author: LOVETT, District Judge.

text:
    BEAZLEY v. ALLEN, Collector of Internal Revenue.
    No. 308.
    District Court, M. D. Georgia, Macon Division.
    Aug. 16, 1945.

      John A. Sibley, of Atlanta, Ga., and James Mann, of Norfolk, Va., for plaintiff.
    John P. Cowart, U. S. Atty., and Chas. W. Walker, Asst. U. S. Atty., both of Macon, Ga., Samuel O. Clark, Jr., Asst. Atty. Gen., and Andrew D. Sharpe and Mills Kitchin, Sp. Assts. to Atty. Gen., for defendant.
   LOVETT, District Judge.

F. W. Beazley, the plaintiff, having paid additional income taxes assessed against him for the year 1941, and having unsuccessfully sought a refund, brings this suit against the Collector to recover the taxes and interest, alleging the tax was illegally exacted.

The plaintiff, his wife and son filed separate federal income tax returns for the calendar year 1941 and each paid the taxes reported therein respectively to be due. A subsequent investigation and audit of plaintiff’s return by the Commissioner of Internal Revenue resulted in the assessment and collection of the additional tax, the Commissioner being of opinion income returned by the wife and son in reality was either his or under his control, and was beneficially enjoyed by him.

The issues are submitted to the court for determination, a jury having been waived.

The question presented is whether plaintiff was taxable on the interest on certain securities purchased and pledged to secure a loan in his own name, or whether this income was taxable equally to him, his wife and his son. The answer to the question is controlled by whether he singly or they jointly owned certain bonds, stocks and note of the Southern Ice Company, Inc., of Dallas, Texas, and of certain stocks of affiliated ice companies. Plaintiff claims they were bought and pledged pursuant to the terms of a family arrangement made in 1939 in which the plaintiff was authorized in writing to purchase the securities for the three in equal shares and to finance the acquisition through a pledge thereof, in his own name alone, which arrangement was undisclosed until 1941 for reasons which will be discussed.

The facts are practically without dispute. They may be summarized, as I find them, in this way.

Facts.

Plaintiff at the time of the purchase was and still is a well known and successful executive in the ice manufacturing business. Since 1930 he has been successively president and chairman of the board of directors of the Atlantic Company which owns and operates ice factories, cold storage plants and refrigerating units in seven southern states. In 1939 he was receiving an annual salary of $40,000 for his services in that capacity. At the time, however, due principally to certain reverses in real estate speculation, plaintiff was insolvent and owed $90,000 in excess of the then value of his assets. The separate estate of his wife, at that time, consisted of her home in Atlanta, Georgia, which he had given her and which had a value of approximately $30,000. The estate of his son consisted of an equity in his home in Atlanta worth approximately $6,000.

In 1936 the Associated Utilities Corporation and allied companies, holders of the securities having voting control of the Southern Ice Company, Inc., had sought to interest the plaintiff in the purchase of these securities at a substantial discount, but he had advised them that he was not interested although he did visit some of the operating properties and consulted with the representatives of the owners of the securities relative to the management. In 1938, being importuned by his wife and son to establish the son in business, and to that end to purchase an interest in some company of which he was not a managing executive (his son having found his advancement retarded in the Atlantic Company because of being his father’s son), he agreed to again communicate with the owners of the securities of Southern Ice Company and ascertain whether they were still anxious to sell. His inquiry resulted in negotiations for the purchase of the properties, and in 1939 it was virtually agreed between plaintiff and the owners of the securities that they would sell, the purchase price for all of the stock and underlying securities to be $1,000,000, payable $750,000 in cash with the balance to be paid in three years, the payment of which was to be secured by a second mortgage on the securities acquired. Something in the nature of an option was given to the plaintiff on these terms. The necessity for selling was that the securities were owned by a Holding Company and under the Public Utility Holding Company Act of 1935 could not be retained. 49 Stat. 820, 15 U.S.C.A. § 79k.

An agreement was reached shortly thereafter between plaintiff and the First National Bank of Dallas, Texas, whereby the bank agreed to lend plaintiff the necessary $750,000 cash to be repaid in three annual payments of $250,000 each to become due respectively on October 30, 1939, 1940 and 1941. Notes, negotiable in form but not under seal, were later executed for the loan. This loan was to be secured by a first mortgage on all the purchased assets. This contract was in writing and is sometimes herein referred to as the triparty contract. Similar notes were to be given to the seller of the securities for the balance of the price, secured by a second mortgage on the securities sold.

A few days after these agreements and arrangements were tentatively completed plaintiff sought the advice of his attorney in Atlanta-, a member of the bar of high standing and capacity, respecting the legality and effect under the Internal Revenue Laws of a family partnership consisting of himself, his wife and his son. Pursuant to his attorney’s assurance of the legality of such an arrangement if entered into in good faith, though his attorney at the same time informed him that the Treasury Department looked with disfavor on reduction of tax liability in this manner and would scrutinize with great care any contract that might be entered into, a family partnership contract for the purchase and ownership of the Southern Ice securities was drafted, and later, on April 21, 1939, was executed by the parties, under seal. They were fully informed as to its meaning and effect and the exposure each was making of his individual assets to liability if the purchase turned out to be unprofitable.

The contract provided, in part, that the plaintiff, his wife and his son each agreed to buy the securities of the Southern Ice Company and affiliates in accordance with the terms of the agreement already tentatively reached between the plaintiff and the owners of the securities and the Dallas bank, with each partner to have one-third interest in the property purchased and with each to become liable for one-third of the purchase obligation. As a matter of practical convenience all negotiations and dealings with the owners of the securities and with the lending bank were to be conducted in the name of the plaintiff alone, he being constituted their attorney-in-fact for those purposes. The securities were to be purchased in plaintiff’s name, the bank loan likewise to be in his name, and notes to the bank and sellers of the securities to be in his name. No disclosure of the interest of the wife and' son was to be made until such time as the bank or the sellers of the securities might exhaust the collateral put up to secure payment, and a deficiency resulted which plaintiff would be called upon to satisfy. Upon the happening of either contingency the joint liability of the wife and son was to be revealed. While acting as their agent under the contract plaintiff was to be held to a strict accountability, and he was to be reimbursed proportionately by each of them for all sums he should be called upon to pay out of his individual resources and for all expenses incurred by him in connection with the purchase of the securities and the operation of the enterprise. The purchase and financing were consummated in accordance with these agreements, slightly but not materially modified.

It was further agreed that all the income from the Southern Ice Company bonds or the other securities would go to liquidate the loans and would be credited on plaintiff’s notes.

Between this contract on the one hand and the tri-party purchase and the loan contract, agreed upon in Dallas a few days before the execution of the family partnership contract but not executed until April 24, 1939, on the other, there were certain inconsistencies. The tri-party purchase contract, for example, provided:

“Purchaser hereby covenants with and warrants unto Bank that Purchaser is the legal and equitable owner of the securities. ******
“Purchaser agrees that he will not, without the written consent of the Bank, so long as any of the indebtedness to the Bank shall remain unpaid, nor without the written consent of General Finance (the seller) so long as any of the indebtedness to General Finance shall remain unpaid, sell, transfer, assign, or otherwise dispose of the Securities or any part thereof.”

The plaintiff gave as two of the reasons why the purchase and financing were carried through in his name instead of in the name of his wife, his son and himself (the son and wife being under no disability to contract for themselves), first, that it was simpler and more convenient to do it that way, and, secondly, that when prior to the purchase he informed the Dallas bank’s attorney that the three were the purchasers, he was told because of the community property laws of Texas he, the bank’s attorney, wanted to know nothing about a joint ownership, and he, the plaintiff, thought a word to the wise was sufficient. He mentioned it no more.

However, there was no concealment of the facts from the taxing authorities. Taxpayer’s wife and son showed in their income tax returns large income for 1939, 1940 and 1941 from interest on bonds; books of account were promptly opened and contemporaneously kept showing the joint purchase, expenses incurred in connection therewith, income produced by the securities and how it was distributed; state intangible and other tax returns showed the divided ownership from the beginning,— and all of these records were made accessible to the government when the tax returns were audited.

The enterprise was successful from the date of the acquisition of the securities on April 24, 1939, and on October 30, 1941, the original note of $750,000 to the bank, chiefly by applying the interest paid on the pledged bonds, had been reduced to $500,-000, and plaintiff at that time informed the bank of the theretofore undisclosed family contract of April 21, 1939. Thereupon, after a further curtailment of $100,000 on the loan, advanced by plaintiff for the three and later repaid ratably to him, the plaintiff, his wife and son each gave new notes for one-third of the unpaid balance of $400,000, and one-third of the securities was issued to each. Meanwhile, the $250,-000 debt to the seller of the securities had been retired, before maturity, at a discount.

For the taxable years 1939 to 1941 inclusive the plaintiff, his wife and his son each returned for income tax purposes one-third of the income of the securities. Only 1941 tax liability is here in question because prior to the year 1941 all three of these taxpayers resided in Virginia, and any controversy as to tax liability for the earlier years will be heard in another forum,

Opinion

The plaintiff contends that the family contract is bona fide, valid and binding; that the three parties became joint purchasers of the securities; that each became jointly liable for the purchase price; that such control as plaintiff held over the securities and the income therefrom was only in his capacity as agent or attorney-in-fact for the partnership and that the apparent inconsistencies between the purchase contract and the partnership contract disappear when read in the light of the fact that all the warranties plaintiff made as to title were from his point of view made in behalf of the three and that the intent and purpose of the warranty was to.bind him to do nothing to lessen the value of the security; and that the family contract did not lessen that value but added to it by binding his wife and son, besides himself, to his obligation to the bank.

It is the position of the government that the language of the purchase contract is binding upon the plaintiff and is fatal to the family agreement; that under the provisions of the purchase contract the plaintiff alone acquired the securities which produced the income; that during the taxable year here in question the income from the securities was applied on his debt to the bank; that he alone is taxable thereon for the year 1941 up to October 30, when he gave two-thirds of the equity in the securities to his wife and son; that the family contract was a secret device designed to avoid taxes, had no legitimate objective and for tax purposes was void and useless; and that it is unrealistic to say that plaintiff’s wife and son were bound on the obligation to the bank because in event of default on the loan they had only to fail to disclose or to terminate or destroy the secret agreement and the bank would be able to look only to the plaintiff for the deficiency.

I can hardly bring myself to believe the taxpayer here, experienced as he was in the management and control of large business interests paying large income taxes, was unaware of the differences in the incidence of taxation, if securities about to be acquired were owned by one person or by three. I doubt, however, that the tax motive controlled in bringing the wife and son into the purchase. My view is that the primary consideration was to place his son in a business not under the domination of the father, where he might demonstrate what business capacity he had and develop in a freer atmosphere. But if the greater reason had been to reduce taxes, that motive alone would not make taxable that which otherwise would not be. Apart from the tax motive, the question is was the thing done real and not pretensive and was it forbidden, either expressly or impliedly, by the law of the state or the federal statute. Of course, if the purpose of the taxing act would be avoided or defeated by applying the state law the transaction must fail.

As applied to taxes on income produced by personal services, he who earns is taxed, and he can not escape taxation if he enjoys the benefit of the income when received, whether economic or financial.

Tax liability on income from capital, however, generally is based on ownership, for the tax is laid upon the .“net income of every individual”, and the use of the word “of” denotes ownership. “In the absence of further definition by Congress, a broader significance should not be imputed to the phrase.”

In determining if claimed ownership is true or fictional certain criteria have been set up by the courts which should be applied where the circumstances so require. In Griffiths v. Commissioner of Internal Revenue, 308 U.S. 355, at page 357 et seq., 60 S.Ct. 277, at page 278, 84 L.Ed. 319, the Supreme Court said:

“We cannot too often reiterate that ‘taxation is not so much concerned with the refinements of title as it is with actual command over the property taxed — the actual benefit for which the tax is paid.’ Cor-liss v. Bowers, 281 U.S. 376, 378, 50 S.Ct. 336, 74 L.Ed. 916. And it makes no difference that such ‘command’ may be exercised through specific retention of legal title or the creation of a new equitable but controlled interest, or the maintenance of effective benefit through the interposition of a subservient agency. Cf. Gregory v. Helvering, 293 U.S. 465, 55 S.Ct. 266, 79 L.Ed. 596, 97 A.L.R. 1355. ‘A given result at the end of a straight path,’ this court said in Minnesota Tea Co. v. Helvering, 302 U.S. 609, 613, 58 S.Ct. 393, 395, 82 L.Ed. 474, ‘is not made a different result because reached by following a devious path.’ Legislative words are not inert, and derive vitality from the obvious purposes at which they are aimed, particularly in the provisions of a tax law like those governing installment sales in § 44 of the Revenue Act of 1932 [26 U.S.C.A. Int.Rev.Acts, page 497], Taxes cannot be escaped ‘by anticipatory arrangements and contracts however skilfully devised * * * by which the fruits are attributed to a different tree from that on which they grew.’ Lucas v. Earl, 281 U.S. 111, 115, 50 S.Ct. 241, 74 L.Ed. 731.”

Because a family group is an economic unit, socalled “family arrangements” whereby ownership is diluted, are to be given close and special scrutiny “lest what is in reality but one economic unit be multiplied into two or more by devices which, though valid under state law, are not conclusive so far as (Internal Revenue Laws) [are] concerned.” Helvering v. Clifford, 309 U.S. 331, 335, 60 S.Ct. 554, 556, 84 L.Ed. 788. Nevertheless, the family relationship sets up no bar against its members reducing tax liability. In testing the reality of the transaction, whether sham and pretensive or what on its face it purports to be, it is only “one of the elements to be considered by the trior of the facts.” Members of a family are as much entitled to jointly own stocks and bonds, or to become partners as the result of a joint venture, as strangers in blood, provided, of course, the ownership is in good faith and not merely fanciful.

Except for the failure to make the joint purchase agreement known to the seller of the securities and to the bank which loaned three fourths of the purchase money, there would be nothing to impugn the good faith of the three parties who now claim they were the purchasers or to make questionable what they caused to be solemnly put down on paper as their agreement and which they signed and sealed as their act and deed. The inconsistencies between the tri-party contract and the family joint venture agreement would be of no consequence if the latter had been made known to seller and lender, and they had understood plaintiff’s warranties were made in a representative capacity as well as personally. The explanation made seems to me reasonable. The plaintiff thought a bargain had been found. And so it turned out to be. His son and wife were exceedingly anxious for the sale to be consummated. They wanted the son established in a new business. The lending bank’s attorney had created in the plaintiff’s mind the bugaboo of community property. Plaintiff has testified he feared after all the preliminary points of difference had been reconciled, if he introduced new parties as joint purchasers with him the whole sale would be imperilled and perhaps defeated. He, his wife and son remain uncontradicted in their explanations of the reasons for a joint purchase. If they are to be believed their claims of good faith have been sustained.

The government says in opposition only that the circumstances refute good faith, no business or economic interest was to be served by a joint purchase (except reduction of tax liability) and it is unreasonable to believe the wife and son would expose their modest assets to so great a liability in so hazardous an undertaking.

I am unable to agree with the government.

The son was twenty-six years of age. He was handicapped in his father’s ice company. He was married. He had his father’s ambition and some of his capacity. He wanted “to be on his own.” Jealousies, he thought, kept him from receiving the advancement he believed he had earned. His salary was small; his father supplemented it. In another ice company, similar to the one where he had received his business training, removed from his father’s dominance, he told the family he could get his just reward. I find it not unreasonable to believe that the mother of an only son, indeed only child, under the circumstances would not be careful to count possible costs of the venture, but would be willing to stake it all on his capacity to make good in a new field. Dissatisfied as he was, it is easy to believe the son felt the same way.

There was nothing illegal about the joint purchase agreement under the law of Georgia, where it was executed. The parties were able to contract, a consideration — a promise for a promise — was present, assent was given, and there was a subject matter upon which it could operate. That is all that is required. Ga.Code (1933), Secs. 20-107, 20-304, 53-505. The wife and son had a legal right to constitute the plaintiff their agent. They became undisclosed principals where he acted in their behalf within the authority granted. In their behalf, as I find, he executed promissory notes not under seal, and without revealing that he was acting for them as well as for himself. True on the notes he only could be sued, but on the original undertaking independently of the notes the undisclosed principals could be sued. Coaling Coal & Coke Co. v. Howard, 130 Ga. 807, 61 S.E. 987, 21 L.R.A.,N.S., 1051. The proceeds of the notes went to the benefit of the undisclosed principals in the acquisition of the securities, and they could have been sued in assumpsit, as for money had and received.

It seems clear to me that though the legal title of the securities purchased was in the father, he stood as a trustee for two-thirds thereof, the beneficial ownership of which was in his wife and son. Ga.Code (1933) Sec. 108-106; Swift v. Nevius, 138 Ga. 229, 75 S.E. 8.

But it is said the parties, at their pleasure, could have destroyed, cancelled or otherwise terminated the joint purchase agreement, and thereby defeated any possibility of personal liability on the part of the wife and son. In effect, this is to argue that these parties are shown by the evidence to be dishonest people, who would not keep their agreements, if disadvantageous, and thus will be presumed to act always as self-interest may direct. This has not been shown to my satisfaction. In fact, the only evidence before me touching such a possibility shows that the plaintiff has always met his obligations in full, though relieved of some of them by compromise, in past business transactions, with the exception of discounting substantially one of the notes given to the seller in this transaction through anticipating its maturity, a practice sometimes considered ethical in some business circles.

Certainly the plaintiff could not have claimed the securities for himself. Under the law he could not acquire rights in these securities antagonistic to his wife and son. Forlaw v. Augusta Naval Stores Co., 124 Ga. 261, 52 S.E. 898; Bacon v. Bacon, 161 Ga. 978, 983, 990, 133 S.E. 512. See also Hall v. Commissioner of Internal Revenue, 10 Cir., 150 F.2d 304-308, in which the court said: “We cannot say that the absolute power of the trustee to deal with the trust property as if it were his own empowers him to use it for his own personal advantage and gain. Such a construction of the trust instrument would be contrary to the fundamental principles of equity which guide trustees and protect trust property.”

If I am correct in my statement that plaintiff held two-thirds of the securities in 1941 as trustee or agent for his wife and son, then there is no statutory basis for treating the entire income as his, under section 22(a), of the taxing Act, 26 U.S.C.A. Int.Rev.Code, § 22(a), defining Gross Income, merely because he had broad powers to manage the trust estate. Commissioner of Internal Revenue v. Branch, 1 Cir., 114 F.2d 985, 987, 988, 132 A.L.R. 839; Jones v. Norris, 10 Cir., 122 F.2d 6, 11. If his control was not in his own right, but as the representative of the true owners, whether as agent, guardian, trustee, attorney-in-fact, grantor or settlor, and he could not lawfully recapture the corpus or apply the income for his own benefit, he is not taxable on the income. Potter v. Commissioner of Internal Revenue, 47 B.T.A. 607. The Fifth Circuit Court of Appeals, speaking through Circuit Judge Hutcheson, has said: “Unearned incomes (are taxable) to those who own the property or right that produces them, not to those to whom their earners or owners are under contract to pay them. * * * If compensation paid to one is paid to him as the agent or servant in fact, not in fiction, * * * that income is taxable, not to the servant or agent as earner, but to its real earner, the prin cipal.” Saenger v. Commissioner of Internal Revenue, 69 F.2d 631, 632, 633.

The drawing of lines in tax cases, as in others, must depend in large measure upon the particular facts in each case. Taxability often becomes a matter of degree of command or control, or of economic benefit. Cases on similar facts can be cited both ways, but are of doubtful value in reaching a conclusion. I am. unable here to find any legal control for plaintifFs own benefit over two-thirds of the securities purchased, or as to that fractional part any other substantial incidents or attributes of ownership in him. Cf. Copland v. Commissioner of Internal Revenue, 7 Cir., 41 F.2d 501; Commissioner of Internal Revenue v. Olds, 6 Cir., 60 F.2d 252; Rose v. Commissioner of Internal Revenue, 6 Cir., 65 F.2d 616; Champlin v. Commissioner of Internal Revenue, 10 Cir., 71 F.2d 23; Kell v. Commissioner of Internal Revenue, 88 F.2d 453; Montgomery v. Thomas, 146 F.2d 76 — the last two cases by the Fifth Circuit Court of Appeals.

The cases relied on by the government that follow the rulings in Lucas v. Earl, 281 U.S. 111, 50 S.Ct. 241, 74 L.Ed. 731, and Burnet v. Leininger, 285 U.S. 136, 52 S.Ct. 345, 76 L.Ed. 665, are distinguishable on their facts. We are not here concerned with anticipatory or colorable arrangements to divide a taxpayer’s future earnings produced by personal services, or ineffective agreements of partnerships or equitable partial assignments of a future fund. See Mead v. Commissioner of Internal Revenue, 131 F.2d 323; Villere v. Commissioner of Internal Revenue, 133 F.2d 905; Schroder v. Commissioner of Internal Revenue, 134 F.2d 346, — all Fifth Circuit Cases. Nor are we concerned with a family partnership of a going business, as distinguished from a joint ownership of securities, where one partner by his services produces the income and the other members of the family make no or negligible contribution of service or capital to the enterprise. In 1941, so far as the record before me shows, the plaintiff had no active part in the management of the Southern Ice Company, Inc.

The joint purchase agreement if real and not counterfeit, and the uncontradicted testimony of the plaintiff, his wife and his son, if believed, demand a finding that plaintiff purchased not for himself alone but for the joint account of the three, in equal shares; that the so-called family agreement, though not made public, was entered into in good faith, and was not a mere device or artifice to evade taxes; and that inconsistencies between the family contract and the contract with the seller and the lending bank are insufficient to overcome the testimony of the partners themselves as to their real purpose.

It is earnestly urged by the government that because the interest paid on the securities in 1941 was applied to the reduction of plaintiff’s note at the Dallas bank, he alone was benefited and therefore the income was taxable to him alone. This argument overlooks or ignores the fact that in negotiating the bank loan, as well as in the purchase of the securities, plaintiff was in truth acting as the agent of his wife and son to the extent already discussed. If the income be considered as constructively paid to plaintiff, pro tanto it was paid to him as the “agent or servant in fact, not in fiction,” of his co-adventurers or partners, and was used by him in the same way, to reduce their liability to the bank (undisclosed though it was at that time) as well as his own. Therefore, it becomes taxable to them in proportion to their interest in the fund.

Conclusions.

1. This court has jurisdiction of the parties and the subject matter. 28 U.S.C.A. §41(5).

2. The income in question for the year 1941, the amount of which ($82,848.32) is not in question, representing interest on securities of Southern Ice Company, Inc., is taxable only to plaintiff’s wife and son.

3. The Commissioner of Internal Revenue, therefore, erred in the assessment of the additional tax of $48,352.02 on such income, with interest thereon, against the plaintiff.

4. Plaintiff is entitled to recover of the Collector the assessment illegally exacted and collected with interest thereon as prayed.

Let judgment in accordance with these conclusions be presented on notice.

       Gregory v. Helvering, 293 U.S. 465, 469, 55 S.Ct. 266, 79 L.Ed. 596, 97 A.L.R. 1355. See also (dissenting) Judge Hutcheson in Court Holding Co. v. Commissioner of Internal Revenue, 5 Cir., 143 F.2d 823, 826; Chisholm v. Commissioner of Internal Revenue, 2 Cir., 79 F.2d 14, 101 A.L.R. 200.

       Helvering v. Horst, 311 U.S. 112, 119, 61 S.Ct. 144, 85 L.Ed. 75. 131 A.L.R. 655.

       Commissioner of Internal Revenue v. Smith, 324 U.S. 177, 181, 65 S.Ct. 591; Doll v. Commissioner of Internal Revenue, 8 Cir., 149 F.2d 239.

       Poe v. Seaborn, 282 U.S. 101, 51 S.Ct. 58, 75 L.Ed. 239; Blair v. Commissioner of Internal Revenue, 300 U.S. 5, 6(4), 11, 57 S.Ct. 330, 81 L.Ed. 465; Helvering v. Fuller, 310 U.S. 69, 60 S.Ct. 784, 84 L.Ed. 1082.

       Commissioner of Internal Revenue v. Branch, 1 Cir., 114 F.2d 985, 987, 132 A.L.R. 839.

       Commissioner of Internal Revenue v. Katz, 7 Cir., 139 F.2d 107, 110.

       See Int.Rev.Code, Sec. 3797, 26 U.S.C.A. Int.Rev.Code, § 3797(a) (2).

       Saenger v. Commr., supra.


source: Caselaw Access Project

author: LEAHY, District Judge.

license: Public Domain

text:
    UNITED STATES v. 15.38 ACRES OF LAND IN NEW CASTLE COUNTY, DEL., et al.
    Civil Action No. 520.
    District Court, D. Delaware.
    Aug. 9, 1945.
    John J. Morris, Jr., U. S. Atty., and W. Thomas Knowles, Asst. U. S. Atty., both of Wilmington, Del., and Charles M. Ire-lan, Atty., Department of Justice, of Washington, D. C., for the United States.
    C. A. Southerland and J. LaPenne Guen-veur (of Southerland, Berl & Potter), all of Wilmington, Del., for Delaware Power & Light Co.
    Henry R. Isaacs, of Wilmington, Del., for DeWitt T. Cauffiel.
    C. J. Killoran, Atty. Gen., of Delaware, for State of Delaware and for Trustees of Delaware State Hospital.
   LEAHY, District Judge.

An ATC military air field is located outside Wilmington, Delaware. The land is owned by the Levy Court of New Castle County to the use of the county. See 43 Del.Laws, c. 101, pp. 313, 317. On November 26, 1941, the Levy Court entered into a lease with the United States whereby the government acquired a tenancy from year to year. This lease is not renewable, however, beyond June 30, 1967. Condemnation proceedings were started in this court on February 2, 1945, under the Second War Powers Act, 50 U.S.C.A.Appendix § 632, wherein the Secretary of War sought to acquire a perpetual easement for the construction and maintenance of a railroad spur, connecting the Air Base with the Delaware Railroad (an adjunct of the Pennsylvania Railroad) over lands contiguous to the Air Base. The spur track since its installation has been used solely to furnish supplies to the Air Base. Conced-edly, no other use thereof can be had at the present time. Those having interests in the lands over which the spur track runs and the respondents here are the State Board of Trustees of the Delaware State Hospital for the insane, Delaware Power & Light Company, a Delaware corporation, and an individual, DeWitt T. Cauffiel. Respondents’ answers to the present petition of condemnation contain two prayers; one seeks the dismissal of this proceeding because “it is not a taking of private property for public use” in that the estate sought to be acquired is a right of way in perpetuity to serve the Air Base which is land now used by the United States under a lease for a term of years not to extend beyond 1967; the other prayer, as a form of alternative relief, seeks to change the estate to a temporary easement in order to make it commensurate with the estate now enjoyed by the United States in the land upon which the Air Base is presently located. At the time of institution of the present action, a declaration of taking was filed and $7800 deposited in the registry of the court, representing estimated just compensation; the amount of $1900 was specifically allocated to parcel No. 2 formerly owned by the Delaware Power & Light Company.

At plaintiff’s request a rule issued on respondents to show cause why the primary and alternative prayers appearing in their answers should not be stricken as not valid in law and the perpetual easement sought by the government allowed, leaving for a later stage of the proceeding the ascertainment of damages and just compensation. The State of Delaware, one of the respondents in interest, joined with the United States on the right of the government to acquire a perpetual easement.

The position of respondents, excepting the State of Delaware, is that the taking of an easement in excess of the term of the original lease for the Air Base is not a taking for a public use. True, what is a public use under the Fourteenth Amendment raises a question which may have judicial review, but only to ascertain if the exercise of eminent domain has been exercised arbitrarily. This court recognized the rule in United States v. Parcel of Land in Town of Middletown, D.C.Del., 32 F.Supp. 718. One facet of the rule is that judicial inquiry does not go beyond the determination of the Secretary of War, for example, in acquiring lands for military purposes, as to the necessity for acquisition or the extent of the taking; nor will inquiry be made into his intentions prompting the taking. City of Oakland v. United States, 9 Cir., 124 F.2d 959; United States v. Meyer, 7 Cir., 113 F.2d 387; Barnidge v. United States, 8 Cir., 101 F.2d 295; United States v. 16.747 Acres of Land, D.C.Del., 50 F.Supp. 389. This is because legislative determination of necessity must be delegated to an administrative body of the executive; Joslin Mfg. Co. v. City of Providence, 262 U.S. 668, 43 S.Ct. 684, 67 L.Ed. 1167; and it has even been held that the decision of the Secretary of War in time of war emergency is not even open to judicial inquiry, United States v. 243.22 Acres of Land, 2 Cir., 129 F.2d 678. The decision of the Secretary of War is subject only to the restraints that just compensation will be paid for the taking and that the decision to take is not prompted by bad faith.

Respondents argue, however, it is unnecessary to inquire into the intent of the Secretary of War or to go behind his findings in the case at bar, because he has, in the first instance, determined that the Air Base should be acquired by the government for military purposes not by a fee title or any such perpetual estate, but by a leasing from year to year and not beyond 1967; and his present decision is obviously arbitrary and so must be labelled as not made in good faith, for the sole purpose of the sought easement in perpetuity is to serve merely a temporary leasehold interest. From this, the argument advances that the taking of a quality of interest in an appurtenance in excess of the term by which the government holds the facility served by such appurtenance is, on its face, an arbitrary taking. Once having determined that the land on which the Air Base is now situate was necessary for military purposes, to the extent that the government’s interest would best be served by a leasehold, such primary action, it is árgued, defines any subsequent taking over any such appurtenance likewise and only to a temporary use.

This is s’moly a paraphrase of the rule that any taking must be for a public use and any excess condemnation is not for a public use. See Cooley, Constitutional Limitations, p. 1147; 18 Am.Tur.Eminent Domain, p. 736; City of Richmond v. Carneal 129 Va. 388. 106 S.E. 403. 14 A.L.R. 1341; Winnisimmet Co. v. Grueby, 209 Mass. 1, 95 N.E. 293; In re Opinions of the Justices, 204 Mass. 616, 91 N.E. 578. The argument to support excess taking is bottomed on the original determination by the condemnor as to what was necessary for a public use when he entered into a voluntary lease for the Air Base itself.

The question for decision, then, may finally be isolated: Is it within the judicial function, absent a showing of bad faith on the part of the Secretary of War, to set aside or modify his determination as to the necessity or extent of the property to be acquired? The answer is that, absent such a showing, courts are not required to substitute the’r judgments for that of Secretaries of War in the determination of necessity or quantum of estate to be acquired, in time of war. The Congress, in enacting Sec. 2 of Act 1917 by section 201 of Title II of the Second War Powers Act was of such mind; and it, having delegated to the Secretary of War the power to acquire by condemnation either the fee or any lesser estate on behalf of the United States, as the Secretary may deem necessary, his determination of necessity and extent of a particular taking is not a subject of judicial re-examination. City of Oakland v. United States; United States v. Meyer; Barnidge v. United States; United States v. 16.747 Acres of Land; all supra. In these matters, the court should be hesitant in substituting its discretion or belief for that of the Secretary of War who, under Act of Congress, is clothed with authority to make the determinations of necessity and extent. The judge should only intervene where there is a conclusive showing that the Secretary’s determination is not made in good faith and hence is arbitrary.

The prayers of the respondents will not be stricken from the answers. They will have ample opportunity at trial to meet the requirements by way of proof in support of their allegations that the Secretary’s action is without validity. On the state of the present record, however, it is held that the original acquisition of the Air Base by voluntary lease and the sought perpetual easement of the right-of-way is not beyond the pale of lawful authorization. Accordingly, the rule will be discharged in accordance with the foregoing; and the matter set down for trial on the petition and the answers thereto. In passing, it is suggested that if respondents can show at trial by a factual base, in contradistinction to the conceptualistic arguments that have been made here, that the Secretary of War’s decision rests on an absence of good faith, then the whole matter of necessity and extent of estate sought to be acquired will be critically re-examined; otherwise, not.

An order may be submitted in accordance with the foregoing.

       For the functions of the Levy Courts in Delaware, see United States v. 1010.8 Acres of Land et al., D.C.Del., 56 F.Supp. 120, at page 123.

       City of Cincinnati v. Vester, 281 U.S. 439, 446, 50 S.Ct. 360, 74 L.Ed. 950.

       C. M. Patten v. United States, 9 Cir., 61 F.2d 970, 972; United States v. Certain Parcels of Land in Town of Denton, D.C., 30 F.Supp. 372.

       Judge Frank (United States v. 243.22 Acres of Land, 2 Cir., 129 F.2d 678, 683): “The decision of the Secretary of War is not open to judicial inquiry. That is fortunate, for if it were open, the ensuing delay would delight our country’s enemies.”


author: KENNEDY, District Judge.

text:
    VERNON LUMBER CORPORATION v. HARCEN CONST. CO.
    Civil Action No. 4781.
    District Court, E. D. New York.
    July 26, 1945.

      See also 60 F.Supp. 555.
    Max Ornstein, of New York City, for plaintiff (for the motion).
    Gresser & Walker, of New York City, for defendant (opposed).
   KENNEDY, District Judge.

This is a motion for an order reviewing the taxation of costs by the Clerk of this Court. The action was originally commenced in New York Supreme Court but was removed here. It was subsequently tried without a jury. Plaintiff in its complaint demanded the sum of $5,242.15. The findings of the District Court are to the effect that plaintiff was entitled to this amount. However, the net amount due on the judgment to the plaintiff is $2,150 because defendant succeeded on its counterclaim.

At the time of the commencement of the action in New York Supreme Court, the plaintiff sued out a warrant of attachment. Property of - the defendant was thereafter taken into the custody of the sheriff. Under § 1512 of the New York Civil Practice Act, a successful plaintiff is entitled to tax in the bill of costs an amount proportioned upon the value of the property attached. Under § 1504 of the Civil Practice Act, a successful party is entitled to tax the amount of $25 for proceedings before the filing of note of issue in actions such as this, where it is necessary to apply to the Court for judgment.

Plaintiff included the two items just referred to in the bill of costs here under review. It asked $124 as an allowance in connection with the attachment. In arriving at this amount it used as a basis of calculation the full (not the net) amount of the judgment to which it was eventually held to be entitled, namely, $5,242.15. Plaintiff also included an item in the amount of $25 for costs before the filing of the note of issue. Both of these items were stricken by the Clerk, and I am now asked to review his determination.

Counsel were able to discover only three cases bearing -on the point that is here for decision. Plaintiff relies upon Cleaver v. Traders’ Insurance Co., C.C., 40 F. 863. That case holds that a successful party is entitled to tax in the federal court the items which he was entitled to under the state rules prior to the removal of the cause. The Cleaver case was decided by the Circuit Court for the Eastern District of Michigan, and in the opinion it is specifically stated that a different rule obtains in the Second Circuit. That different rule was laid down by the decisions in Clare v. National City Bank, Fed.Cas. No. 2,793, 14 Blatchf. 445, and Chadbourne v. German-American Insurance Co., C.C., 31 F. 625. It is upon these cases that the defendant here relies.

In 1853 Congress for the first time legislated on the subject of costs. If enacted what has come to be called the “fee bill.” 28 U.S.C.A. § 830, R.S. Sec. 983. Before the enactment of this statute ii was held that, although federal statutes impliedly recognized the right to costs, since Congress had not directly dealt with the subject their amount and award should follow the state law. Hathaway v. Roach, 11 Fed.Cas. page 818, No. 6,213, 2 Woodb. & M. 63; Costs in Civil Cases, 30 Fed. Cas. page 1058, No. 18,284, 1 Blatchf. 652. In substance, the fee bill merely permits the taxation (by the clerk or the judge) of the amount of disbursements for witnesses’ fees (and other named purposes) which the prevailing party has paid or incurred during the pendency of the case. There is nothing in the statutes to indicate that Congress even took into consideration items of “costs,” as distinguished from disbursements, which are allowed by state law. These are items which are not paid out by the prevailing party, but which he is allowed as compensation. It has been said that prior to the enactment of the fee bill taxation of costs in federal courts was made to conform to the usage in the state in which the district was situated, and that after the enactment of the fee bill this practice continued except as to the specific items mentioned in that section.

Indeed, as late as 1931, it was suggested that the right to costs in the federal courts was derived from the rules of decision ■statute, 28 U.S.C.A. § 725. However, in Henkel v. Chicago, etc., Ry., 284 U.S. 444, 447, 52 S.Ct. 223, 225, 76 L.Ed. 386, the Supreme Court took the position that this was not so, and that, on the contrary, the rules of decision statute ceased to have any application after Congress enacted the fee bill. In the Henkel case the Court said that Congress “has dealt with the subject comprehensively, and has made no exception of the fees of expert witnesses.” (Emphasis mine.)

Most of the cases interpreting the fee bill have dealt with disbursements or expense actually incurred by the prevailing party. E. g., Ex parte Peterson, 253 U.S. 300, 40 S.Ct. 543, 64 L.Ed. 919; Williams v. Sawyer Bros., Inc., 2 Cir., 51 F.2d 1004, 81 A.L.R. 1527; Henkel v. Chicago, etc., Ry., 284 U.S. 444, 52 S.Ct. 223, 76 L.Ed. 386. In the Peterson case the controversy related to an allowance by the Court to an auditor, and it was held that it was proper to pay it. In the Williams case the question was whether premiums paid on a bond to release an attachment were recoverable in the federal courts. It was held that they were. In the Henkel case the Circuit Court of Appeals for the Eighth Circuit, 58 F.2d 159, had certified to the Supreme Court the question whether the District Court had power to allow expert witness fees, under circumstances where the state courts of Minnesota authorized the allowance and the inclusion in the taxable costs of such items. The Supreme Court said these items were not allowable, because the fee bill was sufficiently comprehensive to exclude the application in the federal courts of any state practice which was not in accord with the express language of the federal statute.

It is by no means clear to me that in the Henkel case the Supreme Court was saying that party litigants in the federal courts are restricted to the exact language of the fee bill. I say this because in that very opinion the Court (284 U.S. 444, 445, 446 52 S.Ct. 223, 76 L.Ed. 386) quotes with approval the language of Mr. Justice Wood-bury in Hathaway v. Roach, supra, to the effect that it had become “the practical usage by the courts of the United States to conform to the state laws as to costs, when no express provision has been made and is in force by any act of congress in relation to any particular item, or when no general rule of court exists on this subject.” Of course, Hathaway v. Roach was decided long before the enactment of the fee bill and the Henkel case long after. But as Judge Learned Hand points out in the Williams case, supra, the proposition embodied in the words that I have quoted was recognized as well before 1853 as it was afterwards.

It is not surprising, in view of the absence of federal statutes on the subject of costs that are specific, to find the Circuit Court of Michigan holding that state costs accrued prior to removal are taxable by the prevailing party in a cause removed to the federal court (Cleaver v. Traders’ Insurance Co., C.C., 40 F. 863; Trinidad Asphalt Paving Co. v. Robinson, C.C., 52 F. 347) ; the Circuit Court of Maryland deciding the same way (Sawyer v. Williams, 72 F. 296), but the Circuit Court in the Second Circuit deciding the opposite way (Clare v. National City Bank, Fed.Cas. No. 2,793, 14 Blatchf. 445; Chadbourne v. German-American Insurance Co., C.C., 31 F. 625).

I shall not attempt to lay down any general principle or to reconcile the decisions. Dealing merely with the facts before me, I hold that whatever may be the law applicable to the taxation of items disbursed by the prevailing party, he is not entitled to recover items which the state law has given him as compensation for his victory, or rather to punish his adversary for false outcry. These are not “fees.” And since the enactment of the fee bill a strong argument can be made that Congress intended that the party prevailing in the federal court should recover as “costs” merely the amount which he paid, or become liable to pay, and which was saddled upon him as a necessary consequence of the preparation or trial of the law suit. For if Congress intended to make possible the taxation of items allowed by state legislatures to the prevailing party, even if he did not pay them out, then Congress has put it in the power of the state legislatures to regulate the costs of litigation in the federal courts, and even the cost of removal of a suit to the federal court. I mean by that, that if plaintiff is right, the state legislature could provide for an allowance in a prohibitive amount as “costs prior to removal” in the state court. The nonresident defendant who desired to remove would then face the alternative of leaving the cause in the state court or removing it at the peril of payment of a substantial penalty.

If the fee bill as such will not bear the-interpretation permitting the taxation of the items which plaintiff seeks, he can then succeed only on the basis of usage. I have indicated that I do not believe the doctrine of state usage discussed in the cases applies to anything other than actual disbursements. But assuming that it does, there was no such usage in this Circuit sixty years ago (Clare v. National City Bank, Fed.Cas. No. 2,793, 14 Blatchf. 445, Chadbourne v. German-American Insurance Co., C.C., 31 F. 625), and my attention has been called to no case since where any such usage has been recognized.

The determination of the clerk is accordingly sustained.

       I have here paraphrased the language of Judge Learned Hand in Williams v. Sawyer Bros., Inc., 2 Cir., 51 F.2d 1004, 81 A.L.R. 1527.

       See footnote 1.

       This suggestion was made in the dissenting opinion in Williams v. Sawyer Bros., Inc., 2 Cir., 51 F.2d 1004, 81 A.L.R. 1527.


author: LEAMY, District Judge.

text:
    In re WHITCOMB et al.
    No. 7328.
    District Court, D. Vermont.
    Aug. 14, 1945.

      Francis D. Foley and Samuel H. Rothman, both of Burlington, Vt., for creditor.
    Consuelo Northrup Bailey and J. H. Macomber, Jr., both of Burlington, Vt., for bankrupts.
   LEAMY, District Judge.

On September 16, 1944, the debtors presented their petition to this Court asking that they be afforded an opportunity to effect a composition or an extension of time to pay their debts under Section 75 of the Bankruptcy Act, 11 U.S.C.A. § 203. The petition was approved as properly filed under said section and the matter was referred to a conciliation commissioner, directing the debtors to appear before the commissioner and to submit to such orders as might be made in proceedings under that section. On November 18, 1944, the debtors filed with the Commissioner an inventory of their property, and three days later they filed with him a proposal for composition and extension of debt in which they offered to pay to James E. Kennedy, the petitioner herein, who is their only creditor, and in full settlement of his mortgages, the sum of $12,000, or in the alternative, that the actual debt be determined by an independent auditor and when determined that they would pay the same with interest at four percent per annum payable semiannually and the principal to be paid in equal payments over a period of twenty years; also that they be permitted to cut wood and lumber from the farm and apply the net proceeds toward the purchase of necessary additional cattle, giving Mr. Kennedy a mortgage on such cattle as purchased.

A meeting of the creditors was held on December 8, 1944, at which the debtors were present and were examined. It appeared that their debts amounted to $19,-496.03, all of which was owed to the petitioner Kennedy, and that his claim, which was allowed in that amount, is secured by a mortgage upon the real estate described in the debtors’ petition, and a lien upon certain personal property as described in chattel mortgages on record, the mortgaged chattels being for the most part cattle and farm machinery. At the hearing the debtors submitted their offer of composition or proposal for extension and Mr. Ken-edy filed a written objection thereto, thereby rejecting the offer. The Conciliation Commissioner thereupon ordered that the case be closed as to all proceedings under Section 75, subs. a-r.

As the debtors were unable to obtain an agreement with their only creditor, they applied to be adjudged bankrupts under subsection s of Section 75. The application was filed on December 27, 1944. They asked therein “that their property, wherever located, whether pledged, encumbered or unencumbered, be appraised and that their unencumbered exemptions and unencumbered interest or equity in their exemptions as prescribed by the Laws of the State of Vermont be set aside to them, and that they be allowed to retain possession, under the supervision and control of the Court, of all the remainder of their property, including their encumbered exemptions, under the terms and conditions set forth in said Section 75, Subsection s, of the Bankruptcy Act.” On December 29, 1944, the Court entered an order adjudging the debtors bankrupts and requiring further proceedings before the commissioner acting as referee under subsection s.

On February 16, 1945, the petitioner Kennedy moved to vacate and set aside the adjudication and to dismiss the debtors’ petition on the several grounds that the proposal for composition and extension of debt was not made in good faith; that the debtors had not made any serious effort to adjust their affairs with their only creditor; that there was no probability of their rehabilitation and that continued operation of the farm would depreciate the value of petitioner’s security; that they were not entitled to amend their petition since their proposal was not made in good faith; that they were not insolvent, and that as to the mortgaged personal property, under the laws of Vermont, the petitioner Kennedy had absolute title thereto and the right to the immediate possession thereof and that therefore the Court had no jurisdiction over it.

On May 29, 1945, the petitioner withdrew the tenth ground of his motion, namely, to vacate the adjudication and dismiss the petition and, on the same grounds, moved that the Court “refuse to take any control or possession whatever of the personal property on which he has chattel mortgages.”

Since all of the grounds of the motion, except the last, raise questions of fact and no evidence was introduced thereon, no consideration need he given them. It may not be amiss however to point out that these grounds (except the one that the debtors are not insolvent) are very similar to the grounds relied upon in John Hancock Mutual Life Insurance Co. v. Bartels, 308 U.S. 180, 60 S.Ct. 221, 223, 84 L.Ed. 176, and as to which the Court ruled as follow: “The subsections of Section 75 which regulate the procedure in relation to the effort of a farmer-debtor to obtain a composition or extension contain no provision for a dismissal because of the absence of a reasonable probability of the financial rehabilitation of the debtor. Nor is there anything in these subsections which warrants the imputation of lack of good faith to a farmer-debtor because of that plight. The plain purpose of Section 75 was to afford relief to such debtors who found themselves in economic distress however severe, by giving them the chance to seek an agreement with their creditors, subsections a to r and, failing this to ask for the other relief afforded by subsection s. The farmer-debtor may offer to pay what he can, as Bartels did, and he is not to be charged with bad faith in taking the course for which the statute expressly provides. The only reference in Section 75 to good faith is found in subsection i, which relates solely to the confirmation of proposals for composition or extension when the court must be satisfied that the offer and its acceptance are in good faith and have not been made or procured by forbidden means or except as provided in the-statute. That provision manifestly hits at secret advantages to favored creditors or other improper or fraudulent conduct.”

However, the final ground of the motion, and apparently the one on which the petitioner primarily relies, raises a question of law.

Although the mortgages were not introduced in evidence, it seems to be conceded that at the time the debtors filed their application under Section 75, that the petitioner Kennedy was the holder of three chattel mortgages on a very substantial portion, if not all, of the debtors' cattle and farm machinery; that all of the mortgaged property was in the physical possession of the debtors and that Kennedy had made no effort to take possession of the property or to foreclose his mortgages thereon, notwithstanding the fact that the condition of each mortgage had been broken.

Kennedy contends that since the possession of the property by the debtors was permissive only, and that since by the law of Vermont his mortgages give him the legal title to the mortgaged property and the right to the immediate possession thereof, that the debtors have no rights in the property and that this Court should refuse to exercise any control over it. That might be so, were it not for the intervention of the provisions of Section 75.

Section 75 is an emergency measure for the relief of fanners who are in financial distress. Its two aims are to extend to the farmer the unmolested right to effect a composition of his debts, and upon his failure in that respect, it further extends to him, if he asks for it, the right to be adjudicated a bankrupt under subsection s, and to secure its benefits with respect to rehabilitation, provided there is a reasonable hope of rehabilitation. Subsection s provides, in substance, that after the value of the debtors’ property has been fixed by appraisal, that the referee shall set aside the debtors’ unencumbered exemptions and direct his retention of possession of the rest of his property subject to all liens and to the cotirt’s supervision and control. (Italics supplied.) It provides further, in paragraph 2, that if the statutory requirements have been met, that the court is directed to stay all proceedings against the debtor or his property for a period of three years, during which time the debtor may retain possession of his property, subject to the court’s control, provided he pays a reasonable rental. The rental, which is paid into court, is to be used, first for the payment of taxes and necessary upkeep, and the balance distributed to creditors as their interests may appear. If it is necessary for the court to protect creditors “from loss by the estate,” or “to conserve the security”, the court may order the sale of any unexempt perishable property, or of any unexempt personal property not reasonably necessary for farming operations, and the court, in addition to the prescribed rental, may require payments by the debt- or on the principal of his debts in the manner set forth. Paragraph 3 provides that at the end of the three year period, or sooner, the debtor may pay into court the appraised value of the property of which he retains possession, “including the amount of encumbrances on his exemptions, up to the amount of the appraisal, less the amount paid on principal” for distribution to his creditors. It also provides that upon the request of a creditor or the debtor the court shall cause the debtors’ property to be reappraised and the debtor shall then pay the value arrived at into court for distribution to creditors. Thus, by order of court, the debtor may regain full possession and title of his property, the value of which has been devoted to the payment of his debts. And for the protection of secured creditors, it provides that upon request in writing of any one of of them, that the court shall order the property, upon which he has a lien, to be sold at public auction. The debtor is to have ninety days to redeem the property so sold by paying the amount for which it was sold, with interest, into court, and he may apply for his discharge as provided in the Act. If the debtor fails to comply with the provisions of the section or with any orders of the court, or is unable to refinance himself within three years, the court may appoint a trustee and order the property sold or otherwise disposed of as provided in the Act.

It is true, as the petitioner contends, that under Vermont decisions a chattel mortgage operates as an absolute sale, and that after condition broken the whole title vests in the mortgagee. But it vests “subject only to a right in equity to redeem.” Paska v. Saunders, 103 Vt. 204, 215, 153 A. 451, 455. And this is a “right” which the Act plainly intends to protect, since subsection n of the act provides that “the filing of a petition * * * praying for relief under this section, shall immediately subject the farmer and all his property, * * * to the exclusive jurisdiction of the court, including all real or personal property, or any equity or right in any such property * * (Italics supplied.) And the intent of Congress to protect the farmer-debtor in his possession of mortgaged property is further expressed in subsection o which provides that “except upon petition made to and granted by the judge * * *, the following proceedings shall not be instituted, or if instituted at any time prior to the filing of a petition under this section, shall not be maintained, in any court or otherwise, against the farmer or his property, at any time after the filing of the petition under this section, and prior to the confirmation or other disposition of the composition or extension proposal by the court: (1) Proceedings for any demand, debt, or account, including any money demand; * * * (6) Seizure, distress, sale, or other proceedings under an execution or under any lease, lien, chattel mortgage, conditional sale agreement, crop payment agreement, or mortgage.”

As the Supreme Court said in Wragg v. Federal Land Bank, 317 U.S. 325, 328, 63 S.Ct. 273, 275, 87 L.Ed. 300, “ * * * § 75 prescribes its own criteria for determining what property interests may be brought within the jurisdiction of the court. In the interpretation and application of the Bankruptcy Act as in the case of other federal statutes, federal not local law applies. Prudence Corporation v. Geist, 316 U.S. 89, 95, 62 S.Ct. 978, 982, 86 L.Ed. 1293, and cases cited. It is for the bankruptcy court to determine, by reference to the provisions of the bankruptcy statute, what rights created by state law- — regardless of the characterization which may be applied to them by state statutes and decisions — are within the jurisdiction of the bankruptcy court. United States v. Pelzer, 312 U.S. 399, 402, 403, 61 S.Ct. 659, 660, 661, 85 L.Ed. 913.”

Subsection n of the Act clearly confers jurisdiction over the debtors’ “right or the equity of redemption where the period of redemption has not or had not expired” and it had not expired here since no foreclosure proceedings had been instituted.

Construing the Act liberally, as we are admonished to do, “lest its benefits be frittered away by narrow formalistic interpretations which disregard the spirit and the letter of the Act”, it is apparent that its purpose is to maintain the farm as a going concern and it cannot be so maintained unless the debtor is permitted to have possession and to operate the property after the filing of the petition, upon terms which are equitable to him and his creditors and under a stay which will assure him of his possession during a period in which the possibility of his rehabilitation may be determined.

I hold therefore that the debtors’ interest in, and their possession of the mortgaged property, whether it be designated under state decisions as a “right to redeem” or as a “right in equity to redeem”, is an interest intended to be subject to the jurisdiction of the Bankruptcy Court and is capable of administration in this proceeding. To hold otherwise would, it seems to me, completely defeat the purpose of the Act, in its effort to rehabilitate the farmer in financial distress.

Certainly the Act would be of little avail to a Vermont farmer, if upon the filing of a petition thereunder, every holder of a chattel mortgage could step in and strip the farm of the very chattels which are vital to its operation and to the possible rehabilitation of its owner.

Motion denied.


author: WILLIAM C. COLEMAN, District Judge.

text:
    MADDRIX v. DIZE.
    Civil Action No. 2085.
    District Court, D. Maryland.
    July 16, 1945.
    Paul Berman, of Baltimore, Md., for plaintiff.
    Harry Leeward Katz and Ginsberg & Ginsberg, all of Baltimore, Md., for defendant.
   WILLIAM C. COLEMAN, District Judge.

This is a suit under the Fair Labor Standards Act, 29 U.S.C.A. §§ 201-219, and the sole question now before the Court relates to the allowance to plaintiff’s attorney of an additional fee for services.

Plaintiff’s attorney was originally allowed a fee of $75 by this Court at the time this case was heard on the merits. He is now claiming an additional fee of $2500 as compensation for legal services rendered when the case was on appeal to the Circuit Court of Appeals, and before the Supreme Court of the United States. The defendant has moved for dismissal of this claim, alleging that this Court is without jurisdiction at this time to make any further allowance to plaintiff’s attorney, since the original judgment entered by this Court has been affirmed without modification by both the Circuit Court of Appeals and the Supreme Court.

The chronological facts relative to the various steps in this litigation are as follows : On February 1, 1944, after a hearing on the merits, this Court rendered judgment in plaintiff’s favor for $1052.10, and included in this judgment an additional allowance of $75 as a fee to plaintiff’s attorney for services to date, in accordance with the provisions of Section 16 (b) of the Fair Labor Standards Act, 29 U.S.C.A. § 216 (b), which provides that “The court in such action shall, in addition to any judgment awarded to the plaintiff or plaintiffs, allow a reasonable attorney’s fee to be paid by the defendant, and costs of the action.” No claim for, or mention of compensation for possible future legal services was made. This judgment was affirmed August 1, 1944, by the Circuit Court of Appeals, Dize v. Maddrix, 4 Cir., 144 F.2d 584. Thereafter, on November 13, 1944, the Supreme Court granted the defendant a writ of certiorari. 65 S.Ct. 135. The case was duly heard before that Court; on April 9, 1945, it affirmed the action of the Circuit Court of Appeals, Dize v. Mad-drix, 324 U.S. 697, 65 S.Ct. 895, and on the first day of June, 1945, its mandate issued, the relevant part of which reads as follows: “Ordered and adjudged by this Court that the judgment of the said United States Circuit Court of Appeals in this cause be, and the same is hereby affirmed with costs. And it is further ordered, That this cause be and the same is hereby, remanded to the District Court of the United States for the District of Maryland. You, therefore, are hereby commanded that such proceedings be had in said cause, as according to right and justice, and the laws of the United States, ought to be had, the said writ of certiorari notwithstanding.”

Summarized, the attorney’s contention is that since his legal services in connection with the two appeals in this case, i.e., one to the Circuit Court of Appeals and one to the Supreme Court, had of course not been rendered at the time the case was heard by this Court and its judgment entered, this Court has implied if not express power, by reasonable interpretation of the language of Section 16 of the Fair Labor Standards Act, just quoted, to enter a supplemental judgment for an additional fee for these subsequent services, upon being satisfied that such a fee has been earned. On the other hand, defendant’s contention is that because of the character of this Court’s judgment as originally entered; because of the fact that it has been affirmed without modification or reopening by both the Circuit Court of Appeals and the Supreme Court, and the fact that the plaintiff did not raise the question of an additional attorney’s fee either when the case was before this Court, or before either one of the appellate tribunals, as he might have done, he is without remedy in this Court.

We believe that defendant’s contention is sound and therefore deem it unnecessary to consider what might be a reasonable additional fee, were this Court permitted or required to make any additional allowance to plaintiff’s attorney. We must strictly follow the mandate. It is controlling as to all matters within its compass, although on a remand a lower court is free as to other issues. We believe that the matter of fees in the present case was within the compass of both mandates. See Kansas City So. Ry. v. Guardian Trust Co., 281 U.S. 1, 50 S.Ct. 194, 74 L.Ed. 659; Sprague v. Ticonic Bank, 307 U.S. 161, 59 S.Ct. 777, 83 L.Ed. 1184; Hazel-Atlas Co. v. Hartford Co., 322 U.S. 238, 64 S.Ct. 997, 88 L.Ed. 1250. Nor do the Rules of Civil Procedure, Rule 60 (a), (b), 28 U.S. C.A. following section 723c, authorizing the District Courts to relieve from a judgment taken through mistake, inadvertence, surprise, or excusable neglect give this Court power to alter or amend such a judgment as the present one, after its affirmance by the Circuit Court of Appeals and the Supreme Court. See Home Indemnity Co. of New York v. O’Brien, 6 Cir., 112 F.2d 387.

It is true that Section 16 of the Act provides that a reasonable attorney’s fee shall be awarded the plaintiff, “in addition to any judgment awarded” him. But we do not interpret this as requiring this Court to enter a separate judgment for a fee after final judgment on the merits has been entered by this Court, including an attorney’s fee for services up to that time, when no claim for such further allowance has ever heretofore been made during any phase of the litigation, and when .this Court’s judgment has been affirmed without modification. Furthermore, we do not believe that the last clause of the Supreme Court’s mandate to this Court, which we have quoted herein, commanding “that such proceedings be had in said cause, as according to right and justice, and the laws of the United States, ought to be had, the said writ of certiorari notwithstanding,” is intended to authorize a material alteration of the judgment as affirmed, which would result were the attorney’s contention to prevail. This language is rather a “catchall” clause, to cover questions of costs, for example, which it is to be noted are treated as separate from attorney’s fees by the express phraseology of Section 16 of the Act.

Plaintiff’s attorney has submitted no authorities in support of his contention, nor are we aware of any. Such expressions as we have found in the cases in other jurisdictions involving questions which may be said to be related to the precise question before us, would seem to support our conclusion. For example, in Johnson v. Dierks Lumber & Coal Co., 5 Cir., 130 F.2d 115, at page 120, we find the following: “Complaint is made also of the allowance of an attorney’s fee of only $100 for plaintiffs’ attorneys. Since the case must be tried again, that part of the judgment fixing such fee should be vacated and the allowance or disallowance of an attorney’s fee should be determined at the concltbsio>n of the trial.” (Italics inserted.) In Sykes v. Lochmann, 156 Kan. 223, 132 P.2d 620, a decision of the Supreme Court of Kansas in which certiorari by the Supreme Court was denied (319 U.S. 753, 63 S.Ct. 1165, 87 L.Ed. 1707), it was said (132 P.2d at page 624) : “From the record before us it appears the court rendered judgment for a specific amount in favor of each plaintiff and gave judgment against defendant for attorney’s fees in the sum. of $2,-000, with an additional amount if appeal was taken.” (Italics inserted.)

What we have here said is, of course, without prejudice to such right as plaintiff’s attorney may have to apply to the Circuit Court of Appeals or to the Supreme Court for such modification of their action, or of their respective mandates, as might permit consideration of his claim by them, or by this Court upon appropriate direction from one or the other of the appellate courts. However, in the absence of the aforegoing, we conclude that we are without authority to entertain the present petition. Accordingly, an order will be signed granting defendant’s motion for dismissal.


author: McCOLLOCH, District Judge.

text:
    In re SHEPHERD.
    District Court, D. Oregon.
    July 31, 1945.

      Coan & Rosenberg, Ralph A. Coan and Quincy L. Matthews, all of Portland, Ore., for bankrupt.
    W. E. Richardson, of Portland, Ore., for objecting creditor.
   McCOLLOCH, District Judge.

The Referee’s order is affirmed, and I adopt the opinion of the Referee (Honorable Estes Snedecor) as the opinion of the court on the law of the case:

This cause came on for hearing August 7, 1944, upon specifications of objection of Mildred Muck, a creditor, to the discharge of the bankrupt. Each appeared in person and by counsel. At the outset, the objecting creditor presented and asked leave to file amended specifications. The bankrupt moved to strike the third specification as originally filed.

The amended specifications consisted of a reiteration of the original three specifications and a new one designated “Fourth Specification”. The latter contained allegations of fact not mentioned in the original specifications and constituted an attempt to set up a new and additional ground for the denial of bankrupt’s discharge. The time for filing specifications had long since expired. The referee denied the motion for leave to file the amended specifications. Collier on Bankruptcy, 14th Ed., Section 14.07, Page 1276; In re Johnson, D.C.S.D., 192 F. 356, 27 A.B.R. 644; In re Hurowitz, D.C.Mass., 14 F.Supp. 71, 28 A.B.R.,N.S., 479; In re Gagliardi, D.C.N.Y., 36 A.B.R.,N.S., 326; Northeastern Real Estate Corporation v. Goldstein, 2 Cir., 91 F.2d 942, 34 A.B.R.,N.S., 652; In re Martina, D.C.N.Y., 47 A.B.R.,N.S., 182.

The referee also denied bankrupt’s motion to strike the third specification. Reasons for the latter ruling will be discussed later.

After hearing the testimony and considering the evidence offered in support of the first and second specifications the referee ruled in open court that there was no competent evidence to sustain the allegations. Thereafter an order was entered denying and overruling the first two specifications of objection.

The referee took under advisement the third specification and requested briefs, which now have been duly considered.

The third specification raises a question of first impression under the Bankruptcy Act, 11 U.S.C.A. § 1 et seq. The question is, may the bankrupt, after having obtained a discharge from a debt in a prior proceeding and having revived the debt by waiving his discharge, receive another discharge from the same debt in a new proceeding brought more than six years after the first discharge.

The undisputed facts are': The bankrupt was duly adjudged a bankrupt upon a voluntary petition filed June 26, 1931. Thereafter on October 21, 1931, he was granted a discharge. (Bankrupt’s Exhibit 6.) He listed as one of his creditors Mildred McDonald, now Mildred Muck, the objecting creditor herein. The bankruptcy schedules show that the bankrupt was indebted to this creditor on notes signed by him in the sum of approximately $2,600. (Bankrupt’s Exhibit 7.)

On June 5, 1934, Mildred Muck brought an action in the Circuit Court of the State of Oregon against the bankrupt to recover the amounts owing on said promissory notes. The defendant answered by admitting that he was indebted in the amount alleged but, as an affirmative defense, set up his discharge in bankruptcy. The plaintiff in her reply admitted the discharge, but alleged affirmatively that after the bankrupt had filed his petition in bankruptcy and prior to his discharge, he had expressly promised and agreed to pay the notes; that he had stated that he had listed her as a creditor because he was required to do so, but that she could disregard the bankruptcy. She alleged further that pursuant to the agreement he had paid certain sums on account thereof before and after his discharge. A jury trial upon these issues resulted in a verdict and judgment thereon, entered August 7, 1935, for the full amount then owing on said notes in the sum of $2,543.95 with interest thereon at the rate of 6% per annum and costs.

On December 16, Í941, Bernard G. Shepherd filed a second bankruptcy proceeding in which the only unsecured creditor listed is Mildred Muck, the objecting creditor. In her third specification, the objecting creditor set forth substantially the foregoing facts and stated that her claim evidenced by the judgment based upon the bankrupt’s promissory notes is the same obligation from which the bankrupt received a discharge in the former proceeding. She contends that the bankrupt having once waived the right to a discharge in bankruptcy on a debt cannot have another discharge on the same debt.

Neither counsel nor the referee has been able to find a reported case precisely in point. In searching for an analogous situation we find a long list of authorities holding without exception that where a bankrupt, prior to the Chandler Act, failed to apply for a discharge or to pay the costs of the proceedings thereon, he is forever barred from a discharge on the same debts in a subsequent proceeding. Kuntz v. Young, 8 Cir., 131 F. 719, 12 A.B.R. 505; In re Kuffler, 2 Cir., 151 F. 12, 18 A.B.R. 16; Pollet v. Cosel, 1 Cir., 179 F. 488, 30 L.R.A.,N.S., 1164, 24 A.B.R. 678; In re Loughran, 3 Cir., 218 F. 619, 33 A.B.R. 350; Hill v. Railroad Industrial Finance Co., 10 Cir., 92 F.2d 973, 35 A.B.R., N.S., 304; In re Bacon, 5 Cir., 193 F. 34, 27 A.B.R. 736, 737; Horner v. Hamner, 4 Cir., 249 F. 134, L.R.A.1918E, 465, 40 A.B.R. 817; In re Schwartz, 2 Cir., 89 F.2d 172, 33 A.B.R.,N.S., 673; Perlman v. 322 West-72nd Street Co., Inc., 2 Cir., 127 F.2d 716, 49 A.B.R.,N.S., 212; Peoples Loan & Savings Co. v. Charles Emmett Dowdle, 5 Cir., 92 F.2d 442, 34 A.B.R.,N.S., 747; Colwell v. Epstein, 1 Cir., 142 F.2d 138, 56 A.B.R.,N.S., 97; Freshman v. Atkins, 269 U.S. 121, 123, 46 S.Ct. 41, 70 L.Ed. 193, 6 A.B.R.,N.S., 744; Collier on Bankruptcy, Par. 14.05, pp. 1262-1264.

The reasoning employed in most of these cases is well summarized in a recent decision of the United States Circuit Court of Appeals, First Circuit, as follows: “The reasons given for those decisions were the time limitation in the statute itself and the doctrine of res judicata. In them the courts pointed out that to grant a discharge in the second proceeding from debts provable in the earlier proceeding where no application for discharge had been made, would empower the bankrupt effectively to evade the statutory limitation and place within his control the time when he should act. This would operate as an enlargement of the time limit prescribed in the statute and would interfere with the speedy administration of the bankrupt estate. It would be contrary to the spirit and purpose of the statute. They also said that where the bankrupt fails to petition for a discharge the result is in effect a judgment by default in favor of his creditors that he was not entitled to a discharge from their claims. Such a judgment is as forceful as a judgment after trial and is conclusively res ju-dicata between him and the creditors whose claims are listed in the bankruptcy schedules. The result is that the issue presented in the second petition is the same as that which existed in the first and which had been decided against him and in favor of his creditors.” Colwell v. Epstein et al., 142 F.2d 138, 139, 56 A.B.R.,N.S., 97.

The courts have adhered strictly to this rule no matter how extenuating the circumstances may have been that caused the bankrupt to fail or neglect to prosecute his initial proceeding for a discharge. It is not an exaggeration to state that nearly all such defaults were the result of carelessness upon the part of counsel or the bankrupt occasioned in turn by an utter lack of appreciation of the final consequences of their inaction or indifference. A number of decisions stress the point that the only object of a bankruptcy proceeding in a no asset case is to obtain a discharge. If a bankrupt fails to prosecute the proceeding, he is barred from bringing another proceeding for a discharge of the same debts. Such a course amounts to an abuse of the process of the court and will not be countenanced. In re Fiegenbaum, 2 Cir., 121 F. 69, 9 A.B.R. 595; Freshman v. Atkins, supra; In re Vardell, D.C.Tenn., 28 A.B.R.,N.S., 697; Perlman v. 322 West-72nd Street Co., Inc., supra.

If such is the attitude of the courts toward a bankrupt who is indifferent to the relief available to him under the Act, should we expect them to assume a different attitude toward a bankrupt who obtains full relief under the Act and simultaneously waives his discharge on a particular debt? Does it not logically follow that having waived the benefits of the Act as to a particular debt he cannot again seek relief from the same obligation? “It is the purpose of the bankrupt act to convert the assets of a bankrupt into cash for distribution among creditors, and then to relieve the honest debtor from the weight of oppressive indebtedness, and permit him to start afresh free from the obligations and responsibilities consequent upon business misfortunes.” Williams v. United States Fidelity Co., 236 U.S. 549, 35 S.Ct. 289, 290, 59 L.Ed. 713, 34 A.B.R. 181.

In the case before us the bankrupt was accorded full relief in his first bankruptcy from oppressive obligations resulting from business misfortunes. Having waived his right to relief from a particular debt, he is forever barred from seeking again like relief from the same obligation.

The bankrupt, by his motion to strike the third specification, contends that he is entitled to a discharge from all his provable debts unless the specification invokes one of the causes for a denial of a discharge as defined in Section 14, sub. c of the Act, 11 U.S.C.A. § 32, sub. c. It has long been the recognized practice of the bankruptcy court, upon motion of a proper party, or on its motion if the facts appear from its records, to qualify a discharge by excluding debts on which the bankrupt is barred from obtaining relief. Bluthenthal v. Jones, 208 U.S. 64, 28 S.Ct. 192, 52 L.Ed. 390, 13 L.R.A.,N.S., 629, 19 A.B.R. 288; In re Zeiler, D.C.N.Y., 18 F.Supp. 539, 33 A.B.R.,N.S., 627; In re Summer, 2 Cir., 107 F.2d 396, 41 A.B.R.,N.S., 246, certiorari denied 309 U.S. 680, 60 S.Ct. 718, 84 L.Ed. 1024; In re Early, D.C. E.D.Pa., 34 F.Supp. 774, 43 A.B.R.,N.S., 518; In re Tucker, D.C.E.D.N.Y., 49 F.Supp. 239, 53 A.B.R.,N.S., 106.

In Collier on Bankruptcy, 14th Ed., Par. 14.62, 'p. 1381, 1944 Supplement, it is stated: “This practice represents in effect the sole exception to the well settled general rule that a bankruptcy court will not determine the dischargeability of individual claims, and that such questions must be litigated in other appropriate forums when the discharge is pleaded as a defense.”

This case falls within the exception. The specification goes farther than to point out a ground for the denial of a discharge. It challenges the bankrupt’s right to any relief as to the particular debt. It draws the court’s attention to the fact that the bankrupt had previously obtained relief under the Bankruptcy Act from the debt and had expressly waived all rights under the Act. In cases where it appeared that all debts scheduled were listed in a prior proceeding in which the bankrupt failed to obtain a discharge, the court dismissed the second proceeding or denied the discharge altogether. In re Stone, D.C.Or., 172 F. 947, 23 A.B.R. 24; Perlman v. 322 West-72nd Street Co., Inc., supra; Kuntz v. Young, supra. In cases where the bankrupt had incurred new liabilities since his first proceeding, his discharge was qualified by excepting the debts listed in the former proceeding. In re Loughran, supra; In re Summer, supra; In re Zeiler, supra; In re Brown, D.C.N.H., 35 F.Supp. 619, 47 A.B.R.,N.S., 539. In the case before us the bankrupt listed only the one unsecured creditor, but scheduled another creditor holding a note and mortgage on real property which he signed with his wife in 1941. Presumably he is entitled to a discharge from personal liability on the mortgage debt. Accordingly the proper procedure is to enter a qualified discharge, excepting the debt of the objecting creditor as undischargeable.

Counsel for the bankrupt argues with much force that the promise to pay the discharged debt creates an entirely new and distinct obligation which is dischargeable in a subsequent bankruptcy. He cites a recent decision of the United States District Court (Western District of Kentucky) In re Cox, 33 F.Supp. 796, 798, 47 A.B.R.,N.S., 668, in which the court said: “The present case is therefore subject to the well settled rule that a discharge in bankruptcy, while releasing the bankrupt from liability to pay a debt that was provable in bankruptcy, leaves him under a moral obligation sufficient to support a new promise to pay the debt, regardless of whether the hew promise was made before or after the discharge in bankruptcy. Posey v. Mayer’s Adm’r, 3 Ky.Law Rep. 613; Eckler v. Galbraith, 12 Bush, Ky., 71; Tolle v. Smith’s Ex’r, 98 Ky. 464, 33 S.W. 410; Brashears v. Combs, 174 Ky. 344, 192 S.W. 482, 39 A.B.R. 98. It is not clear, however, whether the cause of action is upon the old promise with the discharge in bankruptcy waived by the new promise, or is upon the new promise as a separate and new obligation supported by moral consideration, as an exception to the general rule of consideration. The authorities throughout the country are in conflict on this issue with the weight in favor of the view that the action lies upon the new promise. See 3 R.C.L., Bankruptcy, § 147; 8 Corpus Juris Secundum, Bankruptcy, § 583, subd. d.”

In the first place this contention is not in accord with the facts in the case before us. The objecting creditor’s claim is based upon a judgment obtained in an action for the recovery of money owing on certain notes scheduled in the previous bankruptcy. The bankrupt answered by admitting the obligation and setting up his discharge as a defense in bar. The creditor replied, by way of avoidance, that the bankrupt had waived his discharge by agreeing to pay the debt notwithstanding his bankruptcy. Remington on Bankruptcy,. 5th Ed., states: “The new promise need not be pleaded or proved in the first instance. To do so would be to anticipate a defense. The bar of the discharge is merely matter of defense to be pleaded. If pleaded, then the new promise is in turn to be pleaded, by way of avoidance.” Section 3512, p. 675; Gruenberg v. Treanor, 40 Misc. 232, 81 N.Y.S. 675, 11 A.B.R. 776. The reduction of the creditor’s notes to judgment-served merely to change the form of the debt but did not make a new or different one. In re Summer, 2 Cir., 107 F.2d 396, 41 A.B.R.,N.S., 246; In re Kuffler, 2 Cir., 168 F. 1021, certiorari denied 214 U.S. 520, 29 S.Ct. 701, 53 L.Ed. 1066; In re Schuabel, D.C., 166 F. 383.

We are thus faced with the fact that the judgment from which the bankrupt seeks a discharge in his second bankruptcy represents the same debt scheduled in his former bankruptcy. In United States National Bank of La Grande v. Miller, 118 Or. 280, 246 P. 726, it was held that an action to recover a debt discharged in bankruptcy may be based either on the original debt or on the new promise. In Parker v. Smith, 144 Wash. 24, 255 P. 1026, it was held that an oral promise to> pay a promissory note discharged in bankruptcy revives the obligation as a whole and recovery may be had upon the original note, including the provision for an attorney’s fee. To like effect are: Fierce v. Fleming, 205 Iowa 1281, 217 N.W. 860; Stern v. Bradner Smith & Co., 225 Ill. 430, 80 N.E. 307, 116 Am.St.Rep. 151; Badger v. Gilmore, 33 N.H. 361, 66 Am.Dec. 729; McClintic-Marshall Co. v. City of New Bedford, 239 Mass. 216, 131 N.E. 444; DeWalt v. Heeren, 50 N.D. 804, 197 N.W. 868; Herrington v. Davitt, 220 N.Y. 162, 115 N.E. 476, 1 A.L.R. 1700. In the latter case the court said: “The right of action' is given by a new and efficacious promise. The practice of bringing the action upon-the original demand is, however, sanctioned by usage. The discharge in bankruptcy is,, under such practice, regarded as a discharge of the debt sub modo only, and the new promise as a waiver of the bar to the recovery of the debt created by the discharge. The new promise with such other-facts as are essential to constitute it a valid cause of action may, however, be alleged.” This case is significant in that New York is one of the few states requiring a promise to pay a discharged debt to be in writing. Notwithstanding this requirement the New York Court of Appeals, of which Mr. Justice Cardozo was then a member, held, “The action was properly brought upon the note. For the purpose of the remedy, the original debt might still be considered the cause of action.”

Collier on Bankruptcy, 14th Ed., in dealing with the question -of the revival of a discharged debt by a new promise, states: ■“The general rule is that a discharge affects only the remedy of the creditor and the obligation itself is not cancelled. It now remains to be seen whether the remedial bar of a discharge may be removed in any way. The Bankruptcy Act does not provide for the revival of debts discharged in bankruptcy. The law in the various states governs this matter, and it is generally agreed that the bar of a discharge may be waived by the making of a new promise. In reaching this decision, the courts have employed various theories; some courts have found consideration for the new promise in the form of a past legal obligation plus a present moral obligation, while other courts have declared that no new consideration is necessary to support the waiver.” Par. 17.33, Page 1671.

In Helms v. Holmes, 4 Cir., 129 F.2d 263, 266, 141 A.L.R. 1367, 50 A.B.R.,N.S., 133, the court said: “It must be remembered that a discharge in bankruptcy is neither a payment nor an extinguishment of debts. It is simply a bar to their enforcement by legal proceedings. * * * Thus, the bankrupt is merely given a personal defense which is waived if he chooses not to avail himself of it. This rule that a failure so to plead operates in law as a waiver of the defense has been uniformly followed by State and Federal Courts alike.”

In a case decided recently in the Seventh Circuit, the foregoing case was cited with approval. The court then said: “A discharge is neither a payment nor an extin-guishment of a debt. When properly pleaded, it is a bar to the enforcement of an existing debt by legal proceedings and, thus, it amounts merely to a personal defense which is waived if the debtor chooses not to avail himself of it. A discharged debt may be renewed by a new promise and, even though a state court is advised of a discharge, in the absence of a plea setting up the defense, it has a right to assume either that the bankrupt has renewed his debt by a new promise or that, by his silence, he tacitly exhibits an intent to waive the defense. We know of no basis upon which a court of equity can relieve a defendant from liability because of this failure to plead a personal defense where no ground for the intervention of equity is presented.” In re Innis, 7 Cir., 140 F.2d 479, 481, 55 A.B.R.,N.S., 427; certiorari denied 322 U.S. 736, 64 S.Ct. 1048, 88 L.Ed.,1569.

With due deference to the authorities cited by bankrupt’s counsel to support his contention that the promise to pay a discharged debt creates an altogether new obligation, separate and distinct from the discharged debt, it is respectfully suggested that perhaps the reasoning of these decisions is based upon a misconception of the function of the new promise necessary to revive a discharged debt. It is true that the decisions universally hold that such a promise must be express, clear and unequivocal. A mere acknowledgment of the debt, or an expression of hope, desire, expectation or intention to pay is insufficient. It must be an express promise to pay a specific debt. A few states, not including Oregon, require the promise to be in writing. However, as we have seen, a discharge in bankruptcy does not extinguish the debt. It merely affords a personal defense in bar which may be waived either by a new promise or a failure- to plead it in an action brought upon a discharged debt. Thus the only function of the new promise is to serve as an express waiver of the defense. As most authorities state, it merely revives or renews the legal obligation. It restores the remedy taken away by the discharge. It is the test applied by the court in determining whether the discharge has been waived. No consideration is necessary. In the authorities cited by counsel the courts invoke a moral obligation as the consideration to support the new debt which they seek to create out of the promise to pay the discharged obligation. In this connection Williston states: “The law in most of the United States, as in England, has rej ected the principle of moral consideration, even though some exceptional cases of liability on promises made without present consideration may still exist as in the case of promises to pay debts barred by the Statute of Limitations, or by a discharge in bankruptcy. Such cases are now rested on other grounds and moral consideration as such is held insufficient to support a promise. There can be no question that in most states a plaintiff would invite disaster if he endeavored to support an action on a promise on the theory that the promise was supported by moral consideration without more.” Williston on Contracts, Revised Edition, Section 148, Page 522.

The reasoning adopted herein is the same as that pursued by Judge Harrington in Tubbs v. McCabe in the Superior Court of Delaware, 5 W.W.Harr. 327, 165 A. 336, 337. There, action was brought upon a judgment on a note which had been scheduled in a bankruptcy of the judgment debt- or in Virginia. The only issue is stated as follows: “The defendant does not deny that he expressly promised to pay the plaintiffs’ debt but claims that the action must be on the new promise on which their rights are based. He further claims that as such promise was made in the State of Virginia, by the express provisions of a statute of that state such promise, to be effective, must be in writing.” The court held that the action was brought properly on the old judgment. The following are pertinent excerpts from the opinion, omitting citations:

“The effect of a discharge in bankruptcy may, therefore, not only be waived by a failure to plead and prove such discharge * * * but it may also be waived by a clear and specific promise to pay made by the bankrupt at any time after his petition is filed.
* * * * *
“In this country it is clear, however, that no new consideration is necessary to support the promise of a bankrupt to pay a debt the mere collection of which has been barred by the Bankruptcy Act.
* * * * *
“True, the new promise may, as a general rule, even be conditional and such a promise, if made, is the measure of the plaintiffs’ right whether relied on to raise the bar of the statute of limitations, or in a case where a defendant has been adjudicated a bankrupt (1 Willist. on Contr. §§ 196, 203; 7 Rem. on Bankr. § 3506) ; but where the statute of limitations is involved it is well settled in this state that the action should be on the old debt and not on the new nromise to pay. * * *
“This can only be on the ground that the defense of the statute is waived * * * and the same general principles naturally apply to promises to pay made by a bankrupt. Restatement of the Law on Contr., vol. 1, § 86; 7 Rem. on Bankr. § 3499.
“In fact, the 'old theory that the rights of the plaintiffs in such cases are based on a moral consideration has now been very generally exploded. 1 Willist. on Contr. § 148.
“It is true that for some reason a specific promise to pay is necessary to remove the bar of the statute in bankruptcy cases while a promise to pay will be inferred from a mere acknowledgment of a subsisting demand where the statute of limitations is involved * * *, but whatever the reason for this difference may be, it does not affect the rule above stated.”

From the facts and the law as we see it, our conclusions are: I. The debt owing the objecting creditor is the same obligation from which the bankrupt received a discharge in his first bankruptcy. 2. Having waived his discharge as to this debt, he cannot seek a second discharge from the same obligation. To permit him to do so would be an abuse of process and an imposition upon the court. A qualified discharge is being entered today in which the objecting creditor’s debt is excluded on the ground that the bankrupt had been relieved of the obligation under the Bankruptcy Act and had waived his right thereto.