author: ATWELL, District Judge.

text:
    WICHITA COCA COLA BOTTLING CO. v. UNITED STATES.
    Civil Action No. 226.
    District Court, N. D. Texas, Wichita Falls Division.
    March 30, 1945.
    Agreed Statement of Facts
    It is hereby stipulated by and between the parties hereto, by their respective attorneys, that the following facts shall be taken as true in this case, provided, however, that this stipulation shall be without prejudice to the right of either party to introduce other and further evidence not inconsistent with the facts here stipulated as true.
    I. The amount involved in this suit is less than Ten Thousand Dollars ($10,000), and this Court has jurisdiction .under Title 28, Section 41, of the United States Code, 28 U.S.C.A. § 41.
    II. The Wichita Coca Cola Bottling Company is a corporation, duly incorporated under the laws of the State of Texas, with its principal office in Wichita Falls, Wichita County, Texas. From its inception in 1919 through 1939 the company had a reserve account set up for deposits on cases and bottles taken out by customers. The income tax return for 1919, however, only covered the last sixteen days of such year and did not include any balance sheet or break-down of costs of goods sold, a certified photostatic copy of such return is attached hereto, marked Exhibit 1, and made a part hereof. The return for 1920 listed an item under “Schedule A-12 Expenses” and designated it “Cases and Bottles, replacing wastage, etc.” The return for 1921 listed such account under “Schedule A.12 Necessary Expenses” and designated it “Cases & Bottles, Breakage,” and the return under “Liabilities” also listed “Deposits” of $517.67. Certified photostatic copies of the returns for 1920 and 1921 are attached hereto, marked respectively, Exhibits 2 and 3, and made a part hereof. The returns for 1922, 1923 and 1924 listed such account under “Other Liabilities” as “Deposit on Containers,” certified photostatic copies of such returns are attached hereto, marked respectively, Exhibits 4, 5 and 6, and made a part hereof. The returns for the years 1925, 1926, 1927, 1928, 1929 and 1930 listed such account under “Other Liabilities” as “Deposit on Cases & Bottles,” certified photostatic copies of such returns are attached hereto, marked respectively, Exhibits 7, 8, 9, 10, 11 and 12, and made a part hereof. The returns for the years 1931, 1932 and 1933 listed such account under “Other Liabilities” as “Cases and Bottles Deposit,” certified photostatic copies of such returns are attached hereto, marked respectively Exhibits 13, 14 and 15, and made a part hereof. The returns for the years 1934, 1935, 1936, 1937, 1938 and 1939 listed such account under “Other Liabilities” as “Deposit on Cases & Bottles,” certified photostatic copies of such returns are attached hereto, marked respectively Exhibits 16, 17, 18, 19, 20 and 21, and made a part hereof. A certified photostatic copy of the income tax return filed by taxpayer for 1940 is also attached hereto, marked Exhibit 22, and made a part hereof.
    III. When cases and bottles were delivered to customers a deposit was required from the customer. This deposit was credited to the aforementioned account, and if and when the cases and bottles were returned, the deposit was returned to the customer or to whoever brought them in to the taxpayer, and the account was thereupon debited. The amount received for the beverage itself was credited to the sales' account. The taxpayer had about nine hundred (900) dealers, of which amount credit was extended to only about forty-five (45). Those to whom credit was extended were billed at the end of the month at the price of One and 30/100 Dollars. ($1.30) per case. The statement itself made no reference to a deposit. When cases were sold to cash customers invoices were rendered to them, which invoices, showed a charge of One and 30/100 Dollars ($1.30) per case, but which invoice also had thereon a place showing the number of cases returned, which were credited at the rate of 50 cents per case and the-cash customer paid the difference between. $1.30 per case and the number of cases returned which were credited at the rate of' 50 cents per case.
    IV. The taxpayer during the period: involved, bottled and sold Coca Cola, Orange Crush, Delaware Punch and during-some of the period, other soft drinks. Each of the types of drinks had a distinctive shaped bottle and had their names imprinted in the glass. All of the cases had the wording “Drink Coca Cola in Bottles”' stenciled on the outside of the cases. About 60 per cent of such cases had the-letters “WFCC” also stenciled on the outside. About 40 per cent of the cases had the wording “Wichita Coca Cola Bottling Company, Wichita Falls, Texas,”' stenciled on the inside. The taxpayer-made no attempt to collect the cases from the dealers or individuals. The deposit of 50 cents for the cases and bottles was,, however, paid to each customer or whoever brought in the cases and the type of" bottles in which taxpayer bottled its drinks.. This was done regardless of whether the bottle had the taxpayer’s name on the bottom of it or not.
    V. An inventory of the cases and bottles was taken each year, but this inventory ■did not include the cases and bottles which had been delivered to the customers and which had not been returned at the time •of the inventory. As a result of the non-return of cases and bottles, the reserve listed in the federal income tax returns for the years 1919 through 1939, which are a part of the stipulation, increased from year to year. The table below shows the balance by years, beginning in 1919, and the increase or decrease for each of those years:
    Year Ended Balance Increase
    December 31 Total Debits Total Credits End of Year During Year
    Í9Í9 "$ 17005 ~$ 89.40 ’ 1 (80.65)*' “$ (80.65)
    1920 18.479.04 18.526.50 (33.19) 46.46
    1921 9,008.31 9,559.47 517.97 551.16
    1922 21,055.22 21,846.26 1,309.01 791.04
    1923 33.381.04 33,709.98 1.637.95 328.94
    1924 16,460.07 18.166.59 3,344.47 1,706.52
    1925 19.561.40 21,491.96 5.275.03 1,930.56
    1926 16,343.61 17,569.87 6,501.29 1,226.26
    1927 15.765.41 15,730.21 6.466.09 (35.20)
    1928 7,397.18 7,996.83 7,065.74 599.65
    1929 8,784.35 9,286.31 7,567.70 501.96
    1930 7,903.56 8,120.24 7,784.38 216.68
    1931 4,702.47 4.575.50 7,657.41 (126.97)
    1932 3,226.87 3,319.37 7,749.91 92.50
    1933 4,494.90 4,707.02 7.962.03 213.12
    1934 7,448.43 7.854.50 8.368.10 406.07
    1935 7,599.50 7,922.35 8.690.95 322.85
    1936 9,774.05 10.194.50 9,111.40 420.45
    1937 11.109.05 11.530.50 9,532.85 421.45
    1938 15,029.38 15,598.85 10.102.32 569.47
    1939 13,688.60 13.847.60 10.261.32 159.00
    $251,382.49 $261,643.81 $10,261.32
    * “( — )” shows Decrease.
    Mr. E. A. Denny, who became manager of the taxpayer in 1930, from past experience knew that the amount credited to the Reserve account each year was in excess of the amount which would have to be paid out on account of the return of cases and bottles, which he knew to be true by reason of the fact that there was always breakage or destruction of bottles and cases in the hands of customers, and which he also knew by reason of his previous experience and his knowledge of the increase in the account each year as reflected by the books.
    VI. At the end of the year 1939 the credit balance in .this account was $10,261.-32. In the year 1940, Internal Revenue Agent Jarrett made an audit of the Company’s 1937, 1938 and 1939 income tax statements. In that audit, he determined the increase in the size of the credit balance for each of those years was income and corrected the income tax return which had been previously made by the Wichita Coca Cola Bottling Company by including in the income for the year 1937 a profit of $421.45; for the year 1938 a profit of $569.47 and for the year 1939 a profit of $159, making the total correction of $1,149.92, which is the same amount that this account increased during the three years 1937 to 1939, inclusive. When he charged these items to profit for each of those years, an adjustment was made debiting the account called “Deposit on Cases and Bottles” for this amount and crediting that amount to profit for the several years. After this debit had been made, the balance of the account at the beginning of the year 1940 was $9,111.40.
    VII. In the year 1940 the plaintiff debited the account called “Deposit on Cases and Bottles” with $9,111.40, which took that account off of the books and credited the same amount to surplus. They made their income tax returns without considering the $9,111.40 as income for the year 1940. In an audit made by the Internal Revenue Agent in the year 1942 and covering the 1940 income tax return, the Collector of Internal Revenue assessed a deficiency of $2,058.42 in taxes and $129.93 in interest, or a total of $2,188.35. Of this amount $2,183.99 was paid on April 3, 1942, and the balance of $4.36 was paid on May 4, 1942.
    VIII. The Collector of Internal Revenue contended that the $9,111.40 was income for the year 1940 and found that the net income of the plaintiff for that year was $63,367.10 instead of $54,790.30, which had been returned as income by the plaintiff, but later corrected to $54,255.70, and by reason of this determination assessed the additional tax.
    IX. On February 17, 1944, within less than two years after the payment of the tax, the plaintiff filed with the Collector of Internal Revenue for the Second District of Texas at Dallas, Texas, a Claim for Refund in the amount of $2,186.73, together with interest and any greater amount that was legally refundable. On November 21, 1944, the Commissioner of Internal Revenue rejected the Claim and denied it in its entirety. A certified photostatic copy of such return and letter of rejection is attached hereto, marked Exhibit 23, and made a part hereof.
    X. The returns of the taxpayer for all years except 1928, 1931, 1932 and 1934 were investigated. In its 1920 return (Exhibit 2), the taxpayer listed as an expense “Cases and Bottles, replacing wastage, etc. ...... $20,186.31Thereupon, Deputy Commissioner E. H. Batson in a letter dated December 8, 1921 inquired of taxpayer if such item represented the amount of actual loss sustained on account of bottle breakage and losses, or did it also include purchases of cases and bottles which should be included in inventories. In a letter dated December 24, 1921, A. M. Biedenhorn, then Secretary and Treasurer of taxpayer, replied that the taxpayer carried an account “Cases and Bottles” to which all purchases of cases and bottles were debited; that upon closing its books an inventory of all cases and bottles was taken and credited to such account and that the resultant difference represented the value of cases and bottles lost. Certified photostatic copies of such letters of December 8 and 24, 1921, are attached hereto, marked respectively Exhibits 24 and 25, and made a part hereof.
    In connection with the audit of the 1924-1926 returns, the Bureau of Internal Revenue questioned the Deposit account and the apparent reduction of income by the annual increase in that account. An agent who investigated reported that no part of the account was charged to profit and loss since the money was collected to insure return of the containers and would ultimately be returned 100 cents on the dollar.
    The years 1920 and 1921 were closed by a decision of the Board of Tax Appeals (6 B.T.A. 1333), but on a distinct issue. The 1922 and 1923 liabilities were the subject of a closing agreement and stipulated deficiencies in the Board, and the 1924-1926 liabilities were closed by closing agreement, but the deposit account was noit considered except as hereinbefore stated in this paragraph and paragraph VI hereof.
    XI. If the sum of $9,111.40, which was credited by the plaintiff to surplus in the year 1940, was income for the year 1940, then in such event the plaintiff is not entitled to recover. If, on the other hand, that sum was not income in the year 1940, then the plaintiff is entitled to recover the sum of $2,188.35, together with interest on $2,183.99 from and after April 3, 1942, and interest on $4.36 from and after May 4, 1942, unless the defendant’s affirmative defense prevents the plaintiff from recovery.
    Nelson, Montgomery & Robertson, of Wichita Falls, Tex., for plaintiff.
    Robert R. Reynolds, Jr., Sp. Asst. to Atty. Gen., and Wm. P. Walker, Asst. U. S. Atty., of Fort Worth, Tex., for defendant.
   ATWELL, District Judge.

I think we will have to start from taw. The Income Tax law was directed at income. It was not directed against bookkeeping entries either for or against the taxpayer, or, for or against the government.

Several niceties have been presented here by learned counsel, growing out of the practice of each side with reference to this particular gross aggregate and the yearly accruals beginning in the year 1919 and extending through the year 1939, which resulted in the aggregate of the last year.

So far as I have been able to understand from the stipulation of the parties, which I find to be the facts of this case, the taxpayer did not sell the cases, nor the bottles, to its customers, but it did take from those customers commensurate deposits on the bottles and cases so as to save it from waste or loss in the event those bottles or cases, as the case might be, were not returned to it. The time of such return was immaterial. ' The buyer could substitute other bottles for those bottles, or, if some other person brought in bottles, the taxpayer would take such bottles and use them as against some bottles that were not brought back by the customers. I see nothing in the stipulation that required the taxpayer to put the bottles which it might accumulate from others than its customers, in identical cases that it had sold to some particular customer. I doubt seriously that a pure legal question of bailment could be supported by such facts. Such facts, however, do support the theory that the taxpayer was setting aside and not subjecting itself to income tax liability on this growing sum of money which seems to have been advantaged each year by itself, or certainly was advantaged by itself in the year 1940.

I cannot share, and I do not think the court is required to share, in the thought that the Commissioner, or the Collector, is required to restrict any government taxing right to the investigation of the taxpayer’s methods. The very statement of the thought raises such a tremendous duty on the part of the government that it precludes an exhaustive investigation which that duty would require.

The taxpayer did enjoy an advantage in its annual returns by reason of the method that it had adopted and it enjoyed a large advantage ultimately and finally when it put all of those funds you might say, in its pocket, or, rather into its capital fund, showing its determination at that moment whatever the transactions may have been called, to declare the matter settled.

I believe, gentlemen, that it is a safer course, in the confusing circumstances, to deny the taxpayer a recovery here. It certainly ultimately and finally made income. It certainly and finally ought to pay on that income. What I have said includes, of course, the statement that the facts are as stipulated by the parties, and these observations, quite rough, are as a conclusion, or conclusions of law, and you will prepare your judgment, Mr. Reynolds, to be O. K.’d by Mr. Nelson and his associates, as to form, saving such exceptions as they may wish.


source: Caselaw Access Project

author: VAUGHT, District Judge.

license: Public Domain

text:
    TOWER PRODUCTION CO. v. UNITED STATES et al.
    Civil Action No. 811.
    District Court, W. D. Oklahoma.
    July 2, 1945.
    Paul G. Darrough, of Oklahoma City, Okl. (of Brown, Darrough & Ball, of Oklahoma City, Okl.), and Valjean Biddison, of Tulsa, Okl., for plaintiff.
    Charles E. Dierker, U. S. Atty., and John Brett, Asst. U. S. Atty., both of Oklahoma City, Okl., for defendants United States and H. C. Jones.
    Jarman & Jarman, of Oklahoma City, Okl., for defendant Anderson-Prichard Refining Corporation.
   VAUGHT, District Judge.

A review of the history of this litigation is necessary to a clear understanding of ¡this opinion.

It appears that Ben H. Wofford was indebted to the United States Government for certain income taxes assessed against. him for the year 1930 amounting to $1,379.-84, with interest thereon. Notice of this tax lien was filed in the office of the county clerk of Oklahoma County, Oklahoma, on December 2, 1932. A portion of this tax subsequently was collected by the Collector of Internal Revenue out of the bankruptcy case of Ben H. Wofford in the Northern District of Oklahoma.

Two actions growing out of this claim have been filed in this court. The first one is Cause Number 138—Civil, Tower Production Company v. H. C. Jones, Collector of Internal Revenue, et al. The plaintiff therein claimed it was the owner of the property out of which the Collector sought to collect the tax and that Ben H. Wofford at no time owned any interest in the property. The trial of the cause resulted in a judgment determining that Ben H. Wofford had no interest in the oil and gas leasehold estates to which the tax lien in favor of the United States could attach when the notice of the lien was filed on December 2, 1932. The Circuit Court of Appeals, Tenth Circuit, reversed the judgment and remanded the cause with instructions to dismiss the complaint because it was an action to remove a tax lien as a cloud upon plaintiff’s title and amounted to a suit against the United States without its consent. Jones, Collector of Internal Revenue, et al. v. Tower Production Co., 1941, 120 F.2d 779, 782. Tower Pro-' duction Company urged the Circuit Court to enjoin the Collector from enforcing the levy. Denying such plea, the court said:

“* * * That would be a departure from the theory upon which the case was presented and tried below. Neither the pleadings nor the prayer for relief of the complaint below indicated that the United States or the collector would be called upon to defend against a claimed right for injunctive relief.
“* * *, we think it would be inappropriate for us to determine on this record whether the Production Company is entitled to injunctive relief.”

Thereafter, on July 8, 1941, the present action was filed, Number 811—Civil, Tower Production Co., a Corporation, v. H. C. Jones, Collector of Internal Revenue of the United States of America, and Anderson-Prichard Refining Corporation, a Delaware corporation. 45 F.Supp. 593. The United States was not made a party defendant. The plaintiff sought to enjoin the Collector from enforcing the asserted lien upon the property claimed to be owned by Ben H. Wofford, which property the plaintiff claimed was owned by it. The cause was tried to the court and the issues determined in favor of the plaintiff. A decree was entered permanently enjoining the Collector of Internal Revenue from further attempting to enforce the lien out of the property in question. An appeal from the judgment was duly perfected to the Circuit Court of Appeals, Tenth Circuit, and the cause was reversed with directions, Jones, Collector of Internal Revenue, et al. v. Tower Production Co., 1943, 138 F.2d 675, 677. The court said:

“The pleadings presented substantial issues of fact and law. There was evidence to support a finding that the beneficial title to an undivided one-half interest in the leases vested in Wofford in 1932, and that the tax lien of the United States attached to Wofford’s interest therein, although the trial court ultimately decided that issue in favor of Tower. In order to grant the relief prayed for, it was necessary to adjudge whether the beneficial title to the undivided interest in the leases which Tower now owns ever vested in Wofford and whether the lien of the United States attached thereto and the funds derived therefrom. The real purpose of the action was to secure an adjudication that the beneficial title to an undivided one-half interest in the leases never vested in Wofford and •that the tax lien of the United States never attached thereto. It was not the simple case where a Collector seeks to collect by distraint the taxes of one person out of the property of another. There was a real controversy, presenting substantial issues of law and fact, respecting the title to an interest in the leases and the funds and the claim that the lien of the United States attached thereto. It was necessary to determine that controversy before the relief sought could be granted. It was, in substance, an action to determine title and the rights of the United States under a tax lien asserted by it against such interest and the funds. Upon the issues thus presented, the United States was entitled to be heard. The question of whether a suit is against the United States is not to be determined by the mere nominal party on the record, but by the issues presented and the effect of the judgment which can be entered in response to those issues. The judgment entered in the instant case, in effect, removed the lien as a cloud upon the leases and the funds and directed the payment of the funds to Tower. We conclude that it was a suit against the United States.
“The United States now can be made a party to the action under the Act of December 2, 1942 [28 U.S.C.A. § 901 et seq.], and the rights of Tower and the United States can be fully adjudicated and a binding decree entered.
“The judgment is reversed and the cause remanded with instructions to permit the pleadings to be recast and the United States brought in as a party defendant.”

Pursuant to and in compliance with these instructions, on January 21, 1944, the court permitted the plaintiff to file an amended and supplemental complaint in which the United States was made a party defendant, the allegations are in substance the same as in the original complaint and the relief sought is the same.

On May 26, 1944, the defendant United States filed its answer and set up three defenses.

First. The court lacks jurisdiction to entertain the suit for the reason that the United States of America has not given its consent to be sued in the manner herein involved.

Second. The amended and supplemental complaint has failed to state a claim against the United States upon which relief can be granted.

Third. It denies all paragraphs of the plaintiff’s complaint except paragraphs 1 and 3 and a portion of paragraph 6, as shown by its answer.

The defendant Anderson-Prichard Refining Corporation filed its answer and alleged it had been running regularly the oil produced from the property and is holding in suspense certain funds accrued from the sale thereof, subject to the order of the court as to the disposition thereof.

Upon the issues thus joined the cause came on for trial March 12, 1945. The evidence submitted was substantially the same as that offered at previous hearings, with some additional testimony by the parties, none of which changes the view of the court in its findings heretofore made, and the court holds that such findings apply with equal force to the new defendant, the United States of America, unless the defenses interposed by its answer change the situation.

The first two defenses will be considered together and are disposed of in Jones v. Tower Production Co., supra, 10 Cir., 138 F.2d 675, wherein the court said:

"* * * In our former opinion, we did not refer to the Act of March 4, 1931, 46 Stat. 1528, 28 U.S.C.A. § 901 et seq., an act to permit the United States to be made a party defendant in certain cases, because that Act then only applied to suits brought ‘for the foreclosure of a mortgage or other lien upon real estate, for the purpose of securing an adjudication touching any mortgage or other lien the United States may have or claim on the premises involved.’
“The Act of March 4, 1931, was amended by the Act of December 2, 1942, 56 Stat. 1026, 28 U.S.C.A. § 901 et seq. Section 1, as amended, reads as follows:
“ ‘Upon the conditions herein prescribed for the protection of the United States, the consent of the United States is given to be named a party in any suit which is now pending or which may hereafter be brought in any United States district court, * * * having jurisdiction of the subject matter, to quiet title to or for the foreclosure of a mortgage or other lien upon real estate or personal property, for the purpose of securing an adjudication touching any mortgage or other lien the United States may have or claim on the premises or personal property involved.’ (Italics ours.)
* * * * *
“The United States now can be made a party to the action under the Act of December 2, 1942, and the rights of Tower and the United States can be fully adjudicated and a binding decree entered.”

On the second defense, under the same allegations as we have now in the amended and supplemental complaint, the court said:

“The pleadings presented substantial issues of fact and law. * * * In order to grant the relief prayed for, it was necessary to adjudge whether the beneficial title to the undivided interest in the leases which Tower now owns ever vested in Wofford and whether the lien of the United States attached thereto and the funds derived therefrom. * * * It was, in substance, an action to determine title and the rights of the United States under a tax lien asserted by it against such interest and the funds. Upon the issues thus presented, the United States was entitled to be heard. * * *”

Thus, since the United States is now properly a party defendant the suit becomes one of fact to be determined from the evidence presented. Under these facts this court heretofore has found the issues of fact in favor of the plaintiff and still so finds them.

It is therefore the opinion of the court that judgment be for the plaintiff quashing the warrant of distraint and levy, permanently enjoining the defendant Collector of Internal Revenue and the defendant United States of America from prosecuting the warrant of distraint and levy upon the property involved, and from enforcing the asserted income tax lien of the United States against Ben H. Wofford upon said property belonging to the plaintiff. The defendant Anderson-Prichard Refining Corporation will be directed to free and release to the plaintiff all funds in its hands belonging to the plaintiff. Exceptions are allowed.

Findings of fact, conclusions of law and a form of judgment consistent with this opinion may be submitted within fifteen days from this date.


text:
    RICHARDSON OILS, Inc., v. THOMAS, Collector of Internal Revenue.
    No. 1203.
    District Court, N. D. Texas, Dallas Division.
    Feb. 27, 1945.

      Harry C. Weeks, of Fort Worth, Tex., for plaintiff.
    A. W. Christian, Asst. U. S. Atty., of Dallas, Tex., for defendant.
   ATWELL, District Judge.

I think the record is somewhat larger than it might necessarily be, but it is complete, and if counsel for either side, by agreement with one another, think it should be diminished, if there is an appeal, that can be done without any trouble under our present rules.

Likewise, I think the issue is a narrow issue, somewhat easily understood, but it does involve an important principle which takes us into the realm of construction as well as into the realm of righteousness.

The contract between this taxpayer and his creditor, which was made anterior to the passage of the statute which permitted this sort of a credit upon the taxpayer’s income tax, is not attacked in any way as to its bona fides. The only attack that is made upon it is that it provides for payments, which payments do not specifically use the term “earnings and profits,” which is used in the statute which authorizes such a credit. The contract provides for credits out of “runs.”

The testimony clearly shows that payments were made out of “earnings and profits.” The proper allocation, as conceded here in open Court by both sides, has been used in figuring what amount was credited under the first contract for the million dollar borrow and the merger and increase of that contract sometime after the statute was passed, so that there is no question of fairness in the case.

Nor does there seem to be any serious question, as I have already indicated, about the payments coming out of “runs” which were in truth, “earnings and profits.” The only question, therefore, is whether the phrase “earnings and profits” in the statute should have been used by the contracting parties instead of the word “runs.” So that we see the issue is pretty small and pretty refined, and somewhat unjust, which would deprive two citizens of the right to contract between themselves, the soul of which has been observed by both of them in their dealings with their Government.

Findings of Fact

I. I find the facts are as stipulated by the parties.

II. That the payments that have been credited by the taxpayer and denied by the Commissioner to the taxpayer, came out of “earnings and profits.”

III. That this amount is payments made up of quarterly installments. $8,324.49 was made on October 14, 1938, so that is the last payment, and that is where interest should start to run as to that payment, and the balance of $9,100 should come out of the July 15, 1938 payment.

That will be the judgment, with the usual certificate, to be approved by Mr. Gibson as to form, saving such exception as he may wish.

It follows, as a conclusion of law, what I have already said.


author: HULEN, District Judge.

text:
    UNITED STATES v. MURRAY et al.
    No. 3701.
    District Court, E. D. Missouri, E. D.
    July 13, 1945.

      Harry C. Blanton, U. S. Atty., of Sikes-ton, Mo., for plaintiff.
    Robert C. Hyde, of Poplar Bluff, Mo., for defendant.
   HULEN, District Judge.

The defendants have been cited into this Court to show cause why .they should not be found guilty of contempt of this Court. On the 27th day of June, 1945, on application of Chester Bowles, Price Administrator, Office of Price Administration, this Court issued an order for the inspection by representatives of the applicant of frozen food lockers operated by Lowrie T. Busby and Ivan S. Busby, co-partners, doing business under the name of Busby Frozen Food Bank, at 421 Cedar Street, Poplar Bluff, Butler County, Missouri. Representatives of the applicant, Marcus H. Solomon and Douglas A. Cox, proceeded to Poplar Bluff for the purpose of executing the Court’s order. In the Motion for Citation for Contempt, it is alleged that while the representatives of the applicant were on the premises of Lowrie T. Busby and Ivan S. Busby, where the food lockers are located, on the 28th day of June, 1945, and while they were in the act of executing the order of this Court by inspecting the food lockers descibed in the order, the defendants threatened them with arrest if they proceeded with the inspection, and that as a result of the threats, the representatives of the applicant were forced to desist from the execution of the order of this Court. It is charged that the defendants, in obstructing the execution of the orders of this Court, acted wilfully, deliberately, and knowingly. Defendant Murray is health officer of the City of Poplar Bluff. Sims is Chief of Police.

By answer filed by the defendants, they deny that they threatened to arrest the representatives of the Office of Price Administration, Marcus H. Solomon and Douglas A. Cox, if they attempted to make an inspection of the food lockers in question, and plead further that by virtue of an ordinance of the City of Poplar Bluff, all handlers of food were required to be examined and in possession of a health certificate from a physician, and that all acts performed by them were in furtherance of the enforcement of the alleged ordinance. While the answers state that under the provisions of the ordinance defendant Murray, as health officer of the City of Poplar Bluff, was required to compel the inspectors to comply with the regulations of the Board of Health of the City of Poplar Bluff and the ordinances of that City regarding the handling of food, it developed at the hearing, by statement of counsel for the defendants, that defendants are not now claiming that the ordinances of the City of Poplar Bluff applied or could be enforced to prevent performance of duties by a federal officer acting under a federal statute.

In determining whether or not the defendants shall be found guilty of contempt of 'this Court for the reasons set forth in the Motion for Citation for Contempt, on the record presented in this case, this Court will exercise the power to punish for contempt sparingly, with caution and deliberation.

The principal issue is now one of fact presented by virtue of the full and positive denial by defendant Murray that he threatened or intended to threaten Marcus H. Solomon and Douglas A. Cox, as representatives of the Office of Price Administration, with arrest if they executed the order of this Court and inspected the food lockers referred to, without first obtaining health “cards.”

It is fundamental that the officers, agents, and instruments of the United States are immune from the provisions of a city ordinance in the performance of their duties. This principle of law, while having exceptions not here involved, applies to the ordinance alleged to have been the basis of the defendants’ conduct in this case. It is the duty of the Government and its agencies to employ persons qualified and competent for their work. That duty it must be presumed to have performed, and a city cannot by ordinance impose further qualifications upon such officers and agents as a condition precedent to the performance and execution of duties, prescribed under federal law.

The Court will first consider the case of the defendant Claude E. Murray. The main impression I get of this defendant is that he is imbued with his self-importance. His conduct suggests that a little authority in the hands of some people can become an aggravation, if not a dangerous thing. Part of his actions in this case I ascribe to lack of knowledge, experience, and proper advice.

From facts presented we cannot escape the conclusion that certain people and newspapers have encouraged this defendant in his position because they were adverse, if not to the law, then to the policy of the Office of Price Administration and its regulations. They were willing to urge the defendant in a course of conduct for which they cannot now be held responsible. They found an individual in this defendant unused to publicity, who readily fell a victim to their advice.

The conduct of the Office of Price Administration has not been perfect. Human beings are not infallible. Administration of the Office is a hard and difficult assignment. To the extent of my observation, the men charged with its administration are doing their best. The Office may be subject to criticism for its failure to act more vigorously in ferreting out black market operations — but not for carrying on an inspection service to determine if there are violations of the law. Over a million men have become battle casualties in order to save this Republic and its way of living. The least we can do in their absence is preserve this Republic and the way of living they left behind when they joined the armed services. If we lose the battle on the home front to control prices, prevent inflation, and stamp out black markets, we shall earn the contempt of our fighting men. The Office of Price Administration is the governmental agency charged with responsibility for controlling prices, preventing inflation and stopping the operation of black markets. It should have the support of all law abiding citizens and not be made the subject of bushwhacking expeditions. Public officials should be the last to stand in the way of enforcement of the law and its regulations. Public support and cooperation will be a material contribution to the success and enforcement of the law and avoidance of devastating inflation. Without the efforts of the Office of Price Administration, every citizen, and the salaried man most of all, would have suffered incalculable injury from inflation during the war, and we are not yet safely past the danger.

As I view the evidence in this case in regard to the defendant Murray, he may have acted in good faith when his complaints to the inspectors of the Office of Price Administration were first made, acting under what he believed to be his duty, but he soon became the victim of counsel of those who are against the policies of the Office of Price Administration and thereafter was held up to the public as one who stood between the good people of Poplar Bluff and epidemics of disease of the most devastating character. He states now that all meat touched by the inspectors must be destroyed, yet he shows no concern whatever as to the origin of the meat or whether it came from diseased animals or who handled it prior to its getting into the lockers. His conduct in this case, and the false premises presented, have aroused considerable feeling in Poplar Bluff. To destroy meat because it is touched by the inspectors will cause more ill feeling, and that may be the plan and the purpose of such action. No one would refuse to eat the meat if informed as to the facts of this case. Contrary to the general situation throughout the -Country, meat must be very plentiful in Poplar Bluff that its destruction follows the slightest provocation.

What stands out in this case is that if the defendant had been in good faith and had sought legal advice and acted upon it, this case would not be here, since his counsel, the City Attorney of Poplar Bluff, frankly admits knowledge of the law. However, counsel may have been unwilling to give advice that would have been unpopular or not the kind defendant wanted. There is evidence that after the order of this Court for inspection was served upon the defendant, a representative of the Office of Price Administration asked the defendant, in the presence of the City Attorney, what his position was going to be. The City Attorney deferred answer to the question to the defendant, and the defendant again expressed himself that if inspectors of the Office of Price Administration inspected the meat in the food lockers, without first securing a health card, he would place them under arrest.

The Office of Price Administration officials showed the utmost consideration of the officials of Poplar Bluff. They were patient in the face of the obstructive tactics encountered. For days they delayed the inspection while numerous conferences were held. There is no evidence upon which defendants’ counsel can base his charge that the Office of Price Administration officials sought to entrap the defendant. What action, other than a citation, could be expected on defiance of the order of this Court ?

On the issue whether the defendant Claude E. Murray did or did not threaten to arrest the officials of the Office of Price Administration if they proceeded in the execution of the order of this Court to inspect the food lockers without first securing a health card, Mr. Solomon and Mr. Cox testified to repeated threats of arrest by the defendant. It is this Court’s opinion that the defendant Murray, in his denial of making threats of arrest and other testimony given at the hearing, coolly, calmly, and deliberately gave false testimony. This conclusion I reach from the testimony of inspectors Solomon and Cox, and in addition thereto from the conflicting testimony of defendants Murray and Sims. Defendant Murray stated that he gave no orders to Sims that he was to arrest the inspectors if they entered the food lockers during his absence. He testified under oath, “I never told Sims anything.” Defendant Murray was followed to the witness stand by the defendant Sims, who frankly admitted a conversation with the defendant Murray, about the inspection of the food lockers by the Office of Price Administration officials, although he was somewhat vague as to the details of the conversation. Defendant Sims impressed the Court as a truthful man. Defendant Murray was quoted repeatedly by the Poplar Bluff newspaper as having threatened the inspectors of the Office of Price Administration with arrest if they inspected the food lockers without first obtaining health cards. All of the interviews with the newspaper, concerning threats of arrest, were denied by Murray as false. The Court does not personally know the editor of the Poplar Bluff newspaper, but he has had occasion to see and observe him in litigation in Court in Cape Girardeau, and was impressed that he was a man of honor and integrity. We do not believe the local press would repeatedly misquote the defendant. Over and above all of this testimony, we find the question— what is this case about? Why would the inspectors have stopped their inspection and resorted first to securing a court order and then citation for contempt, had the defendant not threatened them with arrest if they proceeded to inspect the contents of the food lockers? What attitude the District Attorney will take with regard to the testimony of the defendant Murray in this Court is not for this Court to determine. Under ordinary circumstances, giving of wilful, false testimony in the trial of a case in a Federal Court is contempt. To the end that this case shall not be complicated by contempt added to contempt, this Court will not now assess punishment because of the false testimony given by the defendant Murray.

There is a cloud upon the good faith of the defendant Murray in his defense that he was acting under an ordinance of the City of Poplar Bluff in insisting that the inspectors of the Office of Price Administration secure health cards. When the inspectors first broached the subject of inspecting the food lockers, the demand of the operators was that a Court order be secured before it was done in some cases. Nothing was said by any one at that time about health cards. No ordinance of Poplar Bluff requires food handlers to have health cards. No regulation of the Board of Health was offered requiring food handlers to have health cards. In fact, defendant Murray testified he made no effoit to locate such a regulation before coming to the hearing, where such a regulation was to be the foundation of his defense. So the ordinance and regulation, which since the defendant entered the scene have been publicly paraded as the authority for his action, are a myth insofar as the record in this hearing is concerned.

In inspecting the food lockers, the representatives of the Office of Price Administration were engaged in the performance of a duty arising under the laws of the United States, on order of this Court. The performande of that duty was directly obstructed by threats of arrest by defendant Murray. This Court finds such action on the part of defendant Murray was wilful. It constitutes contempt. If the orders of the Court are to be set aside, and their execution prevented by private citizens or local officers claiming to act under municipal ordinances then the Court would be powerless to enforce its decrees. That the execution of Court orders shall not be interfered with is the very bedrock of the power of Courts to administer justice. If the orders of this Court are unreasonable, illegal, or improper, there is an orderly way to test their legality.

The question now presented is— what punishment shall be assessed in this case? As the Court has observed, it is strongly of the opinion that much of the conduct of the defendant is the result of • bad advice and counsel of those who were using him to vent their ill will against the Office of Price Administration. Inspection of the food lockers is proceeding without interference. With this in mind, it is the order and judgment of the Court that the defendant Murray is found guilty of contempt of this Court for wilfully and knowingly preventing the execution of the orders of this Court by threats of arrest of those engaged in the execution of those orders, and that he be committed to the custody of the Attorney General for imprisonment for a period of thirty days. Execution of the sentence shall be stayed during the good conduct of the defendant.

As to the defendant John W. Sims, it appears that he has been Chief of Police only a short period of time. Manifestly he cannot be charged with full knowledge of the duties of his office. There is evidence that he was never near the establishment where the food lockers were located, and that his remarks with reference to arresting the inspectors of the Office of Price Administration came in response to questions asked of him. Absent the conduct of the defendant Murray, the Court has grave doubts that the conduct of the defendant Sims would have prevented the execution of the orders of this Court. The Court being doubtful as to the guilt of defendant Sims, he is discharged.


author: LEAHY, District Judge.

text:
    In re NORTH CONTINENT UTILITIES CORPORATION.
    No. 355.
    District Court, D. Delaware.
    July 7, 1945.

      See also 54 F.Supp. 527.
    David K. Kadane, Sp. Counsel, and Arthur Goldman, both of Philadelphia, Pa., for Securities and Exchange Commission.
    Sydney K. Schiff (of Pam, Hurd & Reichmann), of Chicago, Ill., for North Continent Utilities Corporation.
    Helmer Hansen, of Chicago, Ill., for Preferred Stockholders’ Committee.
   LEAHY, District Judge.

The court approved a Sec. 11(e) plan of North Continent Utilities Corporation under the Public Utility Holding Company Act of 1935, 15 U.S.C.A. § 79 et seq. See D.C., 54 F.Supp. 527. The plan called for satisfaction of the company’s debentures by pro-rata payments of cash as assets were sold from time to time. The March 17, 1944, order of approval provided, among other things, that the Court take exclusive jurisdiction over the company and its assets. Paragraph 2 of the order specifically provides: “North Continent Utilities Corporation shall retain possession of its assets and continue the operation of its business through its officers, directors and employees and in accordance with its Articles of Incorporation and its By-Laws, except as otherwise provided by this Order or any subsequent order herein”. The SEC now moves to amend the above paragraph by adding an additional sentence which will read: “North Continent Utilities Corporation until further order of this Court may enter into transactions not inconsistent with the plan, including sales of its assets or assets of its subsidiaries, upon the filing of appropriate applications and declarations with, and the entry of appropriate orders by the Securities and Exchange Commission, in conformity with the Public Utility Holding Company Act of 1935 and the rules, regulations and orders promulgated and issued thereunder.”

The proposed amendment should be allowed. The plan contemplates complete liquidation of North Continent. Since the order of approval was entered, it has been and now is disposing of its assets by selling portfolio securities and physical assets of its subsidiary companies engaged in the gas and electric utility business and in the ice and mining nonutility businesses. The proposed amendment, in short, simply affirms the SEC’s reservation of jurisdiction in its order approving the plan under date of November 16, 1943, i. e., its reserved jurisdiction in respect of “any steps taken to effectuate disposition of North Continent’s assets”. As assets are transmuted into cash, Sec. 12(d) of the Act becomes operative. That section provides: “It shall be unlawful for any registered holding company, by use of the mails or any means or instrumentality of interstate commerce, or otherwise, to sell any security which it owns of any public-utility company, or any utility assets, in contravention of such rules and regulations or orders regarding the consideration to be received for such sale, maintenance of competitive conditions, fees and commissions, accounts, disclosure of interest, and similar matters as the Commission deems necessary or appropriate in the public interest or for the protection of investors or consumers or to prevent the circumvention of the provisions of this title or the rules, regulations, or orders thereunder.”

The question raised by the motion to amend the order of March 17, 1944, is whether approval of this court must also be obtained in respect of each sale of assets, because this court has retained exclusive jurisdiction of those assets. We do not think that such court approval is necessary.

Homewood v. Standard Power & Light Corporation, D.C.Del., 55 F.Supp. 100, 103, suggested the necessity to integrate the Public Utility Holding Company Act into the judicial process in view of the SEC’s statutory duties. The present matter is another illustration of the same thought. Sec. 12(d) was designed to protect investors against any sacrifice of their equity in the sale of their assets. SEC’s Rule U — 44 was promulgated to carry Sec. 12(d) into effect. Form U — 1 is a declaration which must be filed in connection with the sale of any asset. It provides for minute exposition; for example, there must be disclosure as to the nature of the assets involved, all relevant financial data, terms and conditions of sale, etc. SEC’s staff, consisting of attorneys, analysts, accountants and engineers, then goes into action. Their expert competence is shown by the fact that from December 1, 1935, to June 30, 1944, 692 orders have been entered respecting sales of utility assets. In the fiscal year ending June 30, 1944, 272 of such orders have been entered. No federal court in our system has had such' specialized experience.

Moreover, practical considerations must be examined. If sales must be approved by both SEC and court, the apparent difficulties inherent in a single situation show the impracticability of such duality of administrative and judicial approval. To take the instance where portfolio securities are sold for resale by the buyer, the usual form of underwriting agreement provides for such resale within not more than 48 or 72 hours. SEC is adequately equipped, with its trial examiners, to conduct hearings on the appropriateness of price and underwriting spread, so that the Commission may enter its order within the stated period. If in addition court approval of such underwriting were always required, another hearing would likewise be required, after notice given, and it is doubtful if the usual form of underwriting agreement could be utilized.

Underwriters’ risk increases commensurately with the period between the signing of the agreement and the time of resale of the securities to the public. The time factor defines the size of the spread. Neither the SEC nor the court would approve a sale by an unusual underwriting which would substantially diminish the return the company would ultimately receive for the sale of its assets.

The ruling here simply approves what the court believes to be a pure piece of administrative business — disposition of a subject company’s assets as an inherent part of a plan of liquidation after notice and opportunity for hearing and critical examination by the SEC and its staff. If a party is of belief that the sales price of a particular asset is grossly inadequate because of an arbitrary fixation of values, there has been no suggestion that such party may be deprived of a judicial review, either in the District Court of enforcement or to a Circuit Court of Appeals under Sec. 24(a). But, such observations are by way of obvious dicta, for no one has, as yet, raised the point. The precise problem attempted to be met here is the simple separation of the functions of court and SEC for the purpose of carrying out a plan that has already been approved by both SEC and court.

The motion for an amendatory order is granted.

       The Congressional intent is clear:
      “Subsection (d) [of Section 12] prohibits registered holding companies from disposing of their assets and securities in. contravention of the rules and regulations of the Commission regarding costs, accounts, competitive bidding, fees, disclosure of interest, and similar matters so that both the investor and the underlying properties may be protected in the reorganization of the systems. This section is essential to prevent piecemeal evasion of the reorganization safeguards set up in Section 11 and to prevent the sacrifice of the investors’ equity.” S. Rep. 621, 74th Cong., 1st Sess., p. 35.

       There is one dáss of sales which does not come before the Commission: “sales of securities or utility assets to a Federal or State government or to any subdivision, agency, or instrumentality thereof” have been exempted by the Commission in Rule U — 44(b) (3). The basis for such rule, the avoidance of supervision of the activities of government instrumentalities, is founded on the same principles of comity which we think should be persuasive with this court.

       Whether the District Court of enforcement is the exclusive tribunal, once a plan has been submitted for approval, see Okin v. Securities and Exchange Commission, 2 Cir., 145 F.2d 206, certiorari granted 65 S.Ct. 1569.


author: MILLER, District Judge.

text:
    FRANKLIN PIONEER CORPORATION v. GLENN, Collector of Internal Revenue.
    No. 749.
    District Court, W. D. Kentucky, Louisville Division.
    May 17, 1945.
    J. W. Fowler, Jr., of Louisville, Ky., for plaintiff.
    Henry L. Spencer, Dept. of Justice, of Washington, D. C., Eli H. Brown, III, U. S. Atty., of Louisville, Ky., and David C. Walls, Acting U. S. Atty., of Hardinsburg, Ky., for defendant.
   MILLER, District Judge.

The plaintiff, Franklin Pioneer Corporation, filed this action to recover from the Collector of Internal Revenue for the District of Kentucky the sum of $2,006.73 which it claims it was illegally required to pay under a deficiency income tax assessment for the year 1940. The plaintiff in its income tax return for the year 1940 took a deduction of $11,086.61 resulting from a loss which it claims it incurred by the sale of 300 shares of common stock of Continental Shares on December 18, 1940. This stock was an investment of the plaintiff in the amount of $11,100. The plaintiff realized from the sale $12.39. The defendant contends that the shares of stock became worthless in 1933 when the corporation was placed in receivership, and that the loss was an allowable deduction for the taxable year 1933 and not thereafter.

The facts are as contained in the Agreed Stipulation of Facts filed herein on April 25, 1945.

Losses are deductible from income for those years only in which the losses are sustained. In order that a loss arising from investment in the capital stock of a corporation be regarded as sustained in any given year, it is ordinarily necessary either that there be a final disposition of the investment, as by sale or exchange, or that there be some “identifiable event” by which the loss is otherwise clearly evidenced. The taxing act contemplates losses which arise from closed and completed ■transactions and which are fixed by identifiable events. Section 23 of the Internal Revenue Code, 26 U.S.C.A. Int.Rev. Code, § 23; United States v. S. S. White Dental Manufacturing Company, 274 U.S. 398, 47 S.Ct. 598, 71 L.Ed. 1120.

Partial losses are not allowable as deductions from gross income so long as the stock has a value and has not been disposed of. Shrinkage in value is not recognized by the taxing act. The difference between the price paid for property and its market value in a later year affords no basis for determining a gain or loss while the taxpayer still retains ownership of the property. As long as the stock has any value, either present or potential, the taxpayer may not claim a deduction on account of its shrinkage in value. Weiss v. Wiener, 279 U.S. 333, 335, 49 S.Ct. 337, 73 L.Ed. 720; Miami Beach Bay Shore Co. v. Commissioner, 5 Cir., 136 F.2d 408, 409; Warren Service Corp. v. Commissioner, 2 Cir., 110 F.2d 723, 725; Rassieur v. Commissioner, 8 Cir., 129 F.2d 820, 826; See also United States v. S. S. White Dental Mfg. Co., 274 U.S. 398, 401, 47 S.Ct. 598, 71 L.Ed. 1120.

Neither the balance sheet of a corporation showing no equity for the stockholders, nor the appointment of a receiver, the appointment of a trustee in reorganization .proceedings, nor the adoption of a resolution by the board of directors providing for a liquidation, is decisive on the question of the worthlessness of stock in a corporation where the evidence also establishes the existence of a potential value which may be realized upon liquidation or through continuation of the business. G. E. Employees Securities Corporation v. Manning, 3 Cir., 137 F.2d 637; Van Clief v. Helvering, 77 U.S.App.D.C. 337, 135 F.2d 254, 257; Nelson v. United States, 8 Cir., 131 F.2d 301, 302; Rassieur v. Commissioner, 8 Cir., 129 F.2d 820, 825; Jones v. Commissioner, 9 Cir., 103 F.2d 681, 685; Burnet, Commissioner, v. Imperial Elevator Co., 8 Cir., 66 F.2d 643; Deeds v. Commissioner, 6 Cir., 47 F.2d 695.

The stipulation of facts states that the stock in question was “continuously quoted on the open market and bought and sold through brokers engaged in the sale of over-the-counter stock from 1933 to 1940 inclusive.” It also has attached as an exhibit the bid and asked quotations for the stock for the same years. During the year 1933 actual sales of the stock occurred on the open market at prices ranging from 5 cents to 40 cents a share, and during 1934 sales of the stock continued at 10 cents per share. In 1936 the sale price of the stock had increased to a low of 12 cents and a high of 25 cents. In 1937 the stock sold at as high as 70 cents, but thereafter slumped badly to a low of 3 cents. However, in 1940, the year in question in this litigation, there were actual sales at 4 cents and 5 cents and additional bids for the stock at not less than 2 cents. Such sales, particularly the sales at 40 cents in 1933 and 70 cents in 1937, show rather conclusively that the stock was not worthless in 1933. Even .though its book value had disappeared and the shrinkage in market value had been very great, yet there still existed a potential value which was worth something to the owner. This potential value still existed in 1940 when the stock was finally disposed of by the taxpayer. The continued existence of actual sales from 1933 through 1940, even though at a low figure, refutes the contention that the stock was worthless in 1933 oi at any time subsequent thereto before it was disposed of. The plaintiff is entitled to the loss resulting from the sale for income tax purposes for the year 1940. See Long v. Glenn, Collector, D.C., No. 491, Louisville Division, W.D.Ky. (not reported), affirmed, 6 Cir., 145 F.2d 234.

The plaintiff will tender for entry judgment in accordance with the foregoing Findings and Conclusions.


text:
    CARRINGTON v. KENTUCKY HOME MUT. LIFE INS. CO.
    No. 764.
    District Court, W. D. Kentucky.
    June 28, 1945.
    Millard Cox, of Louisville, Ky., for plaintiff.
    Woodward, Dawson, Hobson & Fulton and L. H. Hilton, all of Louisville, Ky., for defendant.
   MILLER, District Judge.

The plaintiff Richard A. Carrington, Jr., as Trustee for the creditors of James E. Campbell, deceased, brought this action to recover of the defendant, Kentucky Home Mutual Life Insurance Company, on two life insurance policies of $5,000 each covering the life of James E. Campbell, subject to payments made by the defendant under the policies in the total sum of $6,649.95. The defendant denied liability for the unpaid balance by reason of a lien and interest accumulations arising out of re-insurance agreements under which it took over the policies in question previously issued by other life insurance companies.

On August 12, 1912, the Citizens National Life Insurance Company, a Kentucky corporation, issued to James E. Campbell, a resident of Oakfield, Georgia, its policy No. 21685-CN under the terms of which it insured the life of Campbell in the sum of $5,000 in consideration of the payment by Campbell of an annual premium of $160.30. On December 31, 1914, the Citizens National Life Insurance Company was consolidated with the Inter-Southern Life Insurance Company, a Kentucky corporation, which company assumed all the liabilities of the Citizens National Life Insurance Company including the contingent liability under the policy above referred to on the life of Campbell.

On April 22, 1918, the Inter-Southern Life Insurance Company issued its policy No. 71356 to James E. Campbell under the terms of which it insured the life of Campbell in the amount of $5,000 in consideration of the payment by Campbell of an annual premium of $160.05.

Thereafter and while the aforesaid policies were in full force and effect, Campbell became financially involved with unpaid liabilities totalling $17,636.17. On March 18, 1922, Campbell assigned the two policies to W. H. Miller of Lynchburg, Virginia, as Trustee for his creditors. The Inter-Southern Life Insurance Company accepted the assignment. Thereafter Miller as trustee continued to pay the annual premiums on the policies.

In the early part of 1932 the Inter-Southern Life Insurance Company met with financial reverses and on April 16, 1932, the Circuit Court of Franklin County, Kentucky, appointed receivers for it. On August 8, 1932, the Kentucky Home Life Insurance Company, a Kentucky corporation, and the defendant herein under its later name of Kentucky Home Mutual Life Insurance Company entered into an agreement with the receivers of the Inter-Southern Life Insurance Company under which the Kentucky Home Life Insurance Company re-insured all of the outstanding policies of the Inter-Southern Life Insurance Company including the policies hereinabove referred to. Miller as trustee for the creditors of Campbell continued to pay to the defendant the annual premiums on the policies. Subsequently Miller resigned his trusteeship and the creditors chose in his stead as trustee the plaintiff Richard A. Carrington, Jr., of Lynchburg, Virginia. Upon assuming his duties as substituted trustee the plaintiff caused to be reassigned to him the two policies of insurance on the life of Campbell which assignment was made and accepted by the Kentucky Home Mutual Life Insurance Company on April 8, 1935.

Under the terms of the re-insurance agreement of August 8, 1932, a lien was placed against the cash surrender value of each Inter-Southern Life Insurance Company policy to the extent of 60% of the net equity thereof as defined in the agreement. The agreement provided in part as follows:

Clause 4 — “* * *: however no deduction on account of such lien or interest shall be made from the amount payable on any death claim arising under any policy re-insured and/or assumed hereunder.”
Clause 5 — “The Company agrees that in the event of the death of any insured while his or her policy is in force, it will waive the aforesaid lien or any balance thereof remaining, and all interest accumulations thereon, and the cost of waiving such lien and interest shall be provided out of the unassigned funds and/or contingency reserve of the business of Inter-Southern reinsured hereunder. If, however, such unassigned funds and/or contingency reserve are insufficient to provide the cost of such waiver, then the Company will provide therefor out of its own surplus and/or earnings, but the Company shall be entitled to recover said sums so advanced, without any interest thereon, out of Inter-Southern assets, and nothing herein shall obligate the Company to maintain any reserve, legal or otherwise, to insure the waiving of liens by reason of the obligations assumed in this clause.”
Clause 8 — “* * * Nothing in this clause, however, shall be construed as relieving the Company from liability for payment of death claims without deduction on account of the lien.”
Clause 34 — “This Agreement may be amended by consent of the parties hereto with the approval of the Commissioner and the Franklin Circuit Court.”

On March 16, 1935, and on the petition of the Kentucky Home Life Insurance Company the re-insurance agreement was amended so as to give effect to the fact that the defendant had become a mutual company and had changed its name to Kentucky Home Mutual Life Insurance Company. Clause 8 in this amendment was in the same words as Clause 8 in the original amendment. Clause 34 in this amendment provided as follows:

“This agreement may be further amended at any time from time to time by the Company and the Commissioner subject to the approval of the Franklin Circuit Court.”

After the plaintiff succeeded Miller as trustee for the creditors in 1935 he found in the files that Miller turned over to him a circular letter to the policyholders of the Inter-Southern Life Insurance Company dated September 22, 1932, and signed by William B. Harrison as President of the Kentucky Home Life Insurance Company. This letter enclosed the defendant’s certificate of assumption of the outstanding insurance and contained the following statement:

“This certificate now forms a part of your policy of insurance and should be securely attached to the policy. It is your guaranty that the Kentucky Home Life Insurance Company will grant the benefits provided by your policy, subject to the terms of the re-insurance agreement. * * *
“Your attention is directed to the following important provisions of the attached re-insurance agreement:
“1. Death Claims Are Paid in Full, without deduction on account of the lien. * * *»

The file also contained a letter dated 'March 14, 1934, to Miller signed by S. C. Woods, Cashier of the Kentucky Home Life Insurance Company, which contained the following statement :

“This policy is in full force with this company and is subject to the reinsurance agreement whereby this company assumed the Inter-Southern business. * * * This company guarantees to give the same death benefit in connection with the policy that was previously enjoyed by the Inter-Southern Life Insurance Company and is responsible for the policy for its face amount at the death of the insured.”

The file also contained a letter on the stationery of the Kentucky Home Life Insurance Company dated March 16, 1934, addressed to Miller and signed by “Hugh D. Hale, Policyholders Service Division,” which contained the following statement:

“These policies, having been originally issued or assumed by the Inter-Southern Life Insurance Company, have been transferred to this Company. The death benefits were assumed in full, each policy being for $5,000.00 and carrying this payment to the beneficiaries, or the estate of the insured, are subject of course to the existing assignments without thus being affected or influenced by the failure of the former company. This Company is responsible for all Inter-Southern death losses and are paying these promptly in accordance with the terms of the policies. You can continue premium payments on death policies as these are due, feeling assured that the amounts as provided for in the policies will be paid at the death of the insured.”

Under date of August 12, 1936, the plaintiff wrote the defendant asking for the correct cash value of the two policies and whether or not the policies would be paid in full upon death. He received in reply a letter of August 19, 1936, signed by Karl E. Rothrock, Manager of the Policy Loan Department, which gave the net cash value of Policy No. 21685-CN as of August 12, 1936, as $773.77, payable with 3%% interest after August 8, 1938, and the net cash value of Policy No. 71356 as of April 22, 1937, as $754.44, payable with 3%% interest after August 8, 1938. This letter also contained the following statement:

“By keeping the insurance in force there is available insurance protection for the gross amount of $10,000. In reinsuring this business we did not reduce the death benefit, nor did we increase the premium rates.”

Under date of August 28, 1936, Karl E. Rothrock again wrote the plaintiff, replying to a letter from the plaintiff, making further inquiry about the two policies. In this letter Rothrock stated:

“As far as we are concerned, in the event of death while the policies are in force there will be payable the face amount of each policy, assuming that no loan indebtedness exists at the date of death.”

The plaintiff would not have continued to pay the annual premiums under the policies if the death claims were not to be paid in full. As the annual premiums under the two policies became due he called upon the creditors of Campbell to contribute their pro rata share thereof which he collected and used to continue the payment of the premiums in order to keep the two policies in force and effect. The two policies of life insurance constituted the principal assets to which the creditors of Campbell could look to the payment of their claims.

On September 18, 1939, on petition of the Kentucky Home Mutual Life Insurance Company and the Commissioner of Insurance for Kentucky, the Franklin Circuit Court approved and made effective another amendment of the re-insurance contract of August 8, 1932. In this amendment the language contained in Clause 8 of the original agreement of August 8, 1932, and in the amendment of March 16, 1935, was eliminated entirely. Also the obligation to pay the death benefits contained in Clause 4 of the original agreement was eliminated and the application of the lien was described as follows:

“Both lien and interest thereon shall be deducted from (1) Any payment made by the Company under said policies; (2) Any settlement made by the Company under said policies.”

The plaintiff had no notice of this proceeding in the Franklin Circuit Court or of the amendment of September 18, 1939, until the receipt by him of a letter from the defendant dated September 14, 1943, advising that the 60% lien with accumulated interest constituted an indebtedness against the policies including death claim settlements. James E. Campbell, the insured, died on May 27, 1944. At that time all the annual premiums called for by both policies had been paid and both policies were in force and effect.

On August 12, 1936, giving effect to the payment of the annual premium due at that time, the cash surrender value of Policy No. 21685-CN was $773.77. The premium paid thereafter under said policy with 6% interest to the date of the death of the insured amounted to $1661.58. On April 22, 1937, giving effect to the annual premium due on that date, the cash surrender value under Policy No. 71356 was $755.21. The premiums paid thereafter under said policy with 6% interest to the date of Campbell’s death amounted to $1593.20. Under the terms of the re-insurance agreement cash surrender values were not payable until August 8, 1938.

Under the by-laws of the defendant and by the terms of the policies themselves only the President and Secretary had the power in behalf of the Company to make or modify the contract of insurance and the Company was not to be bound by any promise or representation given by any other person.

Following the death of Campbell the plaintiff duly proved his claim against the defendant under the two policies. The defendant admitted liability in the sum of $3400.85 under Policy No. 21685-CN and in the amount of $3,239.10 under Policy No. 17356, which were the net amounts payable after deducting the liens with accumulated interest. The defendant denied further liability on the ground that under the provisions of the re-insurance agreement as amended September 18, 1939, the policy lien applied against death benefits as well as against cash surrender values. Plaintiff accepted without prejudice the payments admitted to be due by the Company and instituted this action to collect the unpaid balance of $3,350.05 with interest.

The plaintiff contends that he had valid contracts of insurance calling for death benefits in the amount of $10,000 by reason of his payment of the premiums in consideration of the defendant’s promise to pay the death claims in full as evidenced by the correspondence between the parties, and that in any event the defendant is estopped to change its position after the plaintiff acted upon its representations to that effect.

Policyholders in the Inter-Southern Life Insurance Company were not required to accept the terms of the reinsurance agreement of August 8, 1932, but such ones as did elect to become parties to that arrangement are bound by the terms of the agreement. Casteel v. Kentucky Home Life Insurance Co., 258 Ky. 304, 79 S.W.2d 941. Miller, as trustee for the creditors of Campbell, by continuing to pay the premiums thereafter to the new insurer, elected to become a party to the reinsurance agreement and he and the plaintiff became 'bound by its terms. Kentucky Home Life Ins. Co. v. Leisman, 268 Ky. 825, 830, 105 S.W.2d 1046. One of the terms of the reinsurance agreement was that it could be changed or modified by the Franklin Circuit Court of Kentucky upon proceedings properly instituted and approved by certain parties and the Court. Accordingly, plaintiff’s contract of insurance with the defendant, regardless of its original terms when accepted by his predecessor Miller and as thereafter continued by the plaintiff, was legally subject to modification without his later consent. His present complaint that his contract was so modified is accordingly without merit unless the defendant is es-topped by reason of its representations to the plaintiff to rely upon the subsequent modifications so made. I do not find in the notices and letters sent to the plaintiff and his predecessor trustee any renunciation of the existing right of the Commissioner and the Court to modify the terms of the agreement upon the institution of proper proceedings to do so. The letter of September 22, 1932, from the President of the Company to Miller and the letter of March 14, 1934, from the Cashier to Miller both specifically referred to the fact that the benefits provided by the policies and certificates of assumption were subject to the terms of the reinsurance agreement: The other letters outlined the benefits under the contract as it then existed. Even if they be construed as a waiver on the part of the Company of the right to subsequent modification with Court approval, which is not the construction placed upon the correspondence by the Court, such attempted waiver could not be validly made by the junior officers who wrote the letters. Connecticut Fire Ins. Co. v. Roberts, 226 Ky. 534, 11 S.W.2d 148; Prudential Ins. Co. of America v. Jenkins, 290 Ky. 802, 162 S.W.2d 791. Accordingly, plaintiff’s rights, if any, must rest upon the principle of estoppel rather than upon the existence of a contract differing from the terms of the reinsurance agreement as modified by order of the Court on September 18, 1939.

One of the essential elements of estoppel is that the one relying on it was induced by the conduct of his adversary to change his status whereby he was deprived of rights which he otherwise would have possessed and which operated to his detriment. The evidence does not show that the plaintiff abstained from doing any act by reason of defendant’s representations. The surmise that he may have taken out additional insurance if he had been advised that the policy would not be paid in full is only speculation. It is not shown that the insured was still an insurable risk at that time, or that the creditors would have been willing to advance the additional sum necessary to effect such insurance at the materially higher rate resulting from the increased age of the insured. By reason of the representations the plaintiff paid the premiums called for by the policies and carried them until the death of the insured. But in doing so he has not suffered any financial loss. The amount which the defendant has conceded to be due under the policies, less the premiums paid with interest, is more than what the plaintiff would have received by surrendering the policies for their cash surrender value at the time when the representations were made. The plaintiff may have been misled, but it was not to his prejudice. Both elements are necessary to constitute estoppel. Kentucky Home Life Ins. Co. v. Kittinger, 262 Ky. 525, 529, 90 S.W.2d 673, 103 A.L.R. 1361; Owens v. National Life & Accident Ins. Co., 234 Ky. 788, 793, 29 S.W.2d 557; 31 C.J.S., Estoppel, § 74. Accordingly, the defendant is not estopped by reason of the statements made to the plaintiff that the death benefits would be paid in full from.now taking the position that death claims are not so payable.

The defendant is entitled to judgment in its favor.


text:
    BOWLES, Price Administrator, v. ALBERT GLAUSER, Inc.
    No. 3703.
    District Court, E. D. Missouri, E. D.
    July 21, 1945.

      George L. Robertson, of St. Louis, Mo., for plaintiff.
    Donald Gunn, of St. Louis, Mo., for defendant.
   HULEN, District Judge.

This matter is before the Court on motion for a temporary injunction.

The plaintiff offered evidence showing payment by defendant to producers of $2364 for cattle, which sum was in excess of the amount permitted by Maximum Price Regulation No. 574. This sum represented an over-payment on 2070 cattle, weighing 3,000,112 pounds, for which defendant paid $332,584. Spreading the excess payment over the total purchase during the period involved, which was from April 30, 1945, to June 2, 1945, the excess would represent approximately seven-tenths of one per cent of the total purchase price, or about $1.12 on each head of cattle purchased. The price which defendant may pay producers for live cattle under Maximum Price Regulation Number 574 is based upon grades. Two grades are here involved, “good” and “commercial.” During the period in question, the maximum price on grade “good” was $15.65 per cwt. On “commercial” it was $12.90 per cwt.

It is the declared public policy of the Government to maintain public stockyards. Title 7 U.S.C.A., § 181 et seq. Governmental supervision of public stockyards has for one of its prime purposes the maintenance of open and free competition among buyers, aided by the sellers’ representatives. Such a system results in payment of the highest market price for the producers’ product that such an arrangement can effect, not exceeding, however, the maximum price set by Government order. Experienced buyers must determine the grade of cattle at the time of bid and prior to purchase. This can be done by experienced buyers, except on occasional border-line cases. The exact grade of all cattle can only be determined after purchase and slaughter of the animal and grading by government inspectors. Most animals present no difficulty as to determining grades. Other animals approach the borderline and present a problem to the buyer to determine their grade at the time of purchase. Seller or producer is trying to get the highest market price for cattle being sold by him permissible under the law. Owing to the shortage in the present cattle market, competition by the buyers has been intensified. Under the circumstances prevailing, there is bound to be created a condition where sales approach close to the maximum price. No one has suggested that the producer’s price should be cut below the maximum price a certain amount to insure no over payment, or that competitive sales should be eliminated. The seller is entitled to the benefit of competitive bidding within the limits of the maximum price set. For this Court to make a ruling that would compel the bidders or packers to confine their bidding on cattle to a figure— any figure — less than the maximum price as fixed by the regulation in order for the packers certainly and absolutely to comply with the Court order, as suggested in plaintiff’s brief, is tantamount to this Court, for all practical purposes, and results in fact, in this Court’s making a new and reduced maximum price for sale of live stock, over which bidders shall not go in purchasing cattle lest they be punished for contempt. This Court has no power to establish ceiling prices, either directly or indirectly. It should refrain from knowingly making a ruling that produces that result, or tends to produce that result. It should strive to effectuate compliance with the law and its purposes, not tie it in legal tangles and create contradictions that make law violators out of the innocent and those who strive in good faith to comply with the law. We do not charge or infer that plaintiff has any such purpose. However, counsel present their case; responsibility for the de-cisión is with the Court. What concerns this Court on granting injunctive relief is the absence of evidence showing an intentional violation of the price regulations. On the record defendant’s conduct could have been a good faith effort to comply with the law. Experience in operating under the regulation has no doubt informed defendant by now how far it can go in bidding and keep within the maximum price regulations. That in some cases there may be occasional slight excesses in payment, resulting from competitive sale and purchase of borderline grades seems to have been anticipated, even though there be a good faith effort by the packer to comply with the law. Any excess payment over Maximum Price Regulation No. 574 is immediately refunded to the ■ Government — ■ at a loss to the packer — and no one else. Unless the excess payment in this case was confined to a small number of purchasers, an over-payment of $2364 in the purchase of $332,584.00 worth of live cattle would not, in and of itself, impress this Court as justifying the granting of a preliminary injunction. This was the evidence plaintiff offered. How the excess was accumulated has not been shown. The burden of proof is on the plaintiff.

The defendant purchaser was penalized by the Government for the full and exact amount of the excess payment by having the sum deducted from its “Packers’ Subsidy.” The excess payment cannot result in any excess sale price for the meat involved, as the sale price of the meat is fixed regardless of the purchase price to the packer. That the packer alone pays to the Government the amount of the excess purchase price, should be a sufficient compulsion to cause the purchaser to confine his paying price within the maximum price allowed by law while meeting competition from other buyers operating under the same regulation.

Of course we do not dismiss this case at this time. We do not hold that injunctive relief is not obtainable in this type of case. Plaintiff is at liberty to apply again for relief prior to trial of the case if facts present themselves justifying such action. This Court is of the opinion that a record to justify injunctive relief under the particular laws and regulations governing the purchase, slaughter and sale of live stock, should include a showing either of intentional violation of the regulation, or careless and reckless disregard of the regulation, or facts from which such a conclusion could reasonably be inferred, and that there is probable cause to find there will be a reoccurrence of the violation, thereby overcoming any presumption or claim that the action of the defendant was in good faith and that he has used his best efforts to comply with the regulations. No such facts have been presented in this case. Let the parties submit findings of fact and conclusions of law in accord herewith.

Motion of plaintiff for preliminary injunction overruled.