423 F.2d 73 (5th Cir. 1970), 27396, Bankers Mortg. Co. v. United States

Docket Nº:27396.
Citation:423 F.2d 73
Party Name:BANKERS MORTGAGE COMPANY, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.
Case Date:February 20, 1970
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit

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423 F.2d 73 (5th Cir. 1970)



UNITED STATES of America, Defendant-Appellee.

No. 27396.

United States Court of Appeals, Fifth Circuit.

February 20, 1970

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Walter P. Zivley, Carroll Shaddock, Liddell, Dawson, Sapp & Zivley, Houston, Tex., for appellant.

Anthony J. P. Farris, U.S. Atty., James R. Gough, Asst. U.S. Atty., Houston, Tex., Richard M. Roberts, Acting Asst. Atty. Gen., Lee A. Jackson, William A. Friedlander, Elmer J. Kelsey, Attys., Tax Div., Dept. of Justice, Washington, D.C., Johnnie M. Walters, Asst. Atty. Gen., for appellee.

Before GEWIN, THORNBERRY and AINSWORTH, Circuit Judges.

GEWIN, Circuit Judge:

We are again called upon to determine the tax consequences of a 1937 transaction between Bankers Mortgage Company (taxpayer) and Humble Oil and Refining Company (Humble). Over a quarter of a century ago this court 1 quoted Mr. Justice Frankfurter 2 in characterizing the transaction here under scrutiny 'as 'a technically elegant arrangement whereby an intricate outward appearance was given to the simple sale' from the taxpayer to the Oil Company.' Apparently unburdened by the intervening years and undaunted by our prior decision affirming an exhaustive Tax Court decision, the taxpayer now argues that this court committed error years ago; and if not, new developments and facts now require a judgment in its favor. 3 Taxpayer initiated these proceedings

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in the United States District Court for the Southern District of Texas to recover excess income taxes paid for 1937 ($165,074.10) and 1962 ($82,587.45). The court found that a prior judicial determination rendered the 1937 claim res judicata and collaterally estopped taxpayer from asserting the 1962 claim. We affirm.

The district court made the following findings of fact: Prior to 1937, taxpayer leased its mineral rights in a 299.5 acre tract in the Sugarland Oil Field to H. C. Cockburn. The lease awarded to taxpayer certain royalties from the production of any oil or gas. Cockburn's interest under the lease was subsequently assigned to Humble.

In June 1937, taxpayer and Humble entered into an agreement which taxpayer describes as a 'loan.' Taxpayer received $300,000 from Humble in return for two promissory notes, one for $100,000 and the other for $200,000, payable to Humble. Both notes were due on or before June 9, 1967 and bore 4% Annual interest rates. Interest on the $100,000 note was payable monthly and interest on the $200,000 note was due in a lump sum at maturity. The notes were secured by a deed of trust covering taxpayer's mineral interest in the Sugarland tract, including taxpayer's royalty interest under the Cockburn lease.

The terms of the above-described transaction were further defined by an additional agreement. It provides that the royalties (otherwise payable to taxpayer by Humble under the provisions of the Cockburn lease) will be used by Humble to repay the notes in the following order: The royalties will first be applied to the interest and principal on the $100,000 note and then to the principal of the $200,000 note. The district court summarized the additional options contained in the agreement as follows:

(a) Humble was given the option to purchase the * * * mineral interest of Bankers Mortgage at or within 20 days after the liquidation of maturity of the indebtedness. If such option were exercised, the interest due on Note No. 2 ($200,000 note) would be cancelled, and Humble was required to convey to Bankers Mortgage Company a .0014 royalty interest in oil and gas and a 5/9¢ per long ton royalty on sulphur produced by Humble in the Sugarland Oil Field. (b) Bankers Mortgage was given the option to require Humble to exercise the option described in (a) supra, if Humble did not voluntarily exercise it by giving notice to Humble to that effect within 20 days of Humble's failure to exercise it. (c) If Humble did not exercise its option to purchase the property and Bankers Mortgage did not exercise its option to require Humble to purchase the property, Bankers Mortgage could pay the remaining balance due under

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the note and secure a release of the lien. (d) Bankers Mortgage was given the option at any time to cancel the indebtedness and interest due by conveying the full . . . mineral interest owned by Bankers to Humble. (e) If the production from the Sugarland Field ceased and the property was abandoned by Humble before the full principal and interest payable on Note 1 ($100,000 note) was fully paid, the notes would be cancelled, and Humble would have the option to require Bankers Mortgage to convey the property to Humble under the same terms as described in (a) supra.

Taxpayer's 1937 income tax return described this entire transaction as a 'loan.' The Commissioner disagreed and assessed an income tax deficit on the theory that a portion of the $300,000 received from Humble was taxable as gain from the sale of taxpayer's mineral interest in the 299.5 acre tract. This controversy was fully litigated in the Tax Court which rendered a judgment for the Commissioner. On appeal, this court affirmed the Tax Court's decision. 4

In spite of the tax consequences of the transaction, the parties continued to abide by their own understanding of the agreements. 5 By early 1962, the royalty payments due taxpayer under the Cockburn lease has completely paid the principal of both notes and the interest on the $100,000 note. Taxpayer then exercised its option to pay the interest ($137,389.29) on the $200,000 note and receive from Humble a release from the deed of trust lien. Taxpayer's 1962 income tax return indicates that the payment is 'interest on a loan' and therefore deductible. When the Commissioner assessed a tax deficiency based on the improper interest deduction, taxpayer paid the assessment and initiated these proceedings claiming a refund for excess taxes paid, not only for 1962, but also for 1937.

The 1937 Claim

Taxpayer contends that the trial court erred in denying its claim for refund of a portion of its 1937 income taxes. It attempts to avoid the fatal impact of the doctrine of res judicata by seeking relief from the prior judgment under Rule 60(b)(6) of the Federal Rules of Civil Procedure. 6 In the alternative, taxpayer suggests that relief may properly be awarded by considering taxpayer's claim an 'independent action to relieve a party from a judgment.' 7

The purpose of Rule 60(b) is to define the circumstances under which a party may obtain relief from a final judgment. The provisions of this rule must be carefully interpreted to preserve the delicate balance between the sanctity of final judgments, expressed in the doctrine of res judicata, and the incessant command of the court's conscience that justice be done in light of all the facts. In its present form, 60(b) is a response to the plaintive cries of parties who have for centuries floundered, and often succumbed, among the snares and pitfalls of the ancillary common law and equitable remedies. It is designed to remove the uncertainties and historical limitations of the ancient remedies but to preserve all of the various kinds of relief which they offered.

Rule 60(b) contemplates two district procedures for obtaining relief from a final judgment. The first is by motion. 60(b) is directly involved in

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this procedure as it provides (a) the authority to secure relief by motion, (b) the time limitations within which the motion must be filed, and (c) the grounds on which relief can be predicated. This procedure is intended to completely replace the ancillary common law and equitable remedies of coram nobis, coram vobis, audita querela, bill of review and bill in the nature of a bill of review, 8 which are specifically abolished by this rule. The motion for relief from final judgment must be filed in the district court and in the action in which the original judgment was entered. 9 No independent jurisdictional ground is necessary because the motion is considered ancillary to or a continuation of the original suit. 10 Obviously a 60(b) motion addressed to a United States District Court is not the proper vehicle for securing relief from a decision of the Tax Court.

The second procedure contemplated by Rule 60(b) is an independent action to obtain relief from a judgment, order, or proceeding. The first saving clause specifically provides that 60(b) does not limit the power of the court to entertain such an action. 11 It is important to emphasize that 'independent action,' as used in this clause, was meant to refer to a procedure which has been historically known simply as an independent action in equity to obtain relief from a judgment. 12 This action should under no circumstances be confused with ancillary common law and equitable remedies or their modern substitute, the 60(b) motion. 13

When a court grants relief from a judgment or decree by a new trial or rehearing, or by one of the ancillary common law or equitable remedies or their modern substitute, a motion, it is exercising a supervisory power of that court over its judgment; but the original bill, or independent action, to impeach for fraud, accident, mistake or other equitable ground is founded

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upon an independent and substantive equitable jurisdiction. 14

The essential elements of the independent action were outlined by the Eighth Circuit in National Surety Co. v. State Bank:

(1) a judgment which ought not, in equity and good conscience, to be enforced; (2) a good defense to the alleged cause of action on which...

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