author: JAMES ALGER FEE, District Judge.

text:
    UNITED STATES v. GOSSLER et al.
    Civ. No. 1729.
    District Court, D. Oregon.
    April 2, 1945.

      Ernest Falk and Linus M. Fuller, Sp. Attys., Department of Justice, and William M. Langley, Asst. U. S. Atty., all of Portland, Or., for plaintiff.
    Lawrence T. Harris, of Eugene, Or., and James C. Dezendorf, of Portland, Or., for defendants Gallagher.
   JAMES ALGER FEE, District Judge.

This action for condemnation of lands came on for trial of value of the interests of defendants Gallagher and intervenors McNutt, in the Gossler tract of land, before the court with a jury. A verdict was returned establishing the market value of these interests and judgment entered. A motion for a new trial has been filed by the defendants. In order that the points raised thereby may be considered in relation to the setting, a review of the course of the proceedings is necessary.

The action was initiated in the usual manner. The complaint alleged that the Gallaghers claimed some interest in the lands owned by the Gosslers in fee. A declaration of taking of a fee-simple interest in the lands was thereafter placed on file. Gallagher answered, setting up a right to use a roadway across the lands taken. The McNutts were permitted to intervene as partial assignees of Gallagher. The United States moved to amend the declaration of taking to acquire the fee of the Gosslers, subject to a use in common of the roadway by the United States and the intervening defendants, but this was denied since the court believed the circumstances made it inequitable for the Government to withdraw.

Under the regular procedure of this court, a hearing was had as to the market value of the interest of the record owners, and a finding of fact made as to the value thereof. These hearings, although ex parte, usually are in fact trials and a judgment based thereon would be final, subject to the usual rules. Such a finding of fact based on sworn evidence tends to protect the United States from fraud, and tends to protect the judge, who is required to countersign the check disbursing the funds to the landowner based on the evidence taken at the hearing. On stipulation of all parties an order was entered and the judge countersigned checks to the Gosslers for their interest. However, no determination was made at that time as to whether compensation should be paid to the owners of the roadway.

The court thereupon heard argument upon motions to strike and demurrers of the United States to the answers of the Mc-Nutts and Gallaghers.

It is said in these answers that CrownZellerbach Corporation made an agreement with Gallagher granting, for a period of years, the right to take sand and gravel from real estate owned by Crown-Zellerbach on the Santiam Bar adjacent to the Willamette River and specifically described by metes and bounds. The “Gossler Tract” and another tract known as the “Crocker Tract” intervened between the gravel bar and the county road. The Crown-Zellerbach agreement contemplates a right of way shall be obtained from the county road to the gravel bar and that Crown-Zellerbach have a right to the use of it. The Crockers and the Gosslers, by contracts under seal, granted easements of right of way to Gallagher from the road to the gravel bar for a period of five years, but neither grant mentioned the Crown-Zellerbach land or the gravel pit. Gallagher transferred an interest in all rights created by these contracts to the McNutts. A road was constructed and used on the rights of way, and upon the Crown-Zellerbach property, and bunkers, machinery and equipment were installed. Gravel was hauled from the pits on the Crown-Zellerbach real property over this road. Defendants alleged that because of the taking of the intervening tracts by the Government, they lost the sale of enormous quantities of sand and gravel and profits by virtue of the demand for such commodities at the date of taking, at Camp Adair and upon highway contracts upon which defendants had been awarded the bid.

The position of the Lands Division was that since the property of the Gosslers was acquired in fee simple, payment therefor vested the United States with all interest whatsoever in that area; that Gallagher and the McNutts had no property right in these lands but only an easement in gross and that any damage these litigants sustained was because of frustration of contract for which the United States was not liable.

The court overruled motions and demurrers. For clarity of discussion, the theory of these rulings, upon which the case was subsequently tried, is here indicated. When the United States acquires property by condemnation and an unlimited use is contemplated, all interests in the parcel are abrogated except those specifically excepted, as was done for public roads in this complaint. The fallacy of the reasoning which lies at the basis of these motions arises from the concept of the title of real property as a thing with physical attributes, whereas title is a conglomerate of jurisdiction and substantive legal rights fused with the residuals of equitable remedies all developed historically out of feudal notions and medieval conditions. By this proceeding the United States does not acquire a physical thing by taking the fee simple title of the Gosslers, but sets up another title by extinguishment of all interests inconsistent with use by the Government. Since the United States is investing itself with an utterly new title and extinguishing the whole aggregate of rights connected with this piece of ground by condemnation, the Fifth Amendment requires compensation for ail property rights so erased.

The United States cannot abrogate all, but pay for the particular right known as the fee simple title alone. The owner of another recognized property interest attached to the soil would then receive no compensation just or otherwise. Indeed in practice, the value of the fee simple title might well be materially reduced by the existence of this right of way. If payment were made for a specific interest such as the fee title, out of the aggregate, the Government would abrogate the other interests without paying monetary consideration therefor. Such a result does not satisfy the demands of the amendment. The United States is liable to the owner of an easement appurtenant in a suit condemning the fee of the servient estate.

It must be remembered at this point that the question is hot who owns the right of way, but whether there exists a property right for which the condemnor must pay compensation. The modern English law does not recognize easements in gross. A profit a prendre may be defined as the power and the privilege to acquire through severance, ownership of some part of the physical substances included in the possession of land. Such a profit a prendre at common law was an interest in land, and contradistinquished from an easement, could exist in gross. However, a profit a prendre laid a foundation even at common law for the attachment of an easement of right of way appurtenant.

Quaintly enough, there was a profit a prendre in gross consisting of a fishery on the river Ware which savored sufficiently of the soil to serve as a dominant tenement for rights of way connected with the fishing, according to Justice Buckley’s interpretation of Note 7 to Hargreave and Butler’s edition of Co. Litt. 121 b. Gale says, commenting upon this case, “* * * the true test of appurtenancy was the propriety of relation between the principal and the adjunct, which might be found out by considering whether they so agreed in nature and quality as to be capable of union without incongruity.” Based upon this the commentator foreshadowed the proper solution of the case at bar by the answer supplied to certain supposititious circumstances as follows: “Applying the above-mentioned test, it is submitted that if the owner of a right to take certain minerals (p) under close A. obtained from the owner of an adjacent close, B., a grant of a way over the close B., or a right to discharge water over it, for him, his heirs and assigns, as appurtenant to the right of mining, an easement would undoubtedly be created and would be appurtenant to the incorporeal right already vested in the grantee.”

In modern American law, the distinctions between easements in gross, profits a prendre and easements appurtenant was first slurred over and may now be regarded as non-existent. Even if it be concluded that by strict common law doctrine there was no right in the real property here created, the vast majority of jurisdictions of this country include it in this classification. Under the preferred American doctrine, the burden of the easement granted across the Gossler lands would be imposed upon a grantee thereof, or a disseisor of that parcel, since it is a property interest.

Since no case has arisen in Oregon under the exact circumstances, it cannot be determined whether these interests are property rights in the Gossler land. It is to be assumed that the courts of the state would follow the modem tendency and it is certain they would be influenced by the fact that these interests are of a commercial nature and by their nature and quality, can be united without incongruity.

The question of what interests should be paid for by the sovereign in condemnation is an intensely practical one. Consideration must then be given to such factors. The interest which must be compensated for in condemnation proceedings have caused the most notable divergences of the courts and one of the most bitter disputes among legal scholars in modern American law. But this matter should be explored realistically. The court should not be hampered by a sylogistic adherence to feudal categories of estates. The concept “easement in gross” should not hamper inquiry even though it is probable no such interest exists in present day English law. Here is a profit a prendre in gross to take gravel from the Crown-Zellerbach parcel to which is inseparably attached rights of way over that parcel and two adjoining pieces of land forming a continuous basis for a road from the Santiam Bar to the highway.

This right of way exists in grant. This right could, then, have been enforced against the Gosslers by action for damages or by process of injunction. Crown-Zellerbach, the owner of the land upon which the gravel bar existed, had an enforceable interest in the right of way. There was a commercial benefit to Crown-Zellerbach and to the parcel of land owned by it through the continued existence of this easement. There was commercial benefit to the profit a prendre owned by Gallagher and the McNutts in the existence of the right of way on which to haul gravel severed from Crown-Zellerbach land over three contiguous parcels of land to the highway. Therefore, the easement “touches and concerns” each, the Crown-Zellerbach parcel, the profit a prendre, the Gossler parcel, and the intervening tract.

A right of way is a classic easement. The solution of the problem is indicated by the Circuit Court of Appeals of the Second Circuit in United States v. 53¼ Acres of Land, 139 F.2d 244, 247, where it is said, concerning the interest of a mortgagee of a leasehold who had the right of redemption under a statute after termination of lease by summary proceedings for non-payment of rent: “We see no reason to grope about in the mysterious world of ‘estates’ and ‘interests not estates’. The law of New York has put the matter on a very practical basis: a right with respect to property taken in condemnation may be so remote or incapable of valuation that it will be disregarded in awarding compensation; otherwise it will not be disregarded.”

In Brooklyn Eastern District Terminal v. New York, 2 Cir., 139 F.2d 1007, 1011, 152 A.L.R. 296, after quoting the case above cited, the court says: “Seemingly the only doubt is as to whether the interests are in gross; for we question petitioner’s contention that they can be considered appurtenant to petitioner’s other terminal facilities located elsewhere. * * * But this seems unimportant for our purposes here. There appears no reason why compensation should not be paid for the taking of easements in gross.” (Citing many opinions and law review articles.)

The conclusion seems inescapable therefore, that when the United States condemned the Gossler tract, a compensable interest in land was destroyed and that the doctrine of indamnible frustration of contract did not prevent the United States from liability for this property right actually taken.

As the cause came on for trial, it would seem both parties acquiesced in this construction, at least to a degree. There was a stipulation by all parties that the jury should determine “not only the value of the road across the property described in this proceeding as Tract No. C-10, but also the value of the interest of defendants J. H. Gallagher and Belle K. Gallagher, his wife, Earl L. McNutt and J. Ira McNutt in and to the entire 1.8 miles of road leading from the county road across property formerly owned by A. W. Crocker and Agnes M. Crocker and described as Tract No. C-23 as set out in the case of United States v. O. C. Simpson et al. Civil No. 1111 and across the above mentioned Tract No. C-10, and across adjoining land owned by CrownZellerbach Corporation to the site of the Santiam Bar, and also the value of said defendants’ interests in and to said Santiam Bar under a contract with Crown-Zellerbach dated April 11, 1942.”

During the trial the court instructed the jury that the United States was bound to pay just compensation for these rights, describing these as property interests and required the jury to find the full price which these interests could have been sold on the open market for cash under appropriate conditions. The court instructed in part:

“The Gallaghers and McNutt Brothers had a property interest in the Crocker and the Gossler land, as disclosed by the right of way agreements which are in evidence, and an interest in the Crown-Zellerbach property and gravel bar, as is disclosed by the contract with Crown-Zellerbach. On June 18, 1942, the Government took the Crocker and Gossler lands and the Gallagher and the McNutt Brothers interest therein. As a result of this taking of these interests the United States is required to pay just compensation.

“The just compensation for this property consists in the fair market value thereof on the critical date of June 18, 1942.

“The fair market value of a property interest means the full price at which that interest could be sold on the open market for cash, asstuning an owner willing to sell and a purchaser willing and able to buy.”

However, the theory of the defendants as the case developed at trial, extended far beyond compensation for such property interest. Briefly, it was that the United States must compensate defendants not only for these property interests but also for the failure of defendants to make a profit upon an apparent demand in the vicinity for gravel at the date of taking. The demand was based upon the fact that Camp Adair was in construction near by and that the McNutts had bid upon a contract with the State Highway Department for the construction of a highway near by which, if awarded upon the then specifications, would have required great quantities of gravel. Apparently it was believed that compensation for sand and gravel not processed by defendants but in place in the Santiam Bar was to be recovered as well as for equipment set up by them for use on the bar. Furthermore, improper measures of compensation such as the cost of the road on the granted right of way were entertained. Instructions embodying variations of these ideas were asked for and refused. The motion for new trial is based in part upon this refusal which it is claimed constituted error of law. The court said in part:

“Now, in this case I instruct you that there was no taking of sand or gravel by the Government, and you are not to allow any compensation for sand or gravel. There was no talcing of any equipment, and you will not allow any compensation for any equipment. You are not to attempt to evaluate the loss in business, if any, suffered by any of the defendants. The Government did not take the business of any defendant, and therefore, no compensation could be allowed therefor. Neither will you consider the possible profit that might have been made in the sale of any sand or gravel, because there was no sand or gravel taken, and the Government is not required to pay for loss of a business proposition to anyone.

“The sole consideration for you is the fair market value of the Gallagher and Mc-Nutt property interests.”

The court defined the property interests of defendants very broadly so that they included not only the whole right of way, but also the incorporeal right to take sand and gravel so far as connected therewith. The United States does not complain of this. The defendants cannot. If it were error, it was (1) superinduced by the stipulation entered by defendants in open court, and it was (2) a basis for the award of more compensation than defendants were actually entitled. Flowever, this may be technically, the court was of opinion that the profit a prendre and the three connected rights of way must be evaluated together as a practical matter.

The danger inherent as a result of certain irrelevant evidence which got into the case and as a result of this submission of the interests of defendants as a whole, was that the jury might award damages for the loss of a business chance on the failure of the Gallaghers and McNutts to malee a profit on the gravel business of Camp Adair, and the contract which they expected with the state. Even if there had been valid and enforceable contracts relating to this subject matter, the Government would not be liable for failure of the defendants to carry them out, much less for a failure to make a profit. In the Omnia case, the difference between frustrátion of contract by seizure of the subject matter and appropriation of the contract itself is pointed out. It is there said, “Frustration and appropriation are essentially different things.” So in this case there was an essential difference between compensation on the one hand, for the right to take sand and gravel,' and the connecting rights of way and damages on the other hand, because defendants were not able to haul out gravel from the Crown-Zellerbach tract and thereby sell it at an alleged tremendous profit for construction at Camp Adair, or in the contract with the State of Oregon. This contract was, finally, not awarded to them. It is true that if they had got the contract and this gravel had been available, they might have made considerable money. But since, without' fault of the Government, they did not get the contract with the state, the supposed consequences of the taking are pure speculation. The theory of recovery for frustration of contract was ruled out by the court when, in Consideration of the motions and demurrers, it was held defendants could be compensated only if they held a property interest. Throughout the trial, it was apparent that defendants believed that this demand for the market price of sand and gravel at the date of taking, at nearby points, was of relevance and importance. Such factors were of importance only to the extent that these were reflected in the fair market value of the property interests taken. In this case, the Government did not seize any sand, or gravel, or equipment, but at most the right to go upon real property and sever sand and gravel therefrom. The court was bound to rule out these elements which would be pertinent only upon the taking of physical property such as sand and gravel, or as concomitants of a frustration of contract for which the United States is not liable.

The final position of defendants Gallagher and McNutt is that the attorneys for the Lands Division did not have authority to stipulate “to try two unfiled Tucker Act Claims for the value of defendants’ interest in the Crocker land and a claim for compensation for use and occupancy of the defendants’ road on the Crown-Zellerbach lands with this case.”

The authority of counsel for the Government came directly from the Attorney General of the United States. The United States Attorney for the District of Oregon was joined as counsel in the cause. No lack of authority, therefore, appears to bind the United States by stipulation. Actually the court assumed that defendants would not be fairly compensated for their’ interest in this roadway across the Gossler lands unless the entire strip commencing at the gravel pits on Crown-Zellerbach lands and running to the county road, were evaluated. Whether these interests were paid for in this case does not affect the validity of the judgment here against attack by defendants. If so, defendants have received more than they were entitled to because such interests were fairly submitted for valuation. If in some other case, the defendants contend that for jurisdictional reasons the interests were not legally so submitted, the question of the effect of the stipulation and this judgment can be thus considered and the rules of res judicata applied.

A new trial is denied.

       “Defendant’s” is used throughout to designate the intervenors whose petition is identical.

       See Catlin v. United States, 65 S.Ct. 631.

       See United States v. Bauman, D.C., 56 F.Supp. 109, 117.

       See E. C. Shevlin Co. v. United States, 9 Cir., 146 F.2d 613.

       United States v. Welch, 217 U.S. 333, 339, 30 S.Ct. 527, 54 L.Ed. 787, 28 L.R.A.,N.S., 385, 19 Ann.Cas. 680; Silberman v. United States, 1 Cir., 131 F.2d 715; United States v. Certain Lands in City of Des Moines, D.C., 46 F.Supp. 800, 802. See Peabody v. United States, 231 U.S. 530, 538, 34 S.Ct. 159, 58 L.Ed. 351.

       Duckett & Co. v. United States, 266 U.S. 149, 151, 45 S.Ct. 38, 69 L.Ed. 216; Emery v. Boston Terminal Co., 178 Mass. 172, 184, 59 N.E. 763, 86 Am.St.Rep. 473.

       Cf. United States v. Puget Sound Power & Light Co., 9 Cir., 147 F.2d 953.

       United States v. Welch, 215 U.S. 338, 339, 30 S.Ct. 527, 54 L.Ed. 787, 28 L.R.A.,N.S., 385, 19 Ann.Cas. 680.

       See Restatement of the Law of Property, Division Y, Servitudes, Chapter 37, comment f to § 450, pp. 2905-6.

       Hanbury v. Jenkins [1901] 2 Ch. 422. This doctrine may well have been accepted in this country also. Justice Sharswood in Tinicum Fishing Co. v. Carter, 61 Pa. 21, 37, 100 Am.Dec. 597. It is sometimes said there is an indication to the contrary in The Attorney General and The Bromley Rural District Council v. Copeland, 2 K.B. 106, but that was an attempt to found an easement of discharge of water upon another parcel with a right of way, as a dominant tenement instead of a profit a prendre.

       Gale on Easements, 10th Ed., p. 15.

       Guild v. Wallis, 130 Or. 148, 279 P. 546; Houston v. Zahm, 44 Or. 610, 76 P. 641, 65 L.R.A. 799; Ruhnke v. Aubert, 58 Or. 6, 10, 113 P. 38; Jackson v. Trullinger, 9 Or. 393.

       Restatement of the Law of Property, Division V, Servitudes, § 489 and comment thereto.

       Restatement of the Law of Property, Division V, Servitudes, § 4S9, §§ 507, 508 and comment pp. 3092-3099.

       See note, 76 A.L.R. 597.

       See Omnia Commercial Company, Inc., v. United States, 261 U.S. 502, 43 S.Ct. 437, 439, 67 L.Ed. 773.

       This court is committed to the doctrine supported by the weight of authority that the market price of commodities existing as a part of the realty is not a proper measure of compensation, but the fair market value of the interest in real property as, a whole, considering all appropriate elements, is the test See Orgel, Valuation under Eminent Domain, Ch. IX.

       In another case in this court full compensation has been awarded Gallagher and the McNutts for gravel severed from Crown-Zellerbach lands under this same contract and processed and piled thereon, which was actually used by the Government.


source: Caselaw Access Project

author: DUFFY, District Judge.

license: Public Domain

text:
    BRUMDER v. UNITED STATES.
    Civ. A. No. 1222.
    District Court, E. D. Wisconsin.
    Oct. 16, 1944.

      Arthur A. Mueller, of Milwaukee, Wis., for plaintiff.
    B. J. Husting, former U. S. Atty, and Timothy Cronin, U. S. Atty, both of Milwaukee, Wis, for defendant.
   DUFFY, District Judge.

This is an action to recover $5,870.53 income tax paid by plaintiff for the year 1940.

In 1928 and 1929 plaintiff acquired 1,051 shares of the common stock of Continental Shares, Inc, at a cost of $35,629.35. On February 26, 1940, he received in exchange for this stock six shares of the common stock of Liquidating Shares, Inc, and two shares of the common stock of Cliffs Corporation, having a combined market value of $50. Plaintiff sold these shares in December, 1940, for $56.50, and claimed a loss for 1940 by reason of such sale, which claim was disallowed.

Continental Shares, Inc, was a Maryland corporation whose capital structure consisted of $38,000,000 of preferred stock and 2,600,000 shares of no par value common stock. Dividends on the common stock were paid from 1927 to January 2, 1931, but none thereafter; no dividends were declared or paid on the preferred stock after December 15, 1930.

Continental Shares, Inc, became involved in financial difficulties. A receiver was appointed by a Maryland State court on June 22, 1933. The stock was suspended from trading on the stock exchange in November, 1933. On December 31, 1933, the liabilities of the company exclusive of the stock liabilities exceeded assets by $2,889,-966.18. At the end of 1933 the over-the-counter market for the common stock was at 6J^0 per share, which was about % of 1% of the price paid by plaintiff. The company was in process of liquidation. The preferred stock (par value $100) was selling at 500 to $1 a share. In 1933 the company had in litigation a claim of $30,000,000 against the Chase National Bank. Apparently nothing was realized from that claim and on June 2, 1936, Judge Stanton, one of the judges of the Circuit Court in which the receivership was pending, signed a memo opinion in which he stated. “We need only deal with the interests of the preferred stockholders at this time because there is not the slightest hope that anything could be recovered for the common stockholders, even if the alleged claim of $30,000,000.00 were paid in full. * * * ” On May 9, 1938, a plan of reorganization was adopted. It provided for the transfer of the assets of Continental Shares, Inc, to a new corporation, Liquidating Shares, Inc, which was organized on December 15, 1939. The holders of common stock of Continental Shares, Inc, were to receive one share of Liquidating Shares, Inc, for every 200 shares of Continental Shares, Inc, plus one share of the Cliffs Corporation and % warrant. Plaintiff consented to the plan of reorganization on February 21, 1940. In December of 1940 he sold for $56.50 his stock which he had received in exchange for his former holdings in the common stock of Continental Shares, Inc.

A deduction for loss sustained by a person by reason of the worthlessness of stock may be taken only in the year in which the stock actually became worthless. United States v. S. S. White Dental Manufacturing Co., 274 U.S. 398, 47 S.Ct. 598, 71 L.Ed. 1120; Hall v. Commissioner, 7 Cir, 128 F.2d 180. The burden of proving that a loss occurred during the year in which a deduction is sought is upon the taxpayer. Reinecke v. Spalding, 280 U.S. 227, 50 S.Ct. 96, 74 L.Ed. 385; United States v. Anderson, 269 U.S. 422, 46 S.Ct. 131, 70 L.Ed. 347; Jones v. Commissioner of Internal Revenue, 9 Cir., 103 F.2d 681. Whether the taxpayer knew that the stock was worthless at the particular time when the deduction should have been taken is immaterial. Young v. Commissioner of Internal Revenue, 2 Cir., 123 F.2d 597; Hafner v. Commissioner, 31 B.T.A. 338.

A number of identifying events in 1933 show that the common stock of Continental Shares, Inc., became worthless in that year. The company was insolvent. Receivers were appointed. The stock was removed from the stock exchange. The stock for which taxpayer had paid approximately $35 a share was selling on December 31, 1933, at a share.

Plaintiff earnestly contends that the fact the stock had some nominal value proves conclusively that it was not valueless. However, the authorities seem to be practically unanimous on the proposition that when stock has become worthless in a prior year, a sale in a later year for a nominal amount does not give rise to a deductible loss. Brown v. Commissioner of Internal Revenue, 6 Cir., 94 F.2d 101; Gowen v. Commissioner of Internal Revenue, 6 Cir., 65 F.2d 923; Jeffery v. Commissioner of Internal Revenue, 6 Cir., 62 F.2d 661; De Loss v. Commissioner, 2 Cir., 28 F.2d 803; Wesch v. Helburn, D.C., 5 F.Supp. 581; Smith v. United States, D.C., 16 F.Supp. 393; DeFord v. Commissioner, 19 B.T.A. 339; Carroll v. Commissioner, 20 B.T.A. 1029; Meachem v. Commissioner, 22 B.T.A. 1091; Kayser v. Commissioner, 27 B.T.A. 816; Kramer v. Commissioner, 27 B.T.A. 1043; St. Louis Union Trust Co. v. Commissioner, 30 B.T.A. 370; Cass v. Commissioner, 32 B.T.A. 713, affirmed, 8 Cir., 83 F.2d 841; Moyer v. Commissioner, 35 B.T.A. 1155. Plaintiff cites several cases in which the corporation continued in the operation of its business. These cases can be distinguished from the case at bar because Continental Shares, Inc., was in liquidation.

Plaintiff has not maintained the burden upon him to show that his shares of the common stock of Continental Shares, Inc., had any value in 1940. On the contrary it appears that the stock was valueless as early as 1933. Therefore, plaintiff is not entitled to claim a loss in 1940 upon the sale of the shares in Liquidating Shares, Inc., and Cliffs Corporation.

Judgment must go for the defendant.


author: CONGER, District Judge.

text:
    GENERAL MOTORS ACCEPTANCE CORPORATION v. HIGGINS, Collector of Internal Revenue.
    District Court, S. D. New York.
    March 28, 1945.

      John Thomas Smith, of New York City (Anthony J. Russo, of New York City, of counsel), for plaintiff.
    John F. X. McGohey, U. S. Atty., of New York City (Louis Bender, of New York City, of counsel), for defendant.
   CONGER, District Judge.

This is an action to recover $25,000 paid as a documentary stamp tax levied upon certain corporate obligations issued by the plaintiff in 1935. The case was tried without a jury on stipulated facts and certain documents offered in evidence.

It appears that the plaintiff corporation which was engaged solely in the business of providing a financing service for dealers selling products of the General Motors Corporation and the retail customers of such dealers, desirous of funds for financing receivables and for other purposes in its current business, issued in the State of New York between January and June, 1935, 84 instruments designated as 3J4% notes in the total sum of $25,000,000, in denominations as follows:

16 of $1,000,000

4 of 500,000

4 of 250,000

60 of 100,000

The instruments are identical as to form, terms, privileges and conditions except as to the number appearing at the top right-hand corner thereof, date, maturity date, amount, places of payment of principal and interest, and as to persons to whom payable; 13 being payable to the order of designated persons and the remaining 71 being payable to bearer. They were printed on tinted paper with steel engraved borders providing for authentication by the comptroller of the plaintiff corporation, and matured from 4% to 5 years from date of issue.

The Commissioner of Internal Revenue pursuant to a report and recommendation dated December 16, 1936 assessed against the plaintiff a documentary stamp tax on these instruments in the sum of $25,000 under Schedule A (1) of Title VIII, § 800 et seq., of the Revenue Act of 1926, as amended by section 721(a) of the Revenue Act of 1932, 26 U.S.C.A.Int.Rev.Acts, page 288, claiming that these instruments issued by the plaintiff were in the general class of corporate securities taxable under the statute and made demand for payment.

The plaintiff paid the tax under protest and subsequently filed a claim for refund of the said sum so paid together with interest thereon, but the Commissioner of Internal Revenue disallowed and rejected the said claim for refund.

The Commissioner in his letter of rejection dated December 12, 1940 after setting forth the pertinent section of the Revenue Act under which it was claimed the said tax should be imposed, among other things, stated, “The so-called notes have the general appearance of corporate securities — the instrument may be regarded as in registered form.” The Commissioner then referred to Willcuts v. Investors Syndicate, 8 Cir., 57 F.2d 811, certiorari denied, 287 U.S. 618, 53 S.Ct. 18, 77 L.Ed. 537. Hq, also referred to Fidelity Trust Co. v. Lederer, D.C., 276 F. 51, 53, affirmed 267 U.S. 17, 45 S.Ct. 206, 69 L.Ed. 494. The Commissioner in the concluding paragraph of his letter also stated: “The use in the instant instrument of the term ‘note’ does not take it out of the statute. The instrument is certainly within the general class of corporate securities and it may be regarded as in registered form. This is enough to make it taxable and in the opinion of this office the tax was properly paid.”

The applicable stamp tax statute under which it is claimed by the defendant that the instruments involved herein are taxable reads as follows: “Schedule A * * * 1. Bonds of indebtedness: On all bonds, debentures, or certificates of indebtedness issued by any corporation, and all instruments, however termed, issued by any corporation with interest coupons or in registered form, known generally as corporate securities, on each $100 of face value or fraction thereof, 10 cents: * *

The plaintiff contends that the instruments are promissory notes and, therefore, not taxable but that in any event no basis for such stamp tax may be found in the above-cited provision of the law.

The Government argues that while these instruments in controversy are designated “notes”, that does not take them out of the statute; that the statute is a revenue measure and Congress intended that it be broad and comprehensive and reasonably construed to effectuate its general purpose; that the instruments sold by the plaintiff herein were properly taxed as' corporate securities under the statute.

No witnesses were sworn at the trial to testify as to how these instruments might be classified. My examination of the pertinent cases convinces me that such testimony might be proper. My determination may also be arrived at by a study of the instruments themselves. In United States v. Isham, 1873, 17 Wall. 496, 84 U.S. 496, 505, 21 L.Ed. 728, we find the following rule set forth: “Whatever upon its face (the instrument) it purports to be, that it is for the purpose of ascertaining the stamp duty.”

This rule has been followed by the Courts down to the present day. At any rate I do not have the advantage (or perhaps disadvantage) of the expert opinion as to what these documents might be “known generally as” for tax purposes. I can consider only the documents themselves and measure them with the yardstick of the law and precedent.

In connection therewith I quote the first part of one of the said documents, the quotation being taken verbatim from the letter of rejection of the Commissioner of Internal Revenue:

“‘100,000 No. 5 YH 000

United States of America General Motors Acceptance Corporation

‘For Value Received, General Motors Acceptance Corporation, a corporation of the State of New York, (hereinafter called the Corporation), will pay to - on -, 19-, the sum of - ONE HUNDRED THOUSAND DOLLARS ($100,000) at the office of -with interest thereon at the rate of three and one-quarter percent (3-1/4%) per annum from the date hereof, which interest shall be payable at the office of - semi-annually on-and —-in each year, but only upon the presentation of this note for the notation thereon of the payment of such interest’.”

From a cursory glance and indeed after study, the above seems to be nothing more or less than a promissory note blank and when filled out as the evidence shows they were, this part of the instrument appears to be nothing but a promissory note.

These instruments, so far, are in perfect accord with the Negotiable Instruments Law of the State of New York, Consol. Laws, c. 38, which defines a promissory note and which reads as follows: “A negotiable promissory note within the meaning of this chapter is an unconditional promise in writing made by one person to another signed by the maker engaging to pay on demand or at a fixed or determinable future time, a sum certain in money to order or to bearer * * Section 320.

This definition is the same as that contained in the Uniform Negotiable Instruments Act, Section 184, which has been generally adopted throughout the United States. It is clear that the instruments in suit or at least that part set forth above conform perfectly thereto.

The additional terms of the instruments providing for acceleration, redemption before maturity and those dealing with the “negative pledge” clause and authentication are not inconsistent with the spirit of a negotiable promissory note, and have no effect upon its essential character since terms tending to facilitate collection of the same render it more valuable rather than objectionable. Section 21, New York Negotiable Instruments Law; Chicago Ry. Equipment Co. v. Merchants Bank, 136 U.S. 268, 10 S.Ct. 999, 34 L.Ed. 349; First Nat. Bank v. Blackman, 249 N.Y. 322, 164 N.E. 113.

I am satisfied that these instruments are negotiable instruments and essentially and primarily promissory notes. The fact that these documents may run for 4 or 5 years or the fact that they are for a large sum of money in no way affects their negotiability or their character. The fact that they are numbered in series or are printed on engraved paper, I feel does not alter their being classified as notes.

These instruments do have the essentials and come within the definition of the New York State Negotiable Instruments Law and the Uniform Negotiable Instruments Law, viz.: (1) “an unconditional promise in writing”, (2) “made by one person to another”, (3) “signed by the maker”, (4) “engaging to pay on demand or at a fixed or determinable future time”, (5) “a sum certain in money”, and (6) “to order or to bearer.”

Having determined that these documents are promissory notes they may not be taxed under the tax provision in question as bonds per se. Bellefield Co. v. Heiner, 3 Cir., 25 F.2d 560. Neither may they be taxed as debentures which are generally defined as unsecured bonds: Neither may they be taxed as certificates of indebtedness although it is true in a general sense they may be certificates of indebtedness, in that they are instruments acknowledging liability for the payment of money. Still I am, convinced that neither the Treasury Department nor the defendant has ever contended or now contends that a stamp-tax must be paid on a promissory note for that reason.

We are aided a bit in this respect by a ruling made in the past by the Treasury Department defining certificates of indebtedness, viz: “A certificate of indebtedness is primarily any instrument acknowledging liability for the payment of' money, not in the recognized form of a promissory note or bill of exchange.” Treasury Decisions 2713 (Par. 3) 1918.

The question before me, however, is not yet disposed of. These instruments may still1 be taxable as bonds if they come within the provisions of Regulations of the Treasury-71 (July, 1932), which reads as follows: “Art. 12. Instruments issued in numbers,, under a trust indenture are bonds. Instruments containing the essential features of a promissory note, but issued in series,, secured by a trust indenture, either in. registered form or with coupons, embodying provisions for acceleration of maturity-in the event of any default by the obligor,, for optional registration in case of bearer-bonds, for authentication by the trustee,, and in some instances for redemption before maturity, or similar provisions, are-bonds, within the meaning of the statute, whether- called bonds, debentures, or notes.”'

These regulations were promulgated by the Commissioner of Internal Revenue with the approval of the Secretary of the Treasury and while they are not laws enacted by Congress, still it has been, held by the United States Supreme Court,, that they are entitled to respectful consideration and will not be ruled out except: for weighty reasons and have the force and effect of law if not inconsistent with the statutes. Fawcus Machine Co. v. United States, 282 U.S. 375, 51 S.Ct. 144, 75 L.Ed. 397; Maryland Casualty Co. v. United States, 251 U.S. 342, 40 S.Ct. 155, 64 L.Ed. 297; Brewster v. Gage, 280 U.S. 327, 50 S.Ct. 115, 74 L.Ed. 457.

The documents in question have •some of the characteristics mentioned in Regulation 71, Article 12. For instance, they are “instruments containing the essential features of a promissory note”; they are “issued in series”; they have provisions for “acceleration of the maturity in the event of a default by the obligor” and “for redemption before maturity.” It should be noted that these provisions are not uncommon in many promissory notes. There is a provision for authentication by the comptroller of the corporation which may or may not be similar to a provision for “authentication by the Trustee.” In this case I regard it as nothing more than an additional required signature of one of the officers of the corporation. On the other hand these instruments are not issued “under a trust indenture”; are not secured by a "trust indenture, either in registered form or with coupons”; neither are there any provisions for optional registration in case of bearer bonds. I cannot conceive that it is within the spirit and intent of the Regulation to class as bonds instruments having the essential features of promissory notes unless they also had some of the essential features of a bond and unless the instruments were issued under a trust indenture or by a “trust indenture, either in registered form or with coupons.” I hold that these instruments are not taxable under Regulation 71, Article 12.

There is still one more issue to be disposed of. There is still another provision of Schedule A (1) which must be examined. May these instruments be taxable on the theory that they come within this provision — “all instruments, * * * with interest coupons or in registered form, known generally as corporate securities”?.

As I read Schedule A (1), it seems ■obvious to me that there was contemplated a stamp tax upon two classes of instruments: (1) bonds, indentures or certificates of indebtedness issued by a corporation and (2) all other instruments however termed known generally as corporate securities and issued either with interest coupons or in registered form. Goldstein v. Groesbeck et al., D.C., 42 F.Supp. 419.

I disagree with the Government in its contention that the second class of instruments (2) to be taxed is “all other instruments however termed known generally as corporate securities”. To that should be added the words “and issued either with interest coupons or in registered form.” I am of the opinion that it never was intended to tax all instruments issued by a corporation (excepting, of course, bonds, indentures or certificates of indebtedness) which were generally known as corporate securities unless they were issued with interest coupons or were in registered form.

I would say, without deciding the point, that these instruments might well be termed generally “corporate securities.”

It may well be said that these instruments are securities because they were issued by a corporation for the purpose of financing and promoting its enterprise and which were designed for investment. Matter of Waldstein, 160 Misc. 763, 291 N.Y.S. 697.

The instruments in question have the same form, size and appearance of corporate securities; they were issued for the purpose of financing the corporation business ; they were designed for investment.

That is not enough, however. The real test in addition to the above is (a) were they issued with interest coupons and (b) were they issued in registered form?

In Motter v. Bankers Mortgage Co. of Topeka, Kan., 10 Cir., 93 F.2d 778, 779, the Court while holding that the securities were subject to the stamp tax (they were in registered form) laid down the rule as to the construction of this statute: “Obviously, it was contemplated by the Congress that the statute should be broad and comprehensive in scope and cover all forms of bonds, debentures, and certificates of indebtedness, and all instruments of every nature issued by a corporation with interest coupons attached or in registered form known generally as corporate securities * * (Italics added.)

Again in Dauphin Trust Co. v. United States, 3 Cir., 80 F.2d 893, 896, we find the Court in construing this statute using these words: “The certificate has not the ‘interest coupons,’ nor is it ‘in registered form’ as specified, by the statute.”

In United States v. American Trust & Banking Co., 6 Cir., 125 F.2d 113, 115, the Court in determining that certain instruments should be taxed under this statute (the instruments in question were in registered form), laid down this rule: “The provisions of the Act are expressed in broad terms, including taxation of certificates of indebtedness, stock certificates, and all instruments issued by corporations, generally known as corporate securities — provided they have interest coupons or are in registered form.” (Italics added.) See also In re Follansbee Bros. Co., D.C., 42 F.Supp. 448.

It is conceded that the instruments here in dispute had no interest coupons. The sole remaining question is whether or not they are in registered form.

In Benwell v. City of Newark, 55 N.J.Eq. 260, 36 A. 668, 669, a fine description of registration was given as follows: “A registered bond is one which is a simple certificate of indebtedness, in favor of a particular individual, payable at a date named, with interest at days named. The name of the payee is entered on the books of the corporation debtor — municipal or private — as the registered owner, or, if it be a government bond, on the register of the government. On the days when, by the terms of the bond or certificate of indebtedness, the interest falls due, it is paid directly to the registered creditor, without presentation of the bond, — usually by check drawn to his order and sent by mail, or, if he so demands, by cash in hand; but, by long-settled course of practice, the payment is made by check to the order of the creditor. These bonds or certificates of indebtedness are not negotiable, and can be transferred only by an entry on the books of the debtor corporation, with á proper endorsement on the bond itself, or by the issue of a new certificate * * *. The peculiar value of this class of securities lies in the fact that it is not necessary to produce them to the debtor at each time that the interest is due, and the danger of loss by robbery or fire is entirely removed.”

To the same effect are: Read v. Lehigh Valley R. Co., 284 N.Y. 435, 31 N.E.2d 891; Schaffer v. Federal Cement Co., D.C., 225 F. 893. Also see: Fletcher, Private Corporation, Perm. Ed., Vol. 6, C. 30, Sec. 2643.

It is apparent from a reading of the subject instruments that no provision for such registration is present. The fact that they must be presented for notation of payment of interest is repugnant to the registration concept. Benwell v. City of Newark, supra.

True, the instruments were numbered and a record kept of the holders thereof, but such a procedure is something less than sufficient to meet the “registration” idea as indicated by the cases cited.

Willcuts v. Investors Syndicate (cited by the Commissioner herein), 8 Cir., 57 F.2d 811, 812, certiorari denied 287 U.S. 618, 53 S.Ct. 18, 77 L.Ed. 537, is not inconsistent with this view. There, certain “Accumulative Installment Certificates” were the subject in suit and the court, reversing the District Court which had exempted the documents from tax, found them to be in registered form.

However, an examination of the facts of the Willcuts case indicates that more than mere numbering was the basis of the decision. There, the numbers were placed upon a ledger card, application blank, cross-reference card and passbook. The cards were the permanent records of the company and were filed numerically. The instruments were assignable by reference to their registration, it being provided in the instrument that “This Certificate if in force and uncancelled on the books of the company may be assigned, but the assignment or transfer hereof shall not be valid without the consent in writing endorsed hereon by the company and a transfer fee of $1.00 paid to the company.” There is no provision for such registration in the instruments of the instant suit.

The Commissioner also relies upon Lederer v. Fidelity Trust Co., 267 U.S. 17, 45 S.Ct. 206, 69 L.Ed. 494, which reversed 3 Cir., 289 F. 1009. This case may very well be distinguished. The only issue before the United States Supreme Court in the Lederer case (267 U.S. page 20, 45 S.Ct. 206, 69 L.Ed. 494) was whether the “certificates are instruments issued, etc., known generally as corporate securities.”

The record showed 289 F. 1009 footnote 1011 that the documents were in registered form (optional) which read as follows: “The holder of this certificate may have the same registered on the books of the trustee, when registration shall be noted on the back hereof, and thereafter the principal shall be transferred only upon the said books by the registered holder, or his duly authorized representative, unless the same shall have been transferred to bearer, in which case the principal shall be payable to the bearer hereof, the dividend warrants being always payable to bearer.”

The distinguished features of the documents here in question and those in the Willcuts and Lederer cases are this registration feature. The documents here in question contain no provision for registration on their face and in fact were not registered.

I feel that I have not construed this statute too narrowly. If there is ambiguity in this statute as applied to documents of the kind we have here, then that ambiguity should be resolved in favor of the taxpayer. After all it is Congress that should determine whether a tax may be levied and not the Courts. Mitten Bank Securities Corporation v. United States, D.C., 24 F.Supp. 198; Dauphin Trust Co. v. United States, 3 Cir., 80 F.2d 893; Crooks v. Harrelson, 282 U.S. 55, 51 S.Ct. 49, 75 L.Ed. 156; McFeely v. Commissioner of Internal Revenue, 296 U.S. 102, 56 S.Ct. 54, 80 L.Ed. 83, 101 A.L.R. 304.

Plaintiff is entitled to judgment against the defendant for the relief demanded in the complaint.

Settle decree on notice.


author: HARRISON, District Judge.

text:
    SPAULDING et al. v. DOUGLAS AIRCRAFT CO., Inc.
    No. 3806.
    District Court, S. D. California, Central Division.
    June 4, 1945.

      Jos. I. McMullen and Leo R. Friedman, both of San Francisco, Cal., for plaintiffs.
    Francis M. Shea, Asst. Atty. Gen., and Walker Lowry, Atty., Department of Justice, of Washington, D. C., Charles H. Carr, U. S. Atty., and Ronald Walker and Robert E. Wright, Asst. U. S. Attys., both of Los Angeles, Cal., for defendant.
   HARRISON, District Judge.

This is an action under the Declaratory Judgment Statute, wherein plaintiffs seek to have this court hold that the Renegotiation Act, 50 U.S.C.A.Appendix, § 1191, in its original form to and including the amendments by the act of July 14, 1943, is unconstitutional and unenforceable. The controversy arises over the fact that the War Department has determined that the plaintiffs’ profits for the year 1942 were excessive, and in order to recapture said claimed excessive profits has directed the defendant to withhold certain payments due the plaintiffs for the benefit of the United States in accordance with the provisions of said Renegotiation Act.

The United States intervened under the provisions of Sec. 401, Title 28 U.S.C.A. and has moved for a summary judgment on the grounds that the complaint fails to state a claim upon which relief can be granted. Plaintiffs admit that their cause of action is predicated solely upon the theory that said act is unconstitutional and if the court finds that said act is constitutional the motion should be granted.

A similar motion involving the constitutionality of said act was made in the case of Lincoln Electric Co. v. Knox et al., D.C., 56 F.Supp. 308, 310, before a three judge court, wherein the court denied the motion for summary judgment stating: “The rule for summary judgment was, in our opinion, never intended to throw upon the court the burden of determining a case involving, on the one hand, a delicate question of law and, on the other, complicated and controverted facts, without an adequate and proper hearing.”

The pleadings and affidavits submitted on the motion indicated to me that probably the factual situation could be fully developed on a pre-trial, consequently, I set the case for a pre-trial hearing at the same time the motion for summary judgment was set.

The facts as developed by the admissions of the pleadings and the admissions of the parties at the pre-trial hearing developed that the defendant, Douglas Aircraft Company, was a builder of airplanes for the government in the furtherance of the war effort; that the said defendant entered into numerous sub-contracts, in the form of work orders, with the plaintiffs for the manufacture, production and sale of mechanical fittings and parts, in accordance with specific plans and specifications furnished by the prime contractor to be used in the fabrication of airplanes built by it, in accordance therewith. The work orders usually were given and accepted by the plaintiffs on the strength of bids submitted to the prime contractor. The plaintiffs at all times knew that the parts manufactured by them for the defendant were to be used in the fabrication of airplanes for and at the expense of the government.

Following the adoption of the Renegotiation Act, through an exchange of letters, the plaintiffs agreed that all work orders received from the defendant would be subject to the provisions of said act, insofar as the same were required by law or by contract. Plaintiffs further agreed that the special conditions set forth in 42 and 42a would be applicable to all work orders received from defendant. The conditions contained in 42 and 42a amplified the procedure provided in said Renegotiation Act and provided further for the repayment of excess profits by sub-contractors in accordance with the provisions of said act. (See Exhibits A and B to answer admitted in evidence at said pre-trial.)

Thereafter, defendant continued to issue work orders to the plaintiffs and the plaintiffs continued to perform the same. Under the Renegotiation Act the War Department found that the plaintiffs’ profits were excessive for the year 1942 .and directed the defendant to withhold the amount of profits so found from amounts •owing by defendant to plaintiffs under and by virtue of various subsequent work orders.

Upon the conclusion of the pre-trial hearing each party stipulated that the admissions made at said hearing would become a part of the record and that the motion for summary judgment and the final determination of the case should be submitted to the court for decision.

The plaintiffs contend that the said act is unconstitutional and therefore defendant is not justified in withholding payment pursuant to the directive of the War Department and have asked the court to so declare. It is admitted that the payments are withheld solely by reason of the withholding orders of the War Department in pursuance to the provisions of the said Renegotiation Act. The plaintiffs admit that if said act is constitutional they have no cause of action. All parties seek a ruling on the sole isue of constitutionality of said act and have directed their briefs to that end.

On the other hand, the court is mindful that this issue should be avoided if the case can be determined on other grounds, notwithstanding the desires of the litigants. Arkansas Fuel Oil Co. v. Louisiana, etc., 304 U.S. 197, 58 S.Ct. 832, 82 L.Ed. 1287; 16 C.J.S., Constitutional Law, § 94, p. 208; 6 R.C.L. p. 76 and 77; Crowell v. Benson 285 U.S. 22, 52 S.Ct. 285, 76 L.Ed. 598.

The burden rests upon the plaintiffs to establish the unconstitutionality of the act in question beyond a reasonable doubt. Nicol v. Ames, 173 U.S. 509, 514, 19 S.Ct. 522, 43 L.Ed. 786. While I do not believe they have overcome this heavy burden, I feel that this case can finally be determined on other grounds, namely:

First. The correspondence between the parties constituted a contract between them. To me these letters clearly establish an agreement on behalf of the plaintiffs to be bound by said Renegotiation Act, and thereby said agreement became a part of every work order notwithstanding anything therein to the contrary. The parties having thus contracted, it becomes immaterial whether the act is constitutional or not. Jones et al. v. Great Southern Fireproof Hotel, 6 Cir., 86 F. 370; Stover v. Winston Bros. Co., 185 Wash. 416, 55 P.2d 821; United States v. San Francisco, 310 U.S. 16, 60 S.Ct. 749, 84 L.Ed. 1050; Interstate Consol. St. R. Co. v. Massachusetts, 207 U.S. 79, 28 S.Ct. 26, 52 L.Ed. 111, 12 Ann.Cas. 555; International & G. N. Ry. Co. v. Anderson County, 246 U.S. 424, 38 S.Ct. 370, 62 L.Ed. 807.

The position of the plaintiffs is no different than if they had entered into a private contract with the defendant agreeing that all work orders would be filled and the charges therefore would include no excessive profits, leaving the determination of excessive profits solely and exclusively to arbitianon by a third party. If such contract had been entered into, certainly the plaintiffs would not question its enforcibility. In the case at bar the parties have agreed that the agencies of the government would have the authority to eliminate excessive profits in accordance with the provisions of the Renegotiation Act. I see no difference between the two situations.

It would therefore appear that the parties, by their own contract, have eliminated the constitutional question.

Second. It is a recognized principle that a person may be estopped from asserting the unconstitutionality of an act. Pierce Oil Co. v. Phoenix Ref. Co., 259 U.S. 125, 128, 42 S.Ct. 440, 66 L.Ed. 855; United Fuel Gas Co. v. Railroad Commission, 278 U.S. 300, 49 S.Ct. 150, 73 L.Ed. 390; Wall v. Parrott Silver & Copper Co., 244 U.S. 407, 37 S.Ct. 609, 61 L.Ed. 1229; Com’r of Internal Revenue v. Independent Life Ins. Co., 6 Cir., 62 F.2d 1066, 1067; Daniels v. Tearney, 102 U.S. 415, 26 L.Ed. 187.

The correspondence heretofore referred to and the conduct of the Plaintiffs, in my opinion, creates an estoppel. The plaintiffs voluntarily executed their letter of November 14, 1942, at which time they indicated a willingness to be bound by the terms of the Renegotiation Act. They continued to accept work orders from the defendant. They knew and agreed that in performing such work in connection with the war effort any excessive profits were subject to recapture by and through the agencies of the government. After obtaining work orders and completing the same they are now attempting to avoid the effect of their agreement. It seems to me that by their own conduct they have waived their right to assert the unconstitutionality of the act in question and by the same token are estopped at this late date to retain any excessive profits. Having accepted the benefits of said work orders they are not now in a position to avoid the terms under which said work orders were issued and received.

Third. This action presents no justiciable controversy. Article I, § 9, clause 7 of the Constitution provides as follows: “No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law * *

Congress in making appropriations has the power and authority not only to designate the purpose of the appropriation, but also the terms and conditions under which the executive department of the government may expend such appropriations. Thus the War Department was required to make the Renegotiation Act a part of all its contracts.

The purpose of the appropriations, the terms and conditions under which said appropriations were made, is a matter solely in the hands of Congress and it is the plain and explicit duty of the executive branch of the government to comply with the same. Any attempt by the judicial branch of our government to interfere with the exclusive powers of Congress would be a plain invasion of the powers of said body conferred upon it by the Constitution of the United States.

Our judiciary has been exceedingly careful not to intrude upon the powers of the other two branches of the government and has often recognized its limitations in this respect.

In the case of Decatur v. Paulding, 14 Pet. 497, 39 U.S. 497, 522, 10 L.Ed. 559, the court expressed itself as follows: “ * * * To permit an interference of the courts of justice with the accounts and affairs of the treasury, would soon sap its very foundations; money would not be drawn out according to its own rules, nor could the secretary of the treasury ever inform congress of the amount needed. Congress would, of necessity, be compelled to consult the court, not the secretary, when making appropriations.”

In Commonwealth of Massachusetts v. Mellon, 262 U.S. 447, at page 488, 43 S.Ct. 597, 601, 67 L.Ed. 1078, the following language is used: “The functions of the government under our system are apportioned. To the legislative department has been committed the duty of making laws, to the executive the duty of executing them, and to the judiciary the duty of interpreting and applying them in cases properly brought before the courts. The general rule is that neither department may invade the province of the other and neither may control, direct, or restrain the action of the other. * * * ”

Pertinent language is used in Standard Oil of California v. United States, 9 Cir., 107 F.2d 402, 409, wherein it was stated: “ * * * The disposal of the public lands is not a subject over which the ‘judicial power’ of the United States is extended. It is a field in which the authority of the Congress is supreme. Lee v. Johnson, 116 U.S. 48, 6 S.Ct. 249, 29 L.Ed. 570; Art. IV, sec. 3, clause 2 of the Constitution, U.S.C.A. * * * ”

Again in Stitzel-Weller Distillery v. Wickard, 73 App.D.C. 220, 118 F.2d 19, at page 22, the court said:

“In the Haskins Bros, case [Haskins Bros. & Co. v. Morgenthau] we said (66 App.D.C. 178, 85 F.2d [677], 681):

“ ‘In the instant case it is therefore of no consequence whether the act under which the tax was collected be constitutional or unconstitutional. The fact that the tax has been collected and deposited in the treasury by the collecting officials of the government renders the custodian of the fund impotent to withdraw the money and disburse it unless and until directed to do so by an act of Congress or until the United States shall submit to be sued to determine its disposition.

“ ‘It is equally of no consequence that the bill alleges that the fund belongs to appellant and others similarly situated. It is not in the hands of the officers but in the treasury, and though earmarked as a special trust fund, has been mingled with the moneys of the United States. The purpose of the bill, therefore, is to coerce the United States, through their officers to pay out money in the treasury as to which Congress has limited the power of withdrawal to the payment to the Philippine government. To permit this, mould be to usurp the legislative function of appropriation, to substitute a court for the executive officers of the government, and to supplant by an order of court the duty and obligations imposed upon them by their oaths of office. It is therefore of no moment whether the United States have the use of this money as they do the ordinary revenues of the government or whether the money represents a trust fund created by Congress and earmarked for a specific purpose. In either case it is money in the Treasury of the United States as to which the United States had and have the power of control and disposition.’ ” (Italics supplied.)

In Gillioz v. Webb et al., 5 Cir., 99 F.2d 585, 586, the following may be found: “On its face the constitutional point is without merit, for what is in question here is not the construction or validity of a statute, but of a contract voluntarily entered into with the Government. The fact that Congress authorized, indeed, required the inclusion in it of the clause in question as a condition to letting the work, is significant only upon the question of the authority of the executive officer to write the clause in. Without such authorization it may well be doubted that the contracting officer of the Government would have had authority to insert it. Cf. United States for Use and Benefit of Johnson v. Morley Construction Co., D.C., 17 F.Supp. 378, 388.”

Under the Public Contracts Act of June 30, 1936, 41 U.S.C.A. § 35 et seq., Congress attached specific strings to certain appropriations analogous to those involved in the present action. Congress provided for the payment of minimum wages as determined by the Secretary of Labor to be paid by sellers of goods to the government. The constitutionality of this act was raised in the case of Perkins v. Lukens Steel Co., 310 U.S. 113, 60 S.Ct. 869, 84 L.Ed. 1108. An injunction had been granted against the enforcement of the act and as a result the effectiveness of the same had been nullified for over a year. This provoked rather straightforward language from the Supreme Court, speaking through Mr. Justice Black, wherein certain lines of demarkation were drawn between the functions of the legislative and executive branches of the government and the judiciary. In plain and definite terms certain paths were forbidden for the courts to travel. Among other things the court stated, starting at page 127 of 310 U.S., page 876 of 60 S.Ct., 84 L.Ed. 1108:

“Like private individuals and businesses, the Government enjoys the unrestricted power to produce its own supplies, to determine those with whom it will deal, and to fix the terms and conditions upon which it will make needed purchases. Acting through its agents as it must of necessity, the Government may for the purpose of keeping its own house in order lay down guide posts by which its agents are to proceed in the procurement of supplies, and which create duties to the Government alone. It has done so in the Public Contracts Act. * * * Courts have never reviewed or supervised the administration of such an executive responsibility even where executive duties ‘require an interpretation of the law.’ Judicial restraint of those who administer the Government’s purchasing would constitute a break with settled judicial practice and a departure into fields hitherto wisely and happily apportioned by the genius of our polity to the 'administration of another branch of Government. (Italics supplied.)

afs * * * #

“In this legislation Congress did no more than instruct its agents who were selected and granted final authority to fix the terms and conditions under which the Government will permit goods to be sold to it. The Secretary of Labor is under a duty to observe those instructions just as a purchasing agent of a private corporation must observe those of his principal. In both instances prospective bidders for contracts derive no enforceable rights against the agent for an erroneous interpretation of the principal’s authorization. For erroneous construction of his instructions, given for the sole benefit of the principal, the agent is responsible to his principal alone because his misconstruction violates no duty he owes to any but his principal. The Secretary’s responsibility is to superior executive and legislative authority. Respondents have no standing in court to enforce that responsibility or to represent the public’s interest in the Secretary’s compliance with the Act. That respondents sought to vindicate such a public right or interest is made apparent both by their prayer that the determination be suspended as to the entire steel industry and by the extent of the injunction granted.

s|c iji ‡

"The case before us makes it fitting to remember that ‘The interference of the courts with the performance of the ordinary duties of the executive departments of the government, would be productive of nothing but mischief; and we are quite satisfied, that such a power was never intended to be given to them.’” (Italics supplied.)

The plaintiffs being clearly within the purview of the Renegotiation Act and having agreed to be bound thereby are in no better position than the -prime contractor. I am of the opinion that this case is distinguishable from Coffman v. Breeze Corporations, Inc. et al., 323 U.S. 316, 65 S.Ct. 298, in that the case at bar deals with the expenditure of public funds. It would therefore appear that the plaintiffs’ problem is one beyond the reach of this court.

Therefore, in view of the facts pleaded in the complaint and the surrounding facts brought out in the pre-trial of this case, the defendant is entitled to a judgment of dismissal. Defendant is directed to prepare forthwith findings in accordance with this opinion.


author: PINE, Associate Justice.

text:
    WALDPORT SEAFOOD CO., Inc., v. COE, Commissioner of Patents, et al. (two cases).
    Nos. 25032, 25033.
    District Court of the United States for the District of Columbia.
    June 7, 1945.
    William G. MacKay and Charles R-Allen, both of Washington, D. C., for plaintiff.
    W. W. Cochran, Sol., U. S. Patent Office, of Washington, D. C., for Defendant Conway P. Coe, Commissioner of Patents.
    Royal R. Rommel (of Lancaster, All-wine & Rommel), of Washington, D. G, and Beekman Aitken, of New York, N. Y., for defendant Cranberry Canners, Inc.
    A. W. Murray, of Chicago, 111., for defendant Ilwaco Oyster Co., Inc.
   PINE, Associate Justice.

These are actions under Sec. 4915, R.S., 35 U.S.C.A. § 63. Plaintiff applied for registration of a trade mark consisting of the term Pacific Spray for canned crab meat. Defendants Cranberry Canners, Inc., and Ilwaco Oyster Co. filed respective notices of opposition to such registration. Prior use by opposers is not in issue. The mark registered to Cranberry Canners, Inc., is Ocean Spray and is applied to canned cranberries. The mark registered to Ilwaco Oyster Co. is Northern Spray and is applied to canned oysters. Canned crab meat and canned cranberries are goods of the same descriptive properties within the meaning of the Trade Mark Laws, 15 U.S.C.A. § 85. This is also true of canned crab meat and canned oysters. California Packing Corp. v. Halferty, 54 App.D.C. 88, 89, 295 F. 229. In my opinion the mark Pacific Spray so nearly resembles the marks Ocean Spray and Northern Spray that its use would likely deceive purchasers or cause confusion, or perhaps more accurately stated, further confusion, in the canned foods trade. In any event, the question is not free from doubt, and doubt should be resolved against the newcomer. Skelly Oil Co. v. Powerine Co., 86 F.2d 752, 24 C.C.P.A., Patents, 790. Furthermore, the term Pacific, forming part of plaintiff’s mark, is descriptive of the goods to which the mark is applied. 15 U.S.C.A. § 85.

I therefore find for the defendants in both cases. Counsel will prepare and submit, on notice, judgments and findings of fact and conclusions of law.


author: FAKE, District Judge.

text:
    BRITTEN et al. v. UNITED STATES.
    Civil Action No. 1749.
    District Court, D. New Jersey.
    June 15, 1945.
    Orlando H. Dey, of Rahway, N. J., for plaintiffs.
    Thorn Lord, U. S. Atty., of Newark, N.J., Grover C. Richman, Jr., Asst. U. S. Atty., of Camden, N. J., Samuel O. Clark, Jr., Esq., Asst. Atty. Gen., and Andrew D. Sharpe and Ruppert Bingham, Sp. Assts. to Atty. Gen., for defendant.
   FAKE, District Judge.

This is an income tax case instituted here under the authority of Title 28 U.S. C.A. § 41(20). Plaintiffs allege an overpayment of certain captial gains taxes for the year 1935 paid under protest, and now seek a recovery thereof with interest.

The question to be decided is whether the taxes so paid were properly taxable against the executors as such, under the will, thus falling on the estate as a whole, or against three separate trusts set up by the will and so falling severally on the respective trusts.

The testator by his will made certain specific devises and bequests and directed the payment of debts and funeral expenses, and then by the Seventh paragraph thereof provided as follows: “I give, devise and bequeath all the rest, residue, and remainder of my estate * * * to my executors * * * in trust, nevertheless, to divide the same into two equal shares hereinafter referred to respectively as the ‘Wife’s Share’ and the ‘Children’s Share’ ”, and by clause (b) of the same paragraph he provided that the Children’s Share be divided into as many equal parts as he had children surviving. Testator left him surviving a widow and two children, hence three trusts are involved.

The answer to the question depends upon a proper construction of the will under the pertinent state law.

It is clear, I think, that by his will the testator intended that his widow and children would be entitled to the income of the trusts from the date of his death. Gates v. Plainfield Trust Co., 121 N.J.Eq. 460, 191 A. 304, affirmed, 122 N.J.Eq. 366, 194 A. 65. It follows therefore that the equitable titles to the respective trusts actually vested in the cestuis qui trustent immediately on the testator’s death. 'Since titles are never strictly in abeyance and since the existence of a cestui qui trustent requires also the existence of an outstanding legal title, it must be found that the trustees then also became vested with the legal titles to the trusts at the death of testator.

It is urged by the defendant that because the executors did not specifically set up on their books the three several trusts or deal with them as separate trusts until the year 1938, the capital gains for the year 1935 inured to the estate as a whole.

In this connection the old maxim, “Equity looks on that as done which ought to be done”, would seem to apply. Looking then to what ought to have been done here, it is seen that the capital gains for the year 1935 were in reality the gains of the respective trusts and although they were not then actually set up on the books as separate estates, they must now be construed as set up as of testator’s death. Matter of Hibbler, 78 N.J.Eq. 217, 78 A. 188, affirmed, 79 N.J.Eq. 230, 81 A. 1133. See also Roebling v. Commissioner, 3 Cir., 78 F.2d 444, and Fidelity Union Trust Co. v. Kelly, 3 Cir., 102 F.2d 333. Therefore, in the instant case it appearing that the executors took no beneficial title to the capital gains but acted only in an administrative capacity in relation thereto, the gains cannot be said to inure to them or through them to the estate. This is so even though it appears that in some instances they may have dealt with the several estates on the erroneous assumption that but one estate was involved.

Judgment will be entered in conformity herewith on notice.


text:
    KAUFMAN et al. v. JOHN BLOCK & CO., Inc., et al.
    District Court, S. D. New York.
    Feb. 28, 1945.
    Macklin, Brown, Lenahan & Speer, of New York City, for libellants.
    Arthur A. Atha, of New York City, for respondents.
   CONGER, District Judge.

Respondents have excepted to the libel as being beyond the admiralty jurisdiction of the court. Since there is no diversity or other grounds of jurisdiction, respondents ask that the libel be dismissed.

The first cause of action in the libel alleges that the respondents represented themselves to be the agents for the charterer of the vessel “Marie Anna”, and solicited from the libellants two shipments for sea carriage by the vessel as shown by two bills of lading annexed to the libel. Thereafter libellants delivered the goods to the respondents at the port of Charleston, South Carolina, where the “Marie Anna” was located and entrusted them to the respondents for delivery to Barranquilla, Colombia. The respondents then demanded the prepayment of the freight, and libellants paid these charges. The respondents failed to deliver the goods, and the libellants have suffered $4,500 in damages in retrieving and reshipping the goods. This cause of action is clearly for the breach of contract to carry goods by sea, and as such is within the admiralty jurisdiction of this court. May v. Hamburg-Amerikanische P. Atkien-Gesellschaft, D.C., 57 F.2d 265, 270.

The second cause of action alleges that the principal “Marie Anna, Inc.” is a wholly fictitious corporation, and that the respondents knew it was a wholly fictitious corporation which was not the charterer or operator of the “Marie Anna” or any other vessel; that the respondents represented themselves as officers, directors, and agents for the “Marie Anna”, and used fictitious names in so holding themselves; that the respondents knew or should have known that the vessel “Marie Anna” was a yacht, prohibited from carrying cargo for hire, and enjoined by an order of this court from having its registry changed, from sailing from the port of Charleston, South Carolina, and from leaving any port in the United States; that despite this, the respondents issued the bills of lading annexed to the libel; that the checks by which the libellants prepaid the freight were cashed by the “Marie Anna, Inc.” through the Paramount Check Cashing Service, after a resolution of the “corporation” had been passed authorizing the service to cash the corporation’s checks and a corporate seal was added to the resolution; that the respondents have retained the moneys received from the checks, and the libellants have suffered $4,500 damages.

This cause of action is either for moneys had and received or for fraud. In either event, it is not maritime, but a pure common-law action. This court’s admiralty jurisdiction does not extend to any suit not maritime, Rea v. The “Eclipse”, 135 U.S. 599, 10 S.Ct. 873, 34 L.Ed. 269, nor can nonadmiralty causes of action be joined to admiralty ones. Westfall Larson & Co. v. Allman-Hubble Tug Boat Co., 9 Cir., 73 F.2d 200; The Yankee, D.C., 37 F.Supp. 512, 513.

Giving full faith and credit to the allegations of the second cause of action in the libel, it seems to me that the charge set forth is one of obtaining money under false and fraudulent representations; a common-law action. True, the artifice used is a bill of lading but this cause of action has not to do with the bill of lading but with the obtaining of money by fraud.

Motion granted only as to the second cause of action. Settle order on notice.


author: HANNAY, District Judge.

text:
    UNITED STATES v. ONE PACKARD AUTOMOBILE, MOTOR NO. B-305217.
    Civil Action No. 31.
    District Court, W. D. Texas, Del Rio Division.
    May 12, 1945.
    W. R. Smith, Jr., U. S. Atty., and J. M. Burnett, Asst. U. S. Atty., both of San Antonio, Tex., for plaintiff.

      Phil B. Foster, of Del Rio, Tex., for claimant.
   HANNAY, District Judge.

On June 11, 1943, A. R. Kahn, Assistant Collector of Customs at the Port of Laredo, Texas, applied for a warrant of detention for one 1939 Packard coupe automobile, Engine No. B-305217, Serial No. 12992286, Illinois license plates No. 164 — 758, alleging that on May 13, 1943, a taxi driver, name unknown, attempted to smuggle said automobile from the United States of America over the international bridge at the port of Del Rio, Texas, without declaring same to the customs officer on duty for legal exportation.

Immediately after this automobile was detained for investigation, one Salvador Abraham (Perez) appeared with a bill of sale which showed he, as Salbador Abraham, had purchased this automobile from Larry Hamm that same day for the sum of Five Hundred Fifty ($550) Dollars. Salvador Abraham (Perez) is a citizen and native of Piedras Negras, Mexico.

The following day Salvador Abraham (Perez) presented to the Deputy Collector of Customs at Eagle Pass, Texas, certain papers showing that he had, since the detention of this automobile, transferred the title from Salbador Abraham to S. Abraham Perez, and purchased Texas license plates, 1942, Ño. V-54400, with 1943 Texas tab No. HAI-605.

Having become acquainted with the above mentioned facts, on the 7th day of June, 1943, the said Assistant Collector of Customs, having what he thought probable cause to believe that a deliberate attempt was being made to export the above-described automobile from the United States to Mexico in violation of the provisions of the Export Control Act of July'2, 1940, as amended, 50 U.S.C.A.Appendix, § 701, and proclamations, rules and regulations issued thereunder, duly seized the above described Packard automobile and applied for a warrant to justify the further detention of such property so seized.

Thereafter-, on June 11, 1943, a United States Judge for the Western District of Texas granted such application for a warrant and signed the warrant of detention of such property.

On August 9, 1943, the United States District Attorney for the Western District of Texas filed a libel on behalf of the United States of America, setting forth the facts of the seizure and of the warrant of detention, and that no claim for restoration of said automobile had been filed, and stating that said automobile is forfeited to the use of the United States of America, and libellant prayed that due process and monition be awarded to enforce the seizure and that said automobile be forfeited to the use of the United States of America.

On August 10, 1943, a United States judge for the Western District of Texas duly signed the order requiring notice upon attachment, which was duly filed on September 8, 1943.

Later, on November 29, 1943, S. Abraham Perez filed an intervention and answer wherein he claimed to be the owner of the automobile involved in this case, and denied that any law was violated, or intended to be violated, on his part, and that he in all things acted in good faith. Still later, the same claimant filed a plea in which he asked for the delivery of said automobile, upon the execution by him of proper bond, under either Section 405 of Title 22 U.S. C.A., or, in the alternative, under Section 751 of Title 28, U.S.C.A. This petition for the return of the automobile to claimant was filed on December 24, 1943. On March 19, 1945, the defendant and claimant filed a plea in abatement, in which he stated this suit should be abated, the cause dismissed, and the property returned to him because the application for warrant of detention was filed in this court by the Assistant Collector of Customs on June 11, 1943, after said automobile had been seized on May 13, 1943, inasmuch as more than ten days had elapsed after the seizure of said car before the filing of said application for warrant of detention, and that more than thirty days elapsed after the seizure of said automobile by the officers of the United States Government before application for warrant of detention.

This cause was heard in Del Rio upon the plea in abatement. The date of seizure and the other dates hereinabove set out were proven.

It therefore follows that the plea in abatement should be granted, the cause should be dismissed, and the automobile in question returned to the claimant herein, because under the Espionage Act, Title 6, §§ 1, 2, 22 U.S.C.A. §§ 401, 402, it is the duty of the person making a seizure to apply with due diligence to the Judge of the District Court which has jurisdiction over the place of seizure for a warrant to justify the detention of the property, which application for warrant should be made within a reasonable time, not exceeding ten days after the seizure.

In this case the application was at a time in excess of the ten day provision. This ten day provision is mandatory and must be strictly construed. Since the seizure was made by officers authorized to seize for condemnation, and since the ten day provision of § 402 applies, no other result can be had. See United States of America v. 21 lbs. 8 ozs. more or less, of Platinum, 4 Cir., 147 F.2d 78.

Let order be drawn and presented accordingly.