text:
    BULL v. UNITED STATES.
    No. L-383.
    Court of Claims.
    March 5, 1934.

      David A. Buckley, Jr., of Washington, D. C. (Lawrence P. Mattingly, of Washington, D. C., on the brief), for plaintiff.
    Elizabeth B. Davis, John A. Rees, and W. W. Scott, all of Washington, D. C., for the United States.
    Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
   LITTLETON, Judge.

At the time of his death on February 13, 1920, decedent was a member of a partnership operating under an agreement containing a provision that in the event of death of a partner the surviving partners, with the consent of the executor, should be at liberty to continue the business for a stated time and the estate of the deceased partner might participate in the gains or losses of the business for such period to the same extent as the deceased partner would have participated if living.

The decedent’s share of the partnership profits from January 1 to the date of his death on February 13, 1920, was $24,121.20, and the amount of the profits to which he would have been entitled for the remainder of that year, had he lived and continued a member of the partnership, would have been $212,718.79, which the estate received. Of the latter amount $200,117.09 was received by the estate during 1920 and the balance was received in 1921. The Commissioner included the full amount of the profits from February 13 to December 31, 1920, ultimately received by the executors, together with the earnings accrued to decedent at date of his death, as a part of the estate of the decedent subject to estate tax, and also included the earnings of $200,117.09 received in 1920 as income of the estate for the taxable period February 13 to December 31, 1920, subject to income tax.

We cannot consider whether the Commissioner correctly included the total amount received from the business in the net estate of the decedent subject to estate tax for the reason that the suit was not timely instituted. The only question for decision is whether the Commissioner correctly included the item of $200,117.09 in income for the purpose of income tax payable by the estate.

Plaintiff contends that upon the death of the decedent there was a dissolution of the partnership and that the amount of $212,-718.79 paid by the surviving partners from the earnings of the business to December 31, 1920, was a consideration for the acquisition iby them of the interest of the deceased partner in the partnership, and that, since the value of the decedent’s interest in the partnership at the date of his death, as determined by the Commissioner, was $235,202.99, there was no taxable income to the estate from, the transaction.

The defendant insists that the business was continued, either as a partnership composed of the surviving partners and the executor or as a joint venture in which the estate shared in the profits and losses in the same manner as the decedent would have had he lived, and, since the partnership realized profits, the portion of such earnings received by the estate constituted taxable income to it.

We find it unnecessary to discuss the question whether the estate or the executor was a member of a new partnership from February 13 to December 31,1920, for the partnership agreement, when properly interpreted, did not provide for a sale of a deceased partner’s interest to the surviving partners for a consideration to be measured by a proportionate part of whatever profits might be earned by the business for the remainder of the calendar year in which such member died. The language of the agreement shows clearly, we think, that the estate of a deceased partner, if it elected not to withdraw the decedent’s interest immediately, was to give up no rights with respect to the property of the deceased in the business at the date of death if profits 'should be earned by the continuance of the business by the surviving partner, or partners, for the remainder of the calendar year. If the operation of the business had resulted in a loss, the estate would have shared therein at least to the amount of earnings accrued to the deceased partner at the date of his death. Burwell v. Cawood (Mandeville’s Executor), 2 How. 560, 11 L. Ed. 378. However, as there was no loss, we need not further discuss this phase of the agreement. In this case profits were earned and the estate became entitled to receive, and it did receive, in final settlement, that which the decedent would have been entitled to receive at December 31, 1920, had he lived until that date, namely, the profits accrued to decedent to February 13, 1930, of $24,124.20 and a portion of the profits of the business from February 13 to December 31, 1920, in the amount of $212,-718.79. The first-mentioned amount of $24,-124.20 was taxable income to the decedent for the taxable period prior to his death and constituted a part of his estate for the purpose of the estate tax. This amount was not again taxable to the estate when received, but the amount of $212,718.79 was taxable income as a gain or profit derived by the estate from the use or employment of the property belonging to the decedent at the date of his death, pursuant to an arrangement between the decedent and the other partners prior to his death, to the carrying out of which the estate agreed.

The business in which decedent was a partner was largely, if not entirely, of a personal-service nature. No cash capital or other tangible asset was required and none was invested by the partners. The earnings depended largely upon the personal acquaintance and business relationship of the partners, and shippers and shipowners. Good will was important. When considered in connection with the nature of the business, the agreement, which was made at the time the partnership was first formed, shows that its purpose was to provide a method whereby the business would not be suddenly disrupted in the event of death of any of the partners by immediate withdrawal of accumulated funds by the estate, possible necessity of change in name, or a controversy with respect to matters of accounting.

The estate consented to allow the interest of decedent in the partnership at the date of his death to remain in the business for a period subsequent to death and to a continuation of the business by the surviving partners in accordance with the method provided in the agreement until December 31, 1920. An a result, the estate received $212,718.79 as a gain which was earned subsequent to February 13, 1920. The estate, being a taxable entity, was clearly liable for income tax on this income and was properly taxed on $200,-117.09 thereof received in 1920.

The petition must, therefore, be dismissed. It is so ordered-


source: Caselaw Access Project

author: GARDNER, Circuit Judge.

license: Public Domain

text:
    HUBBELL et al. v. LEONARD (MITCHELL et al., Interveners).
    No. 2579.
    District Court, E. D. Arkansas, W. D.
    Jan. 5, 1934.
    David M. Wood, of New York City, and Joseph C. Gamble, of Des Moines, Iowa (Thomson, Wood & Hoffman, of New York City, and Gamble, Read & Howland, of Des Moines, Iowa, on the brief), for complainants.
    Charles T. Coleman, of Little Rock, Ark., and Walter L. Pope, Asst. Atty. Gen. (Hal L. Norwood, Atty. Gen., and Walter G. Rid-dick, of Little Rock, Ark., on the brief), for defendant.
    John C. Sheffield, of Helena, Ark., for interveners.
    Before GARDNER, Circuit Judge, and MARTINEAU and RAGON, District Judges.
   GARDNER, Circuit Judge.

This is a suit in equity, brought by the plaintiffs, who are citizens of states other than Arkansas, and are not citizens of the state of Arkansas, against the defendant Roy V. Leonard, individually, and as treasurer of state of the state of Arkansas, to enjoin and restrain him from paying out certain funds of the state derived from taxation of motor vehicles and gasoline.

Plaintiffs constitute a committee, and under the terms of a written agreement dated June 1, 1933, are assignees of certain bonds and interest coupons issued by the state of Arkansas, and as such assignees are empowered to bring this suit. There is therefore a diversity of citizenship between the plaintiffs and the defendant; the amount in dispute, exclusive of interest and costs, exceeds the sum or value of $3,000; and the suit, it is alleged by appropriate averments, arises under the Constitution of the United States.

The suit has been finally submitted on the pleadings and certain admitted facts.

There are two counts in the bill of complaint, each charging a violation of section 10, article 1, of the Constitution, providing that no state shall pass any law impairing the obligation of contracts, and of the Fourteenth Amendment, providing that no state shall deprive any person of life, liberty, or property without due process of law, nor deny to any person within its jurisdiction the equal protection of the laws. The material facts in connection with count 1 are as follows: By Act of the General Assembly of the State of Arkansas, known in the record as Act No. 80 (page 215), approved March 4, 1927, which amended Act of the same legislature, known as Act No. 11 (pages 17, 20),'approved February 4, 1927, it was, among other things, provided as follows:

“Section 5. To hasten the completion of the state highway system as rapidly as possible, the Commission shall for each of the years 1927, 1928, 1929> and 1930, allot for new construction a sum equal to twice the aggregate amounts allotted to road districts, and for each year thereafter, until the road system of the state is brought to a parity, shall allot as a minimum a sum at least equal to the aggregate amount allotted to road districts. To provide the funds to meet this requirement, the state shall borrow each year whatever amount may be necessary, in addition to the money derived from automobile licenses and fees, gasoline and motor oil taxes, and from Federal Aid, on such terms as to interest and maturities and subject to the limitations hereinafter set out, as may be determined to be for the best interest of the highway system, and to issue State Highway notes for the amount borrowed, to be secured by a pledge of the revenues derived from automobile licenses and fees, and gasoline and motor oil taxes, and to pledge said revenues, or so much thereof as may be necessary, for the payment of said notes, and the State of Arkansas hereby pledges to the purchasers and future holders of State Highway notes that the State of Arkansas will never so long as any of said notes are outstanding permit sections 35 and 36 of Act No. 5 of the Extraordinary Session of the General Assembly of the State of Arkansas, approved October 10, 1923, to be repealed or amended so as to in any manner reduce the revenue therein provided for, and the State of Arkansas further pledges that in the event of a substitute fuel for motor vehicles, or in the event of improvement in equipment that would reduce gasoline consumption or other change of conditions that would reduce the annual revenue from automobile licenses and fees, and gasoline and motor oil taxes below seven million five hundred thousand dollars ($7,500,000.00) that in such event the state will amend section 35 and 36 so as to provide for an annual minimum revenue from automobile licenses and fees and gasoline and motor oil taxes of seven million five hundred thousand dollars ($7,500,000.00) and the State of Arkansas further pledges that it will not issue in the aggregate more State Highway notes than can be fully paid, with interest thereon, from a revenue of seven million five hundred thousand dollars ($7,500,000.00) a year during the period beginning with the first maturity date and ending with the last maturity date of said notes.
“The State Treasurer shall set aside out of the first revenue collected from automobile licenses and fees, and from gasoline and motor oil taxes during the first half of each fiscal year, a sum sufficient to pay the interest on the State Highway notes, and the maturing notes, due and payable during the first half of the fiscal year, and shall set aside out of the first of said revenues collected during the last half of each fiscal year, a sum sufficient to pay the interest on the State Highway notes, and the maturing notes, due and payable during the last half of the fiscal year.
“Such notes issued by the state shall be known as -State Highway notes, shall be signed by the Governor, the State Treasurer and the State Highway Commissioner, and attested by the Secretary of State, and shall state in the face of said notes that the revenues derived from automobile licenses and fees, and from gasoline and motor oil taxes, are pledged for the payment of such notes.
“The State Auditor, 'with the approval of the Governor, shall prepare the form of said notes. Said notes shall be in denominations of one thousand dollars or multiples thereof, and shall be payable to bearer, but shall contain a provision for being converted into registered notes by being registered in the office of the State Treasurer. Said notes shall be negotiable paper notwithstanding they are payable out of a special fund derived by the state from automobile licenses and fees, and gasoline and motor oil taxes.
“The state shall sell State Highway notes only as the Highway Commission finds that funds are needed, and shall not sell more than thirteen million dollars of notes in any calendar year. No notes shall be sold until the State Treasurer shall first have advertised for bids in newspapers, periodicals, or financial journals selected by him, the advertisement to be published not less than twenty (20) days before the day of sale. All bids shall be opened in public, and the state shall have the right to rejeot any and all bids, and may if it deems best, auction the sale of such notes. Said notes shall not be disposed of at less than par on the basis of interest at the rate of five per cent per annum plus accrued interest from date of notes to date of delivery, but if said notes should bear a less rate of interest, they may be disposed of at less than par, provided that on the basis of the amount at which the notes are sold, and the rate of interest they bear, the interest shall not exceed the equivalent of five per cent per annum on the par or face value of the notes, exclusive of the expenses incident to the sale of said notes.”

By Act No. 6 of the General Assembly, approved October 3, 1328, it was provided that, in addition to the provisions contained in the above-quoted act, the state highway commission might sell short-term notes maturing within a year, the issuance of which, however, was not to affect the power to issue state highway notes pursuant to the terms of the statute, but the proceeds of the sale thereof were to be used to pay any outstanding short-term notes and interest. This statute further provided that not more than $18,000,000 par value of notes should be sold in any calendar year beginning with the year 1928, and, if in any year the sale of notes should be deemed inadvisable, .sufficient in amount might be sold in subsequent years to bring the average up to $18,000,000 a year.

By Act No. 65 (page 264), approved February 28, 1929, the General Assembly again in substance re-enacted the provisions of the foregoing statutes.

Pursuant to the authority contained in these various acts, the state from time to time issued certain highway obligations amounting in the aggregate to the par value of $84,000,000, bearing interest at the rate of 4% per cent, per annum, payable semiannually.

Plaintiffs are the owners and holders of the legal title to a large quantity of each of these issues of bonds under these various statutes, aggregating $41,833,000, and on all of which one semiannual installment of interest falling due in 1933 is past due and unpaid.

In each of these obligations, it is, among other things, provided:

“The State of Arkansas also covenants that this and all other obligations of this series shall be paid promptly as they mature, and to that payment the full faith and credit of the State are irrevocably pledged. As special security for the payment of this and the other obligations of this series, the State of Arkansas hereby pledges its revenues derived from automobile licenses and fees and from its tax on gasoline and on any substitute therefor used in propelling automobiles on its highways.
“The State of Arkansas covenants that its treasurer of state will set aside out of the first revenue collected from automobile licenses and fees and from taxes on gasoline and on any substitute therefor during each semi-annual period, funds sufficient to pay all obligations of this series and interest thereon maturing and accruing during such period.”

By sections 35 and 36 of Act No. 5 of the General Assembly, approved October 10,1923 (Ex. Sess., pp. 53, 54), a tax of 4 cents per gallon was levied on each gallon of gasoline sold in the state for the purpose of propelling any automobile or motor vehicle on the public roads in the state, and a tax of 10 cents per gallon was levied on each gallon of motor oil so sold, and a fee for the registration and licensing of all motor vehicles was also levied.

Section 6 of this act (page 19) created a special fund in the state treasury, to be known as the “state highway fund,” and provided that thereafter the state’s portion of all automobile fees, licenses, and privilege taxes, gasoline tax, motor oil tax, and all other moneys received by the state from owners of motor vehicles in connection with the use of the public roads, should he paid into this fund.

Section 64 of the same act (page 80) provided that it should be the duty of the treasurer of the state to credit the money collected and received by him from the gasoline and motor oil tax, under the provisions of the act, to the state highway fund, and that the money so collected should he used exclusively for the purposes set forth in the act.

This act was modified by Act No. 65 (page 264), approved February 28, 1929, as to the amount of fees to be charged for the registration and licensing of motor vehicles, but the provisions of sections 6, 35, 36, and 64 were re-enacted and retained.

By Act No. 63 (page 171), approved February 25, 1931, provision was made for the levy of a privilege tax of 6 cents on each gallon of motor vehicle fuel sold in the state, and of this tax five-sixths was to he deposited in the state treasury to the credit of the state highway fund, and-one-sixth, under certain conditions, was to be credited to a fund known as the county highway fund. Section 6 of this act (page 178) reads in part as follows:

“Section 6. Nothing contained in this Act shall he construed as conflicting with or repealing Section 20 of Act 65 of the Acts of 1929, and to this end it is hereby provided that should the revenue produced under Act 65 of the Acts of 1929 be less than $7,500,000 for any year, then and in that event, such deficit shall be taken from the county highway fund for such year, before an allotment to the counties is made as provided for in this Act.
“It being expressly understood that all funds derived from the operation of this Act or from the operation of said Act 65 of the Acts of 1929 shall he applied first to the payment of state highway notes or bonds and coupons issued by the State of Arkansas under the provisions of Act 11 of the Acts of 192,7 and under the provisions of Act 65 of the Acts of 1929.”

During each of the years from 1927 to 1932-, both inclusive, the avails of the taxes arising from the tax on gasoline and automobile license taxes, provided for by the above-mentioned acts, amounted in the aggregate as follows:

By Act No. 6 (page 19), approved January 39, 1933, and by Act No. 36 (page 95), approved February 27, 1933, the fee theretofore provided for the registration and licensing of motor -vehicles was reduced, so that during- the months from January to June, 1933, both inclusive, the avails of the taxes levied for gasoline tax and auto license fees by virtue of the legislative acts of 1933, were as follows:

The amount of funds required to meet the interest payments and maturities upon the state highway obligations issued and sold pursuant to statutory enactments from the years 1927 to 1934, are as follows:

The 1933 General Assembly passed a series of statutes which plaintiffs assert are unconstitutional; among these acts being Acts Nos. 6 and 36.

Among the other acts complained of is Act No. 48 (page 130), approved February 22, 1933, which amended the first paragraph of section 6 of Act No. 63 of the Acts of 1931 (page 178), approved February 25, 1931, by striking therefrom the following:

“And to this end it is hereby provided that should tho revenue produced under Act 65 of the Acts of 1929 be less than $7,500,000 for any year, then and in that event, such deficit shall be taken from the county highway fund for such year, before an allotment to tho counties is made as provided for in this Act.”

This act further provided that the counties should receive the one-eent allotment under Act No. 63 by the following ¡provision:

“Except the said sixth-eent gasoline tax refund to the counties, it is hereby expressly understood that all funds derived from tho operation of this act or from the operation of said Act 65 of the Acts of 1929 shall be applied first to the payment of state highway notes or bonds and coupons issued by the State of Arkansas under the provisions of Act 11 of the Acts of 1927 and under the provisions of Act 65 of the Acts of 1929.”

By section 4 of this act (Acts 1933, p. 134) it is declared that the specific purposes of the act are to so amend and repeal existing laws as to insure adequate aid for the construction of permanent roads constituting school bus routes, rural mail routes, United States mail routes, and farm-to-market roads in the various counties, and to further assure that the gasoline tax apportioned to the various counties under the provisions of Act No. 63 of the Acts of 1931, will be used for such purposes; “to preserve and protect to the respective counties of the state the allotment of gasoline taxes as provided in subdivision (f) of Section One of said Act 63 of the Acts of 1931 and to prevent and prohibit any part of said tax from being paid into the State Highway fund regardless of whether or not said highway fund annually recevoes an income of $7,500,000.00, and to prevent the transfer of said tax to the State Highway fund, or any other fund except the county highway fund under any circumstances whatsoever.” (Italics supplied.)

By Act No. 19 (pages 44, 45), appro\’ed February 7, 1933, it is provided as follows:

“Subject to the requirements for paying maturing State Highway notes or bonds and interest thereon, the state treasurer shall, during each of the fiscal years from March 1, 1933, to March 1, 1935, set aside semi-annually out of the first moneys coming into the State Highway Fund the sum of $1,000,000.-00 for the maintenance of the state highways and the expense of the highway department.” Section 1.

By Act No. 82 (page 245), approved March 7, 1933, the General Assembly provided that the state highway fund as such should be abolished; that all funds arising from the operation of toll bridges be credited by the state treasurer to a fund to be known as the bond refunding fund, and all appropriations for the maintenance and operation of tollbridges should be paid from that fund; all funds arising from other sources to be credited to a fund to be known as the unapportioned fund. The act created in the state treasurer a fund to be known as the highway maintenance fund, and all appropriations for the expenses of the highway department and for the maintenance of the state highway system were made payable from this fund. The state treasurer was required to transfer each month from the revenues in the unapportioned fund to the highway maintenance fund the sum of $166,666.66, and the remainder of the revenue from the state highways to a fund to be known as the bond refunding fund.

By Act No. 167 (page 496), approved March 28, 1933, it is provided, among other things, that beginning January 1, 1934, the state treasurer shall set aside out of the bond refunding fund the sum of $125,000 every three months as a sinking fund to be used exclusively for the purchase of state bonds. It authorizes the issuance of state bonds in a total sum equal to the aggregate of the entire outstanding indebtedness of the state on account of the construction and maintenance of the state highway system, and for the exchange of state bonds for obligations issued on account of the state highway system.

By Act No. 183 (page 573), approved March 28, 1933, there is appropriated the sum of $4,380,000 from the bond refunding fund for the purpose of paying interest on state bonds for the fiscal year ending June 30,1934, and a like sum for the same purpose for the fiscal year ending June 30, 1935, and appropriating from that fund, for the purpose of purchasing state bonds during the biennial period ending June 30,1935, the sum of $250,000 for the year ending June 30, 1934, and the sum. of $500,000 for the year ending June 30, 1835.

By Act No. 270 (page 837), approved March 30, 1933, it is provided that the auditor of the state, and the state treasurer, shall transfer from the bond refunding fund for each fiscal year ending June 30, 1935, the sum of $250,000, and place this amount to the credit of the charities fund.

By Act No. 12 (1st Ex. Sess.), approved August 24, 1933, it is provided, among other things, that the refunding board, created by Act No. 167 for the year 1933, be directed and empowered to defend all suits 'brought against the state, or any of its officers, making an attack upon Act No. 167, or seeking to prevent the refunding of obligations therein mentioned, or to prevent the maintenance of state highways; and this board is authorized to compromise, discharge, and adjust any obligations to be refunded under Act No. 167, except such claims a§ might be compromised and settled by the highway audit commission. This act appropriates the sum of $60,000, or so much thereof as may be necessary to enable the board to carry out the provisions of the act.

Various other acts of the same general character were passed by the 1933 General Assembly, the purpose and effect of which was to divert the funds that had theretofore been pledged and appropriated to the payment of interest and principal of the state highway bonds, to some other purpose.

The second count of the bill of complaint involves tollbridge bonds issued by the state, and the issues there presented are in principle identical with those raised in the first count.

The defendant as state treasurer, pursuant to the provisions of the various acts passed by the 1933 General Assembly, has paid out and disbursed of the funds in his possession and in the state highway fund, or the highway maintenance fund, or the bond refunding fund, the sum of at least $52,000 for and on account of warrants of less than $100 par value each, and has set aside from the moneys in his hands in these funds, or some of them, during each month from January to June, 1933, both inclusive, the sum of $166,666.06 for road maintenance, and he intends to continue to set aside and disburse these funds pursuant to the various acts of the 1933 General Assembly. He also intends to disburse, pursuant to the various 1933 legislative acts, all of the funds theretofore pledged, and it is the contention of the plaintiffs that the diversion of these revenues is an impairment of the contracts entered into between the state of Arkansas and the holders of the highway and tollbridge obligations issued pursuant to the prior legislation, in violation of section 10 of article 1 of the Constitution of the United States; that the holders of these obligations beeame vested with the right to have these various fees' and taxes levied and collected as set forth in the legislative acts authorizing the issuance of the bonds and in the bonds themselves.

In their prayer for relief, plaintiffs ask that the defendant, individually and as state treasurer of the state of Arkansas, together with his agents, servants, and employees, be enjoined from disbursing or paying out any of the revenues derived from the imposition of the taxes and license fees described in the bill of complaint, pursuant to the unconstitutional acts of the 1933 General Assembly, and that it be adjudged that the holders of these bonds are vested with the first, prior, and paramount rights to such revenues, and that the various acts of the 1933 General Assembly, seeking to divert said revenues from the purpose for which they were originally levied and authorized, be held to be null and void.

The ease has been ably presented by counsel on either side, both by oral argument and printed briefs.

At the very threshold of this controversy, the jurisdiction of the court is challenged, on the ground that the suit, though in form against Roy V. Leonard, individually and as treasurer of state, is in effect a suit against the state. This objection is to be considered with reference to the Eleventh Amendment and with reference to section 10 of article 1 of the Constitution.

The Eleventh Amendment to the Constitution provides that the judicial power of the United States shall not be construed to extend to any suit in law or in equity commenced or prosecuted against one of the United states by citizens of another state. Section 10 of article 1 in effect provides that “No State shall * * * pass any Bill of Attainder, ex post facto law, or law impairing the obligation of contracts.”

The Legislature authorized the issuance of these bonds and made provision for their payment. The validity of this legislation was passed upon by the Supreme Court of Arkansas before the bonds were actually negotiated. Bush v. Martineau, 174 Ark. 214, 295 S. W. 9, 11; Jobe v. Urquhart, 102 Ark. 470, 143 S. W. 121, Ann. Cas. 1914A, 351; Tapley v. Futrell (Ark.) 62 S.W.(2d) 32.

In Bush v. Martineau, supra, the court held that the Legislature had plenary power to contract for and create interest-bearing indebtedness on the part of the state. In the course of the opinion it is further said:

“If the Legislature has ‘plenary power to contract for and create interest-bearing indebtedness/ when ‘the authority to bind the state to the payment of interest on her indebtedness’ is'plainly expressed in the act, as held in Jobe v. Urquhart, supra, then it would appear to be certain that it could validly exercise such power for the building of roads when the act expressly declares it to be the policy or ‘purpose’ of the state so to do.”

Again the court said:

“It is difficult to perceive why the state’s, full faith and credit should not be pledged, if it is to borrow any money. The fact that it pledges the funds arising from the tax on gas, oil, and motor vehicles does not relieve the state otherwise.”

Accepting the construction of the Arkansas Supreme Court as to the validity of this legislation, we may properly assume that the bonds issued pursuant to these acts constitute valid obligations of the state. These acts of! the Legislature authorizing the issuance of the bonds and contracting for their payment, became a part of the state’s contract, and in effect these provisions are embodied in the bonds themselves, leaving no doubt of the intention of the parties that the legislation should be read into the contract. United States ex rel. Von Hoffman v. Quiney, 4 Wall. 535, 18 L. Ed. 403; Board of Liquidation v. McComb, 92 U. S. (2 Otto) 531, 23 L. Ed. 623; Louisiana v. Pilsbury, 105 U. S. 278, 26 L. Ed. 1090; Wolff v. New Orleans, 103 U. S. 358, 26 L. Ed. 395; Moore v. Otis (C. C. A. 8) 275 F. 747, 751; Moore v. Gas Securities Co. (C. C. A. 8) 278 F. 111.

The Circuit Court of Appeals for this circuit, in Moore v. Otis, supra, had before it this identical question, and in the course of the opinion it is there said:

“The laws existing at the time of the issuance of the bonds and under the authority of which they were issued, enter into and become a part of the contract in such way that the obligation of the contract cannot thereafter be in any way impaired or its fulfillment hampered or obstructed by a change in the law.”

There can be no doubt that the effect of the various acts of the 1933 General Assembly was to impair the obligation of these contracts. With commendable frankness this was admitted on oral argument. In the brief of defendant which has been submitted since the oral argument, it is urged that the question whether the acts of the Legislature impair the obligation of the contract or furnish protective color for the threatened act of the defendant cannot be considered or adjudicated until it is first determined whether or not the suit in effect is a suit against the state, because it is said that, if the suit is in reality a suit against the state, this cqurt is without jurisdiction to determine any other question or issue, and has no alternative but to dismiss the suit.

The state is not named as a party to this suit, but, if the state is the real party in interest, and the officer is merely a nominal party, then the suit is in substance one against the state, and cannot be maintained. Carolina Glass Co. v. South Carolina, 240 U. S. 305, 36 S. Ct. 293, 60 L. Ed. 658; Farish v. State Banking Board, 235 U. S. 498, 35 S. Ct. 185, 59 L. Ed. 330; Lankford v. Platte Iron Works Co., 235 U. S. 461, 35 S. Ct. 173, 59 L. Ed. 316; Hopkins v. Clemson Agri. College, 221 U. S. 636, 31 S. Ct. 654, 55 L. Ed. 890, 35 L. R. A. (N. S.) 243; Cunningham v. Macon & B. R. Co., 109 U. S. 446, 3 S. Ct. 292, 609, 27 L. Ed. 992; Christian v. Atlantic & N. C. R. Co., 133 U. S. 233, 10 S. Ct. 260, 33 L. Ed. 589; Cargile et al. v. New York Trust Co. (C. C. A. 8) 67 F.(2d) 585.

We cannot, however, agree with counsel for defendant that in considering the question as to whether this is a suit against the state, we should not give attention to the question as to whether’ the legislative acts, under color of which the defendant claims the right to act, are void as violative of, the contract clause of the Constitution. If these acts are unconstitutional, and for that reason void, they furnish no protection for the acts of the officer, and hence a suit to enjoin such acts 'could not be said to be a suit against the state. Greene v. Louisville & I. R. Co., 244 U. S. 499, 37 S. Ct. 673, 676, 61 L. Ed. 1280, Ann. Cas. 1917E, 88; Ex parte Young, 209 U. S. 123, 28 S. Ct. 441, 450, 52 L. Ed. 714, 13 L. R. A. (N. S.) 932, 14 Ann. Cas. 764; Poindexter v. Greenhow, 114 U. S. 270, 5 S. Ct. 903, 962, 29 L. Ed. 185, 207; Pennoyer v. McConnaughy, 140 U. S. 1, 11 S. Ct. 699, 701, 35 L. Ed. 363; Rolston v. Crittenden, 120 U. S. 390, 7 S. Ct. 599, 30 L. Ed. 721; Tindal v. Wesley, 167 U. S. 204, 17 S. Ct. 770, 42 L. Ed. 137; Hopkins v. Clemson Agri. College, 221 U. S. 636, 31 S. Ct. 654, 656, 55 L. Ed. 890, 35 L. R. A. (N. S.) 243; Looney v. Crane Co., 245 U. S. 178, 38 S. Ct. 85, 62 L. Ed. 230; Houston v. Ormes, 252 U. S. 469, 40 S. Ct. 369, 370, 64 L. Ed. 667; Old Colony Trust Co. v. City of Seattle, 271 U. S. 426, 46 S. Ct. 552, 70 L. Ed. 1019; Terrace v. Thompson, 263 U. S. 197, 44 S. Ct. 15, 68 L. Ed. 255; Public Service Co. v. Corboy, 250 U. S. 153, 39 S. Ct. 440, 63 L. Ed. 905; Cavanaugh v. Looney, 248 U. S. 453, 39 S. Ct. 142, 63 L. Ed. 354; Reagan v. Farmers’ Loan & Trust Co., 154 U. S. 362, 14 S. Ct. 1047, 38 L. Ed. 1014; Sterling v. Constantin, 287 U. S. 378, 53 S. Ct. 190, 193, 77 L. Ed. 375; Cargile et al. v. New York Trust Co. (C. C. A. 8) 67 E. (2d) 585. 588.

In Greene v. Louisville & I. R. Co., supra, the Supreme Court was met with, the contention that the plaintiff could not maintain the suit to restrain certain state officers from performing certain acts under legislative acts which were claimed to be unconstitutional. In the course of the opinion the court said:

“A fundamental contention of appellants is that the present actions, brought to restrain them in respect of the performance of duties they are exercising under the authority of the state of Kentucky, are in effect suits against the state. Questions of this sort have arisen many times in this court, but the matter was set at rest in Ex parte Young, 209 U. S. 128, 150, 155, 52 L. Ed. 714, 725, 727, 13 L. R. A. (N. S.) 932, 28 S. Ct. 441, 14 Ann. Cas. 764, where it was held that a suit to restrain a state officer from executing an unconstitutional statute, in violation of plaintiff’s rights and to his irreparable damage, is not a suit against the state, and that ‘individuals who, as officers of the state, are clothed with some duty in regard to the enforcement of the laws of the state, and who threaten and are about to commence proceedings, either of a civil or criminal nature, to enforce against parties affected an unconstitutional act, violating the Federal Constitution, may be enjoined by a Federal court of equity from such action.’ ”

We think this pronouncement may well be accepted by this court as an authoritative statement of the law based upon all the previous decisions of the Supreme Court.

Great reliance is placed upon the decision in In re Ayers, 123 U. S. 443, 8 S. Ct. 164, 31 L. Ed. 216. That case was urged on behalf of petitioner in Ex parte Young supra, and in reviewing the Ayers Case, the court in Ex parte Young, said:

“The eases upon the subject were reviewed, and it was held (Re Ayers, 123 U. S. 443, 31 L. Ed. 216, 8 S. Ct. 164), that a bill in equity brought against officers of a state, who, as individuals, have no personal interest in the subject-matter of the suit, and defend only as representing the state, where the relief prayed for, if done,'would constitute a performance by the state of the alleged contract of the state, was a suit against the state (page 504 [of 123 U. S., 8 S. Ct. 164]), following in this respect Hagood v. Southern [117 U. S. 52, 6 S. Ct. 608, 29 L. Ed. 805], supra.
“A suit of such a nature was simply an attempt to make the state itself, through its officers, perform its alleged contract, by directing those officers to do acts which constituted such performance. The state alone had any interest in the question, and a decree in favor of plaintiff would affect' the treasury of the state.”

Again the court said, in referring to the Ayers Case:

“But the injunction asked for in the Ayers Case, 123 U. S. [443, 8 S. Ct. 164, 31 L. Ed. 216], supra, was to restrain the state officers from commencing suits under the act of May 12, 1887 (alleged to be unconstitutional), in the name of the state and brought to recover taxes for its use, on the ground that, if such suits were commenced, they would be a breach of a contract with the state. The injunction was declared illegal because the suit itself could not be entertained, as it was one against the state, to enforce its alleged contract. It was said, however, that, if the court had power to entertain such a suit, it would have power to grant the restraining order preventing the commencement of suits. (Page 487 [of 123 U. S., 8 S. Ct. 164]). It was not stated that the suit or the injunction was necessarily confined to a ease of a threatened direct trespass upon or injury to property.”

In the instant case, no affirmative relief is sought against the defendant, but it is sought to enjoin him from carrying out unconstitutional statutes invading the constitutional rights of the plaintiffs.

In Pennoyer v. MeConnaughy, supra, suit was brought to restrain an officer from acting under a statute which was violative of section 10, article 1, of the Constitution. In considering the question whether the suit was in effect one against the state, the court, in an opinion by Mr. Justice Lamar, among other things, said :

“A very large number of eases involving a variety of questions arising under this amendment have been before this court for adjudication; and, as might naturally be expected, in view of the important interests and the wide-reaching political relations involved, the dissenting opinions have been numerous. Still, the general principles enunciated by these adjudications will, upon a review of the whole, be found to be such as the majority of the court and the dissentients are substantially agreed upon.
“It is well settled that no action can be maintained in any federal court by the citizens of one of the states against a state, without its consent, even though the sole object of such suit be to bring the state within the operation of the constitutional provision. which provides that ‘no state shall pass any law impairing the obligation of contracts.’ This immunity of a state from suit is absolute and unqualified, and the constitutional provision securing it is not to be so construed as to place the state within the reach of the process of the court. Accordingly, it is equally well settled that a suit against the officers of a state, to compel them to do the acts which constitute .a performance by it of its contracts, is, in effect, a suit against the state itself.
“In the application of this latter principle, two classes of cases have appeared in the decisions of this court, and it is in determining to which class a particular ease belongs that differing views have been presented.
“The first class is where the suit is brought against the officers of the state, as representing the state’s action and liability, thus making it, though not a party to the record, the real party, against which the judgment will so operate as to compel it to specifically perform its contracts. * * *
“The other class is where a suit is brought against defendants who, claiming to act as officers of the state, and under the color of an unconstitutional statute, commit acts of wrong and injury to the rights and property of the plaintiff acquired under a contract with the state. Such suit, whether brought to recover money or property in the hands of such defendants, unlawfully taken by them in behalf of the state, or for compensation in damages, or, in a proper ease where the remedy at law is inadequate, for an injunction to prevent such wrong and injury, or for a mandamus, in a like case, to enforce upon the defendant the performance of a plain, legal duty, purely ministerial, is not, within the meaning of the eleventh amendment, an action against the state.”

As has been observed, in the instant case no affirmative relief is asked against the defendant. It is not sought to compel him to perform the state’s contract, but we are asked to enjoin him from acts authorized by the unconstitutional statutes which would be violative of plaintiffs’ rights guaranteed by the Constitution.

By valid legislative enactments, which became part of the contracts involved, certain revenues were set aside and appropriated to the payment of the interest and principal of these obligations. The defendant now, acting under color of unconstitutional statutes, is threatening to divert these funds to the irreparable injury of the plaintiffs. His threatened affirmative action is what is sought to be enjoined. As said by the Supreme Court in Hopkins v. Clemson Agricultural College, supra:

“The many claims of immunity from suit have therefore been uniformly denied, where the action was brought for injuries done or threatened by public officers. If they were indeed agents, acting for the state, they — • though not exempt from suit — could successfully defend by exhibiting the valid power of attorney or lawful authority under which they acted. Cunningham v. Macon & B. R. Co., 109 U. S. 446, 452, 27 L. Ed. 902, 994, 3 S. Ct. 292, 609. But if it appeared that they proceeded under an unconstitutional statute, their justification failed, and their claim of immunity disappeared on the production of the void statute.”

In Houston v. Ormes, supra, there was involved a suit to establish an equitable lien for attorney’s fees upon a fund in the treasury of the United States appropriated by Congress to pay a claim found by the Court of Claims to be due to one Sanders. It was contended that the suit was in effect one against the United States. In the course of the opinion it is said:

“But since the fund in question has been appropriated by act of Congress for payment to a specified person in satisfaction of a finding of the Court of Claims, it is clear that the officials of the Treasury are charged with the ministerial duty to make payment on demand to the person designated. It is settled that in such a case a suit brought by the person entitled to the performance of the duty against the official charged with its performance is not a suit against the government.”

In Sterling v. Constantin, supra, the United States District Court entered an interlocutory injunction restraining the Governor and certain military officials of Texas from enforcing military orders restricting the production of plaintiff’s oil wells, and it was contended that the suit was one against the state. In denying this contention, the court succinctly said:

“The suit is not against the state. The applicable principle is that, where state officials, purporting to act under state authority, invade rights secured by the Federal Constitution, they are subject to the process of the federal courts in order that the persons injured may have appropriate relief.”

The Circuit Court of Appeals of this circuit, in Cargile v. New York Trust Company, supra, in discussing the contention that the suit in that case was one against the state, said:

“The mere fact, therefore, that the defendants are officers or agents of the state, does not in itself place them beyond the reach of equitable power. Immunity from suit is an attribute of sovereignty which cannot be invoked by public officers when sued for their own wrongful acts, even though such acts might be committed under color of an unconstitutional statute. Individual officers of a state do not constitute a privileged class, but are amenable to the law, and they cannot interpose the shield of the Eleventh Amendment.”

To attempt a.review of the various decisions of the Supreme Court on this subject would unduly extend this opinion and serve no useful purpose.

Immunity from suit is an attribute of sovereignty. It was the theory of the English law that the king could do no wrong, but it developed that his ministers could. When the acts of officers, sought to he controlled by injunction or mandamus, represent the sovereign will, the suit cannot be maintained because the state is then the real party. The converse of this rule is likewise true, that, when the acts of the officers are in violation of the sovereign will of the state, then their acts may be controlled by injunction or mandamus. A distinction is to be drawn between the government or administrative agencies of the state and the state itself. The state in contemplation of the Eleventh Amendment, is an abstraction, an ideal entity, “intangible, invisible, immutable.” The government, on the other hand, is the agency through which the state acts. When the government functions within the limitations of its powers as fixed by the Constitutions of the state and the United States, it represents the state, but when that government violates these inhibitions and transcends its limitations, it is a lawless usurper. The government of the state, and the state’s administrative agencies, as distinguished from the sovereign state which can do no wrong, are subject to the sovereign will — -the mandates and inhibitions of the State and Federal Constitutions — as are the private citizens. Hence, when the Legislature of a state passes an act within the limits imposed by the State and Federal Constitutions, that act is the sovereign will, but, if an act transcends such limits, it is a mere nullity, and the legislative agency thereby commits 'a wrongful act. The principle is well stated by the Supreme Court in Poindexter v. Greenhow, 114 U. S. 270, 5 S. Ct. 903, 914, 962, 29 L. Ed. 185, where the court, among other things, said:

“In the discussion of such questions, the distinction between the government of a state and the state itself is important, and should be observed. In common speech and common apprehension they are usually regarded as identical; and as ordinarily the acts of the government are the acts of the state, because within the limits of its delegation of power, the government of the state is generally confounded with the state itself, and often the former is meant when the latter is mentioned. The state itself is an ideal person, intangible, invisible, immutable. The government is an agent, and, within the sphere of the agency, a perfect representative; but outside of that, it is' a lawless usurpation. The constitution .of the state is the limit of the authority of its government, and both government and state are subject to the supremacy of the Constitution of the United States, and of the laws made in pursuance thereof. So that, while it is true in respect to the government of a state, as was said in Langford v. United States, 101 U. S. 341 [25 L. Ed. 1010], that the. maxim, that the king can do no wrong, has no place in our system of government; yet it is also tree, in respect to the state itself, that whatever wrong is attempted in its name is imputable to its government, and not to the state, for, as it can speak and act only by law, whatever it does say and do must be lawful. That which, therefore, is unlawful because made so by the supreme law, the constitution of the United States, is not the word or deed of the state, but is the mere wrong and trespass of those individual persons who falsely speak and act in its name.”

In the instant case, the legislative acts of 1933, which purport to divert and appropriate these funds to other purposes, are unconstitutional and hence there has, been no lawful appropriation of the revenue in the hands of the treasurer to these other purposes. On the other hand, by prior acts confessedly constitutional, these funds have been pledged, set aside, and appropriated.

We conclude that the suit is not one against the state,_ and that the plaintiffs are entitled to the injunetional relief prayed for as against the defendant.

We have permitted the county judges of the various counties to intervene in this suit, and they assert that the defendant has in his possession funds belonging to the county highway fund which were appropriated by Act No. 48 of the 1933 General Assembly (page 130), and which are the property of the various counties. It is their contention that these funds should not be subject to injunction.

Under the provisions of Act No. 606 of the 1921 Session of the General Assembly (page 685), there was imposed a tax of one cent per gallon on gasoline sold in the state, this tax to be collected by the county collectors and divided by the county courts, one-half to the county general road fund, and one-half to the Treasurer of the State of Arkansas for the benefit of the state highway improvement fund. Prior to 1921 the principal source of revenue available for the construction and maintenance of county roads was a 3-mill road tax. By Act No. 501 of the 1923 General Assembly (page 408), there was imposed a tax of 3 cents per gallon on gasoline, 75 per cent, of whieh was dedicated to the county highway improvement fund, and 25 per cent, of whieh was dedicated to the state highway improvement fund. By Act No. 5 of the 1923 General Assembly (Extra Session, p. 11) there was established a comprehensive system of state highways, and a tax of 4 cents per gallon on gasoline was levied for the purpose of constructing and maintaining the highways of the state system and to assist the counties in maintaining and improving county roads.

Under the provisions of Act No. 81 of the 1927 General Assembly (page 221), 50 per cent, of the 3-mill road tax whieh had theretofore been used by the counties for the maintenance and construction of county roads was appropriated for the purpose of improving streets in municipalities. Under the provisions of Act No. 11 of the 1927 General Assembly (page 17), a tax of 5 cents a gallon was imposed for the purpose of benefiting the state highway system. At least, this is the conclusion of the pleader in intervention. In 1931 a 6 cents tax was imposed on gasoline, five-sixths of which was to be deposited in the state treasury to the credit of the state highway fund, and one-sixth to the credit of a fund known as the county highway fund. The proceeds of the fund were to be distributed to the counties quarterly. The statute provided, however, that, if the total revenue produced from the 6 cents tax should be less than $7,500,000 a year, the deficit should be taken from the county highway fund for any such year before an allotment to the counties was made (Act No. 63, 1931 General Assembly [page 171]).

Act No. 48 of the 1933 General Assembly repealed and struck out from Act No. 63 of the 1931 General Assembly section 6 thereof, which contained provision that, in the event the revenue should be less than $7,500,000 in any one year, the allotment to the counties should not be made until after the deficit should have been provided for. This legislation has already been referred to and need not again be set out nor summarized.

The question to be determined is whether the one-cent revenue from the gasoline tax, allocated to the county highway fund by the 1931 General Assembly, could constitutionally be so allocated by the 1933 legislation, regardless of whether the revenue from gasoline tax was less than $7,500,000 per annum, contrary to the provisions of the 1931 act to the effect that none of it should be paid into the county highway fund until and unless the revenue produced should equal that sum. Prior legislation pledged this revenue to the payment of interest and principal of the highway and tollbridge bonds. As has already been observed, by contract set out in legislative enactment and embodied in these bonds, the revenue of the state derived from automobile licenses and fees, and from a tax on gasoline, and on any substitute thereof used in propelling automobiles on its highways, was set aside out of the first revenues collected in an amount sufficient to pay the accruing interest and the maturing bonds during the periods designated. It was expressly covenanted in the statutes that as long as any of these contract obligations were outstanding, the state would not permit sections 35 and 36 of Act No. 5 (Ex. Sess.), approved October 10, 1923, to be repealed nor amended so as to reduce the revenue therein provided for, and that, if the revenue arising from these sources should fall below $7,500,000 per annum, it would amend sections 35 and 36 so as to provide for an annual minimum levy of $7,500,000, and in 1929 such an amendment was adopted.

The interveners contend that the legislation relative to the funds derived for improvement of county highways in no manner violates the contracts of the state; but the manifest purpose and effect of Act No. 48 of the 1933 General Assembly was to displace the guaranteed priority of payment of the bonds of the state and interest from funds raised by taxation of motor vehicles and gasoline and to substitute therefor a priority in favor of the county highway fund. It is clear that this act, in providing that certain funds should go to the county highway fund from the revenue raised by taxation of motor vehicles and gasoline, impairs the obligation of the contracts made by the state, to the effect that the treasurer should set aside out of the first revenue collected from these sources during each semiannual period, funds sufficient to pay all obligations of the series of bonds and interest thereon maturing and accruing during such period.

The prayer of the interveners must therefore, be denied.

Counsel for plaintiffs may prepare findings and conclusions and form of decree in accordance with this opinion.


author: PATTERSON, District Judge.

text:
    RICHARD v. NATIONAL CITY BANK OF NEW YORK.
    District Court, S. D. New York.
    Feb. 20, 1934.
    Engelhard, Pollak, Pitcher & Stem, of New York City (Walter PI. Pollak, Frederic C. Pitcher, and Ruth I. Wilson, all of New York City, of counsel), for plaintiff.
    Shearman & Sterling, of New York City (Joseph M. Proskauer, Philip A. Carroll, Otey McClellan, and M. V. Voorhies, all of New York City, of counsel), for defendant.
   PATTERSON, District Judge.

The question is whether the provision of the Glass-Steagall Banking Act permitting the removal of certain actions against national banks from state courts to the District Court (Act June 16, 1933, e. 88, § 15; [12 USCA § 632]) applies to suits pending in a state court at the time when the act took effect.

The relevant portion of the statute reads :

Section 25 (b). “Notwithstanding any other provision of law all suits of a civil nature at common law or in equity to which any corporation organized under the laws of the United States shall be a party, arising out of transactions involving international or foreign banking, or banking in a dependency or insular possession of the United States, or out of other international or foreign financial operations, either directly or through the agency, ownership’, or control of branches or local institutions in dependencies or insular possessions of the United States or in foreign countries, shall be deemed'to arise under the laws of the United States, and the district eourts of the United States shall have original jurisdiction of all such suits; and any defendant in any such suit may, at any time before the trial thereof, remove such suits from a State court into'the district court of the United States for the proper district by following the procedure for the removal of causes otherwise provided by law. Such removal shall not cause undue delay in the trial of such ease and a ease so removed shall have a place on the calendar of the United States court to which it is removed relative to that which it held on the State court from which it was removed.”

This action was brought in the New York Supreme Court on December 8, 1932, to recover deposits alleged to have been received by the defendant at its Petrograd branch. After the passage of the Glass-Steagall Act, the defendant, a national bank, removed the case to this court. The plaintiff has made a motion to remand the case to the state court. Concededly there was no ground for removal except that the ease was one against a corporation organized under the laws of the United States and arose out of transactions involving international or foreign banking.

The question is purely one of construction of the statute. The power of Congress to grant jurisdiction to the federal courts in eases brought against corporations organized under the laws of the United States was settled in Osborn v. Bank of United States, 9 Wheat. 738, 6 L. Ed. 204. Indeed, the present act merely restores to the national courts part of the jurisdiction over eases against national banks which they had had for many years prior to 1882 (see 12 Stat. 081; Act of March 3, 1875, c. 137, 18 Stat. 470; Act of July 12, 1882, c. 290, 22 Stat. 162). Nor can it be doubted that Congress may, if it sees fit, provide that the privilege of removal shall extend to eases pending in the state courts at the time when the statute permitting removal was enacted. The point here is simply whether Congress intended to grant the right of removal in such cases.

The plaintiff refers to the general principle that statutes are prospective rather than retrospective; that they are addressed to the future and not to the past. Winfree v. Northern Pacific R. Co., 227 U. S. 296, 33 S. Ct. 273, 57 L. Ed. 518; Shwab v. Doyle, 258 U. S. 529, 42 S. Ct. 391, 66 L. Ed. 747, 26 A. L. R. 1454; Hall v. Chicago, R. I. & P. R. Co. (C. C.) 149 F. 564; Jacobus v. Colgate, 217 N. Y. 235, 111 N. E. 837, Ann. Cas. 1917E, 369. That argument would be persuasive if the defendant had removed, or attempted to remove, the ease prior to the passage of the statute. See Fraenkl v. Cerecedo Hermanos, 216 U. S. 295, 30 S. Ct. 322, 54 L. Ed. 486; Newell v. Baltimore & Ohio R. Co. (C. C.) 181 F. 698. But the argument has no application here. The removal came after the passage of the statute permitting removal. The act is plainly one relating to remedies and not to substantive rights. The rule that statutes changing remedies or procedure generally affect future steps in pending suits, in the absence of words of exclusion, is not in conflict with the rule against retroactivity, for in such cases the statute is applied only in a prospective way. Baltimore & P. Railroad Co. v. Grant, 98 U. S. 398, 25 L. Ed. 231; Petition of Callanan (D. C.) 51 F.(2d) 1067; Lazarus v. Metropolitan El. R. Co., 145 N. Y. 581, 40 N. E. 240; Lamport v. Smedley, 213 N. Y. 82, 106 N. E. 922. If this were all, my conclusion would be that the case was properly removed.

But tlie‘act in question provides, first, that suits of a certain nature to which any corporation created by the laws of the United States “shall be a party” shall be deemed to arise under the laws of the United States; second, that the district courts shall have original jurisdiction of such suits; and, third, that the defendant “in any such suit” may remove it from the state court. The suits covered by the act are only those to which such a corporation “shall be a party.” These are words of futurity, and it is doubtful, to say the least, whether suits already brought when Congress passed the statute were intended to be included. Ex parte Morel (D. C.) 292 F. 423, 428.

Any doubt arising from the words used in the act becomes a certainty when the act is viewed along with earlier legislation relative to removal. The Separable Controversy Act of 1866 began with the words: “That if in any suit already commenced, or that may hereafter be commenced, in any State court.” Act of July 27, 1866, e. 288, 14 Stat. 306. The Prejudice or Local Influence Act of 1807 provided for removal “where a suit is now pending, or may hereafter be brought in any State court.” Act of March 2, 1887, c. 196, 14 Stat. 558. The Judiciary Act of 1.875 was made applicable to suits “now pending or hereafter brought in any State court.” Act March 3, 1875, e. 137, 18 Stat. 470. In the Judiciary Act of 1888, the suits declared to be removable were those “now pending, or which may hereafter be brought;” that phrase being used in four places in section 2 of the act. Act of August 13, 1888, c. 866, 25 Stat. 433. In the Judicial Code of 1911, the broad provision on removal covers suits “which may now be pending or which may hereafter be brought, in any State court.” Act March 3, 1911, c. 231, § 28 (28 USCA § 71 and note). There are other removal acts which likewise are expressly made applicable to suits already commenced in the state courts. Act March 30, 1872, c. 72, 17 Stat. 44; Revised Statutes 1878, § 644; Judicial Code of 1911, § 34 (28 USCA § 77).

On the other hand, there is a line of removal acts in which nothing is said as to pending eases. There was no such reference in the Judiciary Act of 1789 (Act of September 24, 1789, c. 20, § 12, [28 USCA § 71 note]), nor in the present sections 30, 31, and 33 of the Judicial Code (28 USCA §§ 73, 74, 76).

From a review of these statutes, it is fair to say that, whenever it has been the legislative intent that a removal statute should apply to suits already pending in the state courts, the practice has been to declare such intent in express words. The omission of corresponding words in the statute under discussion has a significance that cannot be overlooked. Reiche v. Smythe, 13 Wall. 162; 20 L. Ed. 566; Pirie v. Chicago Title & Trust Co., 182 U. S. 438, 21 S. Ct. 906, 45 L. Ed. 1171; Shwab v. Doyle, supra; Moser v. Newman, 6 Bing. 556. The conclusion must be that Congress did not intend that the right of removal given in the Glass-Steagall Act should extend to cases pending in the state courts when the act was passed.

The defendant urges that the clause as to the time of removal, “at any time before the trial thereof,” is a strong indication that pending cases were meant to be included. I see no force in the contention. It is by no means novel to permit removal at any time down to trial. The Judiciary Act of 1875 was as liberal in this respect, and in several situations under the existing laws removal at any time before trial is sanctioned. See 28 USCA §§ 73, 74, 70 and 77. The inference that Congress must have intended to include pending eases rests on nothing but conjecture.

In view of the words of futurity used in the act, and in view of the omission in this act of the clause comprehensive of pending cases which has been commonly used in removal statutes, I am convinced that the act was not intended to cover eases pending when it was passed. But, if the point were regarded as open to doubt, I would be obliged in deference to authority to remand the case to the state court. Since Plant v. Harrison (C. C.) 101 F. 307, the rule in this circuit has been that, when the right to remove is doubtful, the doubt is resolved in favor of a remand. Wrightsville Hardware Co. v. Hardware & Woodenware Mfg. Co. (C. C.) 180 F. 586; Vanderbilt v. Kerr (C. C.) 188 F. 537; Orr v. Baltimore & Ohio R. Co. (D. C.) 242 F. 608.

It is hardly necessary to add that the fact of the cause of action having arisen or accrued prior to the passage of the statute permitting removal is not the ground of remand in this ease. That the statute would apply to such a cause of action on which suit had not been commenced when the statute took effect would seem obvious. Cook v. United States, 138 U. S. 157, 11 S. Ct. 268, 34 L. Ed. 906; Teel v. Chesapeake & Ohio R. Co., 204 F. 918, 47 L. R. A. (N. S.) 21 (C. C. A. 6); Holmes v. Camp, 219 N. Y. 359; 114 N. E. 841.

For the above reasons, the motion to remand the action to the New York Supreme Court will be granted.


text:
    MUNZ v. HARNETT, Commissioner of Motor Vehicle Bureau.
    District Court, S. D. New York,
    Dec. 20, 1933.

      Samuel Dinerman, of New York City, for plaintiff.
    The Attorney General, for defendant.
    Before MANTON, Circuit Judge, and COXE, and PATTERSON, District Judges, constituting a statutory court, convened pursuant to section 266 of the Judicial Code, as amended (28 USCA § 380).
   PATTERSON, District Judge.

Suit is brought to restrain the commissioner of motor vehicles of the state of New York from suspending the plaintiff’s license as a chauffeur and his registration certificate as owner of an automobile. An application for a preliminary injunction came on before a court composed of three judges, pursuant to section 266 of the Judicial Code (28 USCA § 380).

A New York statute provides that where judgment on account of death or injuries to person or property resulting from the ownership, use, or operation of a motor vehicle shall be entered against a person, his chauffeur’s license and his registration certificates shall be suspended until the judgment is “satisfied or discharged, except by a discharge in bankruptcy,” at least up to minimum amounts specified in the statute, and also until he gives proof of ability to respond in damages for future accidents in the manner specified in the statute. New York Vehicle and Traffic Law (Consol. Laws, c. 71), § 94-b.

It is shown that the plaintiff is a licensed chauffeur;'that one Burke recovered judgment for $1,750 against him in an action for personal injuries arising out of his negligent-operation of an automobile; that thereafter he was adjudicated a bankrupt, filed schedules in which the judgment in favor of Burke was listed as a liability, and was granted a discharge ; and that he tendered to the commissioner of motor vehicles an insurance policy as evidence of his financial ability to pay damages for future accidents, but the tender was rejected on the ground that the plaintiff must first show payment of the judgment. It is further alleged that the commissioner will suspend the plaintiff’s license under color of the statute referred to unless restrained in this suit, a charge which the commissioner admits. No payment on account of the judgment has been made.

It is claimed that the statute in its entirety is unconstitutional by reason of the Fourteenth Amendment, as depriving the plaintiff of his chance to earn a living as a chauffeur and of his right to own an automobile. We are of opinion that there is no merit in the point.

The ever-increasing use of the highways by those operating motor vehicles is attended by serious dangers of bodily harm and death. In an effort to minimize this menace to public safety, a state as an exercise of the police power may prescribe uniform regulations covering the ownership and operation of these vehicles. Hendrick v. Maryland, 235 U. S. 610, 35 S. Ct. 140, 59 L. Ed. 385; Kane v. New Jersey, 242 U. S. 160, 37 S. Ct. 30, 61 L. Ed. 222; Bradley v. Public Utilities Commission, 289 U. S. 92, 53 S. Ct. 577, 77 L. Ed. 1053, 85 A. L. R. 1131. One of the common requirements is that of registration of motor vehicles, and there cannot be the slightest doubt of the validity of this requirement. Hendrick v. Maryland, supra. So too as to the requirement of a license for chauffeurs and operators. And a state has power to require the furnishing of liability insurance prior to the issuance of a license, as a measure of protecting those who use the highways. Packard v. Banton, 264 U. S. 140, 44 S. Ct. 257, 68 L. Ed. 596; Sprout v. South Bend, 277 U. S. 163, 48 S. Ct. 502, 72 L. Ed. 833, 62 A. L. R. 45; Hodge Co. v. Cincinnati, 284 U. S. 335, 52 S. Ct. 144, 76 L. Ed. 323; Continental Baking Co. v. Woodring, 286 U. S. 352, 365, 52 S. Ct. 595, 76 L. Ed. 1155, 81 A. L. R. 1402; Hicklin v. Coney, 290 U. S. 169, 54 S. Ct. 142, 78 L. Ed. 247, decided by the Supreme Court on December 4, 1933; Opinion of the Justices, 81 N. H. 566, 129 A. 117, 39 A. L. R. 1023.

The statute under attack is of the same general character as the compulsory insurance acts. It suspends the license of a person who has not satisfied a judgment for injuries resulting from his negligent operation of an automobile until the judgment shall have been at least partially satisfied and until proof of ability to pay in the future shall have been, furnished. The New York Legislature may well have considered that such a regulation would have a tendency to reduce casualties on the roads by making owners and operators of automobiles exercise greater care than formerly in order to prevent the entry of such judgments against them. The means adopted by the Legislature have a reasonable, substantial relation to the end in view, public safety on the highway, which is equivalent to saying that the act is a valid exercise of the police power. Morris v. Duby. 274 U. S. 135, 47 S. Ct. 548, 71 L. Ed. 966; Standard Oil Co. v. Marysville, 279 U. S. 582, 586, 49 S. Ct. 430, 73 L. Ed. 856; Sproles v. Binford, 286 U. S. 374, 388-389, 52 S. Ct. 581, 76 L. Ed. 1167.

Statutes similar in all respects to this one, except that they contain no express mention of discharge in bankruptcy, have been sustained in Massachusetts and California. Opinion of the Justices, 251 Mass. 617, 147 N. E. 680; Watson v. Division of Motor Vehicles, 212 Cal. 279, 298 P. 481.

We pass to the other ground of attack, that the statute is in contravention to the Bankruptcy Act (see 11 USCA) because it provides that a discharge in bankruptcy shall not be deemed a satisfaction of the judgment in so far as the suspension of license is concerned. This clause was probably inserted from superabundance of caution, for a discharge in bankruptcy has never been regarded as a satisfaction of a judgment against the bankrupt. It goes only to bar the judgment creditor’s civil remedies to collect the judgment. Dimock v. Revere Copper Co., 117 U. S. 559, 6 S. Ct. 855, 29 L. Ed. 994; In re Weisberg (D. C.) 253 E. 833; Citizens’ Loan Association v. Boston & Maine R. Co., 196 Mass. 528, 82 N. E. 696, 14 L. R. A. (N. S.) 1025, 124 Am. St. Rep. 584, 13 Ann. Cas. 365; Evans v. Staalle, 88 Minn. 253, 92 N. W. 951. It is argued that the effect of the act is to supply the judgment creditor with a remedy to compel the debtor to pay the judgment, despite his discharge in bankruptcy. This argument leaves us unconvinced. The New York Legislature has not undertaken to say that the judgment creditor may compel the debtor to pay in spite of the discharge in bankruptcy. The act no more gives an additional remedy to collect a civil judgment than does a revocation of a license for driving while intoxicated impose an additional punishment for a crime. People v. O’Rourke, 124 Cal. App. 752, 13 P.(2d) 989; People v. Stryker, 124 Misc. 1, 206 N. Y. S. 146. The statute has to do with motor vehicles on the highway. The same reasons that support this legislation against attack on general constitutional grounds support it against this attack ; namely, that it may well tend to cause operators and owners of automobiles to take pains so as not to have a judgment growing out of negligent driving entered against them.

An argument similar to the plaintiff’s has been held untenable in eases where a bankrupt has been fined by a state court for eon-, tempt in proceedings supplementary to execution on a judgment; the fine being ordered paid to the judgment creditor. Even though the judgment is one dischargeable in bankruptcy and the enforcement of the fine may have the effect of compelling payment on account of the judgment, such effect is only a collateral one and the bankruptcy court has no power to interfere. Spalding v. New York, 4 How. 21, 11 L. Ed. 858; In re Koronsky (C. C. A.) 170 F. 719; People of State of New York ex rel. Otterstedt v. Sheriff of Kings County (D. C.) 206 F. 566; In re Metz (C. C. A.) 6 F.(2d) 962, 963. In such cases the pressure to pay is stronger than in a situation like the present.

The plaintiff relies on In re Perkins (D. C.) 3 F. Supp. 697, decided in the Northern District of New York. That ease arose in the course of bankruptcy proceedings. It was held that this statute denied to the bankrupt the full effect of his discharge and was consequently invalid. An order was issued restraining the judgment creditor from filing a copy of the judgment with the commissioner of motor vehicles. We are unable to follow that decision. Reliance is further placed on In re Hicks (D. C.) 133 F. 739, also decided in the Northern District. There a municipal ordinance provided that any city employee who failed to pay his debts should be dismissed. Hicks was a fireman who filed a voluntary petition in bankruptcy and received a discharge. Judge' Ray held that the ordinance as applied to Hicks was invalid. That ease is distinguishable; the failure to pay debts in general having no relation to the qualifications of the bankrupt as a fireman. This statute does not say that no discharged bankrupt shall drive an automobile.

The statute is valid in all respects, and the application for a preliminary injunction is accordingly denied.

      l The text of this act is as follows.:
      “§ 94-b. The operator’s or chauffeur’s license and all of the registration certificates of any person, in the event of his failure within fifteen days thereafter to satisfy every judgment which shall have become final by expiration without appeal, of the time within which appeal might have been perfected or by final affirmance on appeal, rendered against him by a court of competent jurisdiction in this state, or in any other state or the District of Columbia, or of any district court of the United States, or by a court of competent jurisdiction in any province of the Dominion of Canada, for damages on account of personal injury, including death, or damages to property in excess of one hundred dollars, resulting from the ownership, maintenance, use or operation of a motor vehicle by him, his agent, or any other person for whose negligence he shall be liable and responsible, shall be forthwith suspended by the commissioner of motor vehicles, upon receiving a certified: copy of such final, judgment or judgments from the court in which the same are rendered, showing such judgment or judgments to have been still unsatisfied after the expiration of fifteen days after the same became final as aforesaid, and shall remain so suspended and shall not be renewed nor shall any other motor vehicle be thereafter registered in his name while any such judgment or judgments remain unstayed, unsatisfied and subsisting, until said judgment or judgments are satisfied or discharged, except by a discharge in bankruptcy, to the extent of or at least five thousand dollars- for an injury to one person in one accident, and to the extent of ten thousand dollars for an injury to more than one person in one accident, and to the extent of one thousand dollars for an injury to property in any one accident, and until the said person gives proof of his ability to respond in damages, as required in section ninety-four-e of this chapter for future accidents. * * * ”


author: NIELDS, District Judge.

text:
    DOOLEY IMPROVEMENTS, Inc., v. MOTOR IMPROVEMENTS, Inc., et al.
    No. 957.
    District Court, D. of Delaware.
    March 7, 1934.
    Hugh M. Morris, of Wilmington, Del., and John M. Zane, of Chicago, Ill., for plaintiff.
    Robert H. Richards, of Wilmington, Del., and Theodore S. Kenyon (of Kenyon & Kenyon), of New York City, for defendant Motor Improvements, Inc.
   NIELDS, District Judge.

Plaintiff moves to dismiss its bill of complaint without prejudice. Defendant resists the motion because during the progress of the case (1) defendant has become entitled to affirmative relief; (2) defendant has filed an, answer containing a counterclaim praying such affirmative relief; and (3) by a decree entered in this ease eliminating the narrow issue of interfering patents defendant has acquired the advantage of trying in this court the broader issues of an infringement suit.

Plaintiff replies to the (2) defense that the counterclaim is ineffectual because filed after plaintiff’s motion to dismiss. Defendant rejoins that its counterclaim was filed in conformity with Equity Rule 16 (28 USCA § 723); that is, within the time for filing answer as enlarged by order of the court for cause shown. The issues thus presented can be tested by a consideration of the record step by step.

March 7, 1932, plaintiff filed its bill of complaint for relief against interfering patents under section 4918, U. S. Rev. St. as amended by Act March 2, 1927 (35 USCA § 66), and also for patent infringement. March 29, 1932, within twenty days after service of subpoena, defendant Sweetland entered a special appearance and moved to dismiss the bill as to him. On the same day Motor Improvements, Inc., moved to dismiss that part of the bill based on section 4918. Thereupon the court entered an order that the time for filing an answer or other pleading by Motor Improvements, Inc., “be extended until twenty days after the entry of an order by the court” disposing of its motion to dismiss. The motions to dismiss the bill in sa far as it was founded on section 4918 were granted, and on November 21, 1932, a decree to that effect was entered. (D. C.) IE. Supp. 641. This decree eliminated Sweetland and the issue of interfering patents, and confined the issue to a straight infringement suit against Motor Improvements, Inc., as sole defendant. December 7, 1932, after notice to plaintiff, defendant moved to strike from the bill of complaint all impertinent allegations relating to interfering patents. On the following day, upon sufficient reason shown, the court ordered “that the time for filing an answer, further motion or other pleading by the said defendant be extended until twenty days after the entry of an order by the court” disposing of defendant’s motion to strike. December 15, 1932, plaintiff appealed from the decree of dismissal. July 6; 1933, the Court of Appeals of this circuit affirmed the decree of dismissal. 66 F.(2d) 553. November 13, 1933, the Supreme Court denied certiorari. 290 U. S. ---, 54 S. Ct. 127, 78 L. Ed. ---. November 27, 1933, plaintiff filed its motion to dismiss the bill of complaint without prejudice. January 6, 1934, defendant filed its counterclaim.

It would be manifestly unjust to penalize defendant by destroying its right to file a counterclaim when it has conformed strictly to the rules and orders of the court respecting the time of such filing. Under the order of the court of December 8, 1932) defendant’s time for filing its counterclaim was enlarged until twenty days after the hearing of defendant’s motion to strike. When defendant filed its counterclaim, it had a legal right so to do, as the motion to strike had been pending and unheard for nearly a year while plaintiff was pursuing its appellate remedies. The counterclaim was filed under Equity Rule 16 (28 USCA § 723) within the time fixed as enlarged by order of court. Plaintiff cannot deprive defendant of its right to have its counterclaim considered by filing a motion to dismiss the bill.

More than a question of practice or procedure is here involved. A plaintiff has a right to relinquish the pursuit of remedies against a defendant, but if in such pursuit plaintiff has inflicted an injury upon defendant, he cannot destroy defendant’s right arising therefrom. If a defendant has acquired during the progress of a case a right to affirmative relief and embodies that right in a counterclaim, a court of equity is bound to consider such a counterclaim, whether filed before or after plaintiff files a motion to dismiss its bill of complaint. Pullman’s Car Co. v. Transportation Co., 171 U. S. 138, 18 S. Ct. 808, 43 L. Ed. 108.

In its counterclaim defendant alleges: That the Cole patent upon which plaintiff sues is invalid. ' That the device of that patent is of no commercial value. That it has never been made or used by Cole or the plaintiff except possibly for experimental purposes, and that such experimental use has shown it to be valueless. That plaintiff, knowing that there was no interference in fact between the Cole patent and the Sweetland patents of defendant, filed its bill of complaint in this suit alleging that the Sweet-land patents and the Cole patent were interfering patents. That plaintiff, knowing such allegation to be untrue, caused notices to be published in newspapers throughout the United States asserting that Cole was the true and original inventor of the inventions covered by the Sweetland patents and that the Sweet-land patents were invalid; that the devices manufactured by the defendant under the Sweetland patents were infringements of the Cole patent. That such representations were made by plaintiff to the public knowing them to be false and with intent to injure the defendant in its business under the Sweetland patents. As a result of such representations, defendant’s business was injured and suffered great damage. That defendant has been put to great trouble and expense in this suit by reason of the unfounded allegations in respect of infringement and of interfering patents. After the foregoing allegations, the counterclaim concludes with a prayer for affirmative’ relief.

At the hearing of plaintiff’s motion to dismiss without prejudice, the only affidavit filed by either side was one by the president of defendant company. From that source it appears that defendant was incorporated over ten years ago, and as exclusive licensee under the two Sweetland patents has manufactured and sold filters known as the “PurOlator” oil filters. These filters remove deleterious solids from the lubricating oil in the circulating system of internal combustion engines of automobiles, tractors, etc. The business of the defendant has grown to great proportions. Before March 1, 1932, the date of the issuance of the Cole patent, defendant had manufactured and sold six million of such filters, and after that date one and one-half million. They were sold to forty thousand dealers for purposes of equipment and replacement. Defendant has expended $13,000 in preparing and defending this suit and is now prepared to proceed and defend the charge of infringement and make good the allegations of its counterclaim.

The general rule is well settled that the plaintiff in an equity suit has the right, at any time before final hearing by leave of court, to dismiss his bill without prejudice upon, payment of costs. This rule is subject to the exception that such dismissal will in no way prejudice or inflict inequitable hardship upon the defendant otherwise than by the mere prospect of being harassed and vexed by future litigation of the same kind. Pullman’s Car Co. v. Transportation Company, 171 U. S. 138, 18 S. Ct. 808, 43 L. Ed. 108. If this case comes within the rule, the court has no discretion and must grant the motion. If this case comes within the exception, the court may exercise its sound discretion and either deny or grant the motion.

Where the defendant is entitled to affirmative relief by way of counterclaim or has acquired some substantial legal right in the cause or will be seriously prejudiced by a dismissal, or if it is apparent that unnecessary and prolonged litigation will be entailed by dismissal, the cause should not be dismissed without prejudice.

It is obvious that a denial of defendant’s right to prove its counterclaim would of itself be prejudicial and an inequitable hardship to the defendant. Upon this ground alone the motion to dismiss should be denied.

Regardless, however, of the question of affirmative relief under its counterclaim, defendant will be deprived of substantial advantages if the case is dismissed. Plaintiff saw fit to bring the defendant into this court to answer a bill charging interfering patents and infringement of the Cole patent. Defendant has succeeded in having a decree entered eliminating the issue of interfering patents and restricting the suit to a patent infringement suit. In such suit the issues are validity of the Cole patent and infringement thereof by defendant. Having eliminated the narrow issue of priority of invention as between Cole and Sweetland, defendant has secured the advantage of defending in this suit the broader issues of validity and infringement. Defendant should not be forced to surrender that advantage.

January 18, 1933, plaintiff filed a bill of complaint in the Supreme Court of the District of Columbia against defendant and two others under section 4918 alleging interference between the Cole and Sweetland patents. A determination of that issue will be deferred for many months and possibly years. Thereafter an infringement suit must be brought to determine the question of infringement of the Cole patent by defendant. Meanwhile a vast claim for damages will have accumulated against manufacturers using defendant’s device and the distributors thereof. The ends of justice and the interest of all parties demand a speedy determination in this suit of the validity of the Cole patent and the alleged infringement thereof.

Plaintiff gives no reason why it desires to dismiss its bill without prejudice. It may be assumed from the record that it prefers to have’the interfering patents suit in the District of Columbia tried before the trial of the infringement suit in this court. Defendant should not be compelled to its prejudice and disadvantage to yield to plaintiff’s preference.

For the reasons stated, plaintiff’s motions to strike defendant’s answer and counterclaim and to dismiss the bill of complaint without prejudice must be denied.