United States v. Carter

172 F. 1 | 7th Cir. | 1909

SEAMAN, Circuit Judge

(after stating the facts as above). The appeal and cross-appeals for review of the decree (in two parts) entered in this cause raise no questions of law, as we believe, in reference to the primary charge of liability under the bill, which are not elementary and well settled. With, no special findings of fact in the record, however — beyond the recitals and deductions stated in the written opinions filed by the trial judge as premise for the decree — solution of the ultimate facts for the purposes of review has involved examination, not only of voluminous abstracts of the testimony contained .in the printed arguments, but of many pages of testimony in the record, cited in the above-mentioned opinions and in the arguments of counsel. The basic averments of the bill, of great losses suffered by the United States, through payments made to the contractors, Greene and Gay-nor, of prices for their work (furnished under successive contracts) grossly in excess of value, are supported by a mass of evidence, direct and circumstantial, which impresses us to be both sufficient and substantially uncontroverted.

1. In support of the charges against the defendant Oberlin M. Carter of primary liability for conspiring with such contractors to defraud the United States under the several contracts and thus obtaining a share of the illicit proceeds, the charge of fraudulent conduct on his part rests on circumstantial evidence, although the fact is proven and undisputed that he obtained, directly or indirectly, a large share of the profits arising from such contracts. The extent of testimony and multiplicity of facts and circumstances in evidence, upon the issues of conspiracy and the so-called “engineering features of the case” involved therein, preclude any attempt to analyze the conflicting testimony or make any summary within reasonable limits for an opinion; and we are impressed with no view which requires or justifies extended discussion of this class of testimony. The ultimate facts, however, upon which decision of this issue of primary liability may rightly rest, as we believe, are either uncontroverted facts -in evidence, or inevitable deductions from facts well established, to be presently stated.

Under appropriations by the Congress and plans and estimates made by the engineering department for harbor improvements from time to time, in the Savannah district, the United States carried on the work in controversy from 1893 to-1897-, with Capt. Carter in local charge as engineer and disbursing officer. Specifications were prepared by Capt. Carter, and 'upon-approval by his superiors in each instance he advertised for bids and let contracts for the work. One of these contracts, made October 22, 1893, comprised expenditures in excess of $3,000,-000, and is the main subject of controversy; while another, made in 1896, amounted to $3,000,000. Capt. Carter was an officer of the rarmy. of exceptional ability both.as an engineer of harbor work and for business qualities. The work as carried out under the successive contracts, aside from dredging, mainly consisted of mattresses or "mats,'r made of brush fascines united by grillage poles; and all contracts for this class of work were (directly or indirectly) let to the Atlantic Contracting Companj-, as tile lowest bidders, with all operations performed by Greene and the Gaynors, composing that corporation, who had long sustained relations of intimacy with Capt. Carter. - Such discretion as was vested in the engineer in local charge, under department regulations, was exercised to employ this mattress structure for the major part of the work, instead of timber or stone work (included in the specifications and authorized under the contract), and as well, instead, of dredging specified; so that, under the contract of 1892, brush mattresses were used to the amount of .1,3(>3,<272.3(5 square yards, instead of IDO,000 square yards, estimated in the specifications and contract; and this aggregate was kept within the appropriation by omitting other work specified. In reference to this undisputed fact of substitution and increase of mattress work, explanations appear in the testimony that it was found to be advantageous for harbor improvement, and its efficiency is upheld by the concurring opinions of many eminent engineers who testify thereupon; so the foregoing statement is not to be understood as intimating doubt, either of authority to make such changes in the interest of the government, or that such substitutions were not effective for a great work in the improvement of harbors. The extension of the contract rates of 1892, however, to include the large increase of mattresses, measured by the square }^ard — which were made by the contractors in so-called “multiple mats,” in courses of 2 to 10 in number, thus built up on the barges, towed to the work, and launched in place, each course being measured for payment — together with continuance of like general specifications and estimates, in each subsequent call for bids and letting of contracts, are obviously entitled to consideration as circumstantial evidence upon the issues of fact, when linked with the above-mentioned fact of abnormal profits thus realized by the contractors, and other circumstances in evidence.

These further general facts are established by the evidence and not controverted: The contracts which are directly involved in the controversy were let to and performed by Greene and Gaynor (as the principal contracting parties) during the years 1892, 1893, (894, and 189;), and work was paid for by disbursement checks issued by Capt. Carter periodically at Savannah. Upon receipt of the checks it was customary for Greene or Gaynor, or both, to visit New York, where their principal hank account was kept, and the proceeds of checks not used at Savannah for payments upon the work were there divided between the contractors and a third party — R. P. Westcott, who was the father-gn-law of Capt. Carter, residing in New York, retired from active business, with large means, and not engaged in the transactions in any maimer disclosed by the evidence, aside from such sharing in the proceeds. Discovery of these divisions and of innumerable details in evidence involved great skill and patient research through various bank accounts, books of account, checks, and other vouchers; but the proof is dear, both of the facts of division and of the actual amounts turned over — usually found in Westcott’s account, but instances appear of corresponding amount deposited by Carter — and after 1892 the shares, are identified as exactly one-third of the entire proceeds retained in New York, presumably profits under the contracts. This line of proof states the aggregate of payments made to the contractors under the successive contracts (prior to the 1896 contract) to be $2,567,-493.18, while the proceeds thus divided into three shares aggregate $1,815,941.62.

Investments in securities are traced which approximate in date and amount the receipts from these divisions, in numerous instances, and coming to the possession, first of Westcott and then of Carter, aside from occasional instances, contrariwise, but ultimately reaching the hands of Capt. Carter, mainly through a transfer made by Westcott, on October 29, 1897, of securities aggregating over $400,000 in amount, for which Carter’s receipt is in evidence and undisputed. The search for these transactions extended to many localities, through numerous entanglements, and the only disputes arising are upon various details of specific identity and course, which leave uncontro-verted the systematic disposition above stated. Abundant evidence appears of the presence of Capt. Carter in New York, upon monthly visits which coincide in date with those of Greene and Gaynor, and of his intimate relations with Westcott — both before and after the death of Mrs. Carter, daughter of Westcott, who died in December, 1892, leaving no child — including attention to large financial interests of Westcott in 1895, under power of attorney, while the latter was absent in Europe. It does not appear, however, that Carter took part in or was present at any of the divisions referred to between the contractors and- Westcott; nor is there any direct evidence that he was informed thereof, or was mentioned or intended in such transactions to be the beneficiary of such shares, unless an offer on behalf of the United States of purported testimony by Westcott (since deceased) as a witness for the government in extradition proceedings against Greene and Gaynor — in a record stipulated in evidence in other respects — is admissible to that end. Whether the objection raised on behalf of Capt. Carter in the first instance to this offer was not waived by counsel in a subsequent consent to its consideration by the trial court is not free from doubt. As Capt. Carter was not a party to such proceeding, however, we believe this testimony of Westcott to-be inadmissible against him upon the issue referred to. It is, therefore, excluded from the present inquiry, while reserved for later consideration by way of notice to the defendants I. S. Carter and L. D. Carter, under admissions of record on their part.

We concur, therefore, in the view expressed 'in the opinion filed by the trial judge that the charge of conspiracy between Capt. Carter and the contractors to defraud the United States, under the contracts referred to, is (a) neither established by direct evidence; (b) nor can such charge be upheld Under the testimony alone of methods adopted in making specifications, advertising for bids, treatment of proposed bidders, or letting contracts; (c) nor under one or the other several branches of testimony reviewed in the opinion, considered independently of the entire chain of circumstances. But these conclusions are not the tests of sufficiency of the entire chain of circumstantial evidence to sustain that charge. While the fact is established, as there stated, “that a great wrong was practiced in this raid upon the government/' we are not satisfied that the right of the United States “to a decree awarding to it” all property in question “arising from funds made up of profits realized by the contractors” therein may rightly rest, as there stated, upon the proposition that Carter must “as a conclusion of law be held chargeable with knowledge of what was being done in the premises.”

Under the settled facts above recited, however, linked with cumulative evidence tending to prove actual knowledge on the part of Capt. Carter of the excessive profit in the mattress work and of division:; thereof with Westcott in New York, and complicity in the fraudulent transactions, of which (at one time or another) he acquired approximately one-third of the net proceeds, we are constrained to the belief that tlic evidence is decisive, not only of fraud perpetrated by the contractors, but of concurrence and participation therein by Capt. Carter. Whether the parties conspired to that end at or prior to the letting of the contract of 1892 can neither be ascertained from the testimony, nor is such inquiry deemed material upon the issue. With the completion of the mattress work expressly stipulated in that contract, it cannot be doubted under the testimony that Capt. Carter, having personal supervision of the work, as an engineer of great experience and ability in harbor improvements, must have discovered the exorbitant profit afforded at the contract price of mattresses, measured by the square yard. Assuming, therefore, that the terms contracted for were fairly obtained and believed by him to be reasonable when made, and that the discretion vested in the officer in charge was rightly exercised in greatly extending mattress work, instead of carrying out the plan of widening the channel by dredging (as let to another contractor) and of stone work (embraced in the Greene and Gaynor contract), no just ground appears for continuing the same terms, for such extension from 350,-000 to 1,363,372 square yards, yielding to the favored contractors another great ratio of excessive profit, if the unreasonableness of the contract terms was then understood, or was readily ascertainable under the circumstances. This transaction, moreover, was followed up by the succession of contracts in evidence for other improvements in the district of like nature, under the same form of specification and advertisement for bids, to cover alternative‘structures at a single price as ordered; so that no bid was entertainable for the mattress work alone, which was intended and used in the improvement, nor was the “multiple mat” structure (as used) mentioned in either notice, and all were obtained by Greene and Gaynor. All were carried out, measured, and accepted alike with the earlier contract work, up to the appointment of a successor to Capt. Garter. The fact alone of successive contracts thus let to these contractors, at prices far beyond the reasonable value of brush mattresses, whereby the United States was plainly defrauded in overpayments approximating $2,000,000, without proof of tenable excuse for the letting through emergency or other cause, implies either participation in benefits or collusion on the part of the officer having direction of the work. As the evidence further establishes, not only personal and business intimacy between Capt. Carter and these contractors, but his constant presence with them in New York upon the monthly visits to settle accounts and divide the proceeds between the contractors and Westcott as before stated, together with the cogent fact that Carter acquired the share of illicit profits turned over to Westcott, we believe the inference of fact to be inevitable that Capt. Carter connived with these parties in thus defrauding the United States. The question whether the relation of Westcott in these divisions was one of partnership in the contracts (as stated in the opinion below and contended in the argument of counsel for Carter on these appeals), or was that of a mere representative of Carter therein (as counsel for the government contends), may not be clear under the testimony; but neither contention requires discussion or solution under the foregoing view, for the reason that Carter is equally subj ect to the relief sought in this bill, whatever may be the actual relation of Westcott to either of such parties in the transactions.

The bill is voluminous — necessarily so in the light of the array of circumstances involved for equitable relief — and both bill and decree rest upon the well-settled principle of equity that property so obtained by Carter, in fraud of the United States, becomes trust property in favor of the defrauded party, which may be followed up and recovered, whether preserved in its original form or in substituted property. May v. Le Claire, 11 Wall. 217, 236, 20 L. Ed. 50. The testimony is convincing, if not substantially uncontroverted, that the share acquired by Carter from or through the divisions between the contractors and Westcott exceeded the entire amount of property and securities traced to the possession of Carter and impounded in this suit under the several bills; that the major portion of the property in the custody of the court is identified as directly derived from shares of proceeds so obtained, and constitutes the portion scheduled in the decree as a trust fund belonging to the United States, and thus awarded to it; and that Capt. Carter has expended and used from funds and securities in his possession, after so obtaining the share of fraudulent proceeds above stated, large amounts of money, greatly exceeding in the aggregate any amounts which can be assumed to be derived by Carter from other sources, under the most favorable view of his testimony in respect thereof. The provision of the decree, therefore, which awards to the United States the property and securities in custody which are above referred to as directly traced to the proceeds of the fraudulent transactions constituting a trust fund, is well supported by the testimony, as we believe, and will be affirmed accordingly.

Another provision of the decree, however, adjudicates that other securities and stocks, specified in a paragraph marked “2,” were “not purchased with said trust fund, but with the private funds of Robert F. Westcott and Oberlin M. Carter,” and awards such residue to Capt. Carter as not subject to the trust. We believe this provision to be erroneous, irrespective of the contentions on behalf of the government that these investments are otherwise fairly traced to the trust fund, .either directly or indirectly, or by way of substitution in fact. Under the circumstances above recited, with the mass of investments coming to his hands (from whatever source) intermingled and secreted by Carter, asserting title as an entirety, we are of opinion that the elementary doctrine of equity requires that his personal expenditures from the mass be made chargeable against any portion which may be his own; that he cannot be permitted (as sought through his testimony in this case) to segregate a portion from the residue, to be awarded to him as free from the trust, and thus impose the burden of all expenditures so made upon the trust fund; and that, for all purposes of the decree, all the property and securities (in custody) therein described are within the trust, either as original or substitute investments from the trust funds. So the decree must be corrected in respect to such provision, and award title to the securities and stocks mentioned to the United States, without award of any part or portion to Carter.

2. The decree denies the complainant a deficiency decree against the defendant Oberlin M. Carter, upon its election to take such judgment for proceeds of the trust fund which was “dissipated by Oberlin M. Carter and his agents prior to November 6, 1901,” as established by the evidence. Upon this denial error is assigned by the appellant, United States (sixteenth assignment), and we disregard the order of the several provisions and assignments to consider the question thus raised as next in sequence. It does not appear upon what theory this election and motion was denied, nor is any tenable ground suggested therefor in the argument of counsel for appellees. The facts and items upon which the motion rests are undisputed, and it is unquestionable that the equitable relief may be thus extended where trust funds have been dissipated. The limitation named (November (>, 1901) for such charge appears to be predicated on a stipulation of that date, entered into between the parties, which embraces allowances to he made from the funds in court, pending final hearing, and thus resolves any possible doubt in reference to ultimate liability for such expenditures in favor of the defendants. For the amount of such deficiency judgment, the items of conversions from the trust property aggregate $105,019.(Hi, as scheduled from the evidence. In view, however, of the above-mentioned finding by the trial court that the securities set apart to Capt. Carter in paragraph 2 of the decree were not derived from the fraudulent transactions, and of our conclusions (as above stated) that such securities are, nevertheless, subject to the trust, as substitutes for securities dissipated, their face value (as scheduled) should be deducted from the above-mentioned aggregate, to ascertain the amount of the deficiency judgment. The decree will be corrected to grant a judgment for deficiency so ascertained.

9. The several provisions of the decree respecting the defendants Lorenzo D. Carter and 1. Stanton Carter next arise for review, and, being of like class, are grouped for consideration. Those provisions upon which the appellant, United States, assigns error are: (1) Denial of a deficiency judgment against L. D. Carter; (2) adjudication against I. Stanton Carter for $11,454.18, as the amount of trust funds in his hands not accounted for — and these in turn rest upon findings of a master (on reference of special issues involved in their possession of securities), and exceptions overruled, upon which various errors are assigned, for allowances made to these defendants for expenses and services. The relations of I. S. Carter and L. D. Carter to' the controversy may be briefly stated: They were brothers of Capt. Carter, and received from him the property in suit, for care and safekeeping, pending the various proceedings against him, and were assiduous in its concealment .and withholding from the complainant, until accounting and surrender were required under the present .proceedings. It appears, not only from numerous circumstances in evidence, but through their admissions of record, that they were well advised of the charges against Capt. Carter of complicity with Greene and Gaynor (which were widely published), and as well of the tes- ■ timony of Westcott (hereinbefore referred to) in the Greene and Gaynor proceedings, in effect that Capt. Carter was at, all times the actual party in interest, and merely represented by Westcott in the transactions with Greene and Gaynor and in investments of the proceeds. I. S. Carter received and secreted in various places the larger part of the securities, about $350,000 face value,'while L,. D. Carter received the residue of trust property. In answer to a rule of contempt entered against them, each denied either possession or control of such property; but each subsequently made confessions and entered into an accounting before the master, pursuant to a stipulation between all parties to the bill, dated November 6, 1901. The property and securities described in the decree came into the custody of the court through this source.

(1) The errors assigned for denial of a deficiency judgment against U. E>. Carter are, in substance, that he failed to pay over trust funds traced to his possession and admitted by him as received, and that he was relieved from accountability therefor by allowances for expenses and services, which are alleged to be inequitable under the circumstances disclosed. The credits referred to are (a) for various claims for expenses incurred, aggregating $2,379.43 in excess of undisputed expenses, which are complained of as excessive and unsupported by credible testimony; and (b) an allowance of $12,916.66 for salary claimed due from Capt. Carter for services as attorney in fact, under an agreement for $10,000 per annum. Upon the objections raised to items of expense allowed, we believe the findings of the master, approved by the trial court, should not be disturbed, as the stipulation (November 6, 1901) between the parties reserved for allowance assets theretofore “bona fide disposed of” by the agent. The credit.for salary, however, is neither justly charged to the property thus withheld nor within the fair meaning of the stipulation, and, whatever may have been the agreement between the parties to the fraud, we are of opinion that error is well assigned for such allowance. The decree, therefore, must be corrected accordingly to adjudge recovery against the defendant U. D. Carter for $12,916.66 of trust fund not accounted for.

(2).. The decree awards recover)*- against I. S. Carter for $11,454.18, as the balance of trust fund traced to his possession and reported by the. .master,, not accounted for or paid over; and on behalf of the appellant,.. United States, error is assigned for insufficiency of this award, upon various credits allowed by the master, and approved by the trial court, for expenses and salary. As the sum of $6,750 was allowed to this defendant by way of salary, the credit accordingly was erroneous under the above-stated view in reference to like allowance in favor of Tv. D. Carter; but the other objections are overruled, as within the doctrine there stated in respect of the findings of fact. The decree, therefore, must be corrected to make this deficiency award $18,201.18.

4. The remaining assignments of error on the part of the United States relate to allowances made in the final decree for counsel services and other expenses incurred by the defendants under the stipulation entered into November 6, 1901, heretofore mentioned. That ample provision for defraying such expenses out of the fund in court was intended and authorized by the stipulation referred to plainly appears from its terms and is conceded; and the time, skill, and expenditures involved in the services of counsel for which the allowances were granted are neither disputed nor questionable in the light of the record. The only objection raised to either of the provisions for such counsel is that each is excessive. We are of opinion, however, that no abuse of discretion appears in the liberal awards made by the decree, within the purpose of the stipulation, and that no other reviewable question arises under these assignments.

The cross-appeals raised no question not passed upon in the foregoing opinion in reference to the appeal and errors assigned on behalf of the1 United States, and we are satisfied that neither cross-appellant has just ground to complain of the decree.

The decree of the Circuit Court is affirmed in respect of all provisions thereof not expressly mentioned in the foregoing opinion for correction, and the cause is remanded, with directions to correct the decree in the provisions so mentioned in conformity with this opinion.