United States v. Coast Wineries

• Decision Date: 07 November 1942
• Docket Number: No. 10061.,10061.
• Citation: 131 F.2d 643
• Parties: UNITED STATES v. COAST WINERIES, Inc., et al.
• Court: U.S. Court of Appeals — Ninth Circuit

131 F.2d 643 (1942)

UNITED STATES v. COAST WINERIES, Inc., et al.

No. 10061.

Circuit Court of Appeals, Ninth Circuit.

November 7, 1942.

Joseph Lawrence, Director, Bond and Spirits Division, Dept. of Justice, Benjamin H. Pester, Chief, Bond and Tax Section, and Julian D. Simpson, Chief Compromise Section, all of Washington, D. C., and J. Charles Dennis, U. S. Atty., Gerald Shucklin, Asst., and Thomas R. Winter, Gen. Counsel Representative, all of Seattle, Wash., for appellant.

Allen, Hilen, Froude & DeGarmo and Gerald DeGarmo, all of Seattle, Wash., Hubbert & Mullins and W. A. Hubbert, all of Yakima, Wash., and H. W. B. Smith, of San Francisco, Cal., for appellee U. S. Fidelity & Guaranty Co.

Before GARRECHT, HANEY, and HEALY, Circuit Judges.

GARRECHT, Circuit Judge.

This is an appeal from a judgment entered by the District Court of the United States for the Western District of Washington, Northern Division. The United States of America, appellant, instituted this suit against the United States Fidelity and Guaranty Company on two winemakers' bonds executed by The Coast Wineries, Inc., as principal and the United States Fidelity and Guaranty Company as surety, which bonds guaranteed payment to appellant of certain taxes incurred by The Coast Wineries, Inc., in the making and selling of wines at Yakima, Washington.

From the findings of the District Court, which are supported by the pleadings, admissions made, and evidence adduced, we summarize the following pertinent facts:

During the years 1934 and 1935 The Coast Wineries, Inc., was engaged in the business of making and selling wines. To comply with the law The Coast Wineries, Inc., as principal, and appellee, United States Fidelity Company, as surety, on February 1, 1934, executed a bond in the sum of $5,000, and on August 9, 1934, the same parties executed a bond in the sum of $3,000, the obligations of which bonds were identical and as follows: "Now, therefore, the condition of this obligation is such that if the said principal shall fully and faithfully comply with all requirements of the laws of the United States and regulations issued in pursuance thereof respecting the Production, storage, sale, or removal, and the accounting of all wines produced or received by him, or which now remain on said premises; and if the said principal shall well and truly pay all taxes due on said wines at the time and in the manner required by said laws and regulations, then this obligation to be void; otherwise to remain in full force and effect." As a condition to the writing of these bonds, the appellee required indemnitors in the persons of N. J. Dolph, W. A. Hubbert, and Maude Hubbert, his wife, C. T. McKenzie, and Bertha McKenzie, his wife.

In February of 1935 The Coast Wineries, Inc., filed a petition for corporate reorganization in the United States District Court, and on February 27, 1935, on behalf of appellant, the Commissioner of Internal Revenue, acting through Collector of Internal Revenue for the Collection District of Washington, filed a claim in said proceedings for certain taxes, in the sum of $501.67, plus interest, covering capital stock tax assessed under Section 215 of the National Industrial Recovery Act, 48 Stat. 207, for the fiscal year 1934, and on March 4, 1935, filed a claim in said proceedings designated in its record as claim No. 2, for certain taxes in the sum of $9,387.21, plus interest (which claim included the item of taxes in the amount of $3,162.56, sought to be recovered in this action), said taxes being claimed for the taxable years 1934 and 1935 as assessed on distilled spirits under Sections 3244 and 3176 of the Revised Statutes, as amended, 26 U.S.C.A. Int.Rev. Code, §§ 3250, 3612, and under the Liquor Taxing Act of 1934, 48 Stat. 313, and on June 10, 1935, filed a claim in said proceedings for certain taxes, in the sum of $76.20, plus interest, as a proposed assessment for the taxable years 1934 and 1935 of documentary stamp tax under Title V, Part III, §§ 721-726, Revenue Act of 1932, 26 U.S.C.A. Int.Rev.Acts pages 629-636. After the appointment and qualification of the trustee in the matter of the bankruptcy of The Coast Wineries, Inc., said trustee filed objections to the three claims of the United States of America, above mentioned.

On June 6, 1935, the appellant gave written notice to The Coast Wineries, Inc., and to the appellee, United States Fidelity and Guaranty Company, of possible liability upon the bonds sued upon herein, and in accordance therewith the appellee, United States Fidelity and Guaranty Company, gave similar written notice to the indemnitors upon its bonds, namely, N. J. Dolph, W. A. Hubbert, and Maude Hubbert, his wife, and one McKenzie; but thereafter, in reliance upon assurances given by representatives of the Alcohol Tax Unit in Seattle, Washington, that the taxes claimed by the plaintiff for which the defendant, United States Fidelity and Guaranty Company, might be liable upon its bonds had been abated and withdrawn, and upon the record in the Bankruptcy Proceedings of The Coast Wineries, Inc., as hereinafter set forth, showing the disallowance of said tax claims, the defendant, United States Fidelity and Guaranty Company, refrained from filing a creditor's claim within the time allowed by law in the Estate of N. J. Dolph, Deceased, who died subsequent to the adjudication in bankruptcy of The Coast Wineries, Inc., and who left a substantial estate from which such a claim could have been paid.

On June 16, 1935, The Coast Wineries, Inc., was duly adjudicated a bankrupt, and the Yakima Valley Bank and Trust Company was appointed as trustee in bankruptcy, and was authorized to and did employ W. B. Clark and T. E. Grady of Yakima, Washington, as its attorneys. The only substantial asset of The Coast Wineries, Inc., was a quantity of wine, the production and rectification of which was the basis of the claim for taxes asserted in this action, and as filed in the Bankruptcy of The Coast Wineries, Inc., as a part of its claim for $9,387.21, and said wine was ordered sold by the trustee in bankruptcy of The Coast Wineries, Inc., for the sum of $12,500. Subsequent to said sale, at a hearing held on September 16, 1935, at which the attorney representing appellant, the trustee, and the purchaser were all present, the District Judge having charge of said bankruptcy proceeding determined that said wine should be delivered to the purchaser free and clear of tax, and directed the trustee to purchase and affix to the containers the necessary revenue stamps, and pursuant to such direction the trustee did purchase from the proceeds of the sale of said wine Internal Revenue stamps in the total sum of $9,171.62 and did affix same to said containers. This order also provided: "It is further ordered, adjudged and decreed that any and all claims which the United States Government has, or may hereafter have or assert, if any, against the proceeds from the sale of said property in the hands of the Trustee, and the validity, amount and priority thereof shall hereafter be determined by the Court."

Thereafter the objections to the three claims of the United States of America, above mentioned, came on for hearing before the special master in the Matter of the Bankruptcy of The Coast Wineries, Inc., who had theretofore been appointed to hear and pass upon numerous matters in connection with this bankruptcy matter. Said special master sent out a notice to the creditors of The Coast Wineries, Inc., of a hearing to be held at Yakima, Washington, on September 18, 1935, at 9:30 a. m. Among other matters, this notice stated that the hearing was to determine "The amount, validity and priority of the claims of the United States, the State of Washington, and Yakima County for taxes and assessments". On the morning of said day, at Yakima, Washington, and prior to the hearing before the special master, there occurred a conference between Judge Grady, attorney for the trustee, and Mr. Winter, special attorney for the Bureau of Internal Revenue, at which, as testified to by the attorney for the trustee and found by the trial court, it was agreed that if the trustee would withdraw his objections to the claims of appellant for $501.67 and $76.20, the appellant would withdraw, as abated, its larger claim for $9,387.21, of which the claim here in suit was a part. In accordance with this agreement between counsel they together appeared before the special master at the time and place set for the hearing, and, among other things, the following occurred:

"Mr. Winters: If the Court please, I represent the United States Government. I do not know whether it has been explained to your Honor or not, but Saturday Judge Webster entered an order directing the Trustee to purchase stamps and put on the wine which has not been sold, and directed the Government to gauge that wine and figure out the alcoholic action, and that is being done this afternoon.

"* * * I am informed, at least I have an understanding, that the Trustee is going to file a claim in abatement of all of that tax in view of Judge Webster's decision, and if that claim in abatement is allowed, the Government will request authority to withdraw the $9,000 claim filed in this Court, and there will be no use taking testimony in that matter.

"Now, will the Court continue the hearing on the Government $9,000 claim until some later date, in order that the claim in abatement might be filed, and in all probability the claim will be withdrawn if the action in abatement is allowed?

"The Master: There is just a possibility of that?

"Mr. Winters: Well, it has developed into more than a possibility, as I have advised Judge Grady, and I have assurance from the Government, and I am personally recommending the abatement of the claim in view of the situation in this matter, * * *."

On September 28, 1935, pursuant to the continuance granted on September 18, 1935, the matter again came on for...