Ford v. Buffalo Eagle Colliery Co.

• Decision Date: 10 September 1941
• Docket Number: No. 4728.,4728.
• Citation: 122 F.2d 555
• Parties: FORD et al. v. BUFFALO EAGLE COLLIERY CO. et al.
• Court: U.S. Court of Appeals — Fourth Circuit

122 F.2d 555 (1941)

FORD et al. v. BUFFALO EAGLE COLLIERY CO. et al.

No. 4728.

Circuit Court of Appeals, Fourth Circuit.

September 10, 1941.

Before SOPER, DOBIE, and NORTHCOTT, Circuit Judges.

Walter L. Brown, of Huntington, W. Va. (C. W. Strickling, Jackson N. Huddleston, and Fitzpatrick, Brown & Davis, all of Huntington, W. Va., on the brief), for appellants.

E. L. Hogsett, of Huntington, W. Va. (J. W. St. Clair and Hogsett, St. Clair & Greene, all of Huntington, W. Va., on the brief), for appellees.

DOBIE, Circuit Judge.

James H. Ford, Leroy Allebach, Gideon S. Borden, and Robert Mankin, all appellants herein, are the holders of certain notes executed by the Buffalo Eagle Colliery Company (hereinafter called Colliery Company) and secured by a deed of trust covering all the property and assets of the Colliery Company. After appellants' deed of trust was both executed and recorded, the Collector of Internal Revenue seized the assets of the Colliery Company and sold them in satisfaction of the federal income taxes assessed against this company. The property was purchased, at a sale under distraint for the income taxes, by Joseph Lemkuhl, one of the appellees herein, who purported to purchase the property for himself, but who, in reality, purchased the property for the sole stockholders of the Colliery Company, i. e., P. J. Riley, Catherine B. Riley, and John R. Simpson, all appellees herein. Subsequent to Lemkuhl's purchase of the aforementioned property, the Rileys and Simpson formed the Buffalo Eagle Mines Incorporated (hereinafter called the B. E. Mines), another appellee herein. Lemkuhl executed a deed conveying all the purchased property to the B. E. Mines in consideration of the issuance to him of 1,995 shares of its stock. He, then, delivered this stock of the B. E. Mines to the Rileys and Simpson, and, in this delivery, he also included a power of attorney for the transfer of the stock to their names.

Appellants originally instituted this action in the United States District Court for the Southern District of West Virginia for the general purpose of (1) setting aside the aforesaid transactions as against them, (2) having the aforementioned deed of trust adjudicated a lien upon the property in the possession of the B. E. Mines, and (3) enforcing the deed of trust in accordance with its terms. J. Cary Alderson, the trustee under the deed of trust, and all the aforementioned appellees were joined as party defendants. Among other things, appellants maintained that, under section 3697(b) of the Internal Revenue Code, appellees acquired the title to the Colliery Company property subject to appellants' deed of trust; that, under section 3693(b) or section 3701(b) of the Internal Revenue Code, the sale of the property was invalid for lack of sufficient public notice. As the amount in controversy allegedly exceeded $3,000, the jurisdiction of the District Court was invoked on the grounds that a federal question was involved, namely, an interpretation of the provisions of the Internal Revenue Code. Cf. St. Paul, M. & M. R. R. v. St. Paul & N. P. R. R., 8 Cir., 1895, 68 F. 2, 14, discussed in Dobie on Federal Procedure (1928) § 60, p. 173.

After hearing all the evidence, Judge McClintic made his specific findings of fact and then concluded that, as an equitable remedy was here being sought, appellants were (1) barred by laches and, (2) because of certain fraudulent acts committed by them, barred by the equitable doctrine of "clean hands". We have carefully scanned the instant record and we are of the opinion that there is ample evidence to support Judge McClintic's findings of fact; and that, at all events, these findings of fact are not clearly erroneous. See Wolf Mineral Process Corp. v. Mineral Separations N. A. Corp., 4 Cir., 1927, 18 F.2d 483, 486. Also, cf. United States v. Still, 4 Cir., 120 F.2d 876, decided by this court on June 10, 1941; Kuhn v. Princess Lida of Thurn & Taxis, 3 Cir., 1941, 119 F.2d 704, 705, 706. We have concluded that the District Judge did not abuse his discretion in applying the fundamental equitable maxim that "He who comes into equity must come with clean hands." See Keystone Driller Co. v. General Excavator Co., 1933, 290 U.S. 240, 54 S.Ct. 146, 78 L.Ed. 293. Therefore, we find it unnecessary to discuss any of the other issues raised by appellants on this appeal, and we will consider the facts of this case only in the light of the single issue of clean hands.

In 1914, the Colliery Company, a West Virginia corporation, acquired a coal mining lease of 740 acres near Braeholm Post Office in Logan County, West Virginia, installed a mining plant thereon, and began mining operations. After many years of successful operation, this corporation was confronted with a critical federal income tax problem. On October 3, 1925, the company had been assessed with additional income taxes for the year 1917, in the amount of $13,753.65; on January 6, 1926, with additional taxes for 1918, in the amount of $66,192.95; and on January 7, 1926, with additional taxes for 1919, in the amount of $2,246.50. Notices of liens for these taxes had been filed with the Clerk of the United States District Court for the Southern District of West Virginia on December 16, 1925, as to 1917 taxes; and on May 29, 1926, as to 1918 and 1919 taxes. On December 31, 1926, the company had been assessed with additional taxes for 1920, in the amount of $23,530.49; and on February 4, 1927, with additional taxes of $1,611.02 for the year 1922. An appeal was taken from the assessment applicable to 1920 to the Board of Tax Appeals.

The date of July 30, 1927, is of great importance in the consideration of the facts of this controversy; inasmuch as, on that date, one group of Colliery Company stockholders (hereinafter called the Riley group) approved the Colliery Company's purchase of the stock of another group of Colliery Company stockholders (hereinafter called the Ford group), which purchase included a contractual settlement of all unpaid taxes. Some two years prior to this controlling date, the Colliery Company had appointed a tax committee to adjust and settle the taxes. This committee was made up of two men — Leroy Allebach, Secretary and Attorney for the Colliery Company; and James H. Ford, treasurer and superintendent of the Colliery Company, a bookkeeper and an auditor who had had approximately twenty-five years of experience in the coal business. Upon the recommendation of an employee of the United States Internal Revenue Department (hereinafter called the Department), Allebach employed E. S. Sites, himself a former employee of the Department. Ford and Allebach, under the direction of the tax expert, Sites, entered into extended negotiations with the Department for the settlement of the accumulated and unpaid income tax assessments which had been made against the Colliery Company. The form and extent of these negotiations will be discussed below.

Sometime prior to the sale and purchase of the Colliery Company stock on July 30, 1927, dissension arose among the seven stockholders and they, consequently, split into two factions. One faction, the Riley group, was composed of P. J. Riley, the nominal President of the Colliery Company; Catherine B. Riley, the wife of P. J. Riley; and John R. Simpson. The other faction, the Ford group, was composed of Ford, Allebach, G. S. Borden and Robert Mankin. On July 18, 1927, the Ford group presented a "buy or sell" offer to the Riley group, under which one group or the other would sell their stock to the Colliery Company at $700 per share, one-fourth cash and the balance in fifty monthly payments, secured by a deed of trust on all the company's property, the company to assume all unpaid taxes, and the sellers to cooperate with the buyer to the fullest extent in settling any disputed taxes.

Upon receipt of the buy or sell offer, P. J. Riley asked Ford about the taxes; and Ford merely stated that part of the taxes were "outlawed". P. J. Riley was an old man who had but little formal education. He understood the practical operations of the coal business but knew almost nothing about tax matters. All tax matters had been left in the hands of Ford and Allebach. Although P. J. Riley knew that Sites had been hired, and though P. J. Riley had given Sites a power of attorney to handle all tax matters, Riley had never met Sites until long after the purchase of the Colliery Company stock. He, therefore, wrote to Allebach asking specifically what "years and amounts" had been "outlawed" and what "years and amounts" were "still outstanding to be adjusted". In a letter dated July 22, 1927, Allebach replied that he had spoken to Sites and that he had the following to report: the tax claim of the government for 1917 through 1919, totalling $89,333, was "settled and out of the way"; the government claim for 1922 of $6,406.28 had been settled for $1,326.70 and was "paid and * * * out of the way"; the government claim for 1920 of $23,530.49 would be settled for either $12,140.24 or $11,390.25. Allebach concluded his letter with the statement: "I am therefore able to report that the taxes have all been settled except for the year 1920 and these are in the process of settlement."

The District Judge found that it was in reliance upon Allebach's letter that the Riley group elected for the company to buy the stock of the Ford group. In view of the "cordial and intimate" relationship that existed between Allebach and Riley, there is adequate evidence to support this finding. It must be remembered that Allebach was the attorney for the Colliery Company and that the Riley group, all of whom were incompetent by education or experience to handle the tax matters, had left the negotiations with the Department in the hands of Ford and Allebach.

To close the deal, a meeting of the board of directors was held on July 30, 1927. All seven stockholders, as directors, were present. Ford and Allebach, as the...