CITY OF CHATTANOOGA et al. v. HILL.

(Circuit Court of Appeals, Sixth Circuit. July 21, 1905.)

No. 1,436.

BANKRUPTCY-DUTY OF TRUSTEE TO PAY TAXES.

Bankr. Act July 1, 1898, c. 541, § 64a, 30 Stat. 563 [U. S. Comp. St. 1901, p. 3447], which provides that the court shall order the trustee to pay "all taxes legally due and owing by the bankrupt" in advance of the payment of dividends, is not ambiguous, and requires the payment of all such taxes, irrespective of the question of lien, and although they may have been levied on property which did not pass into the hands of the trustee. Appeal from the District Court of the United States for the Eastern District of Tennessee.

Chambliss & Chambliss, for appellants.

Wm. L. Frierson (Lewis Shepherd of counsel), for appellee. Before LURTON, SEVERENS, and RICHARDS, Circuit Judges.

LURTON, Circuit Judge. By intervening petition the state of Tennessee, the county of Hamilton, and the city of Chattanooga sought an order requiring the trustee to pay certain taxes due from the bankrupt corporation, the New Chattanooga Furnace Company, out of the funds in his hands before the payment of dividends. The aggregate of the claims is $690. Of this about two-thirds is the tax assessed upon personal property and the remainder upon the real property of the bankrupt. The greater part of the property upon which this tax was assessed consisted of real and personal property covered by a mortgage. The mortgage debt being in excess of the value of the mortgaged property, the trustee, by consent of the court, relinquished it to the mortgage creditors. The unmortgaged property which came to the hands of the trustee represented about 15 per cent. of the total of the entire property upon which the tax was assessed. Upon this state of facts the court ordered the trustee to pay 15 per cent. of the tax claim, and declined to order the payment of the remainder.

The decree is erroneous, and the trustee should be required to pay all the taxes legally due by the bankrupt. Section 64a of the bankrupt act (Act July 1, 1898, c. 541, 30 Stat. 563 [U. S. Comp. St. 1901, p. 3447]) reads as follows:

"The court shall order the trustee to pay all taxes legally due and owing by the bankrupt to the United States, state, county, district, or municipality in advance of the payment of dividends to creditors, and upon filing the receipts of the proper public officers for such payment he shall be credited with the amount thereof, and in case any question arises as to the amount or legality of any such tax, the same shall be heard and determined by the court."

There seems to be no room for construction. The taxes claimed are confessedly due and owing. Of the aggregate tax claimed $450 was assessed against the aggregate value of the personal property owned by the bankrupt and the remainder upon the aggregate value of the realty. Under the Tennessee statute this assessment con

stituted a first charge or lien upon the fee in said property, regardless of liens or divisions of interest. Acts Tenn. 1903, pp. 663, 667, c. 258. This lien upon the personalty for the tax assessed against the personalty was a lien for the entire tax upon every part of the personalty, and the whole personal tax might have been enforced against that part of the personalty which did not come to the trustee or against that which did. We can find no provision in the Tennessee assessment statutes which apportions the burden among different parcels when the assessment has been made upon the gross value of the personal estate of the taxpayer. But, irrespective of the question of a lien, the taxes constituted a personal debt against the taxpayer which can be enforced by proceedings in personam. The bankrupt act says that "all taxes legally due and owing by the bankrupt" shall be paid by the trustee "in advance of the payment of dividends to creditors." This does not say or mean that such payment shall be dependent upon the question as to whether they are a secured debt. Section 64b deals with the order of payment, and does not mention taxes. Clause 5 of section 64b (30 Stat. 563 [U. S. Comp. St. 1901, p. 3448]), which is supposed to cover taxes, refers only to "debts owing to any person who by the laws of the states or United States is entitled to priority." A tax due to the United States or a state is not a debt owing to "any person," within the meaning of this clause. The priority of taxes is provided for by section 64a. If paid only as a secured debt of the kind referred to in 64b, taxes would be postponed not only to costs of administration but to workmen, clerks, and servants' wages. Congress evidently meant that the sovereign should neither be postponed nor delayed in the collection of taxes, and therefore provided that the trustee should pay all taxes due and owing by the bankrupt in advance of dividends. The bankrupt might have paid all taxes immediately prior to the filing of a petition by or against him. This would not have been a preference. The law means that the trustee shall do what the bankrupt might have done and what good citizenship required him to do. The opinions of the courts are not agreed about this matter, and there are holdings which limit this direction to pay "all taxes due and owing by the bankrupt" to such taxes as constitute a lien upon the bankrupt's estate in the hands of the trustee and remit the sovereign to the enforcement of any lien which it may have against property which the trustee relinquished to the lien creditors. In re Veitch (D. C.) 101 Fed. 251; In re Stalker (D. C.) 123 Fed. 961; In re Brinker (D. C.) 128 Fed. 634. The two last are opinions by Hazel, District Judge. In the case of In re Tilden (D. C.) 91 Fed. 501, it was held that taxes due upon and assessed against the exempt homestead of the bankrupt should be paid by the trustee. That the bankrupt's creditors were not benefited by the bankrupt's homestead was held not enough to raise a doubt upon the plain meaning of so unambiguous. a law. In the case of In re Prince & Walter (D. C.) 131 Fed. 546, state taxes assessed upon mortgaged lands of the bankrupt were directed to be paid out of proceeds of the bankrupt's personalty, there being no proceeds of the land out of which to pay after satis

fying the mortgage thereon. Looking to the terms of 64a, Judge Archbald said: "Taxes, as a class, are thus put at the head of everything, even above the expense of preserving the estate or the cost of administration." In the case of the City of Waco v. Bryan, 127 Fed. 79, 62 C. C. A. 79, the Court of Appeals for the Fifth Circuit in a clear and forceful opinion by Judge Pardee held that the claim of the city of Waco for taxes assessed against the bankrupt was entitled to priority of payment by the trustee for taxes assessed against property which did not come to the hands of the trustee. For the purposes of this case it is enough to say that we concur with that court, but find no necessity for the expression of any opinion as to whether taxes would be entitled to priority over costs and expenses of administration.

The order of the bankrupt court is reversed, with direction to pay the entire claim for taxes.

NEW AMSTERDAM CASUALTY CO. v. EAST TENNESSEE TELEPHONE

CO. et al.

(Circuit Court of Appeals, Sixth Circuit. July 21, 1905.)

No. 1,364.

INSURANCE AGAINST LIABILITY FOR NEGLIGENCE-ACTION ON POLICY-DEFENSES.

Under a policy insuring a company against loss from liability for damages on account of personal injuries due to its negligence, which provided that, in case of a suit to enforce a claim for injuries within the policy, the insurer should be notified, and should defend the suit "or settle the same," where the attorneys and agents representing the insurer made a settlement of such a case for more than the amount of the policy, with the assent of the assured, which paid the money, further provisions of the policy prohibiting settlements by the assured without consent in writing of the insurer, that it should be liable only after final judgment against the assured, etc., have no application, and constitute no defense to an action to recover on the policy on account of the claim so settled; nor can it deny, as against the assured, the authority of the agents and attorneys employed by it and acting in its behalf to make the settlement.

In Error to the Circuit Court of the United States for the Middle District of Tennessee.

This is an action to recover under a policy of indemnity insurance. The New Amsterdam Casualty Company (hereafter styled the "Insurance Company") undertook to indemnify the Cumberland Telephone Company against loss from liability for damages on account of bodily injuries caused by its negligence, liability in any one instance not to exceed $5,000. During the currency of this contract an action was brought at Frankfort, Ky., against the telephone company by Miss Hedger, a citizen of Kentucky, resident at Frankfort, to recover $25,000 damages on account of injuries sustained through the alleged negligent conduct of the telephone company's business in that city. The casualty company was notified both of the happening of the accident and of the bringing of the suit, and at once employed attorneys, and undertook to defend the case, as it was bound to do. Investigation convinced both the telephone and insurance companies that the injury sustained by the plaintiff in the case was very serious, and the case indefensible, and that a judgment in excess of the liability of the insurance company to the telephone company was

very probable. In this condition of affairs, and just as the case was about to be brought to trial, a settlement was reached, by which her expenses of litigation, including her counsel fees and court costs, and the sum of $8,000, was to be received in full satisfaction, and her suit dismissed. A check or draft for $10,085.25 was thereupon given to Judge Ira Julian, the attorney of the insurance company at Frankfort, engaged in defending the suit, and paid over by him to Miss Hedger or her attorneys in full settlement for the amount agreed upon. Upon receipt of this sum she dismissed her suit. Thereupon the telephone company demanded that the insurance company should pay to it the amount of $5,000 and $17.10, one-half the costs of suit, in accordance with the terms of the contract of indemnity. This the insurance company refused to do, denying its liability to pay anything whatever. Thereupon this suit was brought, and the plaintiff recovered a judgment for the sums sued for, with interest. This writ of error has been sued out to reverse this judgment.

C. T. Boyd, for plaintiff in error.

J. J. Vertrees, for defendants in error.

Before LURTON and SEVERENS, Circuit Judges, and THOMPSON, District Judge.

LURTON, Circuit Judge (after stating the facts). The insurance company at the close of all the evidence requested the court to instruct the jury to return a verdict for it. This the court refused, and an exception has been saved. The insurance company then requested a number of special charges, based upon certain provisions of the policy. Most of these were denied, and error is assigned. The case was then submitted to the jury upon a charge not excepted to in any matter now relied upon. This charge, in effect, instructed the jury that the plaintiff would be entitled to recover the amount sued for if they should find that the insurance company and Miss Hedger had agreed upon a sum to be paid in settlement of her claim against the telephone company, and that the telephone company had assented to the terms of settlement, and had paid the money, at the instance of those acting for the insurance company, necessary to carry out the settlement. The question as to whether the persons assuming to represent the insurance company in the settlement made with Miss Hedger had authority to act for it in settling, or whether the plaintiffs were authorized to assume that they had the authority they assumed to have, were questions of fact, in respect to which there was conflicting evidence; and these questions were submitted to the jury upon a charge which, in this aspect of the case, was not excepted to. Upon this issue the jury have found, as we must assume for the purpose of the present hearing, in favor of the contention of the plaintiff. The insurance company, upon the other hand, contended that the case must turn upon certain provisions of the policy. Upon this insistence they bottomed a motion for a peremptory instruction. This being denied, the same matter was again presented in certain requests for special charges, which the court also denied. Exceptions were duly taken to the action of the court, and upon these exceptions the assignments of error have been predicated. The character of the requests denied is sufficiently indicated by the motion for a peremptory instruction, the grounds of that motion having been reduced to writing. If that motion was

properly denied, the special requests were also properly denied, as they cover the same ground. The grounds of the motion were as follows:

"Comes the defendant, the New Amsterdam Casualty Company, all proof having been introduced by both sides, and moves the court to direct a verdict for it upon the following grounds, to wit:

"First. Because the policy of insurance or contract on which plaintiff bases and predicates this suit provides 'that the assured shall not settle any claim arising thereunder, except at its own cost, without the consent to the company previously given in writing,' and no waiver of this provision by the defendant is shown to have been made in writing.

"Second. Because the contract of insurance on which plaintiff bases and predicates its suit provides 'that the assured shall not incur any expense nor interfere in any legal proceeding brought against it for which the company might be liable to it, without the consent of the company previously obtained in writing,' and no waiver of this provision by the defendant is shown to have been made in writing.

"Third. Because the contract or policy of insurance on which plaintiff bases and predicates its suit provides 'that no action shall lie against the company as respects any loss thereunder, unless the action be brought to reimburse the assured for a loss actually sustained by it, after a trial of the issue, and in satisfaction of a final judgment against it,' and no waiver of this provision by the defendant is shown to have been made in writing.

"Fourth. Because the contract or policy of insurance on which plaintiff bases and predicates its suit provides that no action shall lie against the company as respects any loss thereunder, unless brought within the period within which a claimant might sue the assured for damages, unless at the expiration of such period there is such an action pending against the assured, in which case an action may be brought against the company by the assured within thirty days after final judgment has been rendered and satisfied as above,' and no waiver of this provision is shown to have been made by the defendant in writing.

"Fifth. Because the contract or policy of insurance on which plaintiff bases and predicates its suit provides 'that an agent has no authority to change this policy or to waive any of its provisions, nor shall notice to any agent or knowledge of his, or of any person, be held to effect a waiver or change in this contract or in any part of it. No change whatever in this policy, nor waiver of any of its provisions or conditions shall be valid, unless an endorsement is added hereto signed by an officer of the company at its home office expressing such waiver or change,' and no waiver or change of this provision has been agreed to or signed by any officer of the defendant, and indorsed or added to said contract."

The trial judge rightly concluded that the special provisions of the policy upon which the defendant's motion was based, although constituting a part of the contract, were not applicable to the circumstances of this case. After providing by the first clause of the special provisions of the policy, called "General Agreements," that the assured should, upon the occurrence of an accident, give immediate notice, etc., the second clause then provides as follows:

"If thereafter any suit is brought against the assured, to enforce a claim for damages on account of an accident covered by this policy, immediate notice thereof shall be given to the company and the company shall defend such suit in the name and on behalf of the assured, or settle the same."

Thus the obligation of the insurance company was to defend the suit in the name of the assured, or "settle same." The contract does not contain any provision in respect to how or through what agency the insurance company should either defend or settle.