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Freitag v. Strand of Atlantic City Inc.

decided: June 30, 1953.

FREITAG
v.
THE STRAND OF ATLANTIC CITY, INC., ET AL.



Author: Hastie

Before BIGGS, Chief Judge, and GOODRICH and HASTIE, Circuit Judges.

HASTIE, Circuit Judge.

This is an appeal by William L. Taub, counterclaimant, from a judgment entered by the District Court for the District of New Jersey awarding to the United States, intervenor, a fund under the jurisdiction of the court as a result of settlement of the initial phase of this litigation.

Prior to 1945, Abraham Freitag, originally designated as plaintiff in this suit, was the owner of a stock certificate and note evidencing his interest in The Strand of Atlantic City, Inc., the original corporate defendant here. The note was payable "to Abraham Freitag only". The stock certificate had endorsed on it the statement, "The shares represented by this certificate are transferable only pursuant to the terms of a written agreement dated June 20, 1944". This stock certificate and note came into the physical possession of the Collector of Internal Revenue for the First Collection District of New York as a result of tax liens filed against Freitag in April, 1945, to secure indebtedness greatly in excess of any possible value the documents might represent.

In the spring of 1950 there were negotiations for the release of these documents in the course of which it was represented to the Internal Revenue Bureau that unless suit were brought promptly the government's security interest would become worthless by the running of the Statute of Limitations as to the note, and by laches as to any wrong which might have been done to shareholders by those who managed the affairs of the corporation. An agreement was reached pursuant to which the Collector gave up possession of the documents so that suit could be brought on them, received $2500, and agreed to accept as full consideration for discharge of the lien that sum plus 25% of any recovery that might be had on the claims represented. A Certificate of Discharge of the lien was issued incorporating the terms of the agreement. The record shows Taub as the moving party in these negotiations, but it is disputed whether the Bureau was advised that anyone other than Freitag had an interest in the stock and note.

Subsequently this suit was brought in the name of Abraham Freitag, a citizen of New York, in the District Court for the District of New Jersey against The Strand of Atlantic City, Inc., a New Jersey corporation, and Emanuel and Evelyn Solomon, citizens of New Jersey. The complaint alleged that Freitag was a stockholder and creditor of defendant corporation and that the individual defendants had used their positions as officers and directors of the corporation to impair his rights as a stockholder and to endanger his and others' rights as creditors. The complaint sought immediate appointment of a receiver to protect all whose interests might appear. The United States intervened, alleging by virtue of the terms of the Certificate of Discharge a 25% interest in any recovery.

Before appointment of a receiver or hearing on the merits of the complaint, a settlement was reached under which the stock certificate and note in Freitag's name were surrendered to the Solomons and the corporation, and they in turn paid $75,000 to the Camden Trust Co., as escrow agent, to hold until an agreement could be reached among all who might be interested in the fund or until the District Court should order disposition of it. Pursuant to stipulation of the parties, the District Court entered an order on October 30, 1950, dismissing the suit as to defendant corporation and defendants Solomon but preserving the rights of all others as to each other.

The United States then amended its petition in intervention and claimed, in addition to the 25% previously claimed, the balance of the fund in partial satisfaction of a criminal fine of $100,000 which had been levied against Freitag pursuant to a judgment entered in the District Court for the Southern District of New York on May 31, 1945 and more recently filed in the District Court for the District of New Jersey for the purpose of making its lien effective there. Taub answered the government's petition, admitting the government's right to 25% of the fund, but denying its right to the balance.*fn1 He alleged that Freitag was not the owner of the property, which the fund represented, on October 20, 1950, the date on which the criminal judgment was filed in the District Court for the District of New Jersey, because the stock certificate and note had been assigned by Freitag to him on November 30, 1949. On the basis of this assignment Taub claimed the balance of the fund above the 25% admittedly due the government. In answer to Taub's claim, the government alleged that the assignment from Freitag to Taub was "collusive, fraudulent, and without true consideration".

After trial the District Court rendered an oral opinion in which it found that the Certificate of Discharge was obtained by fraud and was therefore null and void, so that the tax lien still existed as to the stock and note and therefore as to the fund which they had produced. The court found further that the assignment from Freitag to Taub had been in fraud of creditors and was void, and that the filing of the criminal judgment in the District of New Jersey created a valid lien against Freitag's property and, hence, against the fund. Upon these grounds the court ordered the entire fund paid into court by the escrow agent, to be held for a period subject to claims for fees and costs, and then to be paid over to the United States. From this judgment, Taub has appealed.

If the first ground for the District Court's decision is sustained the case is at an end, for the original tax lien, if still in effect, will exhaust the fund. The stock certificate and note and the claim they represented were released from this lien by a Certificate of Discharge of Property from Federal Tax Lien, issued under Section 3674(b) of the Internal Revenue Code, 26 U.S.C. § 3674(b), and signed by the Collector of Internal Revenue for the First Collection District of New York, on April 25, 1950. Section 3675 of the Internal Revenue Code, 26 U.S.C. § 3675, provides that "A certificate of release or of partial discharge issued under this subchapter shall be held conclusive that the lien upon the property covered by the certificate is extinguished." This court has held that this peremptory and sweeping statutory language can be avoided only by a showing of actual fraud in the procurement of the discharge. In re Bowen, 1943, 138 F.2d 22; In re Bowen, 1945, 151 F.2d 690. The decisive question, therefore, is whether a finding of such fraud can be sustained on the present record.

We note at the outset that neither in pleading nor otherwise has the government at any time founded a formal claim to the entire fund on the theory that the discharge is voidable. However, the government, in its brief here, urges that under Rule 15(b) of the Federal Rules of Civil Procedure, 28 U.S.C., we should treat this issue as having been raised in the court below. Rule 15(b) provides in part:

"When issues not raised by the pleadings are tried by express or implied consent of the parties, they shall be treated in all respects as if they had been raised in the pleadings. Such amendment of the pleadings as may be necessary to cause them to conform to the evidence and to raise these issues may be made upon motion of any party at any time, even after judgment; but failure so to amend does not affect the result of the trial of these issues."

Before we can sustain the finding of the District Court, we must therefore find that in substance there has been a trial of the issue and that this procedure has been authorized by express or implied consent of the parties. Nowhere in the record does there appear any expression by Taub or his counsel acquiescing to the trial of the issue. And we find it difficult to determine on the record whether the parties even regarded this issue as a matter then being litigated.

Cases in which it has been held that an issue was tried by implied consent proceed in the main on one or more of the following bases: both parties introduced evidence on the issue, or evidence was introduced by one party and no objection was raised by the other, or the "issue" not raised by the pleadings was in reality only an unanticipated line of proof which served to establish a duly pleaded ultimate fact.*fn2 Here, the government offered no evidence of fraud in the procurement of the Certificate of Discharge. The only witness who testified in any way in regard to the circumstances of the release was Taub. On cross-examination and questioning by the court, he testified that he had participated in the negotiations leading to the issuance of the Certificate, and admitted that he had not informed the government officials in writing prior to the actual issuance of the Certificate that he was the assignee of Freitag's interest. He also testified that he had orally informed a Mr. Titman of the Internal Revenue Bureau, who was the principal negotiator on behalf of the government, that he had received an assignment of Freitag's interest. There was offered in evidence a document, signed by Abraham Freitag, drafted as a power of attorney in usual form, except for reference within the instrument to "this assignment" and a statement that the power of attorney is granted "for the sole use and benefit of William L. Taub and at his own cost and expense", to prosecute and settle any claims based on the stock certificate and note. Taub testified that this instrument was prepared at the request of Titman and submitted to the Collector in New York at the time the Certificate of Discharge was issued.*fn3 The trial court obviously considered Taub to be an extremely unreliable witness. And to that court the granting of the Certificate of Discharge on the terms allowed here may have seemed such a dubious exercise of discretion as to suggest strongly either misrepresentation or connivance. But suspicion is not proof. The doubts which may have been raised in the judge's mind by his own examination and counsel's cross-examination of Taub, together with the court's conviction that Taub's self-serving explanations were ...


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