author:
WHITAKER, Judge. LITTLETON, Judge
      MADDEN, Judge

text:
    TRUST CO. OF GEORGIA et al. v. UNITED STATES.
    No. 45667.
    Court of Claims.
    May 7, 1945.

      W. A. Sutherland, of Washington, D. C. (Charles B. Lowndes and Sutherland, Tuttle & Brennan, of Washington, D. C., on the brief), for plaintiff.
    J. W. Hussey, of Washington, D. G, and Samuel O. Clark, Jr., Asst. Atty. Gen. (Robert N. Anderson and Fred K. Dyar, both of Washington, D. G, on the brief), for defendant.
    Before WHALEY, Chief Justice, and LITTLETON, WHITAKER, JONES, and MADDEN, Judges.
   WHITAKER, Judge.

The question presented in this case is the extent of the taxability of the gain derived in 1937 from the redemption by the Retail Credit Company of 545 shares of its own Class A preferred stock held by plaintiffs. The taxpayers claim that the gain is taxable as a capital gain to the extent of 30 percent as an ordinary sale of stock held for more than 10 years. The Commissioner taxed it at normal and surtax rates to the extent of 100 percent, on the theory that the gain was an amount ''distributed in partial liquidation.”

The facts surrounding the transaction are as follows: Prior to May 25, 1931, the Retail Credit Company of Atlanta, Georgia had outstanding 89,738 participating preferred shares of stock and 15,170 shares of common stock, each with full voting rights. The company decided to rearrange its capital structure so as to permit those who were in active management of the business to retain control of the company through ownership of the common stock and to give to other stockholders not in active charge of the management preferred stock having no voting rights. Accordingly, a resolution was adopted on April 27, 1931 authorizing such an amendment of the charter of the company, which was approved by the Superior Court of Fulton County, Georgia on May 25, 1931.

The amended charter authorized the issuance of 150,000 shares of no par value common stock and 50,000 shares of no par value Class A preferred stock. One share of the Class A preferred stock was to be issued for every five shares of the old participating preferred stock.

The Board of Directors was authorized to redeem any particular shares of the Qass A stock it desired without pro rata restrictions, and to resell it at such price as might be fixed by the Board of Directors.

By proper resolutions of the Board of Directors the provisions of the charter were put into effect. The participating preferred stock was redeemed and one share of Class A preferred stock was issued for each five shares thereof. The common stock remained as before except that there was declared thereon a stock dividend of one share of Class A preferred stock for each five shares of common.

After the amendment of the charter Cator Woolford was the owner of both common stock and Class A stock of the company. On August 20, 1935, he transferred to plaintiffs in trust 1,150 shares of the Class A stock and 3,450 shares of the common stock, with authority to sell it according to a stated plan. By 1940 plaintiffs had sold all the common stock to employees of the company. They sold to (the company itself 60 shares of the Class A stock in 1936 and 545 shares in 1937. The extent of the taxability of the gain derived from the sale of the 545 shares in 1937 is the question presented.

On the first of the year following the year the recapitalization was put -into effect the Board of Directors authorized the company treasurer to purchase from anyone wishing to sell not more than 500 of the 22,296 outstanding shares of Class A stock at not more than $100 a share plus accrued dividends. Similar resolutions were passed in the two succeeding years. On October 3-, 1934, a resolution was passed offering stockholders who might wish to sell some or all their Class A stock not less than $99.00 per ' share therefor.

By May 8, 1935, a total of 3,701 shares had been purchased at prices ranging from $84.50 to $99.00 per share.

On May 8, 1935, the company, pursuant to resolution of its Board of Directors, wrote all its stockholders offering to purchase up to 1,127 shares of this stock at $105.00 per share, the call price. In 1935 and 1936 there were purchased 1,317 shares. In 1937 an additional 1,111 shares, including 545 of plaintiffs’, were purchased without previous authorization from the Board of Directors, but this was ratified later.

By the end of 1937 a total of 5,922 shares had been purchased, leaving outstanding 16,374 shares.

The purchases were from anyone wishing to sell and the amount purchased had no relation to the amount of the stock held by the seller. Purchases from stockholders owning more than 30 shares ranged from 13 per cent of their holdings to 100 per cent, and the prices paid ranged from $84.50 to $105.00.

The question is whether the sale by plaintiffs of one-half of their stock in 1937 comes within any of the provisions of section 115 of the Revenue Act of 1936 dealing with distributions of corporate earnings by corporations. The Commissioner treated the sale as a partial liquidation as defined in subdivision (i) and, hence, taxable as provided in subdivision (c).

Section 115 of the Revenue Act of 1936, 49 Stat. 1648, 1687, 26 U.S.C.A. Int.Rev. Acts, page 868, deals with “distributions by corporations.” Subsection (a) defines a “dividend” as follows:

“The term ‘dividend’ when used in this title * * * means any distribution made by a corporation to its shareholders * * * (1) out of its earnings or profits accumulated after February 28, 1913 * * *»

By section 22 of the Act, 26 U.S.C.A. Int.Rev.Acts, page 825, the entire amount received as dividends is required to be included in gross income and is subject to both normal and surtax.

Subsection (c) deals with “distributions in liquidation.” It provides:

“ * * * amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. The gain or loss to the distributee resulting from such exchange shall be determined under section 111, but shall be recognized only to the extent provided in section 112. Despite the provisions of section 117(a), 100 per centum of the gain so recognized shall be taken into account in computing net income, except in the case of amounts distributed in complete liquidation of a corporation. * * * In the case of amounts distributed * * * in partial liquidation * * * the part of such distribution which is properly chargeable to capital account shall not be considered a distribution of earnings or profits.”

* # * * S|t

This made the gain derived on a partial liquidation taxable on the same basis as ordinary dividends.

Subsection (d) is concerned with “other distributions from capital.” It provides that if the distribution is not in partial or complete liquidation and is not out of increase in value of property before March 1, 1913, and is not a dividend, then it is to be taxable, to the extent of the gain derived, as a gain from the sale or exchange of property, that is, as a capital gain. Such a distribution not being in the nature of a dividend is not taxable on the same basis as one.

Thus the statute recognizes that a corporation may acquire its own stock without the transaction being either a dividend or a partial liquidation.

Subsection (g) relates to “redemption 'of stock.” It is quoted in full:

“Redemption of stock. If a corporation cancels or redeems its stock (whether or not such stock was issued as a stock dividend) at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock, to the extent that it represents a distribution of earnings or profits accumulated after February 28, 1913, shall be treated as a taxable dividend.”

Such a redemption, being essentially equivalent to a dividend, was made taxable as one.

Subsection (i) reads:

“Definition of partial liquidation. As used in this section the term ‘amounts distributed in partial liquidation’ means a distribution by a corporation in complete cancellation or redemption of a part of its stock, or one of a series of distributions in complete cancellation or redemption of all or a portion of its stock.”

From a reading of the section it seems to us that Congress’ intention in the enactment of this whole section was to tax dividends at normal and surtax rates and to prevent tax avoidance by taxing as dividends any distribution of earnings or profits of a corporation which was the equivalent of a dividend, in whatever guise distributed.

Ordinarily a distribution of corporate earnings is in the form of a dividend, but Congress recognized that profits might be distributed in other forms, and so escape the tax on dividends, and thus in the various subsections Congress dealt with various transactions which were in the nature of dividends and provided that when' the distribution took on that character it was taxable as such; otherwise, not.

One form in which earnings might be distributed in lieu of a dividend is by partial liquidation of the corporation, as in a case where the corporation has accumulated more assets than it needs to carry on its business, or where it wishes to curtail its activities. Where the corporation desires to liquidate in part, a certain proportion of the stockholdings of each stockholder is called in and in lieu thereof the assets of the corporation are “distributed” to them in proportion to the stock turned in. This contemplates, of course, a proportionate reduction in the stockholdings of each stockholder, either in one transaction or in a series of transactions. It contemplates equal treatment of all stockholders in proportion to their stockholdings. It contemplates a “distribution” among all the stockholders of the corporation’s assets in proportion to their stockholdings. Indeed, the entire section 115 deals with “distributions” by corporations, that is, a division among the stockholders of corporate assets. It had in mind the taxation of a distribution of earnings as dividends, and the taxation of schemes evolved to escape the tax on dividends.

If this is correct, then it is plain that a corporation’s dealings with a lone stockholder, or any number of them less than all, does not come within the ambit of the section. This being the intention of Congress, it was accordingly provided in subsection (d) that if a distribution was made which was not in partial liquidation or was not a dividend, it was taxable only as is the gain from a sale or exchange of property. It was thus recognized that a corporation might acquire its stock in a transaction which did not amount to a distribution of earnings equivalent to a dividend. If so, it was not taxed as such.

This intention is further shown by subsection (g). This section provides for the taxation, on the same basis as dividends, of only those redemptions of stock which are “essentially equivalent to the distribution of a taxable dividend.” The purchase of stock from a sole stockholder bears not the slightest resemblance to the distribution of a dividend.

If plaintiffs had sold the stock in question to anyone other than the corporation, the gain derived would have been taxable as a capital gain only to the extent of 30 percent thereof. For what reason would Congress have desired to tax the gain at normal and surtax rates to the extent of 100 percent if the sale was to the corporation itself? We can think of none, unless the gain was essentially equivalent to a dividend, which was so taxable. A gain derived by one stockholder only has none of the elements of a dividend.

It is true, of course, that if all the purchases by the corporation taken together accomplish the same result as the declaration of a dividend, the gain derived would be taxable as would a dividend ; but that is not the case here. Some stockholders of the Retail Credit Company got $83.50 for their, stock and others got prices ranging up to $105.00. Some stockholders sold all their stock, some one-half of it, and some much less, and presumably some sold none. The company’s stockholders, therefore, did not share in the earnings of the company in proportion to their stockholdings, as they are entitled to do in the case of a distribution of a dividend or any distribution in the nature of a dividend.

That this is a correct interpretation of the intent of Congress is shown by the report of the Finance Committee of the Senate on the 1934 Act (Sen.Rep.No.558, 73rd Cong. 2d Sess. p. 37), which first carried this provision. It reads in part:

“Under existing law a distribution in liquidation of a corporation is treated in the same manner as a sale of stock. This rule has serious objections, as it permits wealthy stockholders to escape surtax upon corporate earnings or profits distributed in the form of liquidating dividends * * *. Your Committee recognizes that liquidating dividends do contain some of the elements of a sale in that the shareholder is relinquishing in whole or in part his investment in the corporation. On the other hand, they also contain some of the elements of an ordinary dividend insofar as they represent a distribution of corporate earnings or profits. * * * The House bill retains the principle of the present law of taxing to the shareholder only the amount by which the liquidating dividend exceeds the basis of the stock with respect to which the dividend is paid. However, to prevent avoidance of surtax through liquidating dividends, the gain to the shareholder is made subject to both normal and surtax. This is accomplished by taxing the gain in the same manner as if it were a gain from the sale * * * of a capital asset held for not more than one year, even though the shareholder may have actually held the stock upon which the dividend is paid for a longer period.” [.Italics supplied.]

This is further shown by the Senate Finance Committee Report on the 1942 Act (Sen.Rep.No.1631, 77th Cong. 2d Sess. p. 116). This reads in part:

“Under existing law * * * the gain realized from a distribution in partial liquidation is treated, despite the provisions of Section 117, as a short-term capital gain. This treatment was occasioned by the facility with which ordinary dividends may be distributed under the guise of distributions in partial liquidation, although Section 115(g) makes explicit provision for the treatment of such distributions as ordinary dividends. Inequality results, however, under the existing law in the case of unquestionable bona fide redemptions of stock not equivalent in any way to the distribution of a taxable dividend. It is believed that the proper application of section 115(g) will prove adequate to prevent taxable dividends disguised as liquidations from receiving capital gain treatment. Accordingly, this section of the bill eliminates the provision requiring the gain from a partial liquidation to be treated as a short-term capital gain.” {Italics supplied.]

Not only does the transaction in this case not come within the spirit of the section, neither does it come within the letter of it. Subsection (i) defines a partial liquidation as “a distribution by a corporation in complete cancellation or redemption of a part of its stock.” When a corporation purchases and retires and completely cancels one share of its stock, it pro tanto liquidates, but there has been no “distribution” of its assets in liquidation. It is only a “distribution” in liquidation with which subsections (c) and (i) are concerned. Furthermore, subsection (i) defines “amounts distributed in partial liquidation” as a distribution in “complete” cancellation or redemption of a part of its stock. Not only was there no “distribution” of assets among all the stockholders of the Retail Credit Company, but also there was no “complete” cancellation or redemption of the stock. As plaintiffs say, it was the certificates of stock that were cancelled; the stock was not.' Under ,the amended charter the directors had the right to resell the stock at any time, at any price, without limitation. This charter provision was never amended or repealed. So long as it was in effect, the stock was not cancelled. There could be no “complete” cancellation of this stock so long as this charter provision remained in effect. Knickerbocker Importation. Co. v. State Board of Assessors, 74 N.J.L. 583, 65 A. 913, 7 L.R.A.,N.S., 885.

The transaction, therefore, does not come within the letter of subdivision (i) and, for the reasons stated above, we do not think it comes within its spirit.

The Circuit Court of Appeals for the Fifth Circuit in Hill v. Commissioner of Internal Revenue, 5 Cir., 126 F.2d 570, held that the gain derived in a similar transaction was subject to tax at the normal and surtax rates. Its decision was based alone on the premise that the transaction came within the letter of subsection (i). For the reasons stated, we do not think it does.

Defendant also cites Cohen Trust v. Commissioner of Internal Revenue, 3 Cir., 121 F.2d 689. In that case the company offered to purchase 10,000 of the 11,116 shares of its outstanding preferred stock. A total of 8,705 shares were acquired, and then the balance of the stock was called and the charter of the company was amended so as to eliminate from its capital structure all of this class of stock. All of the stock was purchased and called at the same price. Here there was a “complete cancellation” of the stock. The facts of that case and in the one at bar are essentially different.

We are of opinion plaintiffs are entitled to recover the sum of $11,730.41 with interest as provided by law from October 19, 1939. Judgment for this amount will be entered. It is so ordered.

WHALEY, Chief Justice, concurs.

LITTLETON, Judge

(concurring).

Defendant appears to rely upon the number of acquisitions by the Retail Credit Company of its Class A preferred stock in support of its position that the amounts paid for such stock were distributions in partial liquidation, but there is nothing in the record to show or indicate that there was any concerted action or intention on the part of the company and the stockholders or that there was any intention or scheme by the corporation, or by any stockholder, such as was contemplated by Congress in sec. 115, to enable any stockholder to escape normal and surtax on the profit derived from the sale of stock by using the capital gains provision of the taxing act on distributions in the nature of dividends. So far as the evidence shows, the Retail Credit Company simply decided to acquire some of its outstanding Class A preferred stock, not for the purpose of completely cancelling it, but subject to re-issuance or sale. It had a right under the statute to do this without rendering the gain to the stockholder taxable one hundred percent as a dividend. Reissuance or sale of treasury stock so acquired gives rise to a taxable gain or a deductible loss to the corporation. Edwin L. Wiegand Co. v. United States, 60 F.Supp. 464, and cases therein cited.

There is a complete absence of any evidence to show that in purchasing the Class A stock from certain stockholders who were willing to sell it the Retail Credit Company did so for the purpose of completely canceling and retiring the stock. It must be assumed that Congress was aware of the fact disclosed by numerous published decisions relating to income taxes that corporations frequently acquire their own stock and hold it as treasury stock subject to reissue or resale; that, in so acquiring stock, they often cancel the certificates but do not completely cancel the stock as such; that corporations also frequently reissue or resell such stock. It must also be assumed that when Congress enacted the Revenue Act of 1936, in subsection (c) of which it inserted the provision relied upon by defendSnt which related to amounts distributed in partial liquidation, i. e., “despite the provisions of sec. 117(a), 100 percentum of the gains so recognized shall be taken into account in computing net income,” it was aware of the Treasury Regulation, art. 543 regs. 65, in effect from May 2, 1934, that a resale by a corporation of its own stock results in a taxable gain or a deductible loss. From this it must be concluded that Congress did not intend that such acquisitions or bona fide redemptions of stock should, standing alone, -be treated as distributions in partial liquidation, and that it was for this reason that sec. 115(i) defined a distribution in partial liquidation as being a distribution “in complete cancellation or redemption of part of its stock.” The instant case is therefore, on its facts, excluded by sec. 115 (i) from the provisions of 115(c) upon which the defendant relies.

The gain received by plaintiffs from the sale of the 545 shares of stock in question would, of course, be taxable 100 percentum under sec. 115(g), even though the stock was not completely cancelled, if defendant had been able to submit sufficient evidence to show that in acquiring the stock the Retail Credit Company cancelled or redeemed it at “such time and in such manner as to make the distribution and cancellation or redemption essentially equivalent to a taxable dividend,” but we have no such evidence and there is no basis in the facts of record for the inference that, in so acquiring the stock, there was present a scheme to make distributions in partial liquidation in the guise of' purchasers of stock, and thereby enable the stockholders to escape or avoid the full normal and surtax on amounts which were in effect “distributions.”

We are not, therefore, justified in finding that the transaction in question was a distribution by the Retail Credit Company in partial liquidation within the meaning of sec. 115(c), (g), or (i). Plaintiffs are therefore entitled to the benefit of the capital gain provision of the taxing act.

MADDEN, Judge

(dissenting).

Our question is whether the payment made in 1937 to the plaintiffs for their stock was, in the circumstances here present, a “distribution by a corporation in complete cancellation or redemption of a part of its stock * * which is the definition given in Section 115(i) to the words “amounts distributed in partial liquidation” which are used in subsection (c) of that section in the Revenue Act of 1936, which subsection required the profits included in amounts so “distributed” to be returned 10Q% for taxation no matter how long the stocks had been held.

The court holds that their transaction is not covered by the statutory language; that the transaction did not result in “complete cancellation or redemption of a part” of the corporation’s stock, because of the provision of the amended charter that any issued stock redeemed, purchased, or otherwise acquired by the corporation might be sold by the corporation at whatever price the board of directors fixed. This provision, the court holds, made the stock purchased from the plaintiffs and others “treasury stock” not completely cancelled or redeemed. I do not agree. The board of directors, in its resolution of October 3, 1934, expressed its intention to reduce the number of shares of preferred stock to 18,000, and in its resolution of May 8, 1935, authorized its treasurer to notify all holders of Qass A preferred stock of its offer to “purchase for retirement” a sufficient number of shares “to complete its financial program.” That the directors intended to eliminate the purchased shares from the corporation’s financial structure is plain. Stockholders who, like the plaintiffs, also owned common stock of the corporation might well have been willing to sell their preferred stock for retirement, when they would not have been willing to sell it for reissue to compete for the future earnings of the corporation, or to compete in the market with the shares of preferred stock which the stockholders retained. The officers of the corporation did “cancel” the stock as effectively as that could be done by physical acts. None of it was ever reissued.

If a taxing body had imposed a per share tax on the corporation’s capital, surely it would not have been taxable on these shares. I think the provision in the amended charter authorizing the corporation to reissue acquired stock was intended only to remove any legal question as to whether the mere acquisition by the corporation of its own stock would, ipso facto, prevent its reissue, and was not intended to tie the corporation’s hands so that it could not, if it so desired and intended, cancel some of its stock. The provision in the resolutions adopted in January of 1932, 1933, and 1934 that the shares purchased under those resolutions should be cancelled, but without prejudice to the right of the corporation to reissue them, was omitted from the resolution of October 3, 1934, and subsequent resolutions, and its omission, in connection with the language and conduct which followed, shows, I think, that the corporation intended to “completely cancel” the shares acquired thereafter.

The court holds that the statutory language of Section 115(c) and (i) does not fit the transaction here involved because the payment made to the plaintiffs was not a “distribution” but was the mere payment of a price for the purchase of some shares. In the statute, Congress was dealing with a number of different kinds of dispositions by a corporation of its accumulated earnings, and was attaching different consequences, in re taxability, to them. It was, it seems, seeking a neutral word which would not, in itself, connote that the disposition referred to was a dividend, or so like a dividend that it ought to be taxed as süch, or was a mere payment of a purchase price, which ought to be taxed like the sale of a horse. Congress was devising a meticulous statutory scheme for dealing with the problem of the disposition by corporations of their accumulated profits to their stockholders, as distinguished from their spending those profits with outsiders. I can think of no generic word more suitable for the purpose than the word “distribution.”

That Congress did not use the word “distribution” in the sense of the payment of a dividend is evident, since dividends ordinarily regarded as such, and by the statute taxed as such, are only one of many kinds of payments dealt with by Section 115, whose heading is “Distributions by Corporations.” And Section 115(g), in providing for the special treatment of a “distribution”1 in cancellation of stock which, because of its time and manner, is essentially equivalent to the declaration of a taxable dividend, recognizes that many-other “distributions” are not dividends or their equivalents. The only other meaning, narrower than “payment,” which occurs to me for possible application to the word “distribution” in this connection, is “pro rata payment” among all holders of the stock in question. But that would mean that if a corporation had reserved the right to call for retirement a specified number of its shares, at one time, or at specified times, by lot, or by selection made by the board of directors, the payments would not be “amounts distributed in partial liquidation” nor taxable as such under Section 115(c). Yet I have no doubt that such payments would be so taxable. The final call which would bring in all the remaining outstanding shares of the kind subject to call would, by any possible meaning of the word “distribution,” be taxable as a “partial liquidation” under Section 115 (c). I see no reason why those stockholders should be taxed three times as much as the ones whose stock was called earlier.

The plaintiffs’ stock was not called pro rata, or by lot, or by selection of the board of directors, or at all. It was purchased as a result of a general offer made by the corporation to its stockholders, which reminded them that it could call their stock, but that instead it was offering the call price to those willing to sell. It thus offered an opportunity for self-selection, and the plaintiffs sold a part of their stock. If after having purchased all the stock it could get from willing sellers, the corporation had needed more and had called it pro rata from all stockholders, that would have been a “distribution,” but it would be hard to find a reason why the stockholders, including the plaintiffs, should pay three times as much taxes on their surrenders of stock in response to the call as on their earlier sales.

The court’s decision really, it seems to me, is aimed at the equity and wisdom of Section 115(c) of the 1936 Act. That the criticism has validity is shown by the fact that Congress repealed the part of it here in litigation in 1942. Its apprehension, in 1936, that dispositions by corporations to their stockholders were so fraught with possibilities of evading taxes that so-called “partial liquidations” must be taxed substantially like ordinary income, yielded in 1942 to recognition that real evasions could be adequately taxed under Section 115(g), and that other partial liquidations belonged, in fairness, with completel liquidations, in the taxing scheme. But the non-retroactive repeal in 1942 of the provisions of the statute under which the plaintiffs were taxed in 1937 is not a reason why we should now give the former statute a narrower construction than we would have done before it was modified.

JONES, Judge, took no part in the decision of this case.

       Subsection (b) of section 115 is not material to our inquiry.

       The intermediate subsections are not relevant.

       Subsections (b) and (j) are not mate-' rial.


source: Caselaw Access Project

author: LITTLETON, Judge.

license: Public Domain

text:
    SANDERS v. UNITED STATES.
    No. 45469.
    Court of Claims.
    May 7, 1945.

      James E. Grigsby, of Oklahoma City, and Thomas P. Gore, of Washington, D. C., for plaintiff.
    William A. Stern, II, of Washington, D. C., and Francis M. Shea, Asst. Atty. Gen., for defendant.
    Before WHALEY, Chief Justice, and LITTLETON, WHITAKER, JONES, and MADDEN, Judges.
   LITTLETON, Judge.

The question presented is whether the defendant unreasonably delayed plaintiff in the completion of the contract of July 9, 1936, by failing to exercise proper diligence and to furnish with reasonable promptness an adequate number of skilled and semiskilled workmen, and in declining for an unreasonable length of time to release plaintiff from the requirements of art. 20 of the contract (finding 4) on account of the failure or inability of the Employment Service to furnish or refer sufficient workmen to properly man the job.

We think defendant did unreasonably delay plaintiff. The facts established by the evidence show that plaintiff was seriously delayed in the completion of the contract for want of an adequate number of skilled workmen and that defendant delayed unreasonably in obtaining information as to workmen available locally for referral to the job from relief and unemployed rolls. A very large number of unemployed skilled workmen were available locally and in surrounding counties in Oklahoma, many were on the relief rolls, and others were on the rolls of the twenty-seven employment service offices in Oklahoma. If the workmen who were available for referral had been promptly referred by the employment service upon plaintiff’s requisitions, as the contract contemplated would be done, plaintiff would have been able to complete the contract work by or before June 23, 1937, the expiration date of the contract time as extended by an extra work order.

The facts also show that defendant delayed unreasonably in acting upon and granting plaintiff’s protests and requests made continuously from September 21, 1936, that such workmen be furnished or that he be released from the requirements of art. 20 in order that he might directly obtain and employ such workmen who were available and could have been obtained in large numbers locally and throughout the State of Oklahoma. When, on March 26, 1937, defendant waived the employment service requirement of the contract plaintiff immediately and continuously thereafter greatly increased his force of skilled workmen in substantial accord with the requirements of the work, but due to the delay which had occurred as a result of his inability to obtain such workmen through the employment service he was unable to complete the work on time although he made every effort to do so. There was a delay of 73 days when the work was completed on September 7, 1937. This delay was due to the fault of the defendant and was without the fault or negligence of plaintiff.

Except for the delay caused by the above-mentioned failures of defendant plaintiff would have been able to complete the work on or before the expiration date of the contract as extended. Since the delay was due to the failure of defendant to fulfill the duties required of it under art. 20 of the contract there was a breach thereof, and plaintiff is entitled to recover the extra costs and damages amounting to $22,350.41 occasioned by such delay (finding 28).

Plaintiff contends that if the Employment Service had been diligent and if the available skilled workmen had been referred with reasonable promptness or if, in the circumstances, he had been relieved at the proper time of the requirement that he obtain such workmen through the employment service office, he could and would have completed the work, including the amount of work required under change order 14, within the original contract time of 270 days and substantially in accordance with his original progress schedule. This is probably true, as the Administrator of the U. S. Housing Authority concluded from the evidence before him, but in the change order given April 10, 1937, and formally issued August 30, 1937, the parties agreed upon a new contract period for completion of 330 days which expired June 23, 1937. The change order calling for additional work and allowing 60 days additional time, by reason thereof, cannot be regarded in whole or in part as merely an extension of time by the defendant on account of delay in connection with the original contract work, if it had been work such as would not operate to relieve the Government of liability for damages for breach of its contract by causing the delay for which such an extension is granted. Cf. Seeds & Derham v. United States, 92 Ct.Cl. 97. Under the terms of the order which was accepted by plaintiff and his sureties in writing, the additional 60 days agreed upon became a part of the original contract period of 270 days for completion for any and all purposes. The change order was made under and fulfilled the requirements of the equitable adjustment provisions of the contract. It was without restriction or qualification and the additional time applied to the completion of the original as well as to the additional work specified therein. Both parties became entitled to the full benefit of the new contract period of 330 days and either party could point to it in defense of a claim by the other party for damages for delay. Blair v. United States, 321 U.S. 730, 734, 64 S.Ct. 820, 88 L.Ed. 1039.

Counsel for defendant contend, in addition to the contention that the Employment Service referred to in art. 20 acted throughout with reasonable diligence, promptness and efficiency, that plaintiff’s delay in completing the superstructure contract was primarily caused by an existing strike of union workmen, formal notice of which was served on defendant’s employment service January 9, 1937, and that defendant was not responsible in damages for such delay. There was a strike when certain of the union workmen who had been obtained through the unions and employed by plaintiff on the foundation contract quit work for the reason stated in the findings and the unions refused to furnish plaintiff skilled union workmen on the contract in suit, but under the contract plaintiff was entitled to use nonunion skilled workmen and he was required to obtain such workmen through the employment service unless and until he was released from that requirement. The plaintiff, although authorized by art. 20 to do so, was not required by that article to obtain the necessary skilled and semi-skilled workmen through or from the unions, but could secure them through the employment service. He endeavored to do so without success. However, upon receipt on January 9, 1937, of formal notice from the Oklahoma Building Trades Council that a strike existed on the project the Employment Service ceased and declined further to select and refer workmen on plaintiff’s requisitions unless such workmen voluntarily came to the employment service office, asked to be referred, and signed a statement that he had been advised of the existence of the strike. The Employment Service took this action under the Wagner-Peyser Act, 48 Stat. 113. As a result of this situation plaintiff was able to obtain only a very few skilled workmen through the employment service office, due evidently to the fact that available nonunion workmen did not wish to sign a document which in effect amounted to a request that they be employed on a project on which a strike existed. Except for the requirement of art. 20 and the conditions imposed by the employment service on referrals, plaintiff on and after January 9, 1937, could have obtained and employed an adequate number of workmen to carry on the work, and he did so when, on March 26, 1937, defendant released him from the requirements of art. 20 of the contract. Defendant delayed unreasonably in taking this action.

We think it was intended that neither the Wagner-Peyser Act nor art. 20 of the contract should operate, under such circumstances as are here presented, to hamper a contractor in employing on a work-relief project workers who were without jobs and who were willing to work thereon if employed directly by the contractor. That plaintiff could have obtained such workmen is shown by the fact that upon being released from the requirements of art. 20, that he obtain skilled workmen through the employment service, he immediately increased the number of workmen by 114 men and soon thereafter the number of workmen were increased by 224 men. All the additional workmen, except a few bricklayers (all of the 85 houses called for by the contract were of brick construction), were obtained from Oklahoma City and surrounding counties as a result of plaintiff’s advertisements in local papers for skilled workers in various classes.

There is in the record reference to some bad weather in February 1937 and to a controversy from December 28, 1936 to March 13, 1937, with reference to a drawing for installation of boilers and steam lines. The boilers were promptly installed by plaintiff and no change was necessary since the drawing as submitted was approved March 13, 1937. The evidence satisfactorily shows that completion of the contract work as a whole was not delayed either by bad weather or by the boiler controversy.

Plaintiff is entitled to recover $22,350.41 and judgment will be entered accordingly. It is so ordered.

WHALEY, Chief Justice, and MADDEN and WHITAKER, Judges, concur.

JONES, Judge, took no part in the decision of this case.


author: BARD, District Judge.

text:
    BOWLES v. SHONTZ et al.
    No. 4407.
    District Court, E. D. Pennsylvania.
    May 10, 1945.
    Leonard J. Bernstein, Robert J. Callaghan and Cyril F. Pessolano, all of Philadelphia, Pa., for plaintiff.
    Bert Shontz, in pro. per.
   BARD, District Judge.

This is an action for an injunction brought by Chester Bowles, Price Administrator, Office of Price Administration, to restrain violation of Section 4(a) of the Emergency Price Control Act of 1942 as amended, 56 Stat. 23, 765, 57 Stat. 566, 50 U.S.C.A.Appendix, § 904(a), and of Maximum Rent Regulation No. 28, redesignated Rent Regulation for Housing (8 F.R. 7322) issued under the Act.

Jurisdiction of this action is conferred upon this Court by Section 205(c) of the Act, 56 Stat. 33, 50 U.S.C.A.Appendix, § 925(c).

I make the following special findings of fact:

1. At all times since December 1942, Page and Shontz Bus Line has been the owner of premises, 1227 Juniper Street, Quakertown, Pennsylvania, within the Philadelphia Defense-Rental Area; and has rented and now rents an apartment located on the second floor of the subject premises to certain tenants.

2. At all times since December 1942 defendant Lucie Shontz has been and now is a partner of Page and Shontz Bus Line.

3. At all times since December 1942, defendant Bert Shontz has been and now is the authorized agent of John Page and Lucie Shontz, copartners, trading as Page and Shontz Bus Line and, in pursuance of authority granted by his principal, has demanded and received rents from the tenant of the subject premises on various occasions.

4. Pursuant to the provisions of Section 2(a) of the Emergency Price Control Act of 1942, as amended, 56 Stat. 23, 765, 57 Stat. 566, 50 U.S.C.A.Appendix, § 902(a), the Price Administrator issued Maximum Rent Regulation No. 28, effective July 1, 1942, redesignated Rent Regulation for Housing, effective June 1, 1943 (8 F.R. 7322), which Regulation as amended has been at all times since the date of its issuance in full force and effect. This Regulation, inter alia, establishes maximum rents for housing accommodations within the Philadelphia Defense-Rental Area and requires every landlord to file a registration statement with the Philadelphia Area Rent Office.

5. Section 13(8) of this Regulation defines a “landlord” as an owner, lessor, sublessor, assignee or other person receiving or entitled to receive rent for the use or occupancy of any housing accommodations, or any agent of any of the foregoing.

6. Defendants Lucie and Bert Shontz have failed to register the second floor apartment of premises, 1227 Juniper Street, Quakertown, Pennsylvania, as required by the aforesaid Regulation, and have persistently refused to comply although solicited to do so on various occasions by representatives of the Philadelphia Area Rent' Office.

Conclusions of Law

1. This Court has jurisdiction of this action brought by the Price Administrator of the Office of Price Administration, pursuant to Section 205(a) of the Emergency Price Control Act of 1942, as amended, to enjoin acts and practices of the defendants constituting violations of Section 4(a) of the Act and of Maximum Rent Regulation No. 28, effective July 1, 1942, redesignated Rent Regulation for Housing, effective June 1, 1943 (8 F.R. 7322).

2. This Court has jurisdiction over the defendants.

3. Both defendants are “landlords” as defined by Section 13(8) of the Rent Regulation for Housing.

4. Since December 1942, to date, defendants have engaged in acts and practices which constituted, and do constitute, a violation of Section 4(a) of the Emergency Price Control Act of 1942, as amended, by failing to register the apartment located on the second floor of premises, 1227 Juniper Street, Quakertown, Pennsylvania, with the Philadelphia Defense-Rental Area Office.

5. An injunction should issue enjoining the defendants and each of them, their attorneys, agents, servants, and employees, and all persons in active concert or participation with them or any of them, jointly and severally from:

(a) Directly or indirectly demanding or receiving any rent unless and until defendants shall file a true and correct registration statement at the Philadelphia Area Rent Office on the form provided therefor, specifying the rent actually received for the apartment located on the second floor of premises, 1227 Juniper Street, Quakertown, Pennsylvania, and as otherwise required in the Rent Regulation for Housing as heretofore or hereafter amended.

(b) Directly or indirectly, ignoring, evading or circumventing any of the requirements relating to the rental of housing accommodations, established by the Rent Regulation for Housing as heretofore or hereafter amended, pursuant to the Emergency Price Control Act of 1942 as amended. And directing the defendants:

(c) To file a true and correct registration statement at the Philadelphia Area Rent Office on the form provided therefor, specifying the rent actually received for the apartment located on the second floor of premises, 1227 Juniper Street, Quakertown, Pennsylvania, and as otherwise required in the Rent Regulation for Housing as amended.


text:
    GOLDBERGER et al. v. McPEAK et al.
    No. 3744.
    District Court, E. D. Pennsylvania.
    May 9, 1945.

      Eugene H. Feldman, of Philadelphia, Pa., for plaintiff.
    Lloyd J. Schumacker, of Souser, Schumacker & Taylor, all of Philadelphia, Pa., for McPeak.
    A. J. Goldin and Alma H. Arnold, both of Philadelphia, Pa., for New England Fire Ins. Co.
   BARD, District Judge.

These are motions for summary judgment under Rule 56 of the Federal Rules of Civil Procedure, 28 U.S.C.A. following section 723c, against two of the defendants, Thomas A. McPeak, individually and trading as McPeak Garment Carriers, and New England Fire Insurance Company.

Plaintiff brought this action against. Thomas A. McPeak (agent) and McPeak Freight Lines, Inc. (principal), interstate common carriers by motor vehicle, for the loss of eight cartons and bags of children’s dresses. Defendant carriers admit delivery of the goods to them, but deny that loss occurred through any dereliction of duty on their part, but rather that the loss was caused by theft. Defendants further deny that Thomas A. McPeak is the agent of McPeak Freight Lines, Inc., but is merely a lessee of certain trucks belonging to the corporation. The agency of Thomas A. McPeak is the sole issue of fact raised in the pleadings. However, since neither motion for judgment is directed against the McPeak Freight Lines, Inc., the question of fact raised is not material to these motions.

The liability of a common carrier for the loss of goods entrusted to it is that of an insurer unless the loss was caused by act of God or public enemy, by the inherent nature of the goods, or the fault of the owner. Villari v. Jones, 155 Pa.Super. 155, 38 A.2d 379; National Line S. S. Co. v. Smart, 107 Pa. 492. A common carrier, being in the nature of an insurer, is liable for goods lost or stolen while in its custody even though it is shown that the loss occurred through no fault or negligence of the carrier. Consolidated Cigar Corp. v. Corbin, 285 Pa. 273, 132 A. 364.

The summary judgment is intended to enable the prompt disposition of cases which do not require trial. Where the pleadings and affidavits indicate no genuine issue as to a material fact and where the moving party is entitled to a judgment as a matter of law on the facts as admitted, the motion must be granted. Mutual Life Ins. Co. of New York v. O’Donnell, D.C., 29 F.Supp. 1010. Defendant carrier’s answer raises no material question of fact and provides no valid defense to the cause of action.

The motion for summary judgment against Thomas A. McPeak, individually and trading as McPeak Garment Carriers is granted.

The second motion for summary judgment is directed against the New England Fire Insurance Company. Liability is predicated on a motor truck cargo policy No. M. T. 16046 issued by the insurance company to defendant, Thomas A. McPeak. This is a standard motor truck cargo policy covering “dress material (no silks either in part or whole)” including the standard common carrier endorsement, Form UCPC-32, as required by the Public Utility Law of Pennsylvania. Act of May 28, 1937, P.L. 10S3, 66 P.S. § 1101 et seq.

The insurance company contends that the lost cargo of goods was children’s dresses for which there was no coverage in the policy. Contention is made that “dress material” means goods in yardage or in bolts but not such material manufactured into dresses. Such artificial and narrow construction of the words “dress material” is not tenable. The dresses shipped were nothing more than the dress material, for which there was coverage, with addition of applied skilled effort in transforming it into useful articles of clothing. There was no change in the goods, either in chemical composition or in physical nature or properties, which would make the dresses something other than that which the parties intended would be covered by the policy. If the insurer wished to limit the coverage, as it is now claimed, it was incumbent upon it to limit unequivocally the coverage of the policy in express terms.

The answer of the insurer denied the material averments of the complaint for lack of actual knowledge of the facts stated and the insurer demanded proof thereof. These averments were admitted, in substance, by defendant carrier. The insurer now contends that its pleadings have raised material issues of fact; that it may require the plaintiff to prove those facts at trial; that plaintiff therefore is not entitled to summary judgment.

The policy contains the standard common carrier endorsement, Form UCPC-32 which reads, in part: “ * * * the Company hereby agrees to pay within the limits of liability hereinafter provided, any shipper, or consignee, for all loss of or damage to all property belonging to such shipper or consignee and coming into the possession of the Insured in connection with its transportation service, for which loss or damage the Insured may be held legally liable * * (Italics supplied.) The promise to pay the shipper upon proof of insured’s legal liability is clear and unequivocal. Plaintiff is entitled to judgment against the insurance company upon proof of the insured’s legal liability to plaintiff for a loss within the coverage of the policy. Such liability has already been adjudicated in this opinion. Although that judgment' might be attacked on the ground of fraud or collusion, the insurer has not made such contentions in his brief or argument.

Plaintiff’s motion for summary judgment against New England Fire Insurance Company is granted.


author: NORDBYE, District Judge.

text:
    UNITED STATES v. SOUCY et al.
    Cr. No. 6842.
    District Court, D. Minnesota, Third Division.
    May 8, 1945.

      R. Edison Barr, of St. Paul, Minn., for petitioner.
    •Alfred A. Donaghue, of Minneapolis, Minn., for Helen S. Ackerman.
   NORDBYE, District Judge.

The petition filed by Lou J. Sansome sets forth that she and Helen S. Ackerman, on the 11th day of February, 1943, became sureties on the bond of one Lawrence A. Soucy in a criminal proceeding entitled “United States of America v. Lawrence A. Soucy.” It appears that on the 13th day of April, 1943, the default of the said principal and the said sureties was entered of record in said criminal proceeding, and on the 30th day of June, 1943, on motion of the United States of America in the criminal proceeding, judgment was entered in the sum of $1,500 against the defendants Lawrence A. Soucy, Helen S. Ackerman, and Lou J. Sansome. The application of the defendants for reinstatement of said bond and the remission of all or a part of the sum was on the same day denied. Pursuant to an execution issued on said judgment on September 19, 1944, Lou J. Sansome paid the United States, on November 2, 1944, the full principal amount of said judgment, plus interest accrued thereon to the date of payment, or a total of $1,620. At the time of the payment of said judgment, and for the claimed purpose of keeping said judgment in full force and effect as to her co-surety, Lou J. Sansome, following the provisions of Section 9410, Mason’s Minnesota Statutes, filed with the Clerk of this Court a claim for contribution against the said Helen S. Ackerman for one-half of the principal amount of said judgment and the accrued interest thereon, totaling $810.

It appears from the petition that on February 11, 1943, at the time of the execution of said bond upon which the judgment of forfeiture was entered, Helen S. Ackerman, in order to qualify herself as surety, justified before a United States Commissioner, disclosing on her oath in writing, that she was the owner of certain property at 2016 Laurel Avenue, Minneapolis, Minnesota, legally described as Lot Ten (10), Block Two (2), Bryn Mawr, according to the plat thereof on file and of record in the office of the Register of Deeds in and for Hennepin County, Minnesota. It is the contention of Lou J. Sansome that before she signed the bond referred to, said disclosure regarding the property owned by Helen S. Ackerman was made in her presence and that she relied upon such disclosure and signed the bond with Helen S. Ackerman because of her belief and reliance that her said co-surety was the owner of the property referred to.

It further appears that on December 29, 1944, Lou J. Sansome obtained and caused an execution to be issued out of the Clerk’s office on her claim for contribution, not only against Ackerman, but against Soucy, the principal, said execution being issued on the judgment entered as against her, Ackerman, and Soucy by the United States of America. The execution was returned unsatisfied. It is set forth that, subsequent to the execution of said bond, and subsequent to a demand made upon Helen S. Ackerman for payment of her co-surety liability to the said Lou J. Sansome, the said Helen S. Ackerman moved into the property at 2016 Laurel Avenue and now-claims said property to be her homestead, exempt from any execution or lien or otherwise, by reason of any claim that the said Lou J. Sansome may have against her. It is represented that the said Helen S. Ackerman has altered her property status from non-exempt to exempt property for the purpose of defrauding Lou J. Sansome and hindering and delaying the collection of said judgment. The petitioner therefore seeks an order of this Court declaring void as to Lou J. Sansome and setting aside the homestead exemption status claimed in the property at 2016 Laurel Avenue, hereinbefore referred to, by the said Helen S. Ackerman, and for a further order declaring the said property to be subject to the lien of said judgment to the extent of the rights of said Lou J. Sansome to contribution from the said Helen S. Ackerman, namely, one-half of the principal of said judgment, plus interest, totaling $810, together with interest thereon.

As heretofore noted, Helen S. Ackerman appears specially and seeks to dismiss the order to show cause on the grounds, first, that the petition fails to state a claim or cause of action against her for the reason that the United States of America is not a proper party plaintiff, and second, that the Court does not have jurisdiction over the parties or the subject matter in that no Federal question is involved in these proceedings. It may be noted that Helen S. Ackerman’s true name is Helen S. Samuelson. Apparently she was married before she signed the bond referred to, but she used the name of Ackerman because the property she listed was in the name of Helen S. Ackerman, which was her name prior to her marriage.

At the outset, consideration must be given to the alleged applicability of Section 9410, Mason’s Minnesota Statutes 1927. This statute provides:

“Whenever a judgment against two or more persons shall be enforced against or paid by one of them, or one of them shall pay more than his proper share as between himself and the other judgment debtors, he may continue the judgment in force for the purpose of compelling contribution; and if, within ten days after such enforcement or payment, he shall file with the clerk a notice of the amount paid by or collected from him in excess of his proper share, and of his claim for contribution, the clerk' shall make a note thereof on the margin of the docket. Thereupon the judgment shall remain in effect in favor of the party filing such notice for the amount and against the party in such notice specified.”

A statute substantially in the same form has been in effect in this State for many years. The present statute differs from the wording of the earlier enactment, but in so far as the question now being considered is concerned, it is to all intent and purposes the same statute. The earlier statute (Gen.Stat. 1878, Chap. 66, Sec. 330) was considered by the Supreme Court of Minnesota in Ankeny v. Moffett, 37 Minn. 109, 33 N.W. 320. The intention of the framers of the statute and the evident theory of its purpose in keeping a judgment alive after payment is clearly set forth by Judge Mitchell in that decision. After discussing the right of contribution as between wrongdoers, he stated, 37 Minn. at page 111, 33 N.W. at page 321:

“ * * * Where one of several defendants, against whom there was a joint judgment, paid the entire sum, there'was much conflict of opinion as to whether the judgment was necessarily extinguished, or whether it could be kept o'n foot for the benefit of the party making the payment, (Freem. Judgm. § 472); and, even where the right of the party making the payment to the benefit of the judgment was recognized, there was great variety of practice as to the manner in which he could avail himself of it. Independently of any statute Upon the subject, he was sometimes allowed to keep the judgment alive by taking an assignment of it to a third person. Some statutes required him to file his bill -in equity to compel contribution, and as a part of the relief granted, in case he established his claim, he would be allowed to use the judgment for the purpose of enforcing contribution. Other statutes provided that execution for his benefit might be allowed to issue on motion in the same action. Others, again, provided that the judgment should be deemed assigned to the party making the payment, who would, by the act of payment, ipso facto be subrogated to all the rights of the judgment creditor, including the right to execution for its enforcement.

“Under this state of the law on the subject this statute was enacted. The first part of it defines when the right of contribution or repayment exists in favor of a judgment debtor who has paid the judgment, as against his co-judgment debtors. The latter part of the section declares that ‘in such cases (all those referred to in the preceding portion of the section) the person so paying or contributing is entitled to the benefit of the judgment to enforce contribution or repayment.’ To this right no condition is attached, except that of filing notice of payment and claim to contribution with the clerk of the court within 10 days. The benefit of a judgment includes the means of enforcing it by execution. We think that it was the intention of the legislature that the subrogation, in such a case, by operation of law, should be as extensive as that which would occur by express assignment, and that, by payment and filing the required notice, the party paying should be ipso facto subrogated to all the right of the judgment creditor. If a party attempts to enforce contribution when he is not entitled to it, or for a greater amount than is his due, of course he could be enjoined.”

It will be observed that this statute assumes to subrogate the party paying the judgment to all the rights and privileges of the judgment creditor. In the instant case, however, the judgment creditor is the United States. It has not given any assignment of this judgment to the petitioner herein. It must be evident that a State statute cannot put private persons in the shoes of the United States as a judgment creditor, particularly in a criminal proceeding where the government is acting in its sovereign capacity. There is no statute of the United States which assumes to grant such subrogation, nor has the Court been referred to any decision which sanctions such rights in a criminal case. In fact, the Supreme Court of the United States has indicated views which are directly contrary. In United States v. Ryder, 110 U.S. 729, 4 S.Ct. 196, 28 L.Ed. 308, the court held that where a surety on a bail bond pays the amount of the bail by reason of the forfeiture of the principal, he is not entitled to be subrogated to .the rights of the United States, and the court pointed out that the only subrogation is the aid that the government will render in every proper way “by process and without process, to seize the person of the principal and compel his appearance. This is the kind of subrogation which exists in criminal cases, namely, subrogation to the means of enforcing the performance of the thing which the recognizance of bail is intended to secure the performance of, and not subrogation to the peculiar remedies which the government may have for collecting the penalty.” 110 U.S. at pages 736, 737, 4 S.Ct. at page 199, 28 L.Ed. 308.

Moreover, it seems elementary that a State statute cannot enlarge the jurisdiction of this Court, which would be the result if the petitioner were subrogated to the rights of the government as a judgment creditor. In fact, to countenance such practice would be to ingraft on a criminal proceeding a private dispute between two individuals as to which the Court has no jurisdiction. It must be remembered that the judgment herein was entered in a matter which pertains exclusively to proceedings which were invoked by the United States as against the sureties on the bond. The only jurisdiction of this Court which the United States invoked was in the criminal proceeding and the enforcement of the bail contract therein. Petitioner herein seems to proceed on the theory that not only is the State statute referred to applicable herein, but that the petition wherein she seeks to invoke the equitable jurisdiction of this Court to render void the co-surety’s attempt to claim homestead rights in certain real estate is merely ancillary to the proceedings on the bond as to which this Court has jurisdiction, and urges the well-recognized principle that the power to enter judgment includes the power to issue all necessary process to enforce its payment. Phelps v. Mutual Reserve Fund Life Ass’n, 6 Cir., 112 F. 453, affirmed 190 U.S. 147, 23 S.Ct. 707, 47 L.Ed. 987. But the fallacy of petitioner’s argument seems patent. Here, the entering of the judgment was for the benefit of the United States, not for the sureties on the bail bond. Their rights as between themselves by reason of anything growing out of their bail contract or by reason of any equitable rights which may inure to either one is of no concern to the government. The petition herein, therefore, cannot be properly characterized as an ancillary proceeding because when the rights of the government became satisfied by reason of its recovery on the bail bond, and when the defendant, Lawrence A. Soucy, was apprehended and sentenced to prison, which fact appears from all the files and records herein, the proceedings were finally terminated. The purpose for which the jurisdiction of this Court was invoked had been fulfilled. This proceeding is not a continuation of the action instituted by the United States. Judgment entered in behalf of the government has been fully satisfied; nothing else remains to be done. Under no conception of ancillary jurisdiction can it be said that the relief now sought by the petitioner is an outgrowth or outbranch of the motion which the United States instituted in order to obtain judgment on the bond. The proceeding in which jurisdiction of this Court was invoked has been terminated and cannot be revitalized in any dispute between the sureties themselves. This dispute is a private matter between two individuals who are both residents of- this State, and has no relation to the purposes for which the original motion was instituted by the United States.

The Court does not express any opinion as to the rights of contribution under the circumstances. But if the petitioner has such rights, she must be relegated to an independent action in a court of competent jurisdiction. It follows, therefore, that the special appearance of Helen S. Ackerman will be sustained; the order to show cause will be discharged; and the petition of Lou J. Sansome will be dismissed. It is so ordered.

An exception is allowed to the petitioner.


author: HINCKS, District Judge.

text:
    F. H. McGRAW & CO., Inc., v. SHERMAN PLASTERING CO., Inc., et als.
    Civil Action No. 368.
    District Court, D. Connecticut.
    April 10, 1943.

      Watrous, Hewitt, Gumbart & Corbin, by James W. Cooper, all of New Haven, Conn., and Joseph Lotterman, of New York City, for plaintiff.
    Benjamin Slade, of New Haven, Conn., for Sherman Plastering Co.
    Parmelee & Thompson, by Herbert S. MacDonald, all of New Haven, for Aetna Casualty & Surety Co.
    Charles H. Levitt, of New York City, and Richman & Silver, of New Haven, Conn., for John T. D. Blackburn, Inc.
    Walter G. Schelker, Jl\, of Dills, Muecke, Schelker & Levinson, all of New York City, and Richman & Silver, of New Haven, Conn., for Milcor Steel Co.
   HINCKS, District Judge.

This is an action of interpleader brought by F. H. McGraw & Company, the general contractor for the construction of a State Hospital at Newtown, Fairfield County, Connecticut, against Sherman Plastering Company, Inc., a subcontractor, and John T. D. Blackburn, Inc., and Milcor Steel Company, both materialmen of the Sherman Company, all of whom were named as adverse claimants to a fund of some $5,000 claimed to comprise the unpaid balance in the plaintiff’s hands of the payments promised to the Sherman Company under the subcontract. Other defendants, citizens both of New York and Connecticut named in the complaint, were defaulted for failure to plead.

The defendants Blackburn, Inc., and Mil-cor Steel each answered and filed both a counterclaim against the plaintiff and a cross-complaint against the Aetna Casualty & Surety Company, which as the surety on the plaintiff’s bond they had cited in as a third-party defendant.

Findings.

Jurisdictional and General Facts.

1. F. H. McGraw & Company, Inc. (hereinafter referred to as McGraw), is a New Jersey corporation and McGraw at all times mentioned in the complaint was engaged in business as a general contractor and builder, authorized to do business in Connecticut.

2. The Aetna Casualty and Surety Company (hereinafter referred to as Aetna) is-' a Connecticut corporation, and is authorized to engage in the business of a surety company in Connecticut.

3. Milcor Steel Company (hereinafter referred to as Milcor) is a Delaware corporation.

4. John T. D. Blackburn, Inc. (hereinafter referred to as Blackburn) is a New York corporation.

5. Sherman Plastering Company, Inc. (hereinafter referred to as Sherman) is a New York corporation.

6. On August 16, 1938, McGraw was awarded by the State of Connecticut the contract for the construction of the Continued Treatment Units, Fairfield State Hospital, Newtown, Connecticut, hereinafter referred to as the “Fairfield job.”

7. On August 16, 1938, McGraw, as principal, and Aetna, as surety, executed and delivered to the State of Connecticut a bond in the principal amount of $1,446,-000 to secure stated obligations of McGraw under its contract with the State.

8. Said bond has been and now is held by the Commissioner of Public Works of the State of Connecticut for the use and benefit of materialmen on the said Fair-field job.

9. The condition of said bond is as follows:

“Now therefore, if the .said Principal shall promptly pay for all materials furnished and labor supplied or performed in the prosecution of the work included in and under the aforesaid contract whether or not the material or labor enter into and becomes a component part of the real asset, then this obligation shall be null and void, otherwise it shall remain and be in full force and effect.

“Any party, whether a subcontractor or otherwise, who furnishes materials or supplies or perform labor or services in the prosecution of the work under this contract and who is not paid therefor, may bring a suit on this bond in the name of the State, prosecute the same to a final judgment and have execution thereon for such sum or sums as may be justly due, provided, however, that the State .shall not be liable to furnish counsel nor for the payment of any costs or expenses of any such suit.”

10. On September 1, 1938, McGraw subcontracted in writing, Exhibit 2, with Sherman for the latter to do certain work, and to furnish certain materials upon the Fairfield job, including the metal furring, metal lathing, corner beads, base beads and plastering. Under this subcontract Sherman promised to furnish labor and material for the Fairfield job “in accordance with the .specifications, general conditions,” etc., of McGraw’s principal contract with the State of Connecticut. And by the terms of the general conditions of the principal contract every subcontractor was to agree “to be bound to the contractor * * * and to assume toward him all the obligations and responsibilities that he * * * assumes toward the owner.” And the owner, i. e., the State of Connecticut, reserved the right not only to withhold from the contractor so much of the approved payments due him as might be necessary “to assure the payment of just claims then due and unpaid of any person supplying labor or materials for the work” but also to terminate the contract if “the contractor shall fail to make prompt payment to persons supplying labor or materials for the work.” Moreover, the subcontract contained an express provision requiring Sherman “in case of any lien or liens upon .said work or materials by reason of any indebtedness for labor and materials accrued against the contractor (Sherman), to pay the same or cause the same to be discharged by giving a bond.”

11. McGraw discharged all its obligations to Sherman under its subcontract but withheld payment of the sum of $5,382.90 which sum upon the bringing of this action McGraw deposited in the registry of the court.

12. Blackburn and Milcor both supplied materials to Sherman which were used under Sherman’s contract with McGraw in the Fairfield job and each has made claim in excess of $5,382.90 against McGraw and against Aetna on account of the materials thus sold and used.

13. Prior to action brought, neither Sherman nor Milcor made any claim against McGraw to moneys claimed to be due from McGraw under its subcontract with Sherman described in Paragraph 10 hereof. By counterclaim and third-party complaint both claimed against McGraw and Aetna under the bond referred to in Paragraphs 7, 8 and 9 hereof.

14. Prior to action brought, Blackburn made claim against McGraw for moneys claimed to be due and owing from McGraw to Sherman under the subcontract. And by counterclaim and third-party complaint herein Blackburn also is pressing its claim against McGraw and Aetna under said bond.

Facts Bearing Particularly upon McGraw-Milcor Relationship.

15. The materials furnished by Milcor as set forth in Paragraph 12 were delivered on the job in Connecticut between August 30, 1939 and October, 1939, and were sold to Sherman at prices which in the aggregate amounted to $6,372.51.

16. No part of the purchase price therefor has been paid, and Sherman is still indebted to Milcor therefor.

Facts Bearing Particularly upon McGraw-Blackburn Relationship.

17. The materials furnished by Blackburn as set forth in Paragraph 12 were delivered on the job in Connecticut between March 24, 1939, and January 9, 1940. Those delivered prior to July 19, 1939, were fully paid for by Sherman and are not involved • in this action. Those delivered after July 19, 1939, were sold to Sherman at prices which in the aggregate (exclusive of an item of $68. for materials returned) amounted to $9,009.64.

18. The Blackburn sales were made on orders made and accepted in the State of New York, and possession of the goods sold passed from Blackburn or its agent in New York or Ohio to common carriers through whom the goods were delivered to Sherman on the job in Connecticut. From its contract as interpreted in the light of these surrounding circumstances, I find that the parties intended that Sherman’s performance was to be by making payment for the goods to Blackburn at Blackburn’s office in New. York.

19. Between June, 1938, and September, 1941, Blackburn furnished other materials to Sherman for jobs other than the Fair-field job.

20. Subsequent to July 19, 1939, Sherman made numerous payments to Blackburn without then directing whether said payments should be applied against its indebtedness for the material furnished to the Fair-field job or against its indebtedness for the material furnished to Sherman’s other jobs.

21. At the time of said payments Blackburn maintained in its books a single running account of all its sales to Sherman, including sales for the Fairfield job and sales for numerous other jobs, and upon the receipt of the payments by Sherman as aforesaid credited said payments to Sherman on said running account without making any allocation of any of said payments to any particular job.

22. If the payments described in Paragraph 20 be deemed all applied against the earliest sales made by Blackburn to Sherman then unpaid, Sherman’s indebtedness to Blackburn on account of material furnished for the Fairfield job was fully paid and discharged. But if Sherman’s said payments be deemed all applied against indebtedness for material furnished for jobs other than the Fairfield job, then Blackburn’s claim of $9,009.64 for the material furnished to the Fairfield job remains wholly unpaid.

23. There is no proof that prior to January 22, 1940, Blackburn manifested an intent to apply the several payments theretofore made by Sherman to Sherman’s indebtedness on account of specific sales of material used elsewhere than in the Fairfield job. On January 24, 1940, at Sherman’s request —indeed at Sherman’s instigation — Blackburn first formulated an intent to apply all payments received from Sherman subsequent to July 19, 1939, to jobs other than the Fairfield job and on the strength of such allocations notified McGraw by letter that its account against Sherman on account of the Fairfield job was unpaid to the extent •of $8,640.16. But neither then nor thereafter until long after this action had been instituted did Blackburn have the data which would enable it to allocate each payment theretofore received from Sherman against specific sales theretofore made to Sherman.

Facts Bearing Particularly on the McGrawU. S. Relationship.

24. On July 14, 1941, social security taxes in the amount of $6,646.30, plus interest, were duly assessed against Sherman. Thereafter notice and demand duly issued to the taxpayer. And on July 30, 1941, a notice of tax lien was duly filed with the 'Clerk of this Court. In 1940, the taxpayer was insolvent and made an assignment for the benefit of creditors and at the time of trial was wholly without assets. Thereafter the United States moved to intervene in this action to enforce its claim for said taxes due from Sherman against the fund deposited in the registry of the court. By order of December 16, 1941, it was admitted as an intervenor and filed its cross-complaint asserting a prior claim to said fund for the satisfaction of said taxes.

Opinion.

Milcor Claim.

McGraw and Aetna dispute this claim upon the contention that Milcor’s claim against Sherman had been ássigned to the American Credit Indemnity Company with which Milcor had a policy of credit insurance. To support the contention, Mc-Graw points to certain circumstantial evidence. It insists that the fact that after Milcor refused, when Sherman’s account was in arrears, to extend credit to Sherman it thereafter did extend fresh credit, indicates that its claim on account of the Fair-field job had been paid by the Indemnity 'Company. It argues that authority given by Milcor to the Indemnity Company to negotiate with Sherman for a settlement of the account imports that the claim had been irrevocably assigned to the Indemnity Company.

No such far-fetched inferences are justified nor is the aggregate effect of such evidence sufficient to disturb my finding that Milcor is still the unfortunate owner of this ancient unpaid claim. That the Indemnity Company attempted to collect from Sherman, and thereby to escape a potential claim under its policy, does not import that it was acting as owner of the claim.

Milcor is entitled to recover against the obligors on the bond in the principal amount of $6,372.51.

Blackburn Claim.

This claim is for price of goods sold to Sherman for the Fairfield job. The claim is valid, of course, only if it is still unpaid. It is indeed unpaid if payments made by Sherman subsequent to July 19, 1939, were in legal effect applied by Blackburn against Sherman’s indebtedness for material furnished for jobs other than the Fairfield job. It is thus necessary to determine at the outset what law governs the effectiveness of those applications.

McGraw contends that the law of Connecticut controls because the principal contract provided for the construction of a public building in Connecticut and is covered by a bond required by the Public Acts of Connecticut and it is upon this bond that the claim is predicated. I agree that all rights created by the bond must be determined by the law of Connecticut. Thus Blackburn, which was not a party to the bond, owes its right to sue on the bond to the law of Connecticut which authorizes actions by third-party beneficiaries. Cf. Byram Lumber & Supply Co. v. Page, 109 Conn. 256, 146 A. 293.

But Blackburn’s right to payment arises not from the bond but from its contract with Sherman. That contract must determine whether or not the right which it created has been discharged by payment. If so, it has no claim at all; if not, it has a claim which is enforceable against Mc-Graw and Aetna under the bond.

The bond is conditioned upon payment “for all materials furnished * * * in the prosecution of the work.” It secures “any party, whether a subcontractor or otherwise, who furnished materials * * * and who is not paid therefor.” Read in the light of the principal contract which is incorporated into its terms, the bond clearly contemplated that the flow of materials to the job would be accomplished by extraneous contracts such as that between Blackburn and Sherman. The bond did not purport to shape or limit all the rights created by these contracts. Plainly it must be construed as intending that the rights of materialmen and the discharge of those rights should be determined under the law applicable to the contracts creating the rights and that the obligors should stand liable only for the discharge of such rights as thus determined.

Since the Sherman-Blackburn contract was made in New York and Sherman’s performance thereunder was to be by payment in New York, the law of New York must determine whether Blackburn’s right under the contract has been discharged. This conclusion follows from a proper interpretation of the bond: there is present no question involving a conflict of laws.

If, however, the point could be deemed to raise a conflict of laws, the rule of the Restatement of Conflict of Laws, Sec. 368, would control. “The law of the place of performance governs the application of a payment to one or another of several debts payable there by the person making the payment to the person receiving it.” Here the debts involved were payable at Blackburn’s office in New York and the place of performance was New York.

Under the law of New York, it is plain that in cases of running accounts when the debtor in making a payment fails to indicate how he wishes the payment to be applied, the debtor is without power thereafter to direct the application but the creditor may make the application as his interest shall suggest. Shipsey v. Bowery National Bank, 59 N.Y. 485; Sheppard v. Steele, 43 N.Y. 52, 3 Am.Rep. 660; Mack v. Colleran, 136 N.Y. 617, 32 N.E. 604. Indeed, this rule of law seems not to be peculiar to New York; it is widely recognized elsewhere. A. L. I. Restatement of Contracts, Sec. 387(b) ; Williston on Contracts (Rev.Ed.1938) Sec. 1796.

To be sure, the Restatement (Sec. 387(b)) specifies that in such cases the creditor must manifest his intention to make his specific application “within a reasonable time.” But the New York Annotations to the Restatement note that this limitation is not in accord with the law of New York, relying largely upon Bank of California v. Webb, 94 N.Y. 467, and Wanamaker v. Powers, 102 App.Div. 485, 93 N.Y.S. 19. In the Bank of California case, it was held that the creditor’s application was effective though not made until over a year after action brought.

Perhaps the New York rule can be reconciled with the language of the Restatement if “a reasonable time” for the specific application be construed, as the New York cases seem to construe it, as being the period of time within which a specific application may be made without injury to the position of the debtor. This view is in harmony with the rule that where neither debt- or nor creditor makes a specific application the court will make the application to the oldest unpaid debt unless the equities of the particular case clearly indicate that some other application is required in justice. Carson v. Federal Reserve Bank, 254 N.Y. 218, 172 N.E. 475, 70 A.L.R. 435; Restatement, Secs. 387(c), 394. It is in harmony also with the trend of the common law to favor the creditor when there are no impelling equities of the debtor which interpose. Williston, Sec. 1800, Cf. Dairymen’s League Co-operative Ass’n v. Hartford Accident & Indemnity Co., 252 App.Div. 527, 300 N.Y.S. 431, 436. Why indeed should the creditor not be allowed even after action brought to make a specific application to his own advantage if the debtor is no worse off thereby than if the application had been earlier made ? In this sense, perhaps, an application even though long delayed may be deemed to have been made within a reasonable time.

Applying, then, the New York rule to the facts of this case, I hold that Blackburn’s counterclaim and cross-complaint herein must be treated as a specific allocation of the Sherman payments to the price of goods furnished to jobs other than the Fairfield job not made too late to have effect. Certainly Sherman, the debtor, was not injured by any lack of timeliness in the making of the application: on the contrary, it has sought, belatedly to be sure, to accomplish the very application which Blackburn asserts.

To be sure, it may be that when a debtor, without direction, makes a payment with money which he is under fiduciary or contractual obligation to apply specifically to the discharge of one out of several debts, the creditor, if having knowledge not only of the source of the money but also of the debtor’s obligation with respect thereto, is limited in his power of application and must apply the payment consistently with the debtor’s obligation. Restatement, Sec. 389 (e); Williston, 2d Ed., Sec. 1804.

But this is not such a case. Here the money received by Sherman from McGraw became Sherman’s and Sherman, notwithstanding its obligation to McGraw to pay its materialmen out of its general estate, was under no obligation to apply that particular money received from McGraw to the discharge of its indebtedness to materialmen. Sheppard v. Steele and Mack v. Colleran, supra.

Nor can there be any question under the facts here as to whether Blackburn did indeed eventually make a specific allocation. For by its very counterclaim and cross-complaint herein Blackburn sufficiently manifested its intention to make the application which it asserts. Indeed, I think that under the New York rule Blackburn’s letter of January 24, 1940 (Findings, Par. 23) the contents of which had already been disclosed to Sherman, was sufficient to accomplish the application asserted.

McGraw and Aetna seem to have assumed that the application could only be made by entries on original books of record showing the specific application asserted. If this assumption be sound in law, it is true that Blackburn cannot prevail. Neither in January, 1940, nor when this action was brought, nor indeed when it filed its cross-complaint and counterclaim herein, were all the payments received from Sherman shown in Blackburn’s books as specifically applied against goods furnished for specific jobs.

But under the rule of the Restatement, Sec. 391, there is nothing to require that a specific application by a creditor to be effective must be recorded on the creditor’s books; it is enough that the creditor notify the debtor or give him some manifestation indicating his intention to make the application. And the law of New York on the point is no less liberal than the rule of the Restatement. Cf. Bank of California v. Webb, supra. True enough, book entries may serve as evidence of specific applications. Van Rensselaer’s Ex’rs v. Roberts, 5 Denio, N.Y., 470. But I find no New York case which even suggests that supporting book entries are indispensable. Indeed, in Dairymen’s League Co-operative Ass’n v. Hartford Accident & Indemnity Co., supra, a specific application by the creditor to items covered by an indemnity bond seems to have been inferred from the bare fact that the creditor would not have required the debtor to furnish the bond unless it had intended to make such applications.

It is true that there seems to be a dearth of cases in New York which discuss just how the creditor may exercise his power of application. The dearth, however, may plausibly be attributed to the liberal rule in New York whereby the application is not required to be made before the bringing of the action. Since the assertion of an application in advance of litigation is not required, an application asserted in the complaint seems generally to have been accepted without contest or discussion as a sufficient manifestation of the creditor’s intent. Cf. Shipsey v. Bowery National Bank, supra, and Mack v. Colleran, supra.

I do not overlook the evidence that shortly after Blackburn’s letter of January 24, 1940, McGraw obtained from Blackburn’s bookkeeper, Legge, a statement (Exhibit 25) which implied that a somewhat different application, and one less favorable to Blackburn, had been made than that now asserted. But Blackburn’s books contain no more support for Legge’s alleged allocation than for Blackburn’s. Nor was there evidence that Legge, the bookkeeper had authority to bind his employer by making an allocation even if he so intended. Plainly a statement, so elicited from the employee in the absence and without the authority of the employer, cannot prevail over contrary manifestations of intention theretofore and thereafter made by the employer.

Indeed, for Blackburn to prevail, there was no need for it to show in detail, as it attempted, to just what jobs, other than the Fairfield job, it applied each payment. Having shown that the aggregate amount of Sherman’s indebtedness on the other jobs was sufficient to absorb the payments which gave rise to this controversy, and having in its counterclaim and cross-complaint — not to mention its letter of January 24, 1940— manifested an intention to apply the payments elsewhere than to the Fairfield job, it was enough. For a debtor, by seasonable direction may require, simply, that all its payments shall be allocated elsewhere than to a specified debt. Restatement, Sec. 387, Comment (i). On principle, a creditor should have the same power. So here, Blackburn’s expressed intention to exclude the Fairfield debt from participation in the asserted allocation, was effective, — coupled as it was by evidence that the aggregate indebtedness on the other jobs was sufficient to absorb all payments made.

Blackburn’s letter of January 24, 1940, claimed somewhat less than the debt as established by the proofs. But this minor variance is of little significance. Even if the variance is due to some modification in the application theretofore made, the modification was assented to by Sherman, at least impliedly, and hence is effective. Restatement, Sec. 392. Louis v. Bauer, 33 App.Div. 287, 53 N.Y.S. 985.

I hold, therefore, that Blackburn is entitled to recover in the principal sum of $9,009.64.

I have doubt, however, whether after such a long-delayed application of Sherman’s payments Blackburn is entitled to interest. If the point is pressed, the parties may be heard on that issue at the settlement of the decree.

Claim of the United States.

Under the Internal Revenue Code, Sec. 3670, 26 U.S.C.A. Int.Rev.Code, § 3670, it is provided: “If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount * * * shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.” And under Sec. 3671 of the Code, 26 U.S. C.A. Int.Rev.Code, § 3671, it is provided that the lien in favor of the Government "shall arise at the time the assessment list was received by the collector.”

Sherman was and is indebted to the United States in the principal sum of $6,646.30 on account of Social Security taxes. The sum was assessed against Sherman on a list sent to the Collector on July 14, 1941. As a result, the Government claims that the moneys paid into court constituted “property” of Sherman subject to lien in favor of the Government. And by virtue of this asserted lien and the insolvency of Sherman, the Government claims a right to the fund in court prior to that of any of the parties hereto.

But never since the asserted lien was claimed to have attached did Sherman have any “property” or “right to property,” within the meaning of Sec. 3670 of the Code, arising from its subcontract with McGraw. See Finding, Par. 10. For by express provision incorporated into the subcontract by reference, the State might treat the failure of prompt payment to materialmen as a breach of the principal contract. And just as McGraw, under the principal contract, was obligated for the prompt payment of materialmen generally, so Sherman under its subcontract with McGraw was obligated to make prompt payment to its materialmen.

And even if it were impossible to spell out in the subcontract an express obligation whereby Sherman was to pay its own materialmen, from the surrounding circumstances such an obligation must needs be implied. In the light of prevailing business practice, it would be preposterous to infer a mutual intent that McGraw should obligate itself to pay Sherman $80,000 for labor and material not paid for. A contrary intent is clearly to be inferred. Sherman dealt with the materialmen on its own responsibility. The materialmen consistently billed Sherman, not McGraw. And Sherman to the extent of its ability did indeed discharge the claims of its materialmen.

We have, therefore, this situation: Under the subcontract, in exchange for a performance on the part of McGraw taking the form of stipulated payments, McGraw was entitled to a two-fold performance on the part of Sherman, viz., (1) the furnishing of the stipulated labor and material and (2) the prompt payment by Sherman for the stipulated labor and material. Assuming, and it is not disputed, that Sherman furnished the labor and material, nevertheless at least to the extent that Sherman failed to pay Blackburn and Milcor there has been a failure of consideration on the part of Sherman under the subcontract. And this failure of consideration at all times has been available to McGraw as a defense pro tanto, or by way of recoupment, to any claim which Sherman might make against McGraw on the subcontract. Williston on Contracts, 2nd Ed., Par. 813, et seq., 883; Restatement of 'Contracts, Sec. 274; Tice v. Moore, 82 Conn. 244, 73 A. 133, 17 Ann. Cas. 113.

The case is also within the rule of Sec. 270 of the Restatement. For under the contract McGraw was privileged to withhold 10% ($8,000) of the contract price for 65 days after completion. Before this time had arrived Sherman had defaulted on its obligation to make “prompt” payment to materialmen. Cf. Bridgeport Hardware Corp. v. Bouniol, 89 Conn. 254, 93 A. 674.

As a result, at no time since it furnished the labor and materials has Sherman been in a position to demand from Mc-Graw the full payment stipulated in the subcontract; it was entitled to receive from McGraw only the contract price less the amount of its unpaid indebtedness to Blackburn and Milcor. Since the amount owed by Sherman to Blackburn and Milcor exceeded the balance due to Sherman on the contract price, Sherman had no “right of property” in the unpaid contract to which the Government’s claimed lien could attach. And merely by assertion of a lien the rights of the Government rose “no higher than those of the taxpayer whose right to property is sought to be levied on.” Karno-Smith Co. v. Maloney, 3 Cir., 112 F.2d 690, 692.

I hold, therefore, that the cross-complaint of the United States should be dismissed.

Motions to Dismiss Complaint.

At the trial, both Milcor and Blackburn moved to dismiss the complaint on the ground that it fails to state a proper case for an action of interpleader. At the time I took a contrary view but upon the insistence of counsel reserved the point for consideration upon briefs. After full deliberation over the points thus raised, I still must rule that the motions should be denied.

McGraw5 s complaint, to be sure, is not expressly laid upon the bond: It makes no mention of the bond. It does, however, allege facts showing that it is exposed to the hazard of multiple claims under the subcontract with Sherman. Granted that material-men have in law no direct right of action against McGraw under the subcontract nevertheless they might make claim thereunder, notwithstanding. And here, as it happens, Blackburn (Findings, Par. 14) was indeed expressly making claim under the subcontract. Also the United States,-— whose intervention relates back. And the several named defendants who have been defaulted must be deemed to have admitted that they, too, were making such claims.

Perhaps if Milcor had seasonably and unequivocally renounced all claim under the subcontract and had thereupon sought to be dropped as a defendant, its motion to that effect should have been granted. But it is quite another thing to ask at this late date for a dismissal of the complaint on the technical ground advanced. Cf. Federal Rules of Civil Procedure, rule 12(b), 28 U.S.C.A. following section 723c.

Moreover, Milcor and Blackburn by their counterclaims have brought the issues involved under the bond into the case. When McGraw, as obligor under the bond, pays the judgment herein in favor of Milcortand Blackburn it will become subrogated to their rights against Sherman. Indeed, it is implicit in my ruling dismissing the claim of the United States that any claim of Sherman’s against McGraw under the subcontract is subj ect to recoupment in the amount of Sherman’s unpaid indebtedness to Mil-cor and Blackburn.

Altogether I am satisfied that McGraw was subject to multiple liabilities and that the case is within the scope of the Federal Interpleader Act, 28 U.S.C.A. § 41(26), as liberalized by Federal Rules of Civil Procedure, rule 22, even though in the outcome, Sherman having suffered a default, I find none of the defendants entitled to the specific fund in court. The fund, of course, by appropriate provisions in the decree, should be made available for the discharge, pro tanto, of McGraw’s obligations to Mil-cor and Blackburn under the bond, as determined herein. Perhaps this can most conveniently be accomplished by a provision that McGraw, upon filing in court a satisfaction of the judgments in favor of Milcor and Blackburn, shall be entitled to a return of the fund.

Conclusions of Law.

1. On its counterclaim and complaint Milcor is entitled to judgment against Mc-Graw and Aetna in the principal sum of $6,372.51.

2. All questions relating to the application by Blackburn of payments received from Sherman must be determined under the law of New York.

3. Under the law of New York, Blackburn made valid and effective applications of payments received from Sherman as a result of which Sherman’s indebtedness to Blackburn on account of the Fairfield job remained unpaid in the amount of $9,009.64.

4. On its counterclaim and complaint, Blackburn is entitled to judgment against McGraw and Aetna in the principal sum of $9,009.64.

5. The claim of the United States should be dismissed on the merits.

6. The motions of Milcor and Blackburn to dismiss McGraw’s complaint should be denied.

Counsel may submit a comprehensive draft judgment for entry, on a week’s notice to opposing counsel, which may be set-tied in chambers at New Haven on April 28th at 12 o’clock, noon, at which time also counsel may be heard on the issue of interest, if interest is claimed.