Appeal from the District Court of the United States for the Eastern District of Wisconsin, Northern Division; Patrick T. Stone, Judge.
Before SPARKS and KERNER, Circuit Judges, and BRIGGLE, District Judge.
The Consolidated Flour Mills Company of Kansas brought this action to compel payment for flour delivered to the Ph. Orth Company of Wisconsin. The Wisconsin company made counterclaim to moneys which were included in the price of flour purchased under former executed contracts and were paid to cover processing taxes levied pursuant to the Agricultural Adjustment Act. The District Court favored plaintiff's complaint, dismissed defendant's counterclaim and rendered judgment accordingly. From this judgment the defendant appealed.
In 1933 Congress passed the Agricultural Adjustment Act which primarily imposed a tax upon the processing of agricutlrual commodities. 48 Stat. 31, 35, 7 U.S.C.A. § 609 et seq. According to this statute the processor was the taxpayer even though he might pass the burden of the tax on to his vendee. Oswald Jaeger Baking Co. v. Commissioner, 7 Cir., 108 F.2d 375, certiorari denied, 309 U.S. 683, 60 S. Ct. 723, 84 L. Ed. 1027. The amount of the tax was determined by the Secretary of Agriculture to be thirty cents on each bushel of wheat purchased. But in some cases it was necessary to establish a conversion factor which could be used in lieu of the thirty cents per bushel of wheat. For instance, the statute provided for refunds in situations where the processor who had already paid his thirty cents tax sold flour to a charitable organization. 48 Stat. 39, 7 U.S.C.A. § 615(c). The amount of the refund was computed by use of the conversion factor which was determined by the Secretary of Agriculture to be 4.6 bushels of wheat as equaling a barrel of flour or $1.38 per barrel.
The plaintiff is a milling company and during the course of its business engages in various processing operations which eventually convert wheat into flour. After 1933 the plaintiff as a processor and taxpayer was required to pay a tax of thirty cents for every bushel of wheat which it ground into flour, and this tax became a part of the cost of doing business. In 1934 and 1935 the defendant who is a jobber or flour distributor entered into four written contracts for the purchase of plaintiff's flour. In each instance the flour was shipped from plaintiff's Kansas plant "f.o.b. * * * shipping point" and the defendant paid the contract price thereof upon arrival at destination. Subsequently the defendant sold this flour to the baking trade and admits that it did not bear the processing tax burden but that it passed the burden on to the bakers.
The four contracts in question described quantities purchased, set forth prices paid and related to the incidence of the processing taxes. Each contract contained the provision that "This contract constitutes the complete agreement between the parties hereto and cannot be changed in any manner whatsoever without the written consent of both buyer and seller." The only price stated in the contracts or in the invoices was the purchase price the price per barrel of flour. These contracts also declared that the purchase price reflected the amount of processing tax paid by the vendor and proivided against the contingency of an increase or decrease in the tax.*fn1 No mention was made therein as to the amount of processing tax included in the purchase price.
The plaintiff paid the processing taxes levied under the Agricultural Adjustment Act until May 1, 1935. From this date until January 6, 1936 the Collector of Internal Revenue was restrained from collection of these taxes by injunctive order and the tax money accruing was impounded in court. On Januiary 6, 1936 the Supreme Court declared the Agricultural Adjustment Act unconstitutional, United States v. Butler, 297 U.S. 1, 56 S. Ct. 312, 80 L. Ed. 477, 102 A.L.R. 914, and the impounded money was returned to the plaintiff. On June 22, 1936 Congress enacted a Windfall Tax statute which imposed an 80% tax on net income resulting to the processor who had shifted the burden of uncollected processing taxes to his vendee, and a refund statute which provided for the refund of collected processing taxes to the processor who had not shifted the tax burden to his vendee. 49 Stat. 1734; 49 Stat. 1747, 26 U.S.C.A. Int. Rev. Code, § 700 et seq., 7 U.S.C.A. § 644 et seq.
In 1936 the defendant again contracted for the purchase of plaintiff's flour. The flour was delivered and accepted but not paid for, whereupon the plaintiff sued to compel payment. To plaintiff's complaint the defendant made a counterclaim which asserted its legal right to that part of the purchase price of the 1934 and 1935 contracts which reflected the taxes levied pursuant to the Agricultural Adjustment Act. The defendant based its claim thereto on one or the other of the following theories: (1) an agreement by the plaintiff to refund to or to reimburse the defendant in the event the processing tax was invalidated; and (2) the circumstances giving rise to a constructive trust for the use and benefit of the defendant. The court granted judgment to the plaintiff. The defendant appealed from that part of the judgment dismissing the counterclaim and that part of the judgment dealing with the computation of interest.
Between October 10 and October 17 of 1934 there was an exchange of correspondence between the parties to this controversy. The defendant submitted to the plaintiff a copy of an agreement which it had with another milling company and which was considered by them "as part of any contract heretofore or hereafter made by us for the sale of wheat flour." This agreement protected the processor's customers against judicial invalidation of the Agricultural Adjustment Act by providing for reimbursement to the customers in case of invalidation and subsequent refund by the government. The defendant wanted to know "what we may expect in our dealings with you." The plaintiff replied that "The 'agreement' submitted to you by our brother miller is, to our notion, merely sales and good will promotion. * * * Always in the past [there has been] * * * concerted action on the part of the millers. Regardless of whether the act is found unconstitutional or whether the processing tax is reduced * * * , you can rest assured that the milling industry will act as a unit. The contract which you have signed will not protect you to any greater extent than if you had no contract."
Between October 17 and November 22 of 1934 there was a long distance telephone call between Philip Orth, Jr. of the defendant company and Wiley T. Hawkins of the plaintiff company. Orth testified that: "I discussed with Hawkins the plaintiff's unwillingness to enter into a written contract with the defendant like the one [above described]. * * * He told me that if the plaintiff did not have to pay the tax, the defendant would get it back. * * * Then only did I make the contract of November 22, 1934." Hawkins testified that he talked with Orth concerning the processing taxes but denied any oral agreement to refund. He stated that: "I did not tell him that the plaintiff * * * would do the same with respect to refunds as the rest of the milling companies, nor did I agree to a refund of money to his company or imply such in any way."
About March 20, 1935, the defendant received the "Consolidated Flour Mills Co. News." An item in this weekly service represented that: "The miller passes the tax on to his consumer in toto.* * * The consumer pays the processing tax. His wheat flour cost $1.38 per barrel extra and his bread one-half cent per loaf extra. Collection at the rate of 30 per bushel of wheat ground is made from the millers monthly. * * * " Fred Burns of the plaintiff company testified that the first sentence of the News Sheet quoted above was incorrect but that it had never been retracted. He stated that the price of flour reflected the tax and that the quotation above was "a much simpler way to state it in the News Sheet." He added that: "The quantity of wheast required to make a barrel of flour varied * * * from four to five bushels. I have never figured the processing taxes in terms per barrel and nothing was added directly to the sales price of a barrel of flour because of this tax. We do not fix the price of flour we sell but the price is fixed as a result of bargaining at arm's length for wheat."
At the trial the defendant sought to introduce certain evidence which was excluded by the court. For instance the defendant offered to prove that many mills, which represented around ninety per cent of the volume of production in the milling industry, had made refudns to their customers for purchases made during the injunction period. In this connection Fred Burns of the plaintiff company testified that during the injunction period tax moneys in the amount of $520,363.70 had been impounded in court, and that when this was returned approximately $300,000 was refunded to certain plaintiff's customers but the defendant was not one of the recipients.
The defendant also offered to prove that it was common knowledge among the milling industry that the amount of the tax included in the price for a barrel of flour was $1.38, that in general the price per barrel during the tax period was $1.38 higher than before the tax, and that the price per barrel was reduced between $1.10 and $1.38 immediately after the invalidation of the tax. In this connection Fred Burns testified that: "We did not raise the price per barrel of flour $1.38 after the day the tax went into effect. I do not know how much we raised it. It depended upon what the wheat market was. * * * The day after the tax was declared unconstitutional we did not reduce the price of flour $1.38 per barrel in order to get new orders at that time. We reduced it somewhat * * * but not $1.38 per barrel. On ...