Merchants' Nat. Bank of Baltimore v. Roxbury Distilling Co.

• Decision Date: 25 March 1912
• Citation: 196 F. 76
• Parties: MERCHANTS' NAT. BANK OF BALTIMORE v. ROXBURY DISTILLING CO.
• Court: U.S. Court of Appeals — Fourth Circuit

196 F. 76

MERCHANTS' NAT. BANK OF BALTIMORE v. ROXBURY DISTILLING CO.

United States District Court, D. Maryland.

March 25, 1912

The following is the opinion of John Hinkley, Special Master:

The Roxbury Distilling Company is a body corporate, duly incorporated under the laws of the state of West Virginia by charter dated May 9, 1900, and expiring May 15, 1920. At the time of its incorporation and until the appointment of receivers on February 21, 1910, it conducted a distillery in Washington county, Md., having a complete distillery plant and several bonded warehouses for the storage of whisky distilled by the company, pending the payment of the internal revenue tax of $1.10 per gallon and the withdrawal of the whisky. The president of the company and the active manager of the business was George T. Gambrill, who was largely interested as a stockholder of the company. The original capitalization of the company was $100,000, divided into 1,000 shares of $100 each, of which George T. Gambrill owned 960 shares. On June 16, 1904, the company was reorganized and the capital increased to $400,000 preferred stock and $200,000 common stock; $300,000 of the preferred stock and all of the common stock except the qualifying shares of directors being owned by Gambrill. In April, 1906, the capitalization was increased by the addition of $400,000 of preferred stock and $200,000 of common stock, so that the capital stock thereafter consisted of $800,000 of preferred stock divided into 8,000 shares of the par value of $100 a share, and $400,000 of common stock divided into 4,000 shares of the par value of $100 a share.

Prior to June 19, 1906, the operations of the distillery were carried on for account of Gambrill, he paying and receiving credit for the expenses, and the whisky produced being billed to him and placed in the bounded warehouses of the company for his account. On June 19, 1906, in accordance with an offer, dated June 12, 1906, from Gambrill submitted to a committee of the directors and ratified by the directors and stockholders, Gambrill sold to the company certain property including all his whisky on storage, for the sum of $607,678.18; the consideration being payable $200,000 in common stock at par and $407,678.18 in cash, to be realized by the sale of the company's new preferred stock. The $200,000 of common stock was used largely as a bonus to purchasers of the preferred stock. The property assigned from Gambrill to the Company consisted of 13,363 barrels of whisky in bond, a quantity of free whisky-- that is, whisky on which the tax had been paid-- certain packing and labeling materials, bottling plant, etc., accounts receivable to the amount of $51,190.94 and the good will of the selling business previously conducted by Gambrill under the name of the Roxbury Rye Distributing Company. There is also included in the total an advertising account of $10,923.89 and sundry smaller items of expense account.

On June 19, 1906, an assignment, including in general terms the property sold, was executed by Gambrill to the Roxbury Distilling Company, and on or shortly prior to that date journal entries were made crediting his account with $407,672.18. This sum so credited was thereafter paid in installments to Gambrill by cash payments, assumption of his notes, or merchandise debits, until in February, 1910, his account showed a debit balance against him of $8,607.35 which he attempted to offset by an unauthorized credit made by him on February 15, 1910, of salary from July 1, 1906, to March 1, 1910, at $15,000 a year.

A considerable quantity of the whisky sold by Gambrill to the company had been previously hypothecated by him to secure his notes. Some of these notes were assumed or paid by the company and charged from time to time against his account. Many of them, however, are still unpaid, and storage receipts for some of the same barrels sold by him to the company are still outstanding in the hands of his creditors.

On January 1, 1908, the Roxbury Distilling Company executed a mortgage of its property in Washington county, Md., to the Carnegie Trust Company to secure an issue of $350,000, 6 per cent. bonds, of which bonds $349,000 have been issued and are outstanding and appear to be held entirely by pledgees as security for loans.

On February 21, 1910, the present proceeding was instituted by the Merchants' National Bank, a large creditor of the company, and on the same day Charles A. Webb and Sullivan Pitts were appointed receivers of the company.

On February 25, 1910, S. Johnson Poe was appointed co-receiver and on March 1, 1910, an order was passed giving notice to creditors to file their claims on or before June 1, 1910.

During the course of the operations of the company certificates purporting on their face to be storage warehouse receipts were issued by the Roxbury Distilling Company and certain barrels of whisky designated by the government serial numbers were therein designated as being held on storage for account of the holders of the certificates. Some of these certificates were issued to outright purchasers of whisky, who bought from Gambrill or from the company, some were pledged as security for money borrowed by the Roxbury Distilling Company, and some were issued to Gambrill and pledged by him to secure loans made to him. The receivers' report, filed March 29, 1910, shows that they found stored in the bonded warehouses of the company 17,825 barrels of whisky and 1,301 half barrels, making a total of 19,126 packages. Of this, the report states that there were sold by Gambrill to other persons before the sale of the whisky business to the Roxbury Distilling Company in the year 1906, but still remaining on storage in the bonded warehouses, 615 barrels and 1,125 half barrels, making 1,740 packages, and leaving 17,386 packages which had not been so sold. It was discovered that there had been considerable duplication of these storage warehouse receipts. That is to say, receipts had been issued to different parties for the same barrels of whisky; in a great many cases two receipts having been issued; in some cases three; occasionally four; and in one instance five. The receivers' report states the extent of this duplication to be as follows:

Of the 17,386 packages of whisky of the company, two sets of receipts have been issued on 10,592 packages, three receipts on 4,145 of the duplicated packages, 4 receipts on 1,158 of the triplicated packages, and a fifth receipt for 3 quadruplicated packages. These figures will probably not be modified substantially by a careful analysis of the testimony now before the Master.

This gross fraud had continued for a number of years, and large sums of money were obtained from banks, trust companies, and other innocent holders upon the faith of the pledging of these certificates as collateral for loans.

A sale of the large bulk of whisky which came into the hands of the receivers has been made by them and ratified by the court and the purchase money paid; the whisky remaining in the bonded warehouses subject to payment of tax and withdrawal from time to time at the pleasure of the purchasers. So far as possible, the whisky sold to outright purchasers was not included in the sale, but was reserved for the benefit of such purchasers subject to the final decision of the question of the validity of the receipts. A number of these purchasers applied to the court by petition, and in most cases an order of court was passed authorizing the receivers to deliver the whisky to them upon their filing a bond to refund the value thereof in case the decision should be adverse.

The real estate, machinery, fixtures, tools, and trade-marks covered by the mortgage have not yet been sold, but have been advertised by the receivers for sale on May 31, 1911.

On March 27 and 28, 1911, the question of the validity of the warehouse receipts was argued before me by the holders and pledgees of such receipts, and the contention was made by certain creditors holding duplicated receipts that the receipts were invalid as passing title to the goods in the warehouse of an insolvent distiller. The questions relating to the determination of the priorities of the various holders of duplicated receipts were argued before me on April 10, 13, and 17, 1911, and are now also to be determined.

Characteristics of Bonded Distillery Warehouses, Federal Statutes, and Testimony.

The object of the bonded distillery warehouse is to enable the distiller to keep the spirits distilled by him in storage until they have the requisite age for consumption, deferring the payment of the government tax during this period, and the rights of the government being protected by the complete supervision of the process of distillation and control over the product until the tax has been paid. The provisions of the Federal Statutes are contained in sections 3247 to 3334, title 'Internal Revenue,' subtitle 'Distilled Spirits,' which will be found at 3 Federal Statutes Annotated, p. 630 et seq.; 2 U.S. Compiled Statutes, p. 2104 et seq.

The manner of operating distilleries and the means taken by the government to control the process of manufacture and the spirits produced until the internal revenue tax is paid are further shown by the testimony of Daniel A. Miller, the Deputy Collector of Internal Revenue for the Internal Revenue District of Maryland. Miller's Testimony, pp. 800-830. See, also, Treasury Decisions under Internal Revenue Laws, vol. 10 (1907) and vol. 12 (1909). Decisions Nos. 1,278, 1,488, 1,494, and 1,503.

The main features are the payment of an internal revenue tax of $1.10 per proof gallon, gauging and stamping being done by government officers; permission to keep the spirits for not exceeding eight years without...