United States v. Glidden Co., 8652

• Decision Date: 18 April 1941
• Docket Number: 8653.,No. 8652,8652
• Citation: 119 F.2d 235
• Parties: UNITED STATES v. GLIDDEN CO. et al.
• Court: U.S. Court of Appeals — Sixth Circuit

119 F.2d 235 (1941)

UNITED STATES v. GLIDDEN CO. et al.

Nos. 8652, 8653.

Circuit Court of Appeals, Sixth Circuit.

April 18, 1941.

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Frederick G. Rita, Sp. Asst. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., Sewall Key, Frederick G. Rita, and Paul F. Mickey, Sp. Assts. to Atty. Gen., and Emerich B. Freed and Francis B. Kavanagh, both of Cleveland, Ohio, on the brief), for appellant.

Roger Hinds, of New York City, and H. J. Crawford, of Cleveland, Ohio (Squire, Sanders & Dempsey and Frank Harrison, all of Cleveland, Ohio, on the brief), for appellees.

Before HICKS, ALLEN, and HAMILTON, Circuit Judges.

HAMILTON, Circuit Judge.

Appellant, United States of America, appeals from judgments entered on the pleadings, dismissing its actions upon bonds given by the appellee Glidden Company, with the appellee United States Guarantee Company, surety in connection with the issuance to the Glidden Company of permits to use specially denatured alcohol in the manufacture of industrial products.

Appellee Glidden Company was a permittee under Treasury Regulations 61, promulgated by the Secretary of the Treasury, pursuant to Title 2, of the National Prohibition Act, 41 Stat. ch. 85, p. 307, 27 U.S.C. A. § 4 et seq., for the use of denatured alcohol in manufacturing industrial products.

Under the regulations, it was required to and did execute to the United States three bonds of the respective penalties of $100,000, $50,000 and $70,000, which are identical except as to the penal sums and are on form 1480 as prescribed by the Treasury Regulations. Each bond was given by the appellee Glidden Company as principal and the appellee United States Guarantee Company as surety, as a condition of the issuance of the permits. The recitals of the respective bonds are identical with the exception that the bond for $50,000 provides for the rate of $2 per wine gallon in case of breach whereas the other two provide for $4.50 per wine gallon, and are as follows: "Now, therefore, the condition of the obligation is such that if there be no material false statement in the application for such permit, and the said principal shall not violate the terms of such permit, and shall transport, store and use such denatured alcohol in accordance with the law and regulations made pursuant thereto, and shall in all respects fully and faithfully comply with all provisions of law now or hereafter enacted and all regulations promulgated thereunder respecting such transportation, storage and use, and shall pay for all such denatured alcohol illegally or unlawfully diverted, lost, or unaccounted for a violation of such permit and law and regulations at the rate of $4.50 per wine gallon, and in addition thereto shall pay all penalties and fines imposed, then this obligation to be void; otherwise, to remain in full force and virtue."

Each of the permits provided that it was conditioned on the permittee and all of its agents and employees in good faith observing and conforming to all of its terms and conditions and to all the laws of the United States relating to the manufacturing, taxation, control and traffic in intoxicating liquors and in addition that the permittee would obey all regulations made pursuant to law or all laws then or thereafter in force in the states in which the permittee's business was located, or in which the privileges granted under the permits might be exercised.

In its second amended petition, appellant alleged that the permits were issued to the appellee Glidden Company on its representation that it would use all of the alcohol on which no tax had been paid in the manufacture of legitimate industrial products according to the formulae specified in the application for the permits and that the products, when manufactured, would be disposed of by the appellee solely for industrial uses and to supply the industrial market.

It is then alleged that appellee never intended to use the alcohol for the purpose represented, but intended at all times to, and did, divert it to beverage purposes in violation of the terms of the permit and the laws of the United States.

Appellant in its petition specifically states the substance of the Glidden Company's applications for permits, the substance of the permits, and the form of the respective bonds and the number of wine and proof gallons it received under them from distillers' bonded warehouses tax free. After these recitals, the appellant charges appellee with violating the terms of the permits in the following particulars:

That it falsely and fraudulently represented to the United States that it proposed to use the alcohol according to a formula attached to the permits in the manufacture of an industrial product under the tradename of "Zobelin Lacquer Thinner" when in fact it had theretofore entered into a fraudulent scheme and conspiracy with certain individuals to use the ethyl alcohol contained therein for beverage purposes. It then alleges the alcohol was diverted by the permittee and used for beverage purposes. Appellant's petitions contain two counts on each bond in the alternative, one asking damages at the rate per wine gallon stated in the bond, on each wine gallon diverted to beverage purposes and the other on the basic tax in force against the distiller or importer at the time of the diversion.

In action No. 8652, the petition is in four counts; in action No. 8653 it is in two counts. Appellees answered and admitted the allegations of appellant's petition as to the preliminaries prior to the issuance of the permits, their issuance, the form and execution of the respective bonds and the wine and proof gallons of the alcohol received by the principal pursuant to the permits. They denied all other allegations of the petition and alleged eight affirmative defenses as follows: (1) That the Commissioner of Internal Revenue, in requiring appellee Glidden Company to make payment at the rate of $4.50 or $2 per wine gallon in the event the alcohol was diverted to beverage purposes, exceeded his lawful authority, because no such tax was owing by appellee in case of diversion and that the bonds in no event could be in excess of the actual damages sustained by the United States due to appellees' violation of the permits; (2) that the appellant had theretofore instituted a civil action against appellee Glidden Company to recover all the taxes and penalties claimed to have been due by reason of the diversion of the alcohol described in appellant's petition and that the former action and the present action were based on identical facts and that an adjudication in favor of appellee in the former was a bar to this one and appellant was estopped to maintain a second action against appellees on the bonds herein; (3) that in the prior action it was adjudicated that the Glidden Company had no knowledge of any diversion of the alcohol to beverage purposes; (4) that the repeal of the Eighteenth Amendment to the Constitution of the United States abated the penalties provided in the respective bonds; (5) that appellee Glidden Company had, on a plea of nolo contendere, paid a fine of $10,000 in a criminal action under an indictment which was based on the identical facts alleged in appellant's petitions and that the payment of this sum was in compromise of all the penalties which appellant sought to recover in these actions; (6) that in the former criminal proceeding, appellant in writing indicated that the payment of the fine on appellee's plea of nolo contendere would satisfy all the claims of the United States for any penalties alleged to be due for the conversion of the alcohol and appellant was thereby estopped to make the demands set out in these actions; (7) that appellant's action was barred by the applicable statute of limitations, U.S.C.A. Title 28, § 791, which requires all actions for penalties to commence within five years after they accrue; (8) that a part of the alcohol alleged to have been withdrawn and diverted under count 1 and all of it under count 3 of appellant's petition in action No. 8652 were withdrawn under permits not bonded by the appellee United States Guarantee Company. The appellant demurred to all of the above defenses, which demurrer was overruled. It then denied the allegations of appellees' answer as to defenses 1, 3, 4, 5, 6, 7 and 8, and as to defense 2 plead affirmatively that the former action was not a suit for taxes and no question relating to the liability of appellees on the present bonds was or could have been litigated.

Appellees made a motion for judgment on the pleadings and alleged as grounds therefor, (1) That appellant's second amended petition failed to allege facts sufficient to constitute a cause of action; (2) that appellant's reply to appellees' answer failed to deny any of the facts alleged in any of the affirmative defenses except by mere conclusion of law or by sham and frivolous denials of facts which had theretofore been conclusively adjudicated and were matters of record of which the court could take judicial notice. Their motion was sustained and the petitions dismissed.

Appellant raises no question on this appeal as to the power of the court to dispose of the matter by a summary judgment on the pleadings as provided in Rule 56 of Rules of Civil Procedure, Title 28 U.S.C.A. following Section 723c; Town of River Junction v. Maryland Casualty Company, 5 Cir., 110 F.2d 278. Under this state of the record, counsel agree that there is submitted for the court's determination the sufficiency of each of appellees' special defenses.

Title 3, Sections 1 to 9, inclusive, 41 Stat. ch. 85, pp. 319, 320, 27 U.S.C.A. § 71-79, provided for the manufacture and storage in bonded warehouses of industrial alcohol and Section 10 of the Act, 27 U.S.C.A. § 80, provided for its withdrawal free of tax when it was so denatured as to be unfit for use as an intoxicating beverage....