Petitioners Brief — Sheridan v. Rothensies

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1941

No. 900

In rE: MIFFLIN CHEMICAL CORPORATION,

Debtor,

(Reorganization Proceedings—Section 77B.)

JOHN E. SHERIDAN anv LEO A. CROSSEN, Trustezs,

Mirriin CuemicaL Corporation, Destor 1n BANKRUPTCY

RerorGanization Proceepines, Section 77B,

or Petitioners,

WALTER J. ROTHENSIES, Cottecror or Internat Reve-

NUE, First Cotiection District or PENNsYLvANIA,

Respondent.

BRIEF IN SUPPORT OF PETITION FOR WRIT OF

CERTIORARI.

Opinions Below.

The opinion of the District Court is reported in In re

Mifflin Chemical Corporation, 34 F. Supp. 164 (D. C. E. D.

Pa., 1940).

The opinion of the Circuit Court is reported in In re

Mifflin Chemical Corporation, Sheridan, et al., v. Rothen-

sies, 123 F. (2d) 311 (C. C. A, 3rd, 1941),

REI SRI ENED Oe TC Sieh ™ —

SFR HR EMEP A IL Me pt gE

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Jurisdiction.

The date of the opinion of the Circuit Court of Appeals

for the Third Circuit to be reviewed is October 29, 1941.

The jurisdiction of this Court is invoked under the pro-

visions of Section 240 (a) of the Judicial Code, as amended

(March 3, 1891, ¢. 517, § 6, 26 Stat. 828, as amended; 28

U.S. C. 347 (a)).

Statement of Questions Presented.

The foregoing petition for writ of certiorari contains a

statement of questions presented which, for the sake of

brevity, is not here repeated.

Statement of Case.

The foregoing petition for writ of certiorari contains a

concise statement of case which, for the sake of brevity, is

not here repeated.

Specification of Errors.

The foregoing petition for writ of certiorari contains a

statement of assigned errors, under the heading of ‘‘Rea-

sons for Allowance of Writ’’, which, for the sake of brevity,

is not here repeated. Petitioners intend to urge each and

all of the said errors.

ARGUMENT.

.

Sales in excess of reasonable requirements are not tax-

able under Title 27, U. S. Code, § 153 (now Title 26, U. Ss.

Code, § 3111) and Article 146 of Regulations No. 3.

Judge Bard found that Mifflin made sales in excess of

reasonable requirements of its customers; that such sales

were in violation of Article 146 of Regulations No. 3; and

VR TH

seein ora EIEIO LY REIN, BNR Is Arey es

15

that consequently a tax became due under and by virtue

of the terms of Section 4 of the Liquor Law Repeal and

Enforcement Act, of 1935.

Section 4 of the Liquor Law Repeal and Enforcement

Act of 1935 (Act of Aug. 27, 1935, ¢. 740, (4, 49 Stat. 873,

27 U. S. C. 153), since repealed and incorporated as See-

tion 3111 of the Internal Revenue Code of 1939 (Act of Feb.

10, 1939, e. 2, $3111, 53 Stat. 1, 26 U. S. C. 3111) provides

as follows:

‘‘Any person who shall produce, withdraw, sell,

transport, or use denatured alcohol, denatured rum, or

articles, in violation of laws or regulations now or

hereafter in force pertaining thereto, and all such de-

natured alcohol, denatured rum, or articles shall be

subject to all provisions of law pertaining to alcohol

that is not denatured, including those requiring the

payment of tax thereon; and the person so producing,

withdrawing, selling, transporting or using the dena-

tured alcohol, denatured rum, or articles shall be re-

quired to pay such tax.’’

Article 146 of Regulations No. 3, relative to industrial

alcohol, as amended by Treasury Decision 4541, approved

April 17, 1935 (Volume 33, Treasury Decisions, Internal

Revenue, 90, 93) provides, inter alia, as follows:

‘*The sales of this product must be confined to per-

sons legitimately engaged in a bona fide drug trade,

or to hospitals, sanitariums, turkish baths or other es-

tablishments or stores where such compounds have

customarily been sold, or used for massage or other

external purposes. Failure to comply with these re-

quirements and to confine sales to such persons, or the

making of sales to such persons in quantities in excess

of their reasonable requirements will constitute bad

faith on the part of the permittee and grounds for the

revocation of his permit.’’

Sales in ‘‘excess of reasonable requirements”’ are there-

fore not prohibited by any law and not even referred to in

16

any regulation except Article 146 of Regulations 3. The

Collector’s case therefore, is founded on the theory that

sales in excess of reasonable requirements are forbidden

by Article 146 and are therefore taxable under Section 4 of

the Liquor Law Repeal and Enforcement Act.

It therefore follows that unless the Collector sustains

his proposition that such sales are forbidden by Article 146,

the sales are not taxable.

It is submitted that both the Collector and Judge Bard

overlooked the simple but obvious fact that Article 146

does not forbid sales in excess of reasonable requirements,

but merely states that such sales would constitute bad faith

on the part of the vendor and cause for the revocation of

his permit. In other words, sales in excess of reasonable

requirements do not violate any part of the regulation and

therefore such sales are not taxable under the taxing statute.

The Cireuit Court, without discussion, disposed of the

foregoing argument with the statement that ‘‘Mifflin’s con-

tention that alcohol improperly withdrawn is not subject

to tax but only subjects a producer or seller to revocation

of permit is without foundation’’ (R. 430).

It seems obvious that the regulation deals only with the

grant of permits and the conduct of permittees thereunder.

It was not intended to, nor does it by its terms, prohibit

sales in excess of reasonable requirements; it simply states

that sales in excess of reasonable requirements shall be evi-

dence of bad faith and that the penalty for such bad faith

shall be revocation of the permit.

The obvious reason is that there is not and cannot be

any definite test for measuring ‘‘reasonable requirements.”

Who can foresee with any degree of certainty the reasonable

requirements of Sears, Roebuck and Co. or any of the five

and ten cent stores, or chain drug stores? Their require-

ments may and will vary daily; certainly they will vary

17

with the policy of the business; certainly they will vary

insofar as debtor or any other manufacturer is concerned,

depending on the percentage of total needs purchased from

such manufacturer. If Sears, Roebuck and Co., or Wool-

worth, or Grant, or McCrory, or Kresge, or Walgreens, or

Nevins, or Sun Ray determine to use debtor’s rubbing

alcohol compound as a cut rate or loss leader, any of them

alone might very well legitimately buy and legitimately

sell all the debtor’s output.

‘*Reasonable requirements,’’ however, to the extent that

they can be fixed and determined, mean and define not the

use which customers make of the rubbing alcohol com-

pound after its purchase, but rather their requirements or

needs at or prior to the time of purchase. Consequently the

ultimate use or disposition of the rubbing alcohol compound,

whether licit or illicit, bears no relation to, and does not

prove, the amount or extent of the customer’s reasonable

requirements.

Article 146 clearly reveals the intent of the framers.

Illegitimate sales to persons not engaged in business legiti-

mately using denatured alcohol were forbidden and thus

made taxable because the existence and extent of such

sales are capable of exact proof or denial. As averred

hereinbefore, however, there is not and cannot be any defi-

nite test for measuring ‘reasonable requirements”’, and

therefore neither the existence nor extent of sales alleged

to be in excess of reasonable requirements can be measured,

proved or denied with exact certainty. It was therefore

intended that if a permittee made sales in excess of rea-

sonable requirements, to the extent that ‘‘reasonable re-

quirements”’ can be fixed and determined, such sales would

be deemed to have been made in bad faith and the per-

mittee’s permit revoked. No tax or further penalty would

be imposed, however, since it would be impossible either for

ee a eS

RPS RAAT CE ET RT AIS TRE AI RIE SiO

18

the government or the permittee to prove or disprove with

certainty either the sale or its extent.

So construed, the distinction made by Article 146 be-

tween illegitimate sales and sales in excess of reasonable

requirements is logical and understandable; likewise it is

clear that it was not intended to penalize unprovable sales

in excess of non-measurable reasonable requirements by

taxing the indeterminate amount of the denatured alcohol

involved therein.

Since the statute imposes a tax, and particularly a

penal tax, both the statute and the regulation whose viola-

tion is invoked to bring the statute into operation must be

strictly construed. The canons of construction governing

the interpretation of such statutes are stated in 59 C. J.

paragraphs 569, 660 and 670 as follows:

“The intention of the legislature is to be obtained

primarily from the language used in the statute ies

Where the language of a statute is plain and un-

ambiguous, there is no occasion for construction even

though other meanings could be found, and the court

cannot indulge in speculation as to the probable or pos-

sible qualifications which might have been in the mind

of the legislature, but the statute must be given effect

according to its plain and obvious meaning and ean-

not be extended beyond it.

«“* * * it is a fundamental rule in the construe-

tion of statutes that penal statutes must be construed

strictly (Prussian vs. U. S., 282 U. S. 675, 951 S. Ct.

993 (1931); U. S. v. Fruit Growers’ Express Co., 279

U.S. 363, 49S. Ct. 374 (1929)) * * * under the rule

of strict construction, such statutes will not be enlarged

by implication or intendment beyond the fair mean-

ine of the language used, and will not be held to include

other offenses and persons than those which are clearly

described and provided for although the court may

think the legislature should have made them more com-

prehensive (U. C. v. Weitzel, 246 U. S. 533, 38 S. Ct.

381 (1918); U. 8. vs. N. ¥. Central R. R. Co., 212 U.S.

19

909, 29 S. Ct. 313 (1909)) * * * Ip order to en-

force a penalty against a person, he must be brought

clearly within both the spirit and the letter of the

statute; and if there is a fair doubt as to whether the

act charged is embraced in the prohibition, that doubt

is to be resolved in favor of defendant (Chase vs.

Curtis, 113 U.S. 452, 5S. Ct. 554 (1885); U.S. vs. J. H.

Winchester & Co., 40 F. (2d) 472 (C. C. A. 2d, (1930)).

“* * * As a general rule revenue laws, such as

laws imposing taxes and licenses, operate to impose

burdens upon the public, or to restrict them in the

enjoyment of their property and the pursuit of their

occupations, and, when they are ambiguous or doubt-

ful will be construed strictly in favor of the taxpayer

and against the taxing power (Bowers vs. New York

€ Albany Lighterage Co., 273 U. 8. 346, 47 S. Ct. 389

(1927) ; Hecht vs. Malley, 265 U. §. 144, 44S. Ct. 144

(1923)) * * ®* the provisions of such statutes are

not to be extended by construction or implication be-

yond the clear import of the language used (Crooks vs.

Harrelson, 282 U. 8. 55, 51 8. Ct. 49 (1930) ; Hecht vs.

Malley, supra) * * * In order to sustain the tax,

it must come clearly within the letter of the statute

(Alvea-Nichols Co. vs. U. §., 12 F. (2d) 998 (D. C. IIL,

1926) ).”’

See also U. S. vs. Merrian, 263 U. S. 179, 44 S. Ct. 69

(1923), which holds that all doubts as to the construction

of revenue statutes must be resolved in favor of the tax-

payer.

So construed and interpreted the regulation does not

forbid or prohibit sales in excess of reasonable require-

ments and therefore such sales are not taxable. It

necessarily follows that even were we to admit that debtor

sold rubbing aleohol compound to its customers in excess

of their reasonable requirements, such sales are never-

theless nontaxable and therefore the claim for taxes must

be denied.

a XHNEME

20

Il.

The said Act and Regulation, if construed so as to impose

a tax on sales in excess of reasonable requirements, are un-

constitutional.

It has been argued above that sales of rubbing alcohol

compound by a permittee in excess of its customers’ rea-

sonable requirements are not taxable under the cited act

and regulation. If, however, the said act and regulation

are construed so as to impose a tax on such sales, it is

submitted that they are unconstitutional and invalid in

that:

First, the act is an unconstitutional delegation of legis-

lative power since it delegates to the Commissioner the

power to create the tax by enacting a regulation, the viola-

tion of which automatically makes the tax due and pay-

able;

Secondly, the regulation is not authorized by any policy,

standard, or rule of any taxing statute; it is required and

authorized only by the act dealing with the licensing of

denatured aleohol and the conduct of permittees there-

under; and is not within the framework of any taxing

statute. Hence, the regulation is an invalid and unav-

thorized basis for the exaction of any tax.

The precise constitutional objections raised here are un-

adjudicated. The reported cases sustaining the power of

the Commissioner of Internal Revenue to enact regulations

and determine the taxable status of persons handling de-

natured alcohol, do not deal with, and therefore do not

govern, the cited section of the act and article of the regu-

lation: see Rothensies v. Lichtenstein, 91 F. (2d) 544 (C.

C. A. 3d, 1937); U. S. v. Rosenzweig, 25 F. Supp. 811 (D.

C. M. D. Pa., 1939); Jacoby v. Hoey, 86 F. (2d) 108 (C.

C. A. 2d, 1936); Driscoll v. Jones, 19 F. Supp. 792 (D. C.

Okl., 1937).

21

III.

The District Court erred in allowing the claim without

remanding the case to the Master with directions to give

the Trustees an opportunity to offer testimony in opposition

thereto.

At the conclusion of the claimant’s testimony before the

Special Master, the debtor moved to dismiss the claim,

reserving to itself the right to offer testimony. Subse-

quently, on March 27, 1939, the Special Master filed a

memorandum opinion which in part reads as follows (R.

322):

‘*On page 290 of the notes of testimony Mr. Shapiro,

attorney for the debtor, has reserved the right to offer

testimony dependent upon the motion to strike off.

I may say that I have fully considered the record as it

stands, and have reached the conclusion that the proof

of claim of the Collector of Internal Revenue must be

disallowed. ’’

Since the claim was disallowed by the Special Master,

testimony in opposition to the claim was unnecessary.

Even though the District Court found that the claimant

had made out a prima facie case, in view of the debtor’s

reservation of the right to offer testimony, Trustees repre-

senting large and substantial creditor interests, who were

appointed after the Master concluded his hearings and

filed his report with the District Court, should not be

prejudiced by a peremptory allowance of the claim, but

should at least be given an opportunity to offer a defense

thereto.

It is submitted that it was error for the District Court,

at this stage of the proceedings, to allow any claim what-

soever on behalf of the Collector and that well settled

procedure requires that the cause be remanded to the

Special Master so that the Trustees will have an oppor-

ase eet te

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22

tunity to present whatever proof they may have tending

to controvert the claim.

A similar situation was presented in In re John H.

Livingston Co., 144 F. 971 (C. C. A. 2d, 1905). In that

case the claimant presented evidence in support of his

claim before the Referee. At the close of the claimant’s

case the Trustee moved that th» claim be disallowed. The

Referee granted the motion and disallowed the claim. On

appeal to the District Court the Referee’s order was re-

versed and the claim was allowed as filed. On appeal, the

Cireuit Court held:

‘‘We think this was error because, by such dispo-

sition of the cause, the claim was allowed without any

opportunity to the Trustee to put in what proof he

might be able to produce tending to controvert the

case made by the claimant. The order is refused and

cause remanded with directions to allow the Trustee

to put in his proofs and to pass upon the question

upon the testimony presented by both sides.’’

In re Arthur E. Pratt Co., 252 F. 917 (D. C. N. D.N. Y.,

1918). The Referee disallowed a claim. The District Court

considered at length the testimony and found that some

of the objections of the Trustee to the testimony should

have been overruled, and held that ‘‘as the case stands the

weight of the evidence is with the claimant; but with all the

pertinent facts fully developed it might not be.’? The Court

therefore sent the matter back to the Referee for rehearing.

In re Tenebaum, 56 F. (2d) 217, 218 (D. C. 8S. D. N. Y.,,

1931). The Referee disallowed a claim by a landlord by

not giving the landlord the benefit of a presumption that

payment of rent and the possession of premises by the

bankrupt validated an oral assignment of the lease to the

bankrupt by a prior tenant of the premises. The Court

said:

‘‘T have no way of knowing what the Referee’s

decision would have been if he had given to the claim-

23

ant the advantage of the presumption to which he was

entitled and had weighed the bankrupt’s evidence in

one scale against that presumption and the evidence

offered by the claimant in support of it on the other

scale. The proper course in such, a case is to reverse

the order and to remand the matter to the Referee for

rehearing.’’

In re Crandall, 205 F. 689, 692 (C. C. A. 9th, 1913). The

Referee disallowed the claim and the District Court set

aside the Referee’s action and allowed the claim. On appeal

by the Trustee the Circuit Court said:

‘The Referee proceeded under the belief that the

sworn proof * * * wasno evidence atall * * * By

his action * * * he ignored material legal evidence

* * * The District Court * * * properly held that

the Referee was inerror * * * The order of the lower

court allowed the claim * * * butasthe proof of claim

was not conclusive, such a disposition of the matter

seems irregular. The Referee should proceed to a

new hearing, whereat the sworn proof of the claimant

must be considered, and the Trustee should be given

opportunity to meet the case made by the claimant’s

proof.’’

In the instant case, the Master ruled the claimant failed

to establish a prima facie case. Until reversed by a review-

ing court, that ruling determined that the debtor was not

obliged to rebut the claimant’s evidence and correlatively

the debtor had no legal right to do so. The Master’s ruling

bound the debtor just as much as it did the claimant;

and for the time being, not only decided that the Collector

had no valid claim, but barred the debtor from presenting

a defense.

When the District Court reversed the Master, however,

it not only held, in effect, that the claimant had proved his

case and therefore the debtor was obliged to rebut it, but

also necessarily held, in effect, that because of the Master’s

TE ob: hy “ 6 (-

ie S etek a Tp ts PONS ORE OLE Ie rag

24

ruling in the debtor’s favor, it had lost its right to present

a defense. This consequence is contrary to our Anglo-

Saxon system of law which has always held that no litigant

shall be deprived of his right to a complete trial because

a court erroneously found in his favor before he presented

his defense. No litigant should be prejudiced because he

observed the decision of a court in his favor; and no litigant

should be put to the choice of deciding whether a judicial

decision in his favor should or should not be observed on

the threat of the penalty that if the court erroneously de-

cided for him, he will be prejudiced.

Such, however, was the effect of the District Court’s

decree. The cause should have been referred back to the

Master just as if a nonsuit had been erroneously entered in

a jury trial.

That historic rule is based on sound reasoning. Its jus-

tice is emphasized when we examine the testimony on which

the District Court entered judgment. Nearly all of the

relevant testimony came from convicted racketeers who

had already received, or who had reason to believe they

would receive, leniency from the government in return for

their testimony on behalf of the Collector.

Certainly the debtor was entitled to an opportunity to

offer evidence in opposition to the testimony of the con-

vieted racketeers on which the Collector bases his claim;

a fortiori, Trustees representing substantial creditor in-

terests who were appointed only after the Master’s hear-

ines were concluded, should not be bound by that testimony

until they have had an opportunity to demonstrate its

falsity.

It is submitted, therefore, that Judge Bard erred in

allowing the claim at this stage of the proceedings, and

that he should have remanded the cause to the Special

Master with instructions to allow the Trustees to submit

testimony in opposition to the claim.

RA YNO SE, RHEE TRH ce Cae RR PTS tin iieate abcess tee con aiemetn ieee:

PN OR NE BREE NETRA OE ae AN Bremen

25

Moreover, it is probable that the decision of the Circuit

Court sustaining Judge Bard was based on the misappre-

hension that the Trustees had been appointed prior to the

hearings before the Special Master (opinion of Cireuit

Court, R. 427), when in fact, as will be seen by reference

to the docket entries and the record, the hearings before

the Special Master commenced on May 18, 1938 (R. 7), and

were concluded on September 8, 1938 (R. 272) ; the Master’s

report was filed on July 11, 1939 (R. 1); but the Trustees

were not appointed until April 4, 1941 (R. 423), nearly two

years after the Special Master’s report had been filed with

the Court.

IV.

The District Court erred in setting aside the findings of

fact of the Special Master.

It is well settled, by decisional and statutory law alike,

that the findings of fact of the trier of the facts, who has

seen and heard the witnesses, will not be set aside unless

such findings are wholly unsupported by the evidence:

Kimberly v. Arms, 129 U. §. 512, 9S. Ct. 355 (1888) ; In re

Pullmatch, Inc., 27 F. Supp. 884 (D. C. S. D. Ohio, W. D.

1959) ; Wald v. Longacre, 34 F. (2d) 25 (C. C. A. 3d, 1931) ;

Clements v. Coplin, 72 F. (2d) 769 (C. C. A. 9th, 1934) ; In re

Rubins, 74 F. (2d) 432 (C. C. A. 7th, 1935), cert. den. 295

U.S. 758, 55 S. Ct. 915 (1935).

That rule, too, governs the weight to be given the find-

ings of the Master in a bankruptcy case instituted prior to

the effective date of the Chandler Act and the Federal Rules

of Civil Procedure.

In the Matter of Philpott (S. D., W. Va., Bankruptcy No.

3395, December 30, 1940, unreported), it was said:

‘Question has been raised as to what weight the

court should give to the master’s findings in a bank-

ruptcy case instituted prior to the effective date of the

Tee Soca he PROP R LSA PBR ESTE BEET Ae DN 2 end ROR ae

26

Chandler Act and of the Federal Rules of Civil Pro-

cedure. Under the terms of present General Order 37,

the Federal Rules of Civil Procedure relating to spe-

cial masters is now applicable to all matters pertain-

ing to the appointment and powers of and the proceed-

ings before such masters where not inconsistent with

the act or the general orders. Rule 53 (e) should be

read with General Order 47, and if this is done, no

inconsistency appears. General Order 47 provides:

‘Unless otherwise directed in the order of reference,

the report of a referee or of a special master shall set

forth his findings of fact and conclusions of law, and

the judge shall accept his findings of fact unless clearly

erroneous. The judge, after hearing, may adopt the

report or may modify it or may reject it in whole or in

part or may receive further evidence or may recommit

it with instructions.’ Rule 53 (e) (2) provides that:

‘In an action to be tried without a jury the court shall

accept the master’s findings of fact unless clearly er-

roneous.’ * * * Although advisory in the sense that

‘t needs confirmation, the master’s findings of fact are

presumptively correct and should be adopted by the

court unless shown to be clearly erroneous. In this

case the special master has had an opportunity to hear

and see the witnesses. His findings will be reversed

only when this court is satisfied that error has been

committed.”’

The report of the Special Master refers specifically to

the page numbers of the testimony from which the facts

are taken, and it is urged that every finding is supported

by the testimony (R. 322-863).

The Cireuit Court adopted the view, however, that the

District Court was not bound by the findings of the Master,

even though such findings were supported by the testimony ;

that the Distriet Court might properly make its own find-

ines; and that the Cireuit Court was bound under FRCP

No. 52 (a) to accept the findings of the District Court (R.

426-428). Petitioners urge that the rule thus laid down by

SCM TWN SPER SRT BNO MS ERY ER I

27

the Cireuit Court is error; that the true rule is that the

District Court may not set aside the findings of the Master

unless the findings are wholly unsupported by the evidence,

or capricious or arbitrary; and that since it is not contended

that the Master’s findings are unsupported by the evidence,

or capricious or arbitrary, the District Court erred in sub-

stituting its own findings for the findings of the trier of the

facts who saw and heard the witnesses.

V.

The District Court erred in imputing the alleged wrong-

ful acts and knowledge of Mifflin’s salesmen to Mifflin.

The Special Master, in concluding that the acts and knowl-

edge of Mifflin’s salesmen were, under the circumstances,

not,imputable to Mifflin, stated the applicable law as follows

(R. 355):

‘‘There is of course a fundamental rule of law that

where knowledge is acquired by an agent in the course

of his agency and relates to matters concerning the

business, which the agent was authorized to conduct on

behalf of the principal, such knowledge acquired by the

agent is imputable to the principal. But if the agent

Was perpetrating a fraud on the principal, acting for

his own benefit and not for the benefit of his principal,

the rule would not apply.”’

The reason for the rule is that it is presumed that the

agent will inform his principal; the reason for the excep-

tion to the rule is that the presumption does not apply

where the agent’s relation to the subject matter, or his pre-

vious conduct, renders it certain that he will not inform

his principal: Thomson-Houston Electric Co. v. Capital

Electric Co., 65 F. 341 (C. C. A, 3d, 1931); Hart v. Bier,

74 F. 592 (D. C. E. D. La. 1896); Bank of Overton vy.

Thompson, 118 F. 798 (C. C. A. 8th, 1902); Dixie Guano

28

Co. v. Wessel, 296 F. 433 (C. C. A. 4th, 1924); American

Surety v. Pauley, 170 U.S. 133, 18 8. Ct. 552 (1898) ; Schutz

v. Jordan, 141 U.S. 213, 11 S. Ct. 906 (1891); Benedict v.

Arnoux, 154 N. Y. 715, 49 N. FE. 326 (1898).

Judge Bard, in reaching the contrary conclusion that the

acts and knowledge of Mifflin’s salesmen were imputable to

Mifflin, cites with approval the Master’s statement of the

applicable law (R. 397). Hence, both the Master and the

District Court used the same rule of law to reach opposite

conclusions.

The true reason for the dissimilar conclusions may be

found in the differences between the premises, that is, the

stated facts, upon which the respective conclusions are

predicated.

The Special Master based his conclusion on the follow-

ing facts:

(a) Mifflin had no knowledge or means of knowledge of

the illegitimate transactions (R. 359).

(b) Mifflin’s salesmen were paid by the bootleggers for

their participation in the illegitimate transactions (R. 355,

356).

(c) The dealings between Mifflin’s salesmen and the boot-

leggers were carefully concealed from the debtor because

it was feared that if knowledge of the transactions came

to the debtor, the salesmen would be discharged and Mifflin

would cease selling rubbing aleohol compound to customers

who resold to bootleggers (R. 359).

(d) The illegitimate activities of Mifflin’s salesmen were

in violation of orders received from debtor that rubbing

aleohol compound was to be sold only for legitimate pur-

poses, were not within the scope of their duties, and were

for the benefit exclusively of Mifflin’s salesmen and to the

damage of Mifflin (R. 359).

PREIS TEE RPT AIM CERIN

29

(e) Mifflin investigated the requirements of its customers

and did not at any time sell in excess of such amount (R.

358).

(f) Mifflin made no sales of rubbing alcohol compound

to its customers in bad faith or in excess of their reasonable

requirements (R. 359).

Judge Bard, however, imputed knowledge to Mifflin be-

cause, first, he erroneously ignored or reversed the Master’s

findings; and, secondly, overlooking the patent fact that

the case arose on a demurrer to the Collector’s evidence

sustained by the Master, he concluded that Mifflin admitted

knowledge of the illegal acts of its agents and its consequent

bad faith by expressly failing to deny such knowledge (R.

390, 394, 397, 398, 399, 400, 407).

Since the Circuit Court’s conclusion that Mifflin is re-

sponsible for the acts and knowledge of its employees under

the general doctrine of respondeat superior rests on these

two unsound bases and the facts found by the District Court,

the conclusion itself is necessarily unsound.

It is submitted that Zito vy. U. S., 64 F. (2d) 772 (C.C. A.

ith, 1933), the case cited by the Cireuit Court in support

of its conclusion that even in a criminal case knowledge is

imputable to the principal, does not support that conclusion

for that case was decided against the defendant because the

court and jury found that the defendant knew or should

have known of the illegal activities sought to be imputed

and therefore had actual knowledge.

Finally, none of the cases cited and relied on in the

opinions of the District Court and Cireuit Court, unlike the

instant case, discloses a factual pattern wherein the claim-

ant’s own testimony conclusively demonstrated that its

witnesses, together with the agents, were engaged in an

independent, fraudulent enterprise, the success of which

would be impaired or defeated by the disclosure to the prin-

30

cipal of the knowledge sought to be imputed. Petitioners

submit it is well settled that under such circumstances

the knowledge is not imputable. Recent cases reiterating

that doctrine are Great American Indemnity Co. v. First

National Bank, 100 F. (2d) 763 (C. GC. A. 10th, 1938) ;

FDIC v. Pendleton, 29 F. Supp. 779 (D. C. W. D. Ky., 19289) ;

Hooker v. New Amsterdam Casualty Co., 33 F. Supp. 672

(D. C. W. D. Ky., 1940).

VI.

The District Court erred in making a specific finding of

the amount of alcohol alleged to have been sold by Mifflin

in excess of its customers’ reasonable requirements.

Finding of fact No. 3 of the Supplemental Report of the

Special Master reads as follows (R. 358) :

‘*3. Some of the rubbing alcohol sold by the debtor

corporation to its customers was later diverted by the

said customers or persons herein called ‘bootleggers’

to whom the aleohol compound was resold by the said

customers for illegal purposes. There is no proof as

to the amount of the rubbing alcohol so diverted and

therefore no finding as to the amount can be made.”

Judge Bard, although he made a finding as to amount,

admitted that the record lacks competent evidence of the

exact amount of the rubbing aleohol compound alleged to

have been diverted. Judge Bard said (R. 393):

‘The specific quantity of Mifflin’s rubbing alcohol

purchased by Glanzburg and Gold is not shown on

the record before the Master. This was due, contends

Government counsel, to the Master’s ruling refusing

to allow customers to testify to whom they sold Mit.

flin’s product, and also to the ruling that Glanzburg

could not give his best judgment of the quantity of

Mifflin’s product purchased through the Three Star

Chemical Company. Certain rulings of the Master,

as mentioned in Exception No. 8 (R. 38, 44, 79, 258-62,

31

272-3) precluded the admission of the testimony of

customers as to the exact quantity of rubbing alcohol

they purchased from Mifflin on behalf of or for the

purpose of reselling to the representatives of the boot-

leggers. Counsel for the government contends these

customers had records from which they could testify

as to the exact quantity purchased and sold, whereas

the representatives of the bootleggers, Glanzburg, Gold

and Waldman, on whose behalf the purchases were

made, did not keep such records, and when they testi-

fied they had to rely solely on their memory as to quan-

tity purchased. I think this was error on the part of

the Master. I think this testimony would have clearly

revealed the amount of alcohol in excess of their reason-

able requirements that flowed through these customers

from Mifflin to Waldman and Glanzburg for illegal

purposes, ’’

The Aleohol Tax Unit admits that the quantity stated

in the record reflects only the judgment of Waldman, Glanz-

berg and Goldstein and that such judgment is not the best

evidence of the exact quantities. In a memorandum dated

October 27, 1938, filed by the Aleohol Tax Unit with the

Special Master, it was said on pages 5 and 6:

‘“‘It was evident from the testimony of Waldman,

Glanzburg, and Gold that they kept no permanent

record of their transactions. From the very nature

of their business, it is obvious that such would be the

case. The Mifflin Company, however, did keep records

of the individuals and concerns in whose names their

product was billed, and, these individuals being in

business, kept records of their transactions in Mifflin’s

product. After showing from Mifflin’s records the

quantity of rubbing aleohol compound sold to their

customers, it was the intention of the government to

call these customers and ask them to testify from

their records the exact amount of such product that

they sold to Waldman, Glanzburg, and Gold. Under

the circumstances, there is no question but that this

32

was the best evidence available as to the exact quan-

tities of rubbing alcohol compound involved in this

litigation, as Waldman, Glanzburge and Gold could

only testify to their best judgment as to quantities,

based upon either their recollections of the transac-

tions themselves, or temporary records kept of those

transactions.”’

A reading of the testimony of Glanzberg, Goldstein and

Waldman with respect to quantities shows that such testi-

mony lacks particularity, definiteness and certainty. For

example, Glanzberg stated that he indiscriminately bought

Mifflin, Addy and Bentley rubbing aleohol compound (R.

91, 93). When Glanzberg was asked how much rubbing

aleohol he handled during September and October of 1935,

he estimated that. during these two months he handled

approximately 1000 gross per month (R. 90). He was

then asked to give the percentage of the said 2000 gross

which was manufactured by debtor (R. 93). The witness

replied that he did not keep any records; that he pur-

chased the rubbing alcohol compound from different drug-

gists (R. 94), and when the Special Master said to him,

‘*Can you state what if any of that aleohol came from

the Mifflin Chemical Company of your own knowledge?”

the witness answered that it would not be fair for him

to say the percentage, but that the greater proportion

came from Mifflin (R. 94). Later on the witness said that

he didn’t know of his own knowledge and wasn’t sure that

the alcohol was manufactured by Mifflin, but that he had

been told that the name C. M. Brown on the boxes indicated

that it was a Mifflin product (R. 95, 96). The witness ad-

mitted, however, that he knew that at that time a lot of

people were manufacturing false labels and assuming the

name of Mifflin (R. 96).

Moreover, Judge Bard’s findings as to amount are predi-

cated on the theory that appellants do not deny the testi-

33

mony of Glanzberg, Goldstein and Waldman (R. 390, 394,

397, 398, 399, 400, 404, 405, 407). For example, Judge

Bard, in finding that Mifflin sold 2720 gross pint bottles

in excess of reasonable requirements in the New York area,

said (R. 394);

‘‘The figure of 2720 gross is corroborated evidence

of Waldman’s testimony showing that at least that

.

amount, approximating the amount to which he testi-

fied, passed through their hands. Since no one has

contradicted Waldman as to the purposes for which he

purchased this aleohol by pre-arrangement with Mif-

flin’s agent Taback, I find that at least 2720 gross pint

bottles were furnished these concerns in the New York

area in excess of their reasonable requirements,”’

Obviously it was error to accept Waldman’s guesses

as competent evidence on the theory they are not denied,

when in fact, as hereinbefore argued, petitioners have not

yet had an opportunity to present their denial.

Irrespective of whether the District Court determined

that the Special Master erroneously excluded the testi-

mony of customers, it is incontrovertible that in the present

state of the record there is nO competent testimony show-

ing precisely how much rubbing alcohol was sold in ex-

cess of the reasonable requirements of Mifflin’s customers.

It is suggested that the District Court may, under such

circumstances, have remanded the cause to the Special

Master with instructions to hear and include the testimony

of the customers, but it is submitted that it was reversible

error to make a finding as to amounts without evidence

of the same definiteness and particularity that would be

required in the proof of any other claim in bankruptey or

any other kind of legal action.

Since it is well established that the burden to offer

evidence of that character is on the claimant (K imberly v.

Arms, 129 U. §. 512, 9S. Ct. 355 (1888) ; Matter of Rubins,

32

34

74 FY. (2d) 482 (C. C. A. 7th, 1935) cert. den. 295 U. S. 758,

db) S. Ct. 915 (1985); Clements v. Coplin, 72 F. (2d) 796

(C. C. A. 9th, 1934), the Special Master’s finding that ‘‘no

%°

finding as to amount ean be made’? may not be disturbed

by any reviewing court, particularly since the Aleohol Tax

Unit has admitted, and the District Court has found, that

the best and only competent evidence of the exact amount

of the aleohol diverted is not presently in the record.

All of which is respectfully submitted.

Wexter & WEISMAN,

Harry SHaptro,

Counsel for Petitioners.

Dated January 19, 1942.

Address of Counsel: 1800 Market Street National Bank

Building, Juniper and Market Streets, Philadelphia, Penna.

(8414)