Howell v. Commissioner of Internal Revenue

• Decision Date: 31 March 1934
• Docket Number: No. 9674.,9674.
• Citation: 69 F.2d 447
• Parties: HOWELL v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Eighth Circuit

69 F.2d 447 (1934)

HOWELL v. COMMISSIONER OF INTERNAL REVENUE.

No. 9674.

Circuit Court of Appeals, Eighth Circuit.

February 20, 1934.

Rehearing Denied March 31, 1934.

Daniel V. Howell, of Kansas City, Mo. (Charles M. Howell, Jr., of Kansas City, Mo., on the brief), for petitioner.

S. Dee Hanson, Sp. Asst. to Atty. Gen. (Sewall Key, Sp. Asst. to Atty. Gen., on the brief), for respondent.

Before STONE, SANBORN, and VAN VALKENBURGH, Circuit Judges.

SANBORN, Circuit Judge.

This is a petition to review an order of the Board of Tax Appeals determining a deficiency of $6,595.85 in income taxes of the petitioner for the calendar year 1922.

The People's Trust Company, a bank doing business in Kansas City, Mo., had acquired, prior to April 25, 1922, through the firm of Smith and Ricker, notes secured by chattel mortgages on cattle and mortgages on ranch lands, which notes were guaranteed by that firm. In the spring of 1922 Smith and Ricker became involved financially, and made an assignment for the benefit of their creditors. The members of the firm were large stockholders of the bank, and Ricker was chairman of its board of directors. Smith had been connected with the Commonwealth National Bank of Kansas City, which had failed in January, 1922. The value of cattle and farm lands had slumped and "cattle paper" was not highly regarded. On April 25, 1922, the bank (People's Trust Company) had $406,969.12 of such paper, referred to as "Smith and Ricker loans." On March 14, 1922, at a meeting of the board of directors, the president of the bank had stated that, because of the close connection of Smith and Ricker with the bank and because of their financial difficulties, there might be trouble for the bank, and that it might "serve a useful purpose and ease public opinion" with regard to the bank if the board of directors and the stockholders would guarantee the bank against loss on the paper obtained through Smith and Ricker, and if Smith and Ricker would sell their stock to other stockholders and retire from the board. The minutes of the bank show that at a meeting of directors on April 11, 1922, the petitioner, Charles M. Howell, a director and stockholder of the bank, had read to the board a proposed contract "providing for the guaranty of $200,000.00 against the paper from the office of Smith and Ricker and the pledging of the money and securities to protect that guaranty." Mr. Howell, Mr. Garvey, and Mr. Alves, stockholders of the bank, were appointed a committee "to serve in caring for and carrying out that agreement." Some time between March 14th and April 25th, Smith and Ricker had severed their connection with the bank and sold their stock to other stockholders.

The agreement to protect the bank against losses on the Smith and Ricker paper was made on April 25, 1922. It is entitled, "Indemnity Agreement." It is signed by the stockholders of the bank, who are referred to throughout as "the indemnitors." The undertaking of the signers was "to severally indemnify the Company the Bank in the maximum amount of $200,000.00 against loss, if any, which may be hereafter sustained on account of non-payment of certain loans now held by the Company in its assets and commonly designated as the Smith and Ricker loans." The full text of the agreement, omitting the schedule of stockholders and of notes, is set out in the margin.¹ The petitioner, who is one of the leading lawyers of Kansas City, drafted this agreement and was one of its signers. His share of the indemnity fund was $23,480. The loss to the bank, on account of this Smith and Ricker paper, was $288,541.66, most of the paper being worthless, and the committee, in December, 1922, paid into the bank $200,000 pursuant to the agreement.

Mr. Howell was of the opinion that, by reason of the agreement and his payment of $23,480 thereunder, the relation of creditor and debtors was created between him and the makers of the worthless notes to that extent, and that therefore, in computing his net income for the year 1922, he was entitled to take a deduction of that amount as "debts ascertained to be worthless and charged off within the taxable year." Subdivision (7), § 214 (a), Revenue Act of 1921, c. 136, 42 Stat. 227, 239.

The Commissioner of Internal Revenue refused to allow the deduction, and, upon appeal, the Board of Tax Appeals sustained the Commissioner. 22 B. T. A. 140. Hence the alleged deficiency in the tax and this petition to review.

The only question to be decided is whether, by virtue of the agreement which Mr. Howell signed and his payment thereunder to the Bank, he acquired "debts ascertained to be worthless."

Mr. Howell's position is that, whatever the agreement be called, whether suretyship, guaranty or indemnity, he became, upon the payment of his $23,480 by the committee to the bank, a creditor of the makers of the worthless notes, either because of an implied obligation on their part to indemnify him or because he was, in effect, a purchaser of the notes to the extent of what he paid. No claim of subrogation to any of the rights of the bank against the makers of the notes is made by the petitioner.

The Commissioner and the Board were of the opinion that the agreement was a contract to indemnify the bank in case of loss, that it was entirely independent of the notes, and that there was at no time any obligation on the part of the makers of the notes to repay Mr. Howell the $23,480 which he contributed, and hence no debts which he could charge off.

That in the case of suretyship or guaranty there is an implied agreement on the part of the principal debtor to reimburse his surety or guarantor is unquestioned. See Mellette Farmers' Elevator Co. v. H. Poehler Co. (D. C.) 18 F.(2d) 430; In re Dailey et al. (D. C.) 19 F.(2d) 95; United States Fidelity & Guaranty Co. v. Centropolis Bank of Kansas City, Mo. (C. C. A. 8) 17 F.(2d) 913, 917, 53 A. L. R. 295; National Surety Co. v. Salt Lake County (C. C. A. 8) 5 F. (2d) 34; (compare Jenkins v. National Surety Co., 277 U. S. 258, 48 S. Ct. 445, 72 L. Ed. 874); 28 C. J. 1037.

"From the time of the very earliest cases there has been a general acquiescence in the rule that a payment by a surety or guarantor for the account of their principal is presumed to be at the request of the latter, which raises an implied promise of reimbursement, upon which an action at law will lie." Stearns on Suretyship (3d Ed.) page 503.

There are recognized distinctions between suretyship, guaranty, and indemnity.

A surety and a guarantor are answerable for the debt, default, or miscarriage of another. Strictly speaking, the liability of a guarantor is secondary and collateral, and its enforcement depends upon certain conditions. The liability of a surety is original, primary, and direct. The surety is bound by the same agreement which binds his principal, while a guarantor is bound by his own independent undertaking. Transcontinental Petroleum Co. v. Interocean Oil Co. (C. C. A. 8) 262 F. 278, 279, 283; Hall et al. v. Weaver (C. C.) 34 F. 104, 106. "In case of suretyship there is but one contract, binding the surety and the promisor, but in the case of a guaranty there are two contracts, one binding the principal debtor, and one binding the guarantor." Peterson et al. v. Miller Rubber Co. of New York (C. C. A. 8) 24 F. (2d) 59, 62.

Without a principal debt for which the guarantor is answerable, there can be no guaranty, so that an undertaking by a buyer that it would pay to a bank a sum of money for the seller's account upon the delivery of a ship which the seller was building for the buyer was not a guaranty, but a conditional promise to pay. Yangtsze Rapid S. S. Co. v. Deutsch-Asiatische Bank (C. C. A. 9) 59 F.(2d) 8, 11, 12.

A contract of indemnity is an original undertaking independent of any collateral contract. It creates a primary liability. The promise of the indemnitor is not to answer for the debt, default, or miscarriage of another, but may be to make good the loss resulting from such debt, default, or miscarriage. 28 C. J. 892; Eckhart v. Heier, 37 S. D. 382, 158 N. W. 403; Assets Realization Co. v. Roth, 226 N. Y. 370, 123 N. E. 743; National Bank of Tifton v. Smith, 142 Ga. 663, 83 S. E. 526, L. R. A. 1915B, 1116, 1117; 14 R. C. L. 43. While the object of a guaranty and an indemnity agreement may be the same — to save the promisee from loss — the legal effect is different. One guarantees the performance of an obligation according to its terms. A nonperformance of the obligation constitutes a breach of the guaranty agreement giving rise to the liability of the guarantor. The other indemnifies against loss in case of nonperformance, the failure to perform does not create the liability, and there is no liability until the ascertainment of a loss therefrom. See Weightman v. Union Trust Co., 208 Pa. 449, 451, 57 A. 879; Assets Realization Co. v. Roth, supra; Eckhart v. Heier, supra; 14 R. C. L. 44.

As was pointed out by this court in U. S. F. & G. Co. v. Centropolis Bank of Kansas City, Mo., supra, on page 916 of 17 F. (2d) the agreement of a principal to indemnify his surety for any payment the surety may be compelled to make takes effect from the time the surety becomes responsible for the obligation of the principal. The assumption of responsibility for the...