United States v. Montreal Trust Company

• Decision Date: 06 January 1966
• Docket Number: Docket 29607.,No. 86,86
• Citation: 358 F.2d 239
• Parties: UNITED STATES of America, Appellant, v. The MONTREAL TRUST COMPANY, and Tillie V. Lechtzier, Executors of the Estate of Isidor J. Klein, Deceased, Appellees.
• Court: U.S. Court of Appeals — Second Circuit

358 F.2d 239 (1966)

UNITED STATES of America, Appellant, v. The MONTREAL TRUST COMPANY, and Tillie V. Lechtzier, Executors of the Estate of Isidor J. Klein, Deceased, Appellees.

No. 86, Docket 29607.

United States Court of Appeals Second Circuit.

Argued November 1, 1965.

Decided January 6, 1966.

Certiorari Denied April 25, 1966.

Laurence Vogel, Asst. U. S. Atty., New York City, (Robert M. Morgenthau, U. S. Atty. for Southern District of New York, and Irwin B. Robins, Asst. U. S. Atty., New York City, on the brief), for appellant.

Henry Harfield, of Shearman & Sterling, New York City (John E. Hoffman, Jr., New York City, on the brief), for appellees.

Before KAUFMAN and HAYS, Circuit Judges, and TIMBERS, District Judge.^*

Certiorari Denied April 25, 1966. See 86 S.Ct. 1366.

KAUFMAN, Circuit Judge:

The question before us on this appeal is akin to those repeatedly presented to federal and state courts ever since the Supreme Court's decision in International Shoe Co. v. State of Washington, 326 U.S. 310, 66 S.Ct. 154, 90 L.Ed. 95 (1945), opened the door to continually widening assertions of state-court jurisdiction by means of "long-arm" service of process statutes. On this appeal, we are asked to determine whether the deceased Isidor J. Klein "transacted" sufficient business within New York to subject the executor of his estate to the jurisdiction of the New York courts, and, by virtue of the incorporative provisions of Federal Rules of Civil Procedure 4(e),¹ 4(f) and 4(i), to the jurisdiction of the District Court for the Southern District of New York.

The government brought this action to recover income taxes, interest and penalties aggregating $9,862,053.34, allegedly owed by Klein for the years 1944, 1945 and 1946. Pursuant to Section 302,² of New York's Civil Practice Law and Rules, service was made upon Klein's executor,³ the Montreal Trust Company ("Montreal"), by personal delivery of process in Canada. Challenging this method of invoking the jurisdiction of the District Court, Montreal asserted that service upon it was unauthorized under § 302 because Klein's corporate activities did not amount to the personal transaction of business by him in this state. After a preliminary hearing, Judge McLean accepted this contention and ruled that the District Court did not have jurisdiction to hear the merits of the government's claim, finding that Klein did not transact business in New York within the meaning of § 302. On the government's motion, we granted leave to appeal pursuant to 28 U.S.C. § 1292(b). We reverse and remand because, at this juncture of the case, we conclude that the facts as found by the District Judge demonstrate that New York had sufficient contacts with the transactions which are the subject matter of this case to justify asserting its jurisdiction.

The facts upon which this appeal is based are susceptible of brief exposition. During the relevant taxable years, Klein was the managing director of United Distillers Ltd. ("United"), a publicly owned Canadian company which operated a distillery at Vancouver, B. C. United's function in the corporate hierarchy was to produce whiskey for its subsidiaries, John Dunbar & Company, Ltd. ("Dunbar") and Duncan Harwood & Company, Ltd. ("Harwood"). The "exclusive agent for the entire world" for the distribution of Harwood and Dunbar whiskey was Agencias Distilladores, S. A. ("Agencias"), a Cuban corporation with which Klein's brother-in-law, H. H. Klein, was connected in some undetermined capacity.

Judge McLean's opinion discloses that in April 1944, R. C. Williams & Company, Inc. ("Williams"), a New York corporation, and Agencias entered into a contract by which Williams became the exclusive sub-agent for the distribution of Harwood whiskey in the United States. Under this contract, Williams purchased substantial quantities of Harwood whiskey from Agencias at $19.05 per case and sold the whiskey throughout the country. Since Agencias purchased Harwood whiskey at $8.05 per case, it made a profit of $11.00 on each sale. The District Court made no finding as to the manner in which Agencias distributed this profit, but did determine that as a condition to the making of the contract with Agencias,

"* * * Klein insisted that Williams * * * agree to put on its payroll as salesmen various relatives and friends of Klein. Williams did so and paid them a `commission\' of 60¢ per case of whiskey sold."

Moreover, Judge McLean's opinion reveals that substantial amounts were paid to these designees of Klein and that "they did little or nothing to earn them." And we discover from an examination of the hearing transcript, that Klein, on several occasions, wrote to Irving A. Koerner, Williams' liquor division manager in New York, instructing him as to the method of distributing the 60¢ per case commission and giving him the names of the recipients of these payments. Such commissions, ultimately, were paid by checks drawn on Williams' account at the Chase National Bank in New York City.

The District Judge found, furthermore, that in 1944 and 1945, Murray A. Schutz, operating in San Francisco as Distillers Distributing Company, commenced purchasing Dunbar whiskey from United. Schutz purchased this whiskey for shipment to American military posts in the Far East and Europe. As a pre-condition to the contract between Schutz and United, Judge McLean found that Klein

"insisted that Schutz agree to give two-thirds of Schutz\'s profits to Samuel Sager of New York City, Klein\'s brother-in-law."

In this connection, the transcript discloses that Schutz visited Klein in Vancouver, Canada where negotiations were commenced. At Klein's request, Schutz then went to New York City for further negotiations and the drafting and execution of a contract giving Sager two-thirds of Schutz's profits.

On these facts, the government contends that the funds earned by Williams and Schutz and paid as "commissions" to Klein's relatives and friends were properly the income of Klein for tax purposes, under the familiar attribution of income rules of Helvering v. Horst, 311 U.S. 112, 61 S.Ct. 144, 85 L.Ed. 75 (1940). In response, Montreal argues, as a matter of substantive law, that the government's application of the Horst doctrine to these facts is erroneous and that, in any event, as a matter of procedure, Klein did not "transact" business in New York within the meaning of the "long-arm" statute. On this appeal, we restrict ourselves to the jurisdictional issue and do not pass on the merits of the government's claim for taxes.

I.

Since Pennoyer v. Neff, 95 U.S. 714, 24 L.Ed. 565 (1877), the area in which states are constitutionally permitted to assert their jurisdiction has undergone great expansion. International Shoe Co. v. State of Washington, supra, and McGee v. International Life Ins. Co., 355 U.S. 220, 78 S.Ct. 199, 2 L.Ed.2d 223 (1957), are among the landmarks pointing the way in this direction. And New York, like many other states, enacted its "longarm" statute with the intention of taking advantage of the "new enclave" opened by these cases. New York Advisory Comm. Rep. (N.Y. Legis. Doc., 1958, No. 13), 39-40; 1 Weinstein-Korn-Miller, New York Civil Practice § 302.06.

There is no serious challenge on this appeal to the constitutional power of New York to enact § 302. International Shoe Co. v. State of Washington, supra, authorizes a state to assert its jurisdiction over non-domiciliaries with whom it has sufficient minimum contacts, "such that the maintenance of suit does not offend `traditional notions of fair play and substantial justice.'" 326 U.S. at 316, 66 S.Ct. at 158. To meet this requirement, New York in enacting § 302 has not sought to obtain full in personam jurisdiction over non-domiciliaries who transact business within its boundaries. Rather, New York has limited itself to jurisdiction only in those "causes of action" arising out of activity conducted within the state. Since such a limitation of jurisdiction complies with the mandate of International Shoe Co., supra, we are not here presented with a constitutional issue but with a narrow question of statutory interpretation — did Klein, within the meaning of the "long-arm" statute, transact business in New York.

The District Court, in dealing with this issue at the preliminary hearing, we believe, placed a too heavy burden on the government in requiring it to establish a strong factual basis upon which jurisdiction is predicated in this case. At this early stage of the proceedings, the government should not have been required to submit proof which would, in effect, establish the validity of its claim and its right to the relief sought. Rather, to bring § 302 into operation, and thereby invoke the jurisdiction of the District Court, the government was required to establish only prima facie tax-related transactions of Klein in New York. Cf. Bell v. Hood, 327 U.S. 678, 66 S.Ct. 773, 90 L.Ed. 939 (1946).⁴ We must, therefore, determine whether on the allegations and facts before Judge McLean, Klein was transacting sufficient business within New York so as to bring him within the reach of the "long-arm" statute and require a trial on the merits.

II.

Montreal's position on this appeal is that if Klein had any contacts at all with New York, they were limited to conduct in his capacity as general manager of United. And, it urges, that when one engages in activity within New York in a fiduciary capacity, jurisdiction cannot be obtained over him in his individual capacity. Cf. Boas and Associates v. Vernier, 22 A.D.2d 561, 257 N.Y.S.2d 487 (1st Dept. 1965). But, we find, the premise of this argument untenable. While it is true that Williams and Schutz were the contractual agents of the corporations Klein managed, the government has charged that they were also his personal agents in a scheme to divert funds to Klein's designees. Based on the allegations and findings, Klein could not have been acting in his role as a...