The Distilled Spirits

by Joseph P. Bradley

United States Supreme Court

78 U.S. 356

The Distilled Spirits

IN error to the Circuit Court for the District of Massachusetts; the case being this:

The 48th section of the Internal Revenue Act of June 30th, 1864, ^[1] as amended by an act of July 13th, 1866, enacts that

'All goods, wares, merchandise, articles or objects, on which taxes are imposed by the provisions of law, which shall be found in the possession, or custody, or within the control of any person or persons in fraud of the internal revenue laws, or with design to avoid payment of said taxes, may be seized, &c., and shall be forfeited to the United States.'

The 45th section of this later act ^[2] enacts that

'All distilled spirits found elsewhere than in a bonded warehouse, not having been removed from such warehouse according to law, and the tax imposed by law not having been paid, shall be forfeited.'

By the 42d section of the same act a penalty is imposed on persons executing any false and fraudulent bond or other document for the purpose, among other things, of withdrawing from any bonded warehouse any spirits or other merchandise, or which shall be used in fraud of the internal revenue laws. By this section the property is forfeited and the party executing the document made liable to imprisonment.

The act of 1864 contained no specific provisions for the forfeiture of distilled spirits. The act of 1866 in certain sections (that is to say, in sections from 40 to 45) made provisions about them, including cases in which the government would be entitled to a forfeiture of such spirits. One section, the 40th, enacted that distilled spirts when inspected might be removed, under bond, without payment of tax, from the bonded warehouse of the distiller to any general bonded warehouse. Another, the 41st, that spirits or other merchandise might be removed from bonded warehouse for the purpose of being exported. Another, the 42d, already quoted, makes penal the making of any false bond or other document to evade payment of the tax; another, the 43d, that owners of distilled spirits intended for sale, manufactured before the date of the act, should give notice to the collector to gauge and prove them; another, the 44th, that forfeited spirits should be disposed of by the commissioner of internal revenue; and another, the 45th, as already mentioned, that all distilled spirits found elsewhere than in a bonded warehouse, not having been removed from such warehouse according to law, and the tax unpaid, should be forfeited.

With these various provisions on the statute-book, the United States filed an information stating that the collector of internal revenue at Boston, in April, 1867, had seized 278 barrels of distilled spirits as being forfeited by removal from a bonded warehouse without paying the tax due thereon.

The first count of the information was founded on the 45th section of the act of July 13th, 1866, and alleged that the spirits were found elsewhere than in a bonded warehouse, not having been removed therefrom according to law, and the taxes not having been paid.

The second and third on the 48th section of the act of June 30th, 1864, as amended by act of July 13th, 1866, and alleged that the spirits were in the possession of one Harrington, for the purpose of being sold in fraud of the internal revenue laws, and with design to avoid the payment of taxes.

Subsequently, Harrington appeared and claimed 124 of the barrels, and a certain Boyden the remainder; and they pleaded that none of the goods became forfeited as alleged in the information, and that the allegations therein were not true. Issue was taken on each of these pleas. It appeared in proof, that in April, 1867, a large quantity of spirits were withdrawn from the United States bonded warehouses in Boston upon the pretence of an intent to transport the same to Eastport, Maine, for exportation thence. False and fraudulent bonds were given therefor, and the spirits were never attempted to be transported to Eastport, but were removed for consumption and sale in Boston and its vicinity, and the taxes were not paid. The government contended that the spirits seized were parcel of this lot, and that the claimants were parties to, or cognizant of, the fraud. The claimants contended that part of the spirits in controversy were not a portion of the spirits fraudulently withdrawn, but were from different and distinct lots, and that the spirits claimed by Harrington had been rectified in leaches in which various lots were mixed, including, possibly, some of the lot fraudulently withdrawn, which it was impossible to identify. They further claimed that the spirits were bought in open market without knowledge of the fraud, and that such of the fraudulent lot as Harrington had bought, he had bought through Boyden as his agent. Evidence was given on both sides, tending to prove these several points.

The claimants requested the court to instruct the jury as follows:

'1. That if the spirits had been deposited in a United States bonded warehouse, and had been removed therefrom upon application to the collector of the district in which they were situate, and by his authority, for rectification or transportation for exportation, they are not liable to forfeiture.

'2. That if the said spirits had been removed from a United States bonded warehouse, upon application to the collector of the district, and upon the furnishing of bonds which were satisfactory to and accepted by him, and upon permission thereupon granted by the collector, and were seized before the expiration of the time allowed for rectification or transportation, the spirits are not liable to forfeiture.

'3. That if the said spirits had been removed from a United States bonded warehouse according to the forms of law, viz., upon application made in due form to the collector for leave to withdraw, and upon bonds being given in the prescribed form, and permission thereupon given in due form for their removal, and said spirits had been bought by the claimants of the party withdrawing, or his agent, without knowledge of the fact that the bonds were worthless, or that said spirits were removed from the warehouse with intent to defraud the government, they are not liable to forfeiture.

'4. That if a portion of the spirits proved in this case not to have paid a tax had passed through the rectifiers in which there were other spirits, and so become mixed with them, no portion of the spirits, when rectified, would be liable to forfeiture.'

The court declined to give the first and second of these instructions, but gave the third, with this qualification, that if Boyden bought the spirits as agent for Harrington, and Boyden was cognizant of the fraud, Harrington would be bound by his knowledge.

It declined to give the fourth instruction as prayed for, and instead of it instructed the jury that:

'If the rectified spirits came from vats and rectifiers in which the spirits so fraudulently withdrawn, or any portion, were mixed with other lots of similar spirits of the claimants, so that they could not be distinguished, the government were entitled to the forfeiture of a fair proportion of these spirits, although the mixture might have been innocently made, provided the jury were satisfied of such facts as would, under the instructions of the court, forfeit the spirits so fraudulently withdrawn if they had not been so mixed; and if the jury were satisfied of such facts, and also found the spirits so fraudulently withdrawn were mixed with other similar spirits of the claimants by them fraudulently, with knowledge of the fraud committed, for the purpose of destroying the identity of the spirits and defrauding the government, and were so mixed that they could not be distinguished and identified, that the entire quantity of this mixture seized was forfeited to the United States.'

To the above rulings, and refusals to rule, the claimants took exceptions. The jury found against 50 barrels, claimed by Harrington, and all those claimed by Boyden; and the court decreed accordingly. On appeal to the Circuit Court, that court affirmed the decree. The case was now here on error.

Mr. R. M. Morse, Jr., for the claimants:

The question raised by the refusal of the presiding judge to give the first and second instructions prayed for by the claimants is, whether, upon the facts conceded by the government, the latter were entitled to a forfeiture under either of the sections of the statute under which the information was framed.

We submit that upon the facts conceded by the government, the forfeiture could be had only under section 42, on which, however, no count in the information is founded.

It will be noticed that the act of June 30th, 1864, contained no specific provisions for the forfeiture of distilled spirits. Under the act, therefore, all proceedings for forfeiture of spirits must have been brought under section 48. But the act of July 13th, 1866, provides in sections 40 to 45, inclusive, for all cases where the government would be entitled to a forfeiture of spirts. Hence, to give proper effect to these sections, which else would be meaningless, it must be assumed that section 48 of the act of 1864, as amended by the act of 1866, was intended to apply not to all goods, but to all goods except those for which specific provision was made in the subsequent sections. If this view is correct, then the counts under section 48 of the act of 1864, as amended, cannot be maintained.

The third and fourth prayers relate to the issues of fact submitted to the jury.

The questions of fact in controversy were:

1st. Whether the claimants, or either of them, were parties to the fraudulent withdrawal of the spirits from the warehouses.

2d. Whether they were cognizant of it.

3d. Whether the spirits seized were a part of the spirits fraudulently withdrawn.

4th. Whether they had been mixed with other liquors and then rectified; and,

5th. Whether such mixture, if made, was innocently or fraudulently made.

The fair inference from the verdicts, taken in connection with these instructions, is, that the jury found that Boyden was cognizant of the fraud, but not that he was a party to it, and that Harrington had no knowledge of the same; and that some part, if not the whole, of the spirits seized could not be identified with the spirits originally withdrawn from the warehouses in violation of law.

We consider first the third prayer for instruction, which had relation only to the claim of Harrington.

The only question to be considered is, whether the knowledge of the agent at any time obtained and not communicated to the principal, is to be held to be the knowledge of the principal so as to subject to forfeiture under a severe penal statute, merchandise liable to forfeiture, by the terms of the act itself, only when the principal has knowledge of the fraud.

There is some conflict in the authorities upon this point; but the weight of authority establishes the rule to be, that the principal is not affected by the knowledge of the agent, unless the knowledge is acquired by the agent while in the employ of the principal and in the course of the very transaction in which he is employed. This doctrine was laid down in 1729, in Fitzgerald v. Fauconberge. ^[3] In Lowther v. Carlton, ^[4] Lord Hardwicke said:

'If a counsel or attorney is employed to look over a title, and if by some other transaction, foreign to the business in hand, has notice, this shall not affect the purchaser.'

The doctrine was affirmed by the same judge in Warrick v. Warrick, ^[5] and in Worsley v. Earl of Scarborough; ^[6] by Lord Erskine in Hiern v. Mill, ^[7] and by Lord Eldon in Mountford v. Scott. ^[8] In Kennedy v. Green, ^[9] Lord Brougham held that a client was not to be held cognizant of a fraud, although his solicitor was the contriver and actor in the same, because the solicitor's knowledge was not obtained in the course of his employment for that client.

In the United States the weight of authority is in support of the same doctrine. ^[10]

In England, however, it has been held that when one transaction is clearly followed by and connected with another, or when it is clear that a previous transaction is present to the mind of the agent when engaged in another transaction, there is no ground for the distinction by which the rule that notice to the agent is notice to the principal had been restricted to the same transaction. ^[11] But this relaxation of the rule has not generally obtained in the United States. The courts of Vermont, New Hampshire, South Carolina, Alabama, and Illinois are the only ones that have supported it; and in none of the decisions of these States does it appear that the American authorities were examined.

But even if the court should adopt the modification of the rule, as stated in Hargreaves v. Rothwell and Dresser v. Norwood, yet the instruction was wrong, as it failed to give the qualification which is held in those cases to be essential to affect the principal with the prior knowledge of his agent, to wit: that it must appear that the previous transaction is present to the mind of the agent when engaged in another transaction, or that one transaction is clearly followed by and connected with another so that that fact may necessarily be inferred.

The fourth instruction prayed for applies to the case of both claimants.

Both the prayer for instructions and the instruction of the presiding judge in the District Court assumed that the spirits were mixed with other spirits in the rectifiers, so that they could not be distinguished. The case being one of a loss of identity of the original offending spirits, we submit that neither the new species nor any part of it is liable to forfeiture, and this whether the mixture was innocently made or for the purpose of destroying the identity.

Mr. B. G. Bristow, Solicitor-General, and Mr. C. H. Hill, Assistant Attorney-General, contra.

Mr. Justice BRADLEY delivered the opinion of the court.

Notes

1. 13 Stat. at Large, 223.
2. 14 Id. 163.
3. Fitzgibbon, 211.
4. 2 Atkins, 242.
5. 3 Id. 294.
6. Ib. 392.
7. 13 Vesey, Jr. 120.
8. 3 Maddock, 34.
9. 3 Mylne & Keene, 699; see also Wilde v. Gibson, 1 House of Lords Cases, 605.
10. Farmers' and Citizens' Bank v. Payne, 25 Connecticut, 444; Bank of United States v. Davis, 2 Hill, 452; New York Central Ins. Co. v. National Prot. Ins. Co., 20 Barbour, 468; Brown v. Montgomery, 6 Smith, New York, 287; Jackson v. Sharp, 9 Johnson, 163; Hood v. Fahnestock, 8 Watts, 489; Bracken v. Miller, 4 Watts & Sergeant, 111; Winchester v. Baltimore Railroad Co., 4 Maryland, 231; United States Insurance Co. v. Shriver, 3 Maryland Ch. 381; Willis v. Vallette, 4 Metcalfe, 186; Keenan v. Missouri Ins. Co., 12 Iowa, 126; Bierce v. Red Bluff Hotel, 31 California, 160.
11. Hargreaves v. Rothwell, 1 Keen, 158; Lenehan v. McCabe, 2 Irish Eq. 342; Fuller v. Benett, 2 Hare, 394; Dresser v. Norwood, 17 C. B., N. S. 466.