United States must be brought to the attention of the appropriate federal agency within two years after the claim accrues. 28 U.S.C. § 2401(b) (1976). If the claim is denied, any further action by the claimant must be taken within six months of the denial. Id.; see also § 2675(a). Our task here, as in most limitations disputes, is to decide when plaintiffs’ claim “accrued.”

The United States Supreme Court has found that a claim accrues under 28 U.S.C. § 2401(b) when the injured party first becomes aware of both the existence of an injury and its cause. United States v. Kubrick, 444 U.S. 111, 100 S.Ct. 352, 62 L.Ed.2d 259 (1979). The Banks made their administrative claims on February 7, 1983. Thus, if the Banks knew about the sewage system’s deficiencies before February 7, 1981, and knew these were the type of problems caused by shoddy construction, its suit here would be barred.

The Banks claim that they first learned of defects in the construction on April 21, 1981. On that day, Paul DeArment, Penn-bank’s officer overseeing the loans, met with members of the Authority, its solicitors, and an engineer independently retained by the Authority to inspect the sewage system. The engineer stated, according to Mr. DeArment, that the sewage system “was on the point of collapse.” The engineer found that the sewer pipe was defective; that the pipe joints were leaking; that testing of the system’s performance was careless and inaccurate; and that evidence pointed to collusion between the engineering company and the main contractor to conceal the defects until federal financing could be closed. See Affidavit of Paul DeArment, Jr. Exhibit F.

As one might expect of so serious a problem, it had not gone unnoticed before the April 21,1981 meeting described by the Banks. A group of residents of the area served by the sewage system sued the Authority and its individual members in this court in 1979. Pymatuning Water Shed Citizens For a Hygienic Environment v. Eaton, supra. The residents brought suit under the Clean Water Act, 33 U.S.C. § 1251 et seq. (1976) seeking a remedy for the alleged discharge of sewage sludge into the Shenango River and its tributaries. A large crowd of spectators attended the hearing in the United States Courthouse in Erie. Judge Knox ultimately found several violations of state water quality standards. In addition in his memorandum opinion handed down on August 14, 1980, he described an engineer’s report which “revealed that the sagging of the pipe lines and the separation of the joints resulted from poor construction.” 506 F.Supp. at 905. This is followed by a detailed description of the causes of these defects and what corrective steps had been taken. One of the corrections involved injecting chemical grout into leaky joints to seal them. It appears that the Authority was well aware of these leaks in March 1978 when it passed a resolution prohibiting such chemical grouting. 506 F.Supp. at 906. Furthermore, this legal battle did not end in the district court. The Pymatuning Citizens kept the controversy alive by their appeal to the Court of Appeals for the Third Circuit. Pymatuning Water Shed Citizens For a Hygienic Environment v. Eaton, 644 F.2d 995 (3d Cir.1981). The court affirmed the district court on a jurisdictional question in an opinion handed down on March 30, 1981.

Upon reviewing these opinions, we find it extremely difficult to believe that the Banks had no knowledge of the defects plaguing the sewage system until April 1981. The district court’s opinion itself is one source of detailed information available eight months before that date. We would not, of course, require the Banks to keep abreast of litigation involving its borrowers by searching published opinions — though we would be surprised if the Banks claimed no interest in such opinions. The members of the Authority, however, certainly were other reliable sources of information. They were named defendants in the Pymatuning Citizens suit. They had the power to dispose of up to $6,000,000 in loans from the Banks. They were bound by the loan agreement to

Promptly give notice in writing to the Lending Bank of all litigation affecting the Authority in which the amount is $5,000 or more, and of any dispute with, claim by or order or decree of any governmental or regulatory body which might substantially interfere with the normal operation of the Authority ... or the normal operation of the sewer system.

Complaint, Exhibit A at § H(a).

The Banks stretch their credibility to the limit by alleging that no information about serious flaws in the sewage system passed to them during the 21 month period the Pymatuning Citizens case was pending in our court and the court of appeals.

There is no doubt the Banks were aware of the litigation itself before April 21,1981. Loan Officer Paul DeArment has attached three Bank documents to his affidavit referring to the Pymatuning Citizens lawsuit. Mr. DeArment wrote to an officer of First Seneca Bank on December 6, 1979 that “completion of the project was delayed by a legal action brought against the Townships by a group opposed to the sewer project.” DeArment Affidavit, Exhibit A. In a memorandum to the Authority’s credit folder dated November 12, 1980, Mr. DeArment recites that “[A] citizens group opposed to the project appealed to the Federal Court and ordered [sic] to have the project stopped.” Id. Exhibit C. A similar memorandum dated January 9, 1981 describes litigation pending against the Authority and discussed the Pymatuning Citizens suit in the Court of Appeals but does not elaborate on the subject of that appeal. Id. Exhibit D.

In general, banks do not have a reputation for being overly optimistic. But it appears here that, despite their awareness of a federal lawsuit and appeal, the Banks believed that their interests would be protected without making any inquiry into the subject of the litigation. They take the classic position of the piano player in the brothel. They expressed no interest in the condition of the sewage system until the security of their loans was undone, almost three weeks after the Authority was notified by the FmHA that it would not close Agency financing. The question is very close, but we must decide this challenge to the timeliness of the Banks’ suit according to a presumption in their favor. On summary judgment, we must presume that the facts favor the non-moving party. We know the Banks were aware of litigation over the sewage system, but we have no direct evidence of the Banks’ knowledge of actionable defects prior to April 21, 1981. The Banks receive a windfall from the presumption of facts in their favor, which shields them from being charged with knowledge prior to April 1981. We find, based on the pleadings before us, that plaintiffs’ claim is not barred by 28 U.S.C. § 2401(b).

2. The Misrepresentation Exception to the FTCA.

As a sovereign, the United States is entitled to immunity from tort claims. Congress has, of course, waived this immunity by enacting the Federal Tort Claims Act, 28 U.S.C. §§ 2671-80 (1976). Nevertheless, this waiver of immunity is limited. Among other tort claims excepted under the FTCA, the United States is not liable for “[a]ny claim arising out of ... misrepresentation, deceit, or interference with contract rights.” 28 U.S.C. § 2680(h). The Agencies argue that any fault on their part must be construed as a misrepresentation; a suit based on such conduct is therefore barred. Plaintiffs respond that their action is based on the Agencies’ failure to use reasonable care in exercising their duty to inspect and monitor construction of the sewage system. The fact that the Agencies also failed to report the true condition of the sewage system — negligent misrepresentation — does not defeat the Banks’ claim for negligent inspection.

The Banks rely on Block v. Neal, 460 U.S. 289, 103 S.Ct. 1089, 75 L.Ed.2d 67 (1982) to support their interpretation of the misrepresentation exception. In Neal, the owner of a new, FmHA financed home sued the Secretary of Agriculture under the FTCA. After moving in, Ms. Neal discovered defects in the construction of her home which FmHA officials later confirmed. After receiving complaints, however, neither the builder nor the FmHA took action to correct the defects.

The Court ultimately held that the misrepresentation exception did not bar Ms. Neal’s claim. The construction contract at issue required that the house conform to plans approved by the FmHA. The contract also granted the FmHA the right to inspect and test all materials and workmanship and reject any that were defective. The Court found that these rights created duties owed to Ms. Neal beyond any duty to use due care in reporting the results of FmHA inspections. “Neither the language nor the history of the [FTCA] suggests that when one aspect of the Government’s conduct is not actionable under the ‘misrepresentation’ exception, a claimant is barred from pursuing a distinct claim arising out of other aspects of the Government’s conduct.” 460 U.S. at 298, 103 S.Ct. at 1094.

The Court thus appears to outline a formula for analyzing cases such as the one at bar. When the government invokes the misrepresentation exception, we must first decide whether plaintiff bases its claim on misrepresentation. “[T]he essence of an action for misrepresentation, whether negligent or intentional, is the communication of misinformation on which the recipient relies.” 460 U.S. at 296, 103 S.Ct. at 1093. If we find misrepresentation, we know this “relieves the Government of tort liability for pecuniary injuries which are wholly attributable to reliance on the Government’s negligent misstatements.” 460 U.S. at 297, 103 S.Ct. at 1093-94. Thus if misrepresentation is the sole basis for the Banks’ claim, it must fail. But regardless of whether we find misrepresentation, if we find negligence in certain other Agency conduct, the Banks’ claim will survive, even though some of the legal and factual questions between misrepresentation and other tort actions overlap.

The Court of Appeals for the Third Circuit applied this formula in J.M. Mechanical Corp. v. HUD, 716 F.2d 190 (3d Cir. 1983). There, J.M. Mechanical was a subcontractor on a HUD-funded housing project. Under its regulations, HUD was charged with assuring that the owner of the project furnished surety bonds for payment and performance. HUD received such bonds, but later discovered that they were invalid. HUD took no action to replace the bonds, nor did it notify any of the contractors about the absence of adequate bonding. The general contractor subsequently defaulted under the terms of its construction contract. J.M. Mechanical sued the general contractor in state court and obtained a favorable judgment, but it was never satisfied. J. M. Mechanical then sued HUD for negligent enforcement of its bonding regulations.

The government argued there that J.M. Mechanical’s claim was for misrepresentation no matter what other label the subcontractor had attached to its action. The court of appeals disagreed. It held that HUD had a duty to secure valid payment and performance bonds, a separate duty from any obligation to notify contractors about invalid bonds. Since J.M. Mechanical put forth a claim only partially based on HUD misrepresentation, the court held that 28 U.S.C. § 2680(h) did not bar the action. See also Cross Brothers Meat Packers, Inc. v. United States, 705 F.2d 682 (3d Cir.1983) (United States held liable for negligent inspection where Department of Agriculture entered into contract to inspect meat for private firm). We must measure our case against those described above and United States v. Neustadt, 366 U.S. 696, 81 S.Ct. 1294, 6 L.Ed.2d 614 (1961) in which the Court outlined the scope of the misrepresentation exception in holding for the government.

Our first step in deciding the possible areas of negligence for which the Agencies may be liable is to determine the extent of their duties to the Banks. The Banks claim that the Agencies owed them a duty to perform a specific act: to inspect the sewer system with reasonable care. This duty must have an identifiable source. We will not hold these Agencies liable to private lenders for a general duty to inspect construction projects in which both parties have interests. In Neal, supra, for example, the FmHA’s duties arose through its participation in a building contract. In J.M. Mechanical, supra, HUD regulations dictated its duty to obtain valid payment and performance bonds. Similar duties must arise here by statute, regulation, contract, or court decision for the Agencies to be held liable for negligent inspection.

a. EPA regulations

We will examine first the obligations of the EPA. Congress has provided for the EPA to administer federal grants for construction of water treatment plants, 33 U.S.C. § 1281 (1976), which of course explains the Agency’s presence in this dispute. As part of the management of this grant money, EPA officials must approve “plans, specifications, and estimates for each proposed project for the construction of treatment works ...” 33 U.S.C. § 1283 (1976). We find no mention of any duty of the EPA to inspect construction of treatment plants or sewer lines. On the contrary, the regulations in force at the time the EPA awarded its grant place the burden of inspection on the grantee. “In the case of any project involving Step 3, [that is, the construction of treatment works, 40 C.F.R. § 35.930-1 (1976) ] the grantee will provide and maintain competent and adequate engineering supervision and inspection of the project to insure that the construction conforms with the approved plans and specifications.” 40 C.F.R. § 35.935-8 (1976).

Other regulations illustrate the consistency of placing responsibility for inspection on the grantee, which ultimately enters the contracts and pays the bills. For example, before the EPA awards a waste treatment grant, the regional administrator must determine that the applicant “has the legal, institutional, managerial, and financial capability to insure adequate construction, operation and maintenance of the treatment works ...” 40 C.F.R. § 35.925-5 (1976). After a treatment plant is built, “The grantee must make adequate provisions satisfactory to the Regional Administrator for assuring economic, effective and efficient operation and maintenance of such works in accordance with a plan of operation approved by the State water pollution control agency ...” 40 C.F.R. § 35.935-12 (1976). We find further support in an EPA handbook published in 1976 entitled “How to Obtain Federal Grants to Build Municipal Wastewater Treatment Works”, which plaintiff has supplied in its brief. The provisions of this handbook are not legally binding, of course, and we do not consider them as such. After researching EPA regulations, however, we find this handbook to be a fair guide to what may be expected from the Agency’s administration of waste treatment grants. Under the heading “On-Site Inspection,” the handbook states that “EPA or the State may conduct on-site project inspections to insure that the project is being managed properly, is on schedule, and is being constructed in accordance with approved plans, specifications and change orders” (emphasis supplied). Plaintiff’s Brief, Exhibit G § 14.8. The ambiguity of which body may conduct these inspections and how frequently, if at all, helps convince us that EPA regulations do not set out a duty to inspect by which the EPA could incur tort liability.

b. FmHA regulations

The FmHA’s regulations mirror those of the EPA. Applicants for loans for “community facilities” such as waste treatment plans “must have ... the legal authority necessary for constructing, operating and maintaining the proposed facility or service and for the obtaining, giving security for, and repaying the proposed loan.” 7 C.F.R. § 1933.17(a)(2)(iii) (1978). This section of the regulations is “specifically designed for use by applicants including their professional consultant and/or agent.” 7 C.F.R. § 1933.17(a) (1978). These provisions aimed at bodies like the Authority notify them in general terms that they bear the burden of executing a project that will perform as scheduled, one that will not be hindered by legal, financial, or practical problems. The FmHA certainly is bound to inspect construction of and monitor financing for any project involving FmHA loans. 7 C.F.R. § 1933.9(f) (1978). Other regulations make clear, however, that this does not relieve the borrower from taking steps to assure that the project will perform as expected. During the course of construction, for example, the borrower usually is required to make progress payments to contractors. But “[T]he review and acceptance of partial payment estimates by FmHA does not attest to the correctness of the quantities shown or that the work has been performed [sic] in accordance with the plans and specifications.” 7 C.F.R. § 1933.17(a)(13)(vii) (1978). Finally and most significantly, under the heading “Development inspections”, the regulations provide:

The State Director will designate an FmHA representative to assist the County Supervisor in monitoring the construction of all projects being financed, wholly or in part, with FmHA funds. This assistance will include construction inspections and a review of each project inspection report, each change order and each partial payment estimate and other invoices such as payment for engineering and legal fees and other materials determined necessary to effectively monitor each project. These activities will not be performed on behalf of the applicant/borrower, but are solely for the benefit of FmHA and in no way are intended to relieve the applicant/borrower of his corresponding obligation to conduct similar monitoring and inspection activities.

7 C.F.R. § 1933.9(f) (1979).

Thus, in addition to finding that the Agencies have not been statutorily charged with a duty to inspect, we find that they have effectively disclaimed any implication of such a duty through their regulations.

c. The loan agreement

The regulations cited above govern the relationship between the Agencies and the Authority. It may have been possible for the Agencies to assume additional duties through the loan agreement, but such is not the case. Only Pennbank and the Authority are parties to the agreement. The loan agreement recognizes that the Agencies will provide long term financing. In addition, the Authority warrants that all plans and contracts for the project are subject to FmHA approval. See Complaint Exhibit A, § F(7) and (8) and G(2)(F) The Authority also warrants, however, that it is empowered to acquire, construct and operate a sewage system. The Authority is further bound to enter into “construction contracts for the complete construction of the Initial Construction Project with contractors which are financially responsible and have the resources, equipment, experience and ability to perform their obligations under said contracts____” Id. at § G(2)(a). The Banks’ own language thus makes plain their expectations- that the Authority would be responsible for the construction of the sewage system.

This action by the Banks must fail because it portrays the Agencies in hats they do not wear. The Banks here attempt to thrust the Agencies into the role of construction supervisors. After reviewing how responsibilities for this project have been delegated by the statutes, regulations and agreements, we find that the Agencies involvement is chiefly financial. Their duty is to oversee the federal money being spent. They do examine plans and monitor construction, but as a safeguard against wasteful, negligent or illicit use of government money. The distinction we draw is between overseeing the money being spent on the work and overseeing performance of the work itself. The Agencies use inspections as a tool for fulfilling the former; they have not been made responsible, or accepted responsibility, for fulfilling the latter. No doubt this line occasionally blurs, but it is clear enough in this case to show that the Agencies had no actionable duty to oversee construction.

A hypothetical situation will illustrate the limited purpose of the Agencies’ inspections and the ultimate reason why the Banks cannot escape being barred by the misrepresentation exception. Assume, arguendo, that a team of Agency inspectors discovered excessive infiltration and defective pipe joints during a development inspection. This discovery occurred in April 1978, a year before the project was finished. What then would be the Agencies’ duties?

We conclude that the Agencies would be obligated to take the same course of action that they took in the case at bar: notifying the Authority that significant construction defects had been found and that Agency funding would be withheld pending corrective measures. EPA regulations provided for suspension or termination of grants for good cause; a sewage system that pollutes surrounding waterways would seem to qualify under this standard. 40 C.F.R. §§ 30.915 and .920 (1976). FmHA regulations likewise state that “If there is any indication that construction is not being completed in accordance with plans and specifications or that any other problems exist, the County Supervisor should notify the State Director immediately and withhold all payments on the contract.” 7 C.F.R. § 1933.9(f) (1978). The key provision of these regulations is the Agencies’ responsibility to notify the Authority of any funding changes.

Here lies the fundamental difference between this case and the cases on which plaintiffs rely, Block v. Neal, supra, and J.M. Mechanical v. HUD, supra. We distinguish those cases because, in addition to their duties to inspect and to notify, those government agencies were charged with a duty to cure. In Neal, for example, the Court held that “FmHA’s duty to use due care to ensure that the builder adhere to previously approved plans and cure all defects before completing construction is distinct from any duty to use due care in communicating information to respondent.” 460 U.S. at 297, 103 S.Ct. at 1094 (our emphasis). The Court of Appeals likewise found in J.M. Mechanical that “JM’s claim is based on the failure of the government to secure new bonds, not on the government’s failure to tell JM of the failure of the original bonds.” 716 F.2d at 195. These cases demonstrate that when the government has the power to correct mistakes directly, it should use that power and is negligent when it does not.

Here, the Agencies had no power, thus no duty, to cure defects. They were not party to construction contracts. They had no authority over the contractors and engineers once plans had been approved. They were not entitled to order the contractors to perform certain work or to correct any defects. They could have directed the Authority to have defects corrected, as they ultimately did, but this duty relies on communication to the Authority. This communication — or lack of it — implicates the misrepresentation exception.

CONCLUSION

The FmHA and the EPA were entitled to periodically inspect the construction work only to better control the purse strings. This view is consistent with the overall picture of the Agencies as funding sources, not construction managers. For the Agencies to inspect the sewage system, or be entitled to inspect it, and fail to notify the Authority of the true, defective condition of the construction is to misrepresent it as acceptable. Agency communication thus is essential to the Banks’ claim. We have found no possible Agency duties to the Banks other than the duty to notify the Authority of any funding changes. This includes notice about the discovery of significant construction defects, which intimately affects scheduled funding. The Agencies never provided this notice. The Banks claim thus can only be construed as one for negligent misrepresentation, which is barred by 28 U.S.C. § 2680(h). We need not address defendants’ other arguments.

We will enter an order consistent with this opinion.

      . That question is presently pending in one or more suits filed by the Authority in Crawford County, Pa. Common Pleas Court in 1981 in which over thirty individuals or business entities are named defendants.

      . Congress has precluded the FmHA from spending any federal money on projects which pollute the environment. 7 U.S.C. § 1926(a)(10) (1976). Agency administrators felt that if the Pymatuning Citizens' allegations were sustained on appeal, the FmHA would be placed in the position of funding pollution. See Affidavit of Paul DeArment, Jr. Exhibit E.

      . The Secretary of Agriculture is authorized by 42 U.S.C. § 1471 et seq. to make housing loans to low income rural residents through the FmHA. His presence in that suit does not materially distinguish it from the case at bar.

      . At the outset we find no evidence that the Agencies volunteered to inspect the sewer system on behalf of the Banks or any other party. We therefore will not consider any voluntary assumption of this duty.

      . We have relied on this handbook as evidentiary material and have accordingly ordered it filed.

      . The same section of the handbook and the regulations also provide for final inspection by the EPA, which involves more thorough examination of the sewer construction and its documentation. See 40 C.F.R. § 35.935-14 (1976). The Banks have no quarrel with the final inspection; it could not have been negligent since it revealed the problems at the heart of this dispute.

      . The court recognizes that the regulations cited appear in the Code of Federal Regulations for the years 1978 and 1979. The FmHA approved its loan commitment in January 1977, which means that the approval process primarily was subject to 1976 regulations. Construction of the sewage system was completed in April 1979. While the lag between the effective date of the regulations and the date of loan approval may be relevant, the mere absence of specific provisions in FmHA regulations prior to 1979 does not mean that the Agency recognized a duty to inspect before that time. We therefore will cite these regulations to illustrate the purpose of Agency inspections.

      . Plaintiff First Seneca Bank obtained a participating interest in the loans by separate agreement with Pennbank.

      . We note that the Banks reserved the right to send their own representatives to inspect the sewage system. See Complaint, Exhibit A § H(5).

      . The agencies conceivably could have required plan changes if they had found defects in documents or blueprints. But even the most scrutinized plans have little value when the builder does not follow them. Good planning does not insure good construction.


source: Caselaw Access Project

author: McCLINTIC, District Judge.

license: Public Domain

text:
    UNITED STATES v. STONE CLIFF COAL & COKE CO. et al.
    No. 1081.
    District Court, S. D. West Virginia.
    March 29, 1934.
    Okey P. Keadle, of Huntington, W. Va., and W. F. Evans, of Washington, D. C., for plaintiff.
    Robert S. Spilman and Hawthorne D. Battle, both of Charleston, W. Va. (Price, Smith & Spilman, of Charleston, W. Va., on the brief), for defendants Arthur M. Hill and Kanawha Banking & Trust Co., executors of the will of F. M. Staunton, deceased, Edward Calderwood and H. B. Lewis.
    J. Hunter McClintic, of Charleston, W. Va., for defendant G. T. Thayer.
    Staige Davis, of Charleston, W. Va., for defendant T. C. Beury.
   McCLINTIC, District Judge.

This suit was instituted to recover the sum of $55,255.82, together with interest thereon, on account of income tax assessments made by the Commissioner of Internal Revenue against the Stone Cliff Coal & Coke Company for the years 1915, 1916, and 1917. The Stone Cliff Company admits liability for the assessments for the years 1915 and 1916, amounting to $94.12, but the other defendants deny liability therefor. The Stone Cliff Company contends that no income tax was payable by it for the year 1917, and it, as well as the other defendants, denies liability for any part of the assessments for that year, amounting to the principal sum of $55,161.70. Liability for this item constitutes the only substantial question in this case.

The alleged liability of the individual defendants is based on the claim of the plaintiff that these parties, while directors of the Stone Cliff Company, distributed and dissipated the assets of this company without paying debts due the United States. The facts are as follows:

In the year 1917, and for many years prior thereto, the Stone Cliff Coal & Coke Company, a West Virginia corporation, was engaged in operating, for coal mining purposes, a lease of approximately 1,214 acres of land situated on New river in Fayette county, W. Va. Its capital stock consisted of 600 shares of common stock of a par value of $100’ each, of which 480 shares were owned by the defendant T. C. Beury, who was also president and general manager of the company, and 120 shares were owned by the defendant G. T. Thayer. The chief assets of the company were its leasehold estate and the mining equipment thereon.

On September 10, 1917, the Kanawha Banking & Trust Company of Charleston, W. Va., purchased from T. C. Beury, personally, at their par value, 100 bonds of the Stone Cliff Coal & Coke Company, of the par value of $500 each, and certain unpaid interest coupons attached thereto, in the amount of $7,500, all duly acquired some years prior thereto by Mr. Beury. These bonds constituted a first lien upon the leasehold estate, and all other assets then owned or thereafter acquired by this company, under a deed of trust duly executed by the company on July 1, 1912. In connection with this purchase, F. M. Staunton, H. B. Lewis, and Edward Calderwood, who were officers of the Kanawha Banking & Trust Company, were elected directors of the Stone Cliff Company. At the time Mr. Staunton was the president, Mr. Lewis, the cashier, and Mr. Calderwood, the assistant cashier of the Kanawha Banking & Trust Company. The other two directors of the company were T. C. Beury and G. T. Thayer. Mr. Staunton was the active head of the Kanawha Banking & Trust Company, and handled most of its important matters, including its transactions with the Stone Cliff Company. He was one of the original defendants, but was dead at the time of the trial of this cause.

In the early part of November, 1917, T. C. Beury, who throughout was in active charge and control of all the affairs of the Stone Cliff Company, and owned or operated a number of coal companies in West Virginia, entered into negotiations with the West Virginia Coal Company of Richmond, Va., for the sale to it of the assets of the Stone Cliff Company. These negotiations were concluded on November 20, 1917, by a written agreement by which the Stone Cliff Company, through Mr. Beury, agreed to sell its assets to the-West Virginia Coal Company for a stated price of $162,500 cash. However, this agreement was conditioned upon the purchase by T. C. Beury, individually, from the West Virginia Coal Company of the entire capital stock of the Elmo Mining Company at a price of $125,000 cash, it being further provided that the difference between the respective purchase prices, i. &, $37,500, was to be credited upon indebtedness due from T. C. Beury to the West Virginia Coal Company. This transaction, which was in effect an exchange, was to become effective December 15, 1917. At this time, the Elmo Mining Company was an operating coal company. Practically its only asset was a lease on 1,177 acres of coal land on New river in Fayette county, W. Va., in the vicinity of the Stone Cliff property, together with the mining equipment thereon.

The possession of the Stone Cliff property was turned over to the West Virginia Coal Company, pursuant to this agreement, in December, 1917. At the time of the transfer of possession, the West Virginia Coal Company credited to Mr. Beury the sum of $37,500. At the same time, the West Virginia Coal Company charged to Beury’s account on their books the sum of $10,000 to discharge a note in the amount of $10,000 owing by the Stone Cliff Company to the West Virginia Coal Company. T. C. Beury therefore received a net credit to his personal account of $27,500. No cash or property whatsoever, other than that already mentioned, was actually involved in this transaction, nor did T. C. Beury or the Stone Cliff Company ever receive any cash or other property.

The West Virginia Coal Company refused to surrender the stock of the Elmo Mining Company until the delivery to it of the bonds of the Stone Cliff Company then outstanding, and the payment of certain other outstanding notes of the Stone Cliff Company, amounting to $9,00 O. Whereupon, on February 20, 1918, Mr. Beury, with his own funds, purchased, at their face value, the outstanding bonds and unpaid interest coupons of the Stone Cliff Company from the Kanawha Banking & Trust Company for the sum of $59,000, and forwarded them to the West Virginia Coal Company. On the same date, Mr. Benry, with his own funds, paid two notes of the Stone Cliff Company amounting to the sum of $9,000', above mentioned. On March 4, 1918, the Stone Cliff Company assigned, by proper written instrument, executed by its president, T. C. Beury, its lease, leasehold estate, and all improvements thereon, to the West Virginia Coal Company.

On March 12, 1918, Mr. Beury first mentioned the transaction with the West Virginia Coal Company to his directors, the individual defendants, when he, in an informal way, requested them to sign certain minutes which he had already prepared containing a resolution authorizing the transfer of the lease of the Stone Cliff Company to the West Virginia Coal Company. This was done. Mr. Beury then again called upon the West Virginia Coal Company to surrender the Elmo stock, but it refused to do so. It was then learned that the Elmo Company stock was pledged to the Planters’ National Bank of Richmond, Va., as collateral security for a loan evidenced by a note of the Elmo Company indorsed by the West Virginia Coal Company, in the amount of $35,000. Wherenpon, Mr. Beury, with his own funds, reduced this indebtedness to $27,000, but was unable to make further payments. Later, in the year 1919, Mr. Beury got the Matthew Addy Company of Cincinnati, Ohio, to purchase the note evidencing this indebtedness, secured by said collateral. A few months later, upon default in the payment of the indebtedness, the Matthew Addy Company purchased the Elmo stock for the amount of the note.

The net operating income of the Stone Cliff Company for the year 1917 was the sum of $31,621.51, exclusive of the profit or loss resulting from its transaction with the West Virginia Coal Company. The net value, in the year 1917, of the assets of the company, transferred to the West Virginia Coal Company, was the sum of $84,332.89, based on the March 1, 1913, value thereof, less depreciation, having been so fixed by the Commissioner of Internal Revenue. Upon the erroneous supposition that these assets were sold for $162,500, the Commissioner of Internal Revenue assessed the tax in controversy herein for the year 1917, against the Stone Cliff Company. Accordingly, it is of prime importance to determine just what consideration the Stone Cliff Company received, or should have received, from its transaction with the West Virginia Coal Company. The value of $162,500 placed on the Stone Cliff stock and of $125,000 placed on the Elmo stock were unreal and were fixed at these figures in order to enable the West Virginia Coal Company to increase its invested capital account.

The primary asset of the Elmo Mining Company was its leasehold estate upon which was located a vein of coal from 22 to 32 inches in thickness, very expensive to operate. The mine could not be operated at a profit in normal times, and with the possible exception of the year 1917, every company which had operated it had lost money. The equipment was antiquated and badly in need of repair. The company had no other assets of any value. The defendants introduced the testimony of numerous experienced coal operators, entirely familiar with this property, and several former superintendents of the mine, whose opinion as to the value of this property in the year 1917 ranged from a maximum of $50,000 to a minimum of no value at all.

The plaintiff’s evidence on this question is of little value, since its witnesses were not familiar with the property. The record does not disclose any bona fide sale of stock of the Elmo Company.

Based on the evidence introduced herein, I am of opinion, and so find, that the fair market value of the 500 shares of stock in the Elmo Mining Company was the sum of $25,000 at the time it should have been acquired by the Stone Cliff Company in December, 1917.

In regard to the connection of the individual defendants, Staunton, Calderwood, Lewis, and Thayer, it is not claimed that they acted fraudulently or dishonestly as directors of the Stone Cliff Company, and I find that they acted honestly and in good faith. No one of them received any part of any consideration alleged to have been paid by the West Virginia Coal Company for the Stone Cliff assets, or any other benefit of any kind from this transaction. The same is true of the Kanawha Banking & Trust Company. They did not participate in any way in the settlement made between West Virginia Coal Company and T. C. Beury. Furthermore, these defendants did not know at the time this transaction was consummated that there was, or would be, any liability to, or even claimed by, the plaintiff, United States of America, against the Stone Cliff Company for income tax or other obligations. They had the right to rely upon T. C. Beury, the president, general manager, and principal stockholder of the Stone Cliff Company, owning a substantial majority of its outstanding capital stock,. and in sole active charge of the management of its business and affairs, who alone negotiated this transaction with the West Virginia Coal Company, to consummate it legally. They had no reason to foresee or suspect that the rights of the plaintiff or of any other creditor of the Stone Cliff Company would be prejudiced or affected by any action which the said Beury might take. In fact, by far the greater part of the amount now claimed by the plaintiff as income tax for the year 1917, was not assessed until 1923, over two years after this suit was instituted.

Upon these facts, two questions are presented: (1) Whether the defendants, Staunton, Lewis, Calderwood, Thayer, and T. C. Beury, are liable, individually, for the tax assessed against Stone Cliff Company by the plaintiff, or any part thereof, assuming that such assessments were properly made against the Stone Cliff Company, and (2) Whether the Stone Cliff Company is liable for the tax claimed from it by the plaintiff herein.

Consideration of the first question involves (a) the liability, if any, of the defendants, Lewis, Calderwood, Staunton (now Kanawha Banking & Trust Company and A. M. Hill, executors of the will of F. M. Staunton, deceased), and Thayer; and (b) the liability, if any, of T. C. Beury.

At the outset, it must be borne in mind that the asserted liability of the defendants, Staunton, Calderwood, Lewis, and Thayer, rests upon their alleged negligence as directors and officers of the company. Whether or not these defendants were negligent is purely a question of fact, dependent upon the peculiar circumstances of this case. The rule is stated in Morawetz on Private Corporations, § 552, as follows:

“What constitutes a proper performance of the duties of a director is a question of fact which must be determined in each case in view of all the circumstances; the character of the company, the condition of its business, the usual methods of managing such company, and all other relevant facts must be taken into consideration.”

To the same effect is Thompson on Corporations, § 1385.

The plaintiff has not complained of the transaction between the Stone Cliff Company and the West Virginia Coal Company, but, on the contrary, has impliedly approved such transfer of assets, and has based the tax assessed primarily thereon. According to the plaintiff’s theory, after the proceeds were turned over to Beury, the failure of the directors to take the proceeds away from Beury and apply them to the payment of plaintiff’s claims here asserted, constituted actionable negligence which rendered these directors personally liable. These directors had not elected Mr. Beury president and general manager of the Stone Cliff Company. He, not they, owned or controlled its outstanding capital stock. They could have been removed at any time by Beury. He was in control and managed all of the company’s business and affairs, when they became directors at the time the Kanawha Banking & Trust Company purchased the bonds of the Stone Cliff Company, in the year 1917. With the purchase of said bonds by T. C. Beury from the trust company, in February, 1918, all interest of Staunton, Calderwood, and Lewis in the Stone Cliff Company terminated. As stated above, neither they nor Thayer knew, in March, 1918, when Beury asked them to sign the minutes of the directors’ meeting of March 12, 1918, authorizing him to assign the leasehold only of the Stone Cliff Company to the West Virginia Coal Company, of any claim of the plaintiff. This was primarily and essentially Mr. Beury’s business. There was nothing about it tending to create suspicion. In view of Beury’s long ownership and management of the Stone Cliff Company, it cannot reasonably be said these directors were negligent in acceding to his request. Their liability is predicated upon this isolated transaction.

As stated in Briggs v. Spaulding, 141 U.S. 132, at pages 147 and 149, 11 S. Ct. 924, 929, 35 L. Ed. 662:

“ * * * The degree of care required depends upon the subject to which it is to be applied, and each case has to be determined in view of all the circumstances. They are not insurers of the fidelity of the agents whom they have appointed, who are not their agents, but the agents of the corporation; and they cannot be held responsible for losses resulting from the wrongful acts or omissions of other directors or agents, unless the loss is a consequence of their own neglect of duty, either for failure to supervise the business with attention, or in neglecting to use proper care in the appointment of agents. * * * On the one hand, I think the court should do its utmost to bring fraudulent directors to account ; and, on the other hand, should also do its best to allow honest men to act reasonably as directors,”

The ease of Lewis v. Council (D. C. N. C. 1903 ) 291 F. 148, 163, involved the liability of a director of a company for a breach of trust committed by an officer thereof. The court held the defendant not liable, saying, in the opinion by Connor, D. J.:

“Notwithstanding the reiteration, with accumulating intensity, of language found in the bill, I am not able to find any evidence of either positive misfeasance, misappropriation, or other dishonest or fraudulent conduct by the defendant; nor do I find any evidence of knowledge of such conduct by the secretary and manager, or such information in respect to such conduct, as fixes him with liability as a particeps criminis, upon the principles announced in Chemical Co. v. Floyd [158 N. C. 455, 74 S. E. 465]; Chemical Co. v. Ehrich, supra [(D. C.) 230 F. 1005]; and other decided eases. * * * ”

See, also, Bates v. Dresser, 251 U. S. 524, 40 S. Ct. 247, 64 L. Ed. 388; Fletcher, Cyclopedia Corporations, § 2472.

Nor has the plaintiff shown that any acts of commission or omission of the defendants, Lewis, Calderwood, Staunton, and Thayer, were the proximate cause of any loss to it. As stated in the opinion in the Briggs Case, supra: “It must be made to appear that the losses for which defendants are required to respond were the natural and necessary consequence of omission on their part.”

To the same effect see 7 R. C. L., title, Corporations, § 475; Warner v. Penoyer (C. C. A. 2d 1898) 91 F. 587, 44 L. R. A. 761; Virginia-Carolina Chemical Co. v. Ehrich (D. C. S. C. 1916) 239 F. 1005.

Upon all the facts and circumstances of the situation as disclosed from a careful consideration of the record, I am of opinion, and so find, that these directors were not negligent; that they acted honestly and as reasonably prudent men would have acted under the circumstances, and that no act of commission or omission on their part was the proximate cause of any loss to the plaintiff, and, accordingly, they should not be charged with the alleged liability of the Stone Cliff Company for taxes claimed to be due the plaintiff herein.

Now, as to the liability of the defendant T. C. Beury. It is shown that early in the year 1918, when Beury should have gotten the stock of Elmo Mining Company for the benefit of the Stone Cliff Company, as plaintiff claims, he held valid claims against the latter company in the amount of $68,000; of which the sum of $59,000, represented by the bonds he had purchased from the Kanawha Banking & Trust Company, was secured by a first lien on all its property. Even assuming Beury had no right to credit to his personal account the net sum of $27,500’ on the books of the West Virginia Coal Company, there would remain a valid first lien claim of $31,500 against the Elmo stock, which was more than it was worth. In addition, the stock stood pledged for a loan to the Planters’ Bank in the amount of $35,000, which the Stone Cliff Company could not pay. But without regard to the latter item, there was no equity in the stock for the plaintiff. Under these facts, Beury is not liable for his failure to pay the plaintiff’s claim. He had a legal right to the assets of the Stone Cliff Company superior to that of the plaintiff. United States v. Lam (D. C. Ky. 1927), 26 F.(2d) 830, is in point here.

The remaining question presented is the liability of the Stone Cliff Company for the three assessments, aggregating the principal sum of $55,161.70, made against it by the plaintiff for taxes alleged to be owing for the year 1917. The relevant facts are not in controversy, except the fair value of the Elmo Company stock, which plaintiff alleges should have been received by the Stone Cliff Company. No bona fide sale of this stock is disclosed by the evidence. Therefore, the eases of The Albert Dumois, 177 U. S. 240, 20 S. Ct. 595, 44 L. Ed. 751, and Hinkel v. Motter (D. C.) 39 F.(2d) 159, relied on by the plaintiff, do not apply to the instant ease. However, the value of the assets is a relevant fact bearing upon the value of this stock. As stated by Mr. Justice Brandeis, in Ray Consolidated Copper Co. v. U. S., 268 U. S. 373, 45 S. Ct. 526, 528, 69 L. Ed. 1003:

“ * * * The capital stock of a corporation, its net assets, and its shares of stock are entirely different things. * * * The value of one bears no fixed or necessary relation to the value of the other. The net fair value of the assets was clearly a relevant fact bearing upon the value of the capital stock. It does not appear that the Commissioner refused to consider the selling price of the shares or other factors. He may have given much consideration to the selling price of the shares, and have concluded that, under the conditions prevailing in the year 1920, the average price at which relatively small lots were sold on the Stock Exchange was not a fair indication of the value of the capital stock. We cannot say that he acted arbitrarily or abused his discretion in concluding that ‘the fair value of the capital stock considered as a whole is not materially less than the net fair value of the assets/ * * * ”

I have carefully considered the earnings of the company, the value and character of its assets, the transactions involving the transfers of this stock, and all other relevant factors affecting the value of this stoek, and have come to the conclusion, and so find, that its fair market value was $50 a share at the time of this transaction, in December, 1917, making a total value of $25,000 for the 500 shares.

It follows, therefore, that the Stone Cliff Company suffered a loss in at least the sum of $81,832.89 on its exchange with the West Virginia Coal Company. I say “at least” because it is very doubtful whether the Stone Cliff Company was entitled to the Elmo stoek until it had paid the loan due the Planters’ Bank, for which this stoek had been deposited as collateral. The net income of the Stone Cliff Company, exclusive of the profit or loss from the transaction with the West Virginia Coal Company, was $31,621.51. This operating income was more than offset by the loss suffered by the company in the transfer of its assets. I am, therefore, of opinion that no tax is due the plaintiff from the Stone Cliff Coal & Coke Company for the year 1917.

The plaintiff is entitled to recover from the defendant Stone Cliff Coal & Coke Company the assessments for the years 1915 and 1916 aggregating the principal sum of $94.12, together with interest thereon. It follows from my views hereinbefore expressed that there is no sum due the plaintiff from the Stone Cliff Coal & Coke Company on account of income taxes assessed against it for the year 1917; also that there is no sum whatsoever due to the plaintiff from the defendants, Kanawha Banking & Trust Company and A. M. Hill, executors of the will of F. M. Staunton, deceased, H. B. Lewis, Edward Calderwood, G. T. Thayer, and T. C. Benry, and that plaintiff’s bills of complaint should he dismissed as to them. A decree may he prepared in accordance with the foregoing.


author: McDERMOTT, Circuit Judge. KENNEDY, District Judge

text:
    GYPSY OIL CO. v. OKLAHOMA TAX COMMISSION et al.

    No. 925.
    District Court, N. D. Oklahoma.
    Feb. 19, 1934.

      James B. Diggs, of Tulsa, Okl. (W. C. Liedtke, Russell G. Lowe, Redmond S. Cole, and C. L. Billings, all of Tulsa, Okl., on the brief), for complainant.
    C. W. King, of Oklahoma City, Okl., for defendants.
    Before McDERMOTT, Circuit Judge, and KENNEDY and KENNAMER, District Judges.

       Probable jurisdiction noted by Supreme Court 54 S. Ct. 564, 78 L. Ed. --.

   McDERMOTT, Circuit Judge.

Plaintiff seeks to enjoin the enforcement of the act of the Oklahoma Legislature of April 10, 1933 (chapter 132, S. L. 1933) in so far as it attempts to impose a tax of %th of a cent per barrel on oil produced under leases made with the Osage Tribe of Indians. The bill alleging that the act contravened the Federal Constitution in that it undertook to tax an agency of the federal government, and a preliminary injunction being prayed for, a statutory court of three Judges was assembled as provided by section 266 of the Jud. Code, 28 USCA § 380. Upon that hearing, it was stipulated by counsel that, aside from conclusions, the plaintiff’s bill stated the facts, and the cause was submitted as on final hearing. A motion to dismiss the bill is contained in the answer, later filed; and while the answer contains a qualified general denial, such denial may be disregarded, in view of the stipulation of counsel at the hearing, and in view of Equity Rule 30 (28 USCA § 723), forbidding general denials. The answer raising no issue of fact, and both parties disclaiming the necessity of proof, the case stands for final decree on the facts well pleaded in plaintiff’s bill.

Section 1 of the Act under attack provides :

“Until June 30, 1935, there is hereby levied an excise tax of one-eighth of one cent per barrel on each and every barrel of petroleum oil produced in the State of Oklahoma after the passage and approval of this act. Such excise tax of one-eighth of one cent per barrel shall be reported to and collected by' the Oklahoma Tax Commission at the same time and in the same manner as is now provided by Chapter 66, Article 5 of the Oklahoma Session Laws of 1931, for the collection of gross production tax on petroleum oil. On petroleum oil sold at the time of production, the excise tax thereon shall be paid by the purchaser, who is hereby authorized to deduct, in making settlement with the producer and/or royalty owner, the amount of tax so paid; provided that in the event oil on which such tax becomes due is not sold at the time of production, but is retained by the producer, the tax on such oil not so sold shall - be paid by the producer for himself, including ,the tax due on royalty oil not sold; provided further, that in settlement with the royalty owner, such producer shall have the right to deduct the amount of tax so paid on royalty oil, or to deduct therefrom royalty oil equivalent in value at the time such tax becomes due with the amount of tax paid.”

Section 2 provides that the proceeds of such tax shall be kept in a separate fund and used only for the expenses of administering the proration statutes of Oklahoma.

Chapter 66, art. 5, Okl. S. L. 1931, provides that payment of such taxes shall be made monthly, and that delinquent taxes shall be a lien upon the property of the taxpayer.

This statute makes no provision for payment of taxes paid under protest, but section 12665, O. S. 1931, provides in part:

“In all cases where the illegality of the tax is alleged to arise by reason of some action from which the laws provide no appeal, the aggrieved person shall pay the full amount of the taxes at the time and in the manner provided by law, and shall give notice to the officer collecting the taxes showing the grounds of complaint and that suit will be brought against the officer for recovery of them. It shall be the duty of such collecting officer to hold such taxes separate and apart from all other taxes collected by him, for a period of thirty days and if within such time summons shall be served upon such officer in a suit for recovery of such taxes, the officer shall further hold such taxes until the final determination of such suit. All such suits shall be brought, in the court having jurisdiction thereof, and they shall have precedence therein; if, upon final determination of any such suit, the court determine that the taxes were illegally collected, as not being due the state, county or subdivision of the county, the court shall render judgment showing the correct and legal amount of taxes due by such person, and shall issue such order in accordance with the court’s findings, and if such order shows that the taxes so paid are in excess of the legal and correct amount due, the collecting officer shall pay to such person the excess and shall take his receipt therefor.”

In McCoy v. Childers, 124 Okl. 256, 256 P. 25, it was held that this section was applicable to gross production taxes. The state, in its brief, asserts that the -taxpayer, under this statute, is entitled to recover any illegal tax paid under protest, plus three per cent interest paid by the depositary bank under section 5420, O. S. 3931. Cf. Corporation Comm. v. Lowe, 281 U. S. 431, 437, 50 S. Ct. 397, 74 L. Ed. 945.

The federal statute provides (Act March 3, 1921, e. 120, § 5, 41 Stat. 1250):

“That the State of Oklahoma is authorized from and after the passage of this Act to levy and collect a gross production tax upon all oil and gas produced in Osage County, Oklahoma, and all taxes so collected shall be paid and distributed, and in lieu of all other State and county taxes levied upon the production of oil and gas as provided by the laws of Oklahoma, the Secretary of the Interior is hereby authorized and directed to pay, through the proper officers of the Osage Agency, to the State of Oklahoma, from the amount received by the Osage Tribe of Indians as royalties from production of oil and gas, the per centum levied as gross production tax, to be distributed as provided by the laws of Oklahoma.”

Against this statutory background, this case was filed. The plaintiff is the owner of a number of producing leases executed by the Osage Tribe, their value being largely in excess of $3,000. It is conceded that unless this tax is permitted by the quoted Act of Congress, it is a tax upon a governmental agency. Choctaw, O. & Gulf R. R. Co. v. Harrison, 235 U. S. 292, 35 S. Ct. 27, 59 L. Ed. 234; Indian Territory Oil Co. v. Oklahoma, 240 U. S. 522, 36 S. Ct. 453, 60 L. Ed. 779; Howard v. Oil Company, 247 U. S. 503, 38 S. Ct. 426, 62 L. Ed. 1239; Large Oil Co. v. Howard, 248 U. S. 549, 39 S. Ct. 183, 63 L. Ed. 416; Gillespie v. Oklahoma, 257 U. S. 501, 42 S. Ct. 171, 66 L. Ed. 338; Jaybird Mining Co. v. Weir, 271 U. S. 609, 46 S. Ct. 592, 70 L. Ed. 1112. Plaintiff owns properties in Oklahoma of a value in excess of $10,000,000. Its right to do business in Oklahoma is worth in excess of $3,000. To pay the tax levied under this statute from the date it took effect until it expires by its terms in 1935, would entail an outlay of nearly $1,-500. Taxes now assessed amount to nearly $500.

There are general allegations in the bill as to irreparable injury, but the facts pleaded as to the extent of plaintiff’s far-flung properties, and the knowledge that all possess as to its financial strength, belie any suggestion that its operations would be seriously impaired by the expenditure of $1,500 strung out over two years. It is only fair to say that no such allegation is made in the bill.

The briefs present three questions:

1. Is the tax a “gross production tax upon oil” within the meaning of the Congressional Act permitting such a levy on oil from the Osage leases?

2. Is the remedy at law, to pay the tax monthly under protest, and sue to recover it in twelve suits a year, or one suit with supplemental petitions for succeeding months, an adequate remedy under the federal statutes and decisions?

3. Is the requisite amount involved to confer jurisdiction upon the United States courts?

The last point must be examined first, for it goes to the jurisdiction of this court to pass upon the other two; and it cannot be waived, although the state has indicated its willingness to waive it if possible.

The plaintiff’s position is that the unconstitutional tax clouds the title to property of a value of $10,000,000; and that the right to do business, unhampered by an illegal tax is worth in excess of $3,000. The defendant points out that the cloud upon the titles can be removed, and the obstruction to doing business cleared away, by the payment of $500 now, and not to exceed $1,500 during the life of the statute. That since the plaintiff is financially able to pay the tax without serious inconvenience, the actual controversy is over whether it owes $500 now and will owe $1,000 later.

The controlling decisions leave the matter in considerable doubt. The expression is many times used that the thing in controversy is the “right” sought to be protected from illegal interference. On the other hand, there are decisions that the federal courts cannot enjoin an illegal tax of less than the jurisdictional amount, because it clouds the title of property worth in excess of the jurisdictional amount. An examination of the leading eases relied upon by the parties may help clear up the confusion.

The plaintiff places its chief reliance upon Berryman v. Whitman College, 222 U. S. 334, 345, 348, 32 S. Ct. 147, 149, 56 L. Ed. 225. There a college had a contractual right to exemption' from taxes, protected by the Federal Constitution. The taxing officers undertook to levy a tax in violation of that contract; the levy in question was less than the jurisdictional amount, but if the power existed, the jurisdictional amount would be reached in the succeeding years. The plaintiff alleged in its bill that it owned properties of large values, and that its contract right to be exempt from taxation was worth more than the jurisdictional minimum. The taxing authorities there contended that since the tax then levied was less than the jurisdictional amount, the court could not proceed. To this the court answered:

“Considering the averments of the bill, the amount and value of the property of the corporation, and the nature and character of the contract of exemption asserted, it cannot be doubted that the value of the thing in issue, the contract right, exceeded in value the jurisdictional amount. Granting that the uncertainties of the future and the shifting ownership of property forbids, in a contest merely over the validity of a tax, adding the sum of future taxes which might be levied to the amount of taxes actually levied for the purpose of jurisdiction, that principle can have no application to a ease where the issue presented is not only the right to collect, but also to levy all future taxes.”

Further on in the opinion, reference is made to the earlier decisions, hereafter cited, which hold that jurisdiction depended upon the amount of the unconstitutional tax assessed. The court held that it was unnecessary to qualify or restrict them, saying:

“But such result is uncalled for, as an analysis of the eases will show that all of them considered, in the absence of contract, where the right to levy a particular tax was assailed, whether there was authority to make up the jurisdictional amount required, by calling into the consideration the influence which the judgment might have upon different taxes or the power to take in view future illegal taxes, upon the theory that they might be levied.”

The analogy between that ease and the one at bar is' close. There the plaintiff claimed the contractual right to be exempted from state taxation; here, the plaintiff contends for the constitutional right to be exempt from such taxation without the consent of Congress. There is this difference on the facts: All of the taxes which can be levied under the existing statute do not equal the jurisdictional amount, while the taxes that might be levied in the cited ease exceeded the jurisdictional amount. Perhaps there is room for this fine distinction: In the Whitman Case, the contract which the constitution protected was the property of the college; the constitutional exemption which plaintiff here claims is not its personal right, but the right of the sovereign which Congress may waive.

In City of Hutchinson v. Beckham (C. C. A. 8) 118 F. 399, 402, the city levied a tax upon a lawful business in contravention of the Federal Constitution. The annual tax, $!,- 200, was less than the jurisdictional amount. It appeared in that ease, however, that unless the tax was enjoined, the plaintiff’s employees would quit its service because of repeated arrests, and that as a result of the imposition of the tax the plaintiff would be forced to quit its business, it appearing inferentially at least that plaintiff could not pay the heavy license and continue on. That the ease turned upon that point is indicated by the following excerpt from the opinion:

“From the complainants’ standpoint, therefore, — and the ease must be judged from their standpoint, and not exclusively from the standpoint of the city, — the amount involved in the litigation was not merely the license tax of $500 which accrued on June 1, 1900, but it was the total amount of their loss incident to the causes aforesaid, if the bill was not entertained, and if the city was left free to pursue its own course in enforcing tbe ordinance. Our attention has been invited to several eases which were brought to enjoin tbe collection of taxes that were alleged to be illegal, in which it was held that the amount in controversy for jurisdictional purposes was the amount of the tax (Transfer Co. v. Pendergrass, 16 C. C. A. 585, 70 F. 1; Walter v. Railroad Co., 147 U. S. 370, 13 S. Ct. 348, 37 L. Ed. 206; Railroad Co. v. Walker, 148 U. S. 391, 13 S. Ct. 650, 37 L. Ed. 494); but an examination of these eases' shows that they are not analogous to the case at bar, in that it did not appear that the complainants would sustain any other direct damage save the amount of the tax, which, if paid under protest, they could recover in an action at law, if the tax was found to be illegal. The present case is distinguishable from the cases relied upon by the appellants, in that the tax involved is a license tax imposed by a municipality upon a business concern, tbe payment of wbieb tax may be enforced by fining' and imprisoning' its employees and by daily arrests that will seriously interfere with the prosecution of complainants’ business, and inflict a much greater direct loss than the amount of the tax. The suit at bar, in view of the allegations touching the effect upon the complainants’ business, if the eity is permitted to proceed with the enforcement of the ordinance in its own way, is in reality a bill to prevent the city from breaking up and destroying an established business under the guise of enforcing an illegal ordinance.”

Other cases cited by plaintiff do not involve the collection of taxes. One of them, Mississippi & Missouri River R. R. Co v. Ward, 2 Black, 485, 17 L. Ed. 311, was an action to abate a bridge across tbe Mississippi River because it was an obstruction to the navigation o£ tbe river by a steamboat. There was no showing of the value of the stream for navigation purposes; however, the Supreme Court held that it was not the amount of damages inflicted by tbe nuisance that formed the basis of the jurisdictional amount, but it was the value of the object sought to be obtained by the suit, that is, the removal of the bridge. In this ease, tbe obstruction can be removed by a payment of $1,500. In Western & Atlantic R. Co. v. Railroad Commission, 261 U. S. 264, 43 S. Ct. 252, 67 L. Ed. 645, it was held that tbe courts had jurisdiction of a controversy involving the right of the state to require that a spur track be constructed, even though the cost of construction did not equal the jurisdictional amount, because the order involved not only the construction of the track, but tbe expense of operating and maintaining it. In Packard v. Banton, 264 U. S. 140, 44 S. Ct. 257, 68 L. Ed. 556, a statute required that bus companies should give bond to protect the public against liability. The cost of such bonds did not equal the jurisdictional amount, but tbe affidavits disclosed that such cost would reduce the earnings of the company to the point of confiscation, and thus force it to abandon a business worth more than the jurisdictional amount. In Ratta v. Healy (D. C.) 1 F. Supp. 669, it likewise appeared that if the license tax against peddlers was enforced the abandonment of the plaintiff’s business must result. That the question of jurisdictions1 amount, even in that ease, was not free from doubt is disclosed by the order of the Supreme Court therein, entered February 20, 1933 that:

“In this ease probable jurisdiction is noted. The Court desires to hear argument upon the questions: (a) whether a case for equitable relief is shown; (b) whether tbe amount in controversy is such as to sustain tbe jurisdiction of tbe Court below.” Healy v. Ratta, 288 U. S. 593, 53 S. Ct. 401, 402, 77 L. Ed. 971.

The case was late dismissed when it appeared that the application for a preliminary injunction was not pressed. Healy v. Ratta, 289 U. S. 701, 53 S. Ct. 522, 77 L. Ed. 1459.

Turning now to the cases on the other side: In Washington, etc., Railroad v. Dist. of Columbia, 146 U. S. 227, 232, 13 S. Ct. 64, 66, 36 L. Ed. 951, the plaintiff sought to enjoin a tax which was alleged to be in- . valid, and further alleged that unless the tax were enjoined irreparable injury to its business would result. Chief Justice Puller, speaking for a unanimous court, held that jurisdiction was dependent upon the sum or value really in dispute between the parties, and that it was to be based without regard to the collateral effect of the judgment, and that

“The matter in dispute in its relation to jurisdiction is the particular taxes attacked, and unaccrued or unspecified taxes cannot be included, upon conjecture, to make up the requisite amount.”

In Walter v. Northeastern R. R. Co., 147 U. S. 370, 13 S. Ct. 348, 37 L. Ed. 206, the railroad company brought an action to enjoin the collection of a tax which it alleged to be unconstitutional and void. The taxes in tbe various counties through which the railroad ran exceeded $2,000, but the tax in no single county equaled that sum. The court held there was no jurisdiction.

In Northern Pacific Railroad v. Walker, 148 U. S. 392, 13 S. Ct. 650, 37 L. Ed. 494, it was alleged that certain void taxes were a cloud upon the properties of the plaintiff; the bill was dismissed because

“The record does not show that the amount of the assessments and taxes, forming the subject of tbe litigation, levied in either or all of tbe counties, exceeded tbe sum of $2,000; and even if this bad been so as to tbe aggregate, tbe defendants could not have been joined in a single suit, and tbe jurisdiction thus been sustained.”

In Ogden City v. Armstrong, 168 U. S. 224, 18 S. Ct. 98, 42 L. Ed. 444, several landowners brought a joint suit to enjoin tbe collection of a tax. In the ease of only one plaintiff did tbe tax, for the full ten years it might be assessed, equal the jurisdictional amount. The court took jurisdiction in that one case, but dismissed it as to all other plaintiffs.

In Holt v. Indiana Manufacturing Company, 176 U. S. 68, 72, 20 S. Ct. 272, 273, 44 L. Ed. 374, the plaintiff sought to enjoin the collection of personal taxes on the ground that the state had no constitutional power to levy a tax upon letters patent issued by tbe United States government. Tbe ease was dismissed because it did not appear that the taxes levied equaled tbe jurisdictional amount, tbe court saying:

“Treating this bill as setting up a ease arising under the Constitution or laws of the United States on the ground that the laws of Indiana authorized the taxation in question, and were therefore void because patent rights granted by the United States could not be subjected to state taxation, or because the obligation of the contract existing between the inventor and the general public would be thereby impaired, or for any other reason, the difficulty is that the pecuniary limitation of over $2,000 applied, and the taxes in question did not reach that amount. And the effect on future taxation of a decision that the particular taxation is invalid cannot be availed of to add to the sum or value of the matter in dispute.”

It will be observed that the contention in this ease is precisely the contention in the ease at bar, to wit, that the state had no power to tax an agency of the federal government.

These cases were not overruled by the later decision in the Whitman College Case, and have been followed in recent years by the inferior Federal courts. Among others, see Fishback v. Western Union Teleg. Co., 161 U. S. 96, 16 S. Ct. 506, 40 L. Ed. 630; Adam Schumann Associates v. City of New York (C. C. A.) 40 F.(2d) 216; Delaware Consolidated Oil Co. v. Randall (D. C.) 34 F.(2d) 666; Turner v. Jackson Lbr. Co. (C. C. A.) 159 F. 923, dismissed 218 U. S. 685, 31 S. Ct. 220, 54 L. Ed. 1209; Shewalter v. City of Lexington (C. C.) 143 F. 161; Georgia Power Co. v. Hudson (C. C. A.) 49 F.(2d) 66; Vicksburg, S. & P. Ry. Co. v. Nattin (D. C. La.) 51 F.(2d) 1061. In the latter ease, the court held that a complainant cannot add the tax of subsequent years to those which are due in order to make up an amount sufficient to give a Federal court jurisdiction, and that the jurisdiction depended upon the amount of the particular tax involved.

The recent ease of Matthews v. Rodgers, 284 U. S. 521, 526, 52 S. Ct. 217, 220, 76 L. Ed. 447, may have some bearing upon the question. There the court assumed, but expressly without deciding, that the jurisdictional amount was involved, and the ease turned on whether there was an adequate remedy at law. The court further assumed that if the plaintiffs did not pay the challenged tax, the resultant injury to their business would be irreparable. Nevertheless the court held:

“But appellants insist that the appellees are under no such constraint, either to expose themselves to the penalties for failure to pay the tax or to seek equitable relief against its collection, since each of them may pay the tax to the collecting officer, under protest, and, under the laws of Mississippi, may maintain a suit at law for its recovery on the ground that it was exacted in violation of the Constitution of the United States. That such a procedure saves to the taxpayer his federal right, and, if available, will defeat the jurisdiction of federal courts to enjoin the collection of the tax, has long been the settled rule in this Court.”

The court, in the same opinion, also said:

“The reason for this guiding principle is of peculiar force in cases where the suit, like the present one, is brought to enjoin the collection of a state tax in courts of a different, though paramount, sovereignty. The scrupulous regard for the rightful independence of state governments which should at all times actuate the federal courts, and a proper reluctance to interfere by injunction with their fiscal operations, require that such relief should be denied in every case where the asserted federal right may be preserved without it. Whenever the question has been presented, this Court has uniformly held that the mere illegality or unconstitutionality of a state or municipal tax is not in itself a ground for equitable relief in the courts of the United States.”

Perhaps a fair distinction may be drawn between eases where the payment of a tax is a condition precedent to carrying on a lawful business, or where failure to pay is accompanied by severe criminal or civil liabilities, particularly where the taxpayer is financially unable to pay under protest, and eases where the tax levied is simply a liability against the properly or person taxed. Such a distinction reconciles many of the cases, but will not serve to distinguish the Whitman College Case. If the latter case can be distinguished, it must be on the ground that the college owned a valuable contract for the integrity of which it invoked the federal constitution, and in truth and fact the controversy was over that contract and not the tax; while here the controversy is over the tax alone.

Although the decisions do not leave the matter altogether free from doubt, we are constrained, under the caveat in Matthews v. Rodgers, supra, to hold that the controversy here presented does not exceed the sum of $1,500. None of the “special circumstances” referred to in Matthews v. Rodgers is here present. There is and can be no allegation that the plaintiff is unable to pay the tax, and that its business must be abandoned if it is required to pay under protest and sue to recover. There is no allegation that the collector would be unable to respond to the judgment if one were rendered. There is allegation, that plaintiff's employees would forsake it, its business be disrupted, or any other consequential injury flow from the payment of this monthly -pittance to the state.

The record here presents the unvarnished question whether the Federal courts have jurisdiction to enjoin the collection of state taxes, no matter how trifling the amount, if the bill alleges that the right to do business Tree from an illegal tax is of a value in excess of $3,000. If such is the law, then any taxpayer of size may come into the Federal -courts whenever it cares to contest any tax liability.

In the light of the many adjudications that the jurisdiction of the Federal courts depends upon the amount of the tax sought to be exacted, we are loath to hold that jurisdiction exists because of an allegation that the intangible right to do business unhampered by the tax is worth more than the jurisdictional amount.

If it were clear that this court was without jurisdiction of this cause, it would be inappropriate to pass upon the other two points exhaustively briefed by the parties. Harvey Co. v. Malley, 288 U. S. 415, 53 S. Ct. 426, 77 L. Ed. 866. Absence of jurisdiction is not at all clear, as demonstrated by the faet that Judge KENNEDY believes the Whitman Case controlling. Under such circumstances, we believe that a trial court may fairly pass upon the other points in order to expedite the final determination of the controversy.

It may therefore be said that Judge KENNAMER agrees with Judge KENNEDY that there is no adequate remedy at law; and that the writer agrees with Judge KENNEDY that whatever the character of the tax assailed — whether it is an excise tax or a property tax — it is a tax on gross production of oil within the permissive act of Congress. Judge KENNAMER is of a contrary mind; his position is that the three per cent gross production tax long in effect in Oklahoma (C. O. S. 1921, § 9814) is a property tax — a tex on the mineral estate in the land in lieu of all other property taxes; that gross production is used as a convenient and roughly accurate method of arriving at the value of the mineral estate; that the Oklahoma Supreme Court has so construed the earlier state statute. Meriwether v. Lovett (Okl. Sup.) 26 P.(2d) 200, and eases therein cited. He is of the opinion that the tax under attack, being nominal in amount, assessed without regard to the value of the oil produced, and levied for a particular purpose, is clearly an excise tax. Patton v. Brady, 184 U. S. 608, 22 S. Ct. 493, 46 L. Ed. 713; Flint v. Stone Tracy Co., 220 U. S. 107, 31 S. Ct. 342, 55 L. Ed. 389, Ann. Cas. 1912B, 1312; Mid-Continent-Air Express Corp. v. Lujan, State Comptroller (D. C.) 47 F.(2d) 266; United States Airways, Inc., v. Shaw (D. C. Okl.) 43 F.(2d) 148; Field Packing Co. v. Glenn (D. C.) 5 F.Supp. 4.

It follows that the bill should be dismissed.

KENNEDY, District Judge

(concurring in the result).

I desire briefly to record my views in regard to the disposition of this ease. The plaintiff has no adequate remedy at law, for two reasons: (1) It is required that the tax shall be paid monthly and a lien attaches. Therefore there would be involved the necessity of a multiplicity of suits for recovery back if such taxes were paid under protest. (2) There is no adequate method provided for the recovery of interest upon taxes so paid. The provision of the general statutes of Oklahoma providing for recovery of 3 per cent, on illegal taxes is not adequate, especially in the absence of evidence establishing such rate as reasonable.

As to the amount involved not being sufficient to give the federal court jurisdiction, I cannot agree that the amount of the tax involved must be adopted as the basis of determining the amount in controversy. I am unable to distinguish the ease at bar from the case of Berryman v. Board of Trustees of Whitman College, 222 U. S. 334, 32 S. Ct. 147, 56 L. Ed. 225. There the Supreme Court decided that the. value of the contract to be protected determined the jurisdictional amount. Here the right to “be protected is the freedom from state taxation of an agency of. the federal government. The latter principle of right has been so long and so repeatedly established that it is equivalent in strength to a contract right. Neither do I believe that the incident of future taxes which may or may not be levied necessarily enters into the consideration of the question under the doctrine of the Berryman Case. Mr. Chief Justice White, in writing the opinion, quoted with approval the language of a former decision of the court, and at page 347 of 222 U. S., 32 S. Ct. 147, 149 says: “The contest was over the contract and the consequent want of power to collect any and all taxes the assessment of which did violence to the contract rights of the bank. The court had jurisdiction of the parties and of the subject-matter of the suit, and it was adjudicated that there was a contract which was entitled to protection against impairment by state legislation within the right guaranteed by the Federal Constitution. This adjudication necessarily included not only the taxes for specific years, but foreclosed the right to collect any taxes concerning which the contract afforded immunity to the bank.”

If the right to the protection against taxes upon a federal agency is analogous to a contract right, I can find no distinguishable difference between the eases. To say that present and future taxes which by the terms of the present act apparently expire on July 1, 1935, will not aggregate the jurisdictional amount would mean that the Legislature of Oklahoma could pass repeating statutes of the same character for a limited duration, thereby defeating the right of the plaintiff to he free from the recurring lien of illegal state taxes. In this view, I think that the court has jurisdiction of the cause and should decide it upon the merits.

Adverting to the merits, the claim is made by plaintiff that the tax in question is an excise tax and not a property tax, and therefore not within the permissive act of Congress quoted in the opinion of Judge McDERMOTT. It will be noted that there is no specified limit to the gross production tax there permitted. It is immaterial in the practical construction of the act of Congress what the tax here may be called. In its nature it is the same type of tax which the state of Oklahoma has already levied on gross production upon the basis of value (admittedly valid as coming within the permissive act). Under the challenged law, attempt is made to levy a gross production fax upon the basis of volume. There is no distinguishable difference between the two. Both are within the scope of the permissive act, and I care not whether they may be denominated excise, gross production, or property taxes.

In our interpretation and construction we. should follow the principle aptly stated in Shaffer v. Carter, 252 U. S. 37, where the Supreme Court in speaking of state taxation laws, uses language at page 55, 40 S. Ct. 221, 226, 64 L. Ed. 445 as follows: “This argument, upon analysis, resolves itself into a mere question of definitions, and has no legitimate hearing upon any question raised under the federal Constitution. For, where the question is whether a state taxing law contravenes rights secured by that instrument, the decision must depend not upon any mere question of form, construction, or definition, but upon tbe practical operation and effect of the tax imposed.”

I think the tax here challenged comes clearly within the permissive aet of Congress, and, for that reason, the bill should be dismissed upon the merits.


author: KERRIGAN, District Judge.

text:
    THE FORT BRAGG. In re BEADLE.
    No. 21474.
    District Court, N. D. California, S. D.
    Sept. 25, 1933.
    Sawyer & Cluff, of San Francisco, Cal., for petitioner.
    A. Don Duncan, of San Francisco, Cal., for respondent and claimant Alfred Spencer.
   KERRIGAN, District Judge.

The petitioner is the charterer pro hae vice of the Fort Bragg. He was sued in the California courts by the claimant, a seaman working on the boat, and judgment was recovered against him. The action was brought under the Jones Act (46 USCA § 688) for negligence. Petitioner has appealed from the judgment, and the appeal is now pending. By his petition, petitioner seeks in this proceeding to limit his liability on the judgment to the value of his interest in the vessel as charterer. The matter is before me upon exceptions to the petition, upon motion to dismiss the petition, and upon motion to dissolve the restraining order.

In these several matters there are three issues involved. The first is: Did the petitioner waive his right to limit liability in this court by failing to set up the defense of limitation of liability in the state court? The second is: Must the petitioner pay the costs of the claimant in the state court action as a condition of maintaining these proceedings? The third is: Does the charterer have to surrender the entire value of the vessel and freight or merely his interest therein?

The first question has been answered by the recent ruling of the Circuit Court of Appeals for the Ninth Circuit in The Norco, 66 F.(2d) 651, 652, decided August 21, 1933. It was there held that the failure of the defendant to set up limitation of liability as a defense in the state court action did not amount to a waiver of his right to proceed in the admiralty court at a subsequent date to limit Ms liability, on the ground that “the District Court sitting in admiralty has exclusive jurisdiction to determine all the questions involved in a proceeding for the limitation of liability.” The failure to set up a defense of which a court has not jurisdiction neither makes it res judicata nor waives the right to later assert it in appropriate proceedings. See Langnes v. Green, 282 U. S. 531, 51 S. Ct. 243, 75 L. Ed. 520, as interpreted in Ex parte Green, 286 U. S. 437, 52 S. Ct. 602, 76 L. Ed. 1212.

As to the second question, the petitioner should not be required to pay the costs of claimant in the state court as a condition to the maintenance of these proceedings. The theory of the cases requiring the payment of claimants’ costs is based on laches: That the shipowner, by failing to begin limitation proceedings until after the prosecution of the action at common law, has permitted the claimant to incur the expenses in the other court by reason of his delay, and therefore the court should require the payment of these costs as a condition of 'the maintenance of the limitation proceedings. See Gleason v. Duffy (C. C. A.) 116 F. 288; The Ocean Spray (D. C. this District) 117 F. 971; Monongahela River Consol. Coal & Coke Co. v. Hurst (C. C. A.) 200 F. 711. Since it has been clearly established by Ex parte Green, supra, and The Norco, supra, that the common-law or statutory rights of the claimant to a determination of the questions of existence of and amount of liability are independent of the owners’ right to limitation of liability and that the admiralty court has no right to interfere with the proceedings in the state court, unless it attempts to determine issues properly cognizable only in proceedings to limit liability, the fact that the owner had not earlier exercised his rights in no way affected the proceedings in the state court.

As to the third question, it is contended by the petitioner that he is only required to surrender Ms interest in the vessel arising from the charter and the pending freight which is due him. The interim stipulation now on file provides for such amount.

The governing statute is section 186 of title 46 USCA, which provides: “The charterer of any vessel, in ease he shall man, victual, and navigate such vessel at his own expense, or by his own procurement, shall be deemed the owner of such vessel within the meaning of the provisions of this chapter relating to the limitation of the liability of the owners of vessels; and such vessel, when so chartered, shall be bable in the same manner as if navigated by the owner thereof.”

It would seem apparent from the last clause that the vessel or its value is the measure of the charterer’s liability. Were it not for this statute, the charterer would be liable for the full amount of the judgment against him. The effect of the statute is to enable him to limit his liabibty provided he does as the owner is required to do under section 183 of the same title. He must surrender the vessel or its value. It has been hold that, under the provisions of this section, the charterer as the owner pro hac vice, and not the owner, is the party responsible for the torts of the vessel. Thorp v. Hammond, 12 Wall. 408, 20 L. Ed. 419; The Barnstable, 181 U. S. 464, 21 S. Ct. 684, 45 L. Ed. 964. See the Elfrida (D. C.) 14 F.(2d) 237. Furthermore, the charterer’s interest in the vessel is contractual, and consists merely in the right to use it under the terms and conditions of the charter party. He has nothing commonly regarded as an interest in the ship. If, then, petitioner’s contention were adopted, one having a claim recoverable to the extent of the value of the vessel, had it been operated by the owner, would be bmited to the recovery of the nominal interest of the charterer and the freight, and at the same time would have no right of action against the owner. Such a construction is not warranted by the language of the statute, and its adoption would practically nullify the right of recovery of any sizable claim falling within the limitation statutes where the vessel is chartered. It is my view that the charterer is the owner pro hao vice, and must surrender the vessel and freight pending at the end of the voyage or its value.

It is ordered that the ad interim stipulation for value be increased to include the value of the vessel and freight pending at the end of the voyage or that the vessel be surrendered into the custody of the court; and it is further ordered that the matter of the appraisal of said vessel be re-referred to Ernest E. Williams, Esq., as special commissioner, in accordance with these views.

It is further ordered that the motion to dismiss and the motion to dissolve the restraining order be, and they are hereby, denied. It is further ordered that the exceptions to the petition be, and they are, overruled, and ten days are granted to answer.