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April 23, 1937

BORNN et al.

The opinion of the court was delivered by: ABRUZZO

ABRUZZO, District Judge.

The plaintiff instituted this action against Frank Bornn, doing business as Bornn Distilling Company, and Royal Indemnity Company, a corporation, as defendants. There are three causes of action pleaded in the complaint. The first and second causes of action set forth in the complaint are pleaded against both defendants upon three bonds executed by the defendant Bornn as principal and the defendant Royal Indemnity Company as surety. These bonds were given to protect the government in the event of failure on the part of Bornn to comply with the terms and requirements of certain permits pursuant to which he was authorized to withdraw from government distilleries, without payment of tax, large quantities of specially denatured alcohol for industrial use only. The three bonds aggregated the sum of $100,000, and these two causes of action are limited to that amount.

These two causes of action are identical in factual content. The difference is with respect to the measure of damages to be applied in ascertaining the amount which plaintiff is entitled to recover for Bornn's breach of obligations imposed upon him by the terms of the permits and by the laws and regulations which, as permittee, he was required to obey.

 The third cause of action is against the defendant Bornn alone. It is based upon the same transactions and the same course of conduct on the part of Bornn. The allegations in this action are that Bornn, in violation of his permits, caused the alcohol withdrawn tax free pursuant to his permits to be diverted to a use not contemplated within the permits, laws, and regulations which he was bound to obey. The measure of damages in this cause of action is for the amount of the basic tax computed upon the entire gallonage withdrawn by Bornn tax free for industrial use and diverted to a different and unauthorized use. It is brought under express statutory provision (U.S.Code, Ed. of 1934, title 26, § 1432, subds. (c) and (d), 26 U.S.C.A. § 1432 (c, d).

 The complaint pleads the facts in all three causes of action upon which the government relies, the bonds being made a part of the pleadings. The salient portions of these undertakings will be referred to later in this opinion.

 The record at bar contains no controverted issue of fact in any substantial sense. There were issued to Bornn two basic permits, No. 11740 and No. 20777, dated April 22, 1922, and March 31, 1926, respectively. These permits were issued in accordance with an application previously filed by him. The bonds were executed by the Royal Indemnity Company as surety and by Bornn as principal and filed with the proper official.

 The amount of gallonage which was permitted to be withdrawn under these permits varied from time to time and, whenever there was an increase in the amount, Bornn, as permittee, was required to file further and increased security.

 Under these permits, Bornn withdrew large quantities of specially denatured spirits. This phase of the proof was not contradicted and no detailed resume is therefore necessary.

 The denatured spirits withdrawn by him were made into a rubbing alcohol compound, and from January 1, 1924, up to December 31, 1925, this rubbing alcohol compound contained 92 per cent. pure alcohol, and was shipped to his customers in regulation pint size bottles. Labeled as Alco-Tone or Alco-Primo, some was sold in legitimate commerce. The greater portion of sales was made to persons, who to his knowledge, and with his encouragement and assistance, and even by his procurement, delivered his product to stills, or operators of stills where both the denaturants and the ingredients added by Bornn were eliminated and potable spirits recovered, so that they were fit for beverage use.

 Bornn supplied to these persons who purchased his product a chemical in the form of a white powder, which he declared to be of great assistance of facilitating the recovery of the alcoholic spirits and the elimination of the denaturants and his own ingredients. In making shipment, the precaution was taken generally of requiring that the ostensible buyer should be a druggist or some one having the real or apparent right to deal in such preparations as rubbing alcohol. This would tend to avoid and reduce the likelihood of an official inspection.

 A very large amount of his product, which subsequently found its way to illegitimate buyers and dealers, was distributed in the Buffalo area through the Rudin Drug & Sundry Company of Buffalo. Bornn handled this district skillfully and with a direct intent to avoid the law and regulations under which his permits were issued. His actions, to say the least, were highly questionable and proved beyond a doubt his guilty knowledge of the use to which his product was to be put. Freedman was his salesman and operated in this territory on a commision basis. He was instructed to get a wholesale druggist through whom shipments might be made without their looking suspicious.

 A powder was furnished to this salesman with full instructions as to its use. Freedman thereupon made a contact with the Rudin Drug & Sundry Company and arranged that shipments would be made through that firm. In 1924 and 1925, 47,340 cartons of rubbing alcohol were shipped to Buffalo. It was shown that 40,000 cartons were actually trucked to various stills in the vicinity in and around Buffalo. Sam Sugarman was engaged by Rudin to perform that service. When this arrangement was made between Sugarman, the truckman, and Rudin, Moore, the general manager of Bornn, was present. Obviously, these cartons were taken to the stills for cleaning and redistillation.

 The minimum quantity thus diverted in direct violation of Bornn's permits alone was 60,000 gallons. Of that amount, 92 per cent. was alcoholic spirits and after redistillation, 55,200 gallons of pure alcohol remained, or 110,400 proof gallons. It will be readily seen that this was more than sufficient to exhaust the maximum obligation fixed in the bonds in the event that the plaintiff was entitled to damages either on the first or second cause of action.

 The plaintiff produced conclusive proof that similar conditions existed in Peoria and Scranton, where large amounts of this product was diverted and actually found its way to stills.

 In addition, other gallonages are shown to have been diverted by shipment to persons intending to dispose of the products so obtained for uses which were unauthorized and which were not within the conditions upon which the government waived its tax lien at the time of withdrawal. Bornn gave advice and assistance as to how to eliminate the denaturing chemicals and his own ingredients. He provided demonstrations with a laboratory still in his own place of business as to the cleaning method which he recommended. He violated the terms of his permits, the laws and regulations flagrantly, with one idea in view only, to make large profits for himself. He never intended to keep within the terms of his permit, the regulations, or the law. His conduct indicates that clearly. His sole motive was to use the permits to evade the payment to the plaintiff of a just tax in order to enrich himself. He assisted directly in the violation of the terms of his permits, knowingly and willfully. This is borne out and corroborated in all of its essential details by the sale of the tremendous gallonages which were cash sales. He placed no faith or trust in his co-law violators. Some of his sales, and to put it mildly, they were few, did get into the legitimate market. They were made upon credit. He was cognizant of the type of persons with whom he was dealing.

 It was also proved on the trial that the same bottles that contained this so-called Alco-Tone or Alco-Primo and that were shipped to different destinations subsequently found their way back to his plant to be refilled. This was done through the medium of second-hand bottle dealers. Presumably, ever factor of the disposition of his Alco-Tone or Alco-Primo to provide profits was carefully worked out at the very beginning.

 Bornn, himself, did not testify. The trial took several days, and counsel for the defendant persistently urged that his client was too ill to appear in court or testify. The court elected to send its own doctor to make a physical examination of Bornn. The physician so appointed, after his examination, testified that Bornn's physical condition was such that he was able to come to court and testify.

 Counsel produced a doctor who stated that Bornn's condition was such that it would be detrimental for him to come to court or to testify. Counsel for the defendant adroitly stated that he would not want to take the responsibility of asking his client to appear in court or to testify.

 He did call a witness by the name of Moore, who was the general manager of the defendant and who had been so for many years. He had complete and full knowledge of all of the defendant's affairs and his customers. He admitted that he had received notice from the plaintiff of all the regulations that were put into effect respecting the defendant's permits. It was apparent that he was fully equipped to testify as to the important facts to which the witnesses for the government testified.

 In spite of the damaging testimony given by the government's witnesses which strongly indicated an intention to flagrantly violate both the regulations in force and the law applicable to the defendant's permits, this witness stood strangely mute. The purpose of counsel swearing him and then asking no questions is bewildering to this court. His lack of testimony was of no assistance in determining the issues. The facts were promptly found by the court in favor of the plaintiff. This conclusion was inescapable.

 The defendants rely solely upon questions of law to escape either partial or full liability. Some of these legal defenses upon which the defendants rested are to say the least far-fetched. The law and regulations upon which the plaintiff relied was set forth in full detail by the government. It is well to detail them in sequence in order that they may be more fully understood in their relationship to the case at bar.

 Prior to the enactment of the National Prohibition Act, the Act of June 7, 1906 (34 Stat. 217 [26 U.S.C.A. §§ 1320 and note, 1322, 1323]), was in full force and effect. Section 1 of that statute (U.S.Code, 1925 Ed., title 26, § 481, 26 U.S.C.A. § 1320(a) provided as follows:

 "Domestic alcohol of such degree of proof as may be prescribed by the Commissioner [of Internal Revenue], and approved by the Secretary [of the Treasury], may be withdrawn from bond without the payment of internal-revenue tax, for use in the arts and industries, * * * provided said alcohol shall have been mixed in the presence and under the direction of an authorized Government officer * * * with methyl alcohol or other denaturing material or materials, * * * suitable to the use for which the ...

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