A surety bond, required by the Commissioner of Internal Revenue
under § 6, Tit. II of the Prohibition Act, in connection with a
permit issued to the obligor to sell wines and distilled spirits
for other than beverage purposes, and conditioned
"that, if the said
Page 271 U. S. 333
principal shall fully and faithfully comply with all the
requirements of the laws of the United States now or hereafr
enacted and regulations issued pursuant thereto respecting the sale
or use of distilled spirits and wines for other than
beverage.purpose, then this obligation to be void; otherwise to
remain in full force and virtue,"
is not a bond for a penalty forfeitable in its entire amount
upon a breach of condition, but is a bond for indemnity securing
the payment of the internal revenue taxes, interest, penalties, and
liabilities accruing to the United States by reason of the breach.
P.
271 U. S.
337.
Response to questions certified by the circuit court of appeals
upon a review of a judgment of the district court which dismissed
an action brought by the United States on the bond of a permittee
under the Prohibition Act and his surety to recover the full penal
sum of the bond because of alleged breaches of condition.
Page 271 U. S. 336
MR. JUSTICE SANFORD delivered the opinion of the Court.
This case comes before us on a certificate from the circuit
court of appeals. Judicial Code, § 239.
It appears from the certificate that Zerbey, on January 23,
1920, applied to the Commission of Internal Revenue, under the
provisions of the National Prohibition Act, [
Footnote 1] for a permit to sell distilled spirits
and wines for other than beverage purposes, and filed with his
application a bond in the sum of $100,000, with the National Surety
Company as surety. This bond was on Form 738, previously prescribed
by the regulations, and recited, in accordance therewith that
"the conditions of this obligation is such that, if the said
principal shall fully and faithfully comply with all the
requirements of the laws of the United States now or hereafter
enacted and regulations issues pursuant thereto, respecting the
sale or use of distilled spirits and wines for other than beverage
purposes, then this obligation to be void; otherwise to remain in
full force and virtue."
On January 26, the Commissioner issued to Zerbey a permit "under
the conditions that the provisions of the National Prohibition Act,
and regulations issued thereunder, will be strictly observed."
Thereafter the United States brought an action against Zerbey
and the Surety Company in a Federal district court in which it was
alleged that Zerbey had violated the condition of the bond in (a)
failing and neglecting to keep records of his sales of distilled
spirits, as required by the Prohibition Act and regulations, (b)
selling and
Page 271 U. S. 337
disposing of distilled spirits for beverage purposes, (c)
diverting distilled spirits to other than beverage purposes, and
(d) having in his possession whisky which had been withdrawn, for
nonbeverage purposes only, from a bonded warehouse, of which he
kept no record as required by the Prohibition Act and regulations,
and that the full penal sum of the bond had been forfeited and was
due by the defendants to the United States by reason of these
breaches of the condition of the bond. It was not alleged that any
damage or loss had been sustained by the United States as the
result of these breaches. The defendants filed statutory demurrers,
which were sustained by the district court on the ground that the
United States could not recover the full penal sum of the bond, but
only such loss or damage as it had sustained in consequence of the
breaches of the bond, and the suit was dismissed. And, the case
having been taken to the circuit court of appeals by writ of error,
it has certified that, for the proper decision of the case, it
desires the instruction of this Court as to the following questions
of law:
"(1) Is a bond conditioned upon compliance with the law of the
United States and regulations issued pursuant thereto respecting
the sale or use of distilled spirits and wines for other than
beverage purposes, given the United States by one to whom a permit
to sell intoxicating liquors for other than beverage purposes has
been issued under the provisions of § 6 of Title II of the National
Prohibition Act and regulations promulgated thereunder, forfeitable
upon breach of the condition in the full amount of its penal
sum?"
"(2) Is recovery upon breach of the condition of such a bond
given by one holding such a permit limited to actual damages
sustained by the United States?"
These questions, shortly stated, are, in effect: whether a
permit bond on Form 738 is a forfeiture bond entitling the United
States to recover the full amount named on a
Page 271 U. S. 338
breach of its condition or a bond of indemnity for the actual
damages sustained by the United States from such breach.
Section 6, Title II, of the National Prohibition Act provides,
with certain exceptions not here material, that:
"No one shall manufacture, sell, purchase, transport, or
prescribe any liquor without first obtaining a permit from the
Commissioner so to do. . . . The Commission may prescribe the form
of all permits and applications and the facts to be set forth
therein. Before any permit is granted, the Commissioner may require
a bond in such form and amount as he may prescribe to insure
compliance with the terms of the permit and the provisions of this
title."
By Title II, § 29, it is further provided that any person
violating the provisions of any permit or of this title, shall be
punished by either fine or imprisonment, or both, and, by Title II,
§ 35, that a tax shall be assessed against any person responsible
for an illegal sale in double the amount provided by the internal
revenue law, with an additional penalty.
By regulations issued by the Commissioner in October and
November, 1919, [
Footnote 2]
every applicant for a permit for the sale or use of distilled
spirits or wines for other than beverage purposes was required to
furnish either a bond with corporate or personal sureties, on Form
738, in a penal sum of from $1,000 to $100,000, computed at
specified rates, on the quantity of spirits and wine which he then
had on hand, or would receive in the next quarterly period, or his
personal bond for the same amount, secured by the deposit of
government bonds as collateral security.
Form 738 prescribed for a surety bond, which was used by Zerbey,
was conditioned, as previously stated, that the principal
"shall fully and faithfully comply with
Page 271 U. S. 339
all the requirements of the laws of the United States now or
hereafter enacted, and regulations issued pursuant thereto
respecting the sale or use of distilled spirits and wines for other
than beverage purposes."
The corresponding Form 738A prescribed for a collateral bond,
recited the pledge of government bonds "as security for any
obligation arising hereunder," and contained, after the general
condition in Form 738, a specific provision that
"the said principal expressly agrees that the said bonds so
deposited may be sold . . . and the proceeds applied to the payment
of any internal revenue taxes, interest, and penalties which may be
due, and in satisfaction of any liabilities incurred hereunder, and
the expenses of such sale, if any, and the residue, if any, paid to
the said principal."
Thereafter, by Regulations No. 60, [
Footnote 3] which, dated January 16, 1920, were not, it
appears, published and put into effect until February 1, after the
issuance of the permit of Zerbey, an applicant for a permit to sell
or use distilled spirits or wines was required to file either a
surety bond on a new Form 1408 or a collateral bond on a new Form
1409, provided that, if the holder of such a permit had already
given a bond on Form 738 or Form 738A in a sufficient penal sum, a
new bond should not be required until he was called upon to make an
application for a new permit.
The Form 1408 thus prescribed for a surety bond [
Footnote 4] recites that:
"The condition of this obligation is such that, if . . . the
said principal shall not violate the terms of such permit . . . or
. . . any of the provisions of the National Prohibition Act and
regulations promulgated thereunder as now or hereafter provided,
and all other laws of the United States nor or hereafter enacted
respecting distilled spirits, fermented liquors, wines, or
Page 271 U. S. 340
other intoxicating liquors, and will pay all taxes, assessments,
fines, and penalties incurred or imposed upon him by law, then this
obligation to be void, otherwise to remain in full force and
effect."
And Form 1409, prescribed for a collateral bond, likewise
provides that, upon the sale of the government's bonds pledged as
security, the proceeds, shall
"be applied to the payment of any internal revenue taxes,
interest, fines and penalties which may be due, and in satisfaction
of any liabilities incurred hereunder and the expenses of such
sale, if any, and the residue, if any, paid to said principal."
The case now presented is not that of a bond executed to the
government in a specified penal sum prescribed by statute and
intended as a fixed penalty imposed for a breach of a statutory
duty, which is forfeited in its full amount by a breach of the
condition irrespective of the actual damage thereby caused the
government.
Clark v. Barnard, 108 U.
S. 436,
108 U. S. 461;
United States v. Dieckerhoff, 202 U.
S. 302,
202 U. S. 309;
United States v. Montell (Taney, 47), 26 Fed.Cas. 1293,
1296. Whether Congress did or could authorize the Commissioner in
fixing the form of bond to prescribe a penalty we need no consider,
for here it is plain that he did not intend that the penal sum of a
surety bond on Form 738 should be a penalty or liquidated
damages-in this case of $100,000, the full amount of which the
United States might recover for any breach of condition, however
slight, as, for example, a failure to make a record of any sale as
required by the regulations, but, on the contrary, intended that
such penal sum should be the maximum amount of the obligation
incurred by reason of a breach of the bond. Form 738 is
unquestionably to be read in connection with Form 738A. These were
prescribed by the same regulations as alternative forms of the bond
which the applicant might at his election furnish. They had
precisely the same object, and were intended to secure the same
obligation --
Page 271 U. S. 341
the one by personal sureties, the other by the deposit of
collateral. Plainly it was not intended that the obligation should
be greater in the one case than in the other merely because the
applicant chose to furnish personal instead of collateral security.
The effect of Form 738A is that the applicant's obligation shall be
discharged by the payment of any internal revenue taxes, interest,
penalties, and liabilities accruing to the United States by reason
of a breach of the condition, and it cannot be doubted that this
was intended, in like manner, to be the measure of the obligation
incurred under a surety bond on the corresponding Form 738.
This view is emphasized by the consideration of the new Forms
1408 and 1409 prescribed by Regulations 60. It is clear that Form
1408 is not one for a penalty or forfeiture, but is one for
indemnity merely in respect, broadly speaking, of the liabilities
enumerated in Form 738A.
United States v. Chouteau,
102 U. S. 603,
102 U. S. 608.
And the fact that these new regulations provided that a permit
holder who had previously given a surety bond on Form 738 should
not be required to give a new bond on Form 1408 until called upon
to make application for a new permit, is strongly persuasive
evidence that the Commissioner regarded Form 738 as of
substantially the same character as Form 1408 -- that is, as a bond
for indemnity securing the payment of the liabilities enumerated in
Form 738A.
Our answer to the certified questions is that a permit bond on
Form 738 is not a bond for a penalty forfeitable in its entire
amount upon a breach of condition, but is a bond for indemnity
securing the payment of the internal revenue taxes, interest,
penalties, and liabilities accruing to the United States by reason
of the breach.
[
Footnote 1]
41 Stat. 305, c. 85.
[
Footnote 2]
T.D. 2940; T.D. 2946.
[
Footnote 3]
T.D. 2985.
[
Footnote 4]
Regulations 60, ed. of Feb. 1, 1920, appendix.