#### COLUMBIA SUPPLY COMPANY v. THE UNITED STATES.

[No. 30824.

Decided December 2, 1918.]

*On the Proofs.*

*Contract; Fraud.*— Where a contract is procured, directly or indirectly, through the corrupt or improper influence of an official of the Government, and it appears that said official derived financial profit by reason of the contract, or was actuated by gratuities given him *by*the contractor, the transaction is fraudulent and the contract unenforceable.

*Fraud; Burden of proof.*— While the burden of proving fraud is upon the Government, a wide latitude is permissible in the introduction of testimony tending toward the proof of fraud, and *11courts will not restrict tlie fullest investigations as to its presence or absence from transactions wherein it is alleged to obtain.

*Croolcer*v. *United States,*40 O. Cls., 85, and *MieMgmi Steel Bose Co.*v. *United States,*49 O. Ols., 421, followed.

*The Reporter’s*statement of tlie case:

*Mr. Harry Lane*for the plaintiff. *Messrs. George L. Record*and *Frank J. Higgins*were on the briefs.

*Mr. Richard P.*Whiteley, with whom was *Mr. Assistant Attorney General Huston*Thompson, for the defendants.

The following are the facts of the case as found by the court:

I. The plaintiff is a corporation of the State of West Virginia, and the sole owner of the claim herein sued upon. On the 3d day of March, 1893, a contract was entered into between William H. Spencer and the United States for the furnishing, for the use of the Postal Service, of certain package boxes at a price of $9 each; under said contract patent applications for said boxes were assigned to the United States, and it was agreed that they should be assigned back to said Spencer, his assigns, or legal representative, when the United States should abandon the use of said invention.

On February 1, 1895, the contract executed March 3, 1893 was amended and a new contract executed providing for the furnishing of package boxes of a different style, the difference consisting in adding standards or legs to the boxes sufficiently long to raise them 12 inches from the sidewalk.

Prior to the execution of this amended contract the Columbia Supply Co. by a transfer and assignment had succeeded to all the rights of William H. Spencer, and the contract as amended was carried out by said Columbia Supply Co. The management and control of the business of the said Columbia Supply Co. was committed to the sole direction of Isaac S. McGiehan, president and majority stockholder of the Columbia Supply Co.

Before the execution of the amended contract of February 1, 1895, August W. Machen, then and afterwards superintendent of the Free Delivery System of the Post Office De*12partment, which bureau had charge of the furnishing and installation of the package boxes supplied by the plaintiff company, introduced to Isaac S. McGiehan, president of the company, one George E. Lorenz, stating that Lorenz was his partner in certain oil business. At the same time Machen stated to McGiehan that the package boxes being made by the McGiehan company were defective, because they were too low, and that they ought to be higher from the ground. Lorenz then stated that he had a design for legs which would elevate the boxes. Shortly thereafter McGiehan received a communication from the Post Office Department, asking whether or not the boxes could be elevated from the ground, and the cost thereof, to which McGiehan replied that it could be done and the cost would be $1.25 additional per box. Thereafter Lorenz again called upon McGiehan, and as a result of said interview the following agreement was entered into:

*“*It is hereby agreed and understood that the legs referred to in this connection are the invention of Mr. George E. Lorenz, of Toledo, Ohio, and that the Columbian Mfg. Co. hereby agrees to pay the said Lorenz 50 cents royalty for each package box made by them under the contract renewal and its continuance.

at Street, New York óity, the 10th dajr of Feby., 1895.

S. perE. S. G. H. H. I. S. M.”

In the meantime, and before this agreement had been made with Lorenz, McGiehan had, on February 7, 1895, received from the First Assistant Postmaster General the amended contract dated February 1, 1895, providing an increased price of $1.25 per box for the package boxes contracted for in March, 1898, the said increased price being for the legs or standards, which would raise the boxes at least 12 inches from the ground. The increased compensation provided for in the amended contract of February 1, 1895, was agreed upon by correspondence between McGiehan and the First Assistant Postmaster General, and letters of the First Assistant Postmaster General, although signed by him, were initialed at the top of the page “ T. B. M.” and *“*A. W. M ” *13Machen’s full name was August W. Machen. The “ T. B. M.” is evidently intended for T. W. M., Thomas W. McGregor, a clerk in Machen’s office in charge of supplies, who was later indicted for fraud.

II. On February 18, 1897, a new contract covering a four-year period was entered into between the United States and the Columbia Supply Co. for the furnishing of package boxes for use in the Free Delivery Service, at a price of $10.60 eaefi. This contract extended from July 1, 1897, to June 30, 1901, inclusive. When the bid of the plaintiff company was submitted to the Post Office Department in 1897, certain other bids were made on the same package boxes to be made of the same material and under the same specifications as those furnished by McGiehan, and the bidders proposed to supply said boxes at prices ranging from $3.50 to $8 per box. The committee of Post Office officials handling the awards, however, awarded the contract to McGiehan at $10.60 a box, alleging that his box was believed to be the most convenient and durable.

On January 29,1901, the Postmaster General again advertised for proposals for package boxes, for use in the Free Delivery System of the Post Office Department, for a period of four years, and the plaintiff submitted a proposal in answer to said advertisement, which was duly accepted by the Postmaster General, and in March, 1901, the contract was formally executed. Under this contract the United States agreed to pay $10.80 for each package box of the size, dimension, and description specified in said contract.

III. In accordance with the provisions of the contract executed in March, 1901, the plaintiff furnished to the United States certain boxes from time to time, and at some time in 1903, subsequent to May 8, there had been furnished to the said department by plaintiff 778 package boxes at the contract price of $10.80 each and 25 combination boxes at the contract price of $25.80 each, aggregating $9,047.40. These boxes were accepted by the department, but the bills therefor were not approved or warrant issued in payment thereof, because of an investigation that had been instituted of irregularities in the purchase of supplies for said department. *14Thereupon the purchase of package boxes under the contract executed in March, 1901, was discontinued, and on September 8, 1903, Isaac S. McGiehan, president and majority stockholder of the Columbia Supply Co.; George H. Huntington, secretary and treasurer of the said company; and August W. Machen, superintendent of the Free Delivery System of the Post Office Department, were indicted at Washington, D. C., on chai'ges of bribery and conspiracy to defraud the United States in connection with the purchase of said package boxes. After this time no more orders for package boxes were given to the plaintiff company by the Post Office. Department, payment for the 803 boxes heretofore obtained and not paid for was withheld, and the contract executed in March, 1901, was treated as void and without effect by the Post Office Department.

The proposal of the plaintiff company to furnish the package boxes under the contract afterwards executed in March, 1901, was made and accepted by the United States while payments were being made by the plaintiff directly to August W. Machen, Superintendent of the Free Delivery System, of a part of the money being paid to the plaintiff by the United States for package boxes being delivered under the 1897 contract.

IV. In April, 1903, when the investigation was made by the Post Office Department of irregularities in the purchase of supplies, in which August W. Machen, Superintendent of the Free Delivery System, was concerned, certain post-office inspectors interviewed Isaac S. McGiehan and obtained a statement from him to the effect that no money had ever passed, either directly or indirectly, between plaintiff and his office or company and Machen. An investigation of August W. Machen’s bank account at Westminster, Maryland, however, revealed the fact that he had deposited in his bank at that place a number of checks drawn in his favor by George H. Huntington, the treasurer of the Columbia Supply Co. The checks in question were drawn by said Huntington against his personal account at the Hamilton Bank, New York City, payable to A. W. Machen, in the *15following amounts and deposited in the Westminster Bank by Macben upon tlie dates herein stated:

December 2, 1899_$500. 00

April 3, 1900_ 200.00

September 11, 1900_ 100.00

December 20, 1900_ 250. 00

September 4, 1901_ 250. 00

March 2, 1901_ 850.00

March 15, 1901_ 225. 50

After the discovery of those deposits the post-office inspectors again interviewed McGiehan and Huntington, who at first denied that they had ever paid any money, directly or indirectly, to Machen, but when confronted with the evidence stated that the sums so paid to Machen were paid as royalties due Lorenz under the contracts of 1895 and 1897; that they were paid to Machen at Lorenz’s request, because Lorenz left for Europe, and the checks were drawn on Huntington’s personal account instead of directly on the funds of the company because the company was paying Huntington himself a royalty of 25 cents a box on an improved hinge invented by him, and that it was the practice to draw checks sufficiently large to cover both royalties, which checks Huntington would deposit in his own bank and then pay Lorenz’s royalty from that source.

McGiehan, being requested to produce any stub books of checks drawn by Huntington on the company’s account and to be deposited to his personal account for his disbursement of the alleged royalties, produced a book beginning in March, 1900, which showed that every check appearing therein and drawn by said Huntington on the company’s funds was for the exact amount of the check afterwards drawn by Huntington himself out of his personal bank in favor of Machen. These checks to Huntington out of the plaintiff’s funds were drawn on the following dates and for the following sums:

On March 31, 1900, for_$200. 00

On February 4, 1901, for- 250. 00

On February 21, 1901, for- 350. 00

On March 15, 1901, for_ 225. 50

After McGiehan had been confronted with the evidence of these checks paid directly to Machen, he admitted that he *16had stated that he had directed the money sent to Machen because there was an understanding he was remitting for Lorenz, and stated that a short time after the idea of the standards had been submitted to him by Lorenz, Lorenz stated to him that the package boxes ought to be put on legs, and said:

If you will do that I will see that the contract price is increased; you give me a portion of the amount paid, the amount of the increase for my invention.

It was suggested by the post-office inspectors that a stenographer be called and McGiehan’s statement reduced to writing, to which McGiehan demurred, stating that he would like to have an opportunity to go through his files and look up some documentary evidence; and later, on June 15, 1903, a written statement was secured in which McGiehan admitted that he had no knowledge that the standards upon which he was to pay Lorenz a royalty were patented; that ho never searched to see if they were patented, but denied that he knew that this alleged royalty was a rake-off or bribery of Machen through Lorenz. He admitted that information had come to him from Machen requesting him not to let Lorenz know how many boxes he was paying a royalty upon, and thought that information may have come over the phone to him.

George H. Huntington, the secretary - treasurer of the plaintiff company, was also examined by the post-office inspectors, and stated under oath that payments were made to Machen at McGiehan’s direction, and that he discontinued paying royalties when McGiehan told him it was not necessary to send any more, and that the last payment was the check of March 15, 1901.

After this time package boxes were still being delivered to the Post Office Department under the 1897 contract and between March 23, 1901, and March 14, 1902, warrants were issued to the plaintiff in payment for package boxes under the 1897 contract in the sum of $5,819.40. No royalty was paid to Lorenz or Machen on these boxes or on any package boxes delivered under the 1897 contract after the payment of March 15, 1901 — that is, after the new contract for pack*17age boxes for a four-year period had been awarded to plaintiff. The ordering of package boxes was characterized by the same wasteful extravagance as that of letter boxes, and ii 1901, the last year that the so-called Lorenz royalties were paid, of 8,381 boxes that were purchased, 1,869 of them, or 29 per cent, were stored away unused.

Y. The indictment against Isaac S. McGiehan was *nolle grossed*on November 28,1908. On April 26,1917, his deposition was taken in the present case by plaintiff, and a number of statements made directly contradicting the sworn statement made by him to the post-office inspectors on June 15, 1903, which statement was put in evidence by the United States after he had given most of his testimony. In this last deposition he stated that Machen had not suggested raising the package boxes from the street; said that he had never discussed the question of royalties with Machen at all; and said that he had been very friendly with Machen up to the time of Machen’s trouble, which statements were all at direct variance with the statement in writing made by him in 1903.

VI. During the period covered by the plaintiff’s contract, from July 1,1901, to June 30, 1905, in addition to boxes obtained from plaintiff, the following package boxes were purchased by the Post Office Department:

50 package boxes, at $5- $250. 00

688 package boxes, at $8-„- 5, 504. 00

1,520 combination boxes, at $9.50- 14,440. 00

Total_ 20,194. 00

The profit to plaintiff on each of these 2,258 boxes would have amounted to $3 per box, aggregating $6,764.

VII. Upon the foregoing findings of fact the court finds the ultimate fact, so far as it is a question of fact, that said contract was fraudulent, was in contravention of public policy, and void.

Booth, Judge,

delivered the opinion of the court.

The plaintiff company is the final successor of a business enterprise organized for the purpose of contracting with the United States to furnish the Post Office Department mail *18package boxes. The boxes to be furnished were invented by William H. Spencer, and the original contract to furnish them was made by Spencer on March 8,1893, for a four-year period. Subsequent to March 3, 1893, the present plaintiff company was incorporated under the laws of the State of West Virginia and acquired by proper assignment all the right, title, and interest of said Spencer in the patented mail package box here in issue, as well as the contract theretofore made by said Spencer. The cost to the United States under the original Spencer contract was $9 for each box furnished. In February, 1895, a date subsequent to the assignment of the original contract to the plaintiff company, an amendment was made to the original contract of 1893, providing an increased compensation to the company of $1.25 for each box furnished under the amended agreement. The amendment was brought about through representations made by August W. Machen, then superintendent of the Free-Delivery Bureau of the Post Office Department, that the boxes furnished should be elevated off the ground, and to accomplish this purpose suggested the employment of iron legs. Mr. Isaac S. McGiehan, president and owner of 90 per cent of the stock of the plaintiff company, received the suggestion of Machen during a personal interview upon the subject, and at the same time and in pursuance of a like suggestion from Machen agreed in writing to pay to one George E. Lorenz, of Toledo, Ohio, a royalty of 50 cents for each box made under the amended contract.

In 1897 the plaintiff company obtained another four-year contract, differing from former ones in one respect only, the price to be paid for each box was again increased to $10.00, and royalties were paid as per agreement to Lorenz until by his direction they were paid directly to August W. Machen. In 1901 the plaintiff company was again awarded the package box contract at the advanced price of $10.80 per box. Under the contract of 1901 the plaintiff company furnished 778 boxes at the contract price of $10.80 each and 25 combination-boxes at $25.80 each, amounting to $9,047.40. The department had received and accepted the boxes, but subsequently refused payment therefor on the ground of fraud in the procurement and execution of the contract. The pur*19chases of boxes was discontinued and the contract thereafter treated as void. The present suit is to recover for the boxes so furnished and delivered, or in any event their value.

This is the third suit involving the fraudulent transactions brought to light in the exposures incident to the administration of the Free Delivery Service of the Post Office-Department during the period here mentioned. In each of the previous cases the court discussed at length the principles of law at issue, and finds it now inexpedient to again do more than refer to said cases, one of which reached the Supreme Court on appeal. *Crocker*v. *United*States, 240 U. S., 74; *Michigan Steel Box*Co., 49 C. Cls., 421.

It is vigorously contended by the plaintiff company that denial of judgment under the contract on the ground of fraud can alone be predicated upon “ absolute fraud in the inception of the contract or .the performance of the same ”; that mere suspicions and insinuations involving conjecture fall short of proof of actual fraud alone sufficient to avoid responsibility. If it is vital under the law to prove by express assertion that fraud permeated the transaction here involved under the circumstances contended for by the plaintiff company, the defense would undoubtedly fail. The burden rests upon the defendants; they have assumed it, and once having brought the parties into a situation where rational explanation alone can avail to divest the transaction of its fraudulent character, fraud must be considered proven, notwithstanding the absence of confessions and admissions. It must, of course, be directly connected with the contract, either at its inception or during the performance thereof. A variety of means, cunningly devised as in this case, so decidedly extraordinary and unusual when tested by the ordinary and rational methods of general business transactions, must be explained by the plaintiff company before it can be heard to say that its monetary transaction with an important governmental official in direct charge of the administration of its contract is free from fraud. A wide latitude is permissible in the introduction of testimony tending toward the proof of fraud, and the courts justly frown upon attempts to restrict the fullest investigations as to its presence or absence from transactions wherein it is alleged to obtain. *20The Chief Justice discussed the subject exhaustively in the *Michigan Steel Box*case, *supra.*

The president of the plaintiff company admits having an interview with Machen and Lorenz some time previous to the amendment of the contract of 1893. Machen introduced Lorenz to him as his partner in some oil business. So far as the record discloses, the amendment of the contract was the subject under discussion, and Lorenz subsequently profits in virtue of the amendment to the extent of 40 per cent of the increased compensation thereafter provided. The justifiable pretense set forward is one so utterly absurd as to merit condemnation. The payment is alleged to have been made as a royalty on a patented device. The device was never patented and no letters patent were shown the president of the company, who was himself an experienced and active patent lawyer. This fact, standing alone, is sufficient to condemn the transaction as fraudulent. When, however, it is fortified by the additional circumstances that payments of alleged royalties were made directly to Machen in envelopes mailed to him carrying no other explanation than bank checks drawn by the treasurer of the plaintiff company in his individual capacity, against his own private funds, which had been augmented for this very purpose from the corporate funds of the company, it becomes absolutely convincing of a fraudulent and sinister purpose to profit at the expense of the Government in the performance of the contracts and to purposely conceal the transaction by giving it the appearance of personal dealing between the parties aside from any connection with the company’s business. It is inconceivable that experienced business men should resort to practices so glaringly irregular upon any other hypothesis than an abnormal desire to overreach the defendants in the sale of package boxes. This they did, for each contract provided for increased prices, notwithstanding the utter absence of the slightest reliable testimony of enhanced cost of production.

The payment of a portion of the profits earned in the performance of a Government contract directly to the Government official having personal charge and supervision of the execution of the contract is inherently a business transaction *21of such a questionable character that nothing short of a clear, unequivocal explanation can free it from an intentional purpose to thereby influence and control the action of said official to the gain and profit of the contractor.

In 1901 payments to Machen and Lorenz under the 1901 contract were arbitrarily discontinued, the contract between the plaintiff company and Lorenz rescinded, and, in so far as this record discloses, without the slightest protest or objection on the part of Lorenz or Machen. In other words, Lorenz was submitting without contest to the loss of alleged royalties, amounting at least to $1,875, which had been collected by his agent Machen (exclusive of amounts paid directly to Lorenz) and deposited to Machen’s personal bank account during a period of time slightly in excess of a year. The explanation of this unusual procedure is far from convincing. It is ascribed to a change in the design of the standards or legs used to elevate the box, thereby releasing the company from liability to Lorenz. Lorenz never possessed a monopoly of any design. The legs used for the purpose were simple iron standards never patented and doubtless not entitled to patent. The real purpose is found elsewhere. The company failed in 1901 to secure a postal contract and the president thereof was aggrieved over the fact. Favors from the department ceased to flow with that easy, uninterrupted success that accompanied the bids submitted by the plaintiff company in 1895, 1897, and 1901, with respect to mail-package boxes.

The record is replete with positive testimony directly connecting the plaintiff company with payments of money intended and designed to reach a high Government officer and thereby enable him to participate in the profits of the contract. As well said in the *Michigan Steel Box Co.*case, *sufra:*

> “And it does not materially alter the question whether said superintendent had a financial interest in the contract or the profits supposed to flow therefrom, or was actuated by gratuities furnished him by claimant, or by the hope thereof, for in either case the law will not tolerate a breach of trust on the part of a public official or allow such breach to be made the basis of an action.”

*22The fraud practiced had its inception in the amendment made to the contract of 1893 and extended without interruption through the contracts of 1897 and 1901. Payments of money were made to Machen up to as late as September, 1901, and were only then discontinued because of the apparent unwillingness of Machen to continue in his fraudulent conduct with the company.

It is possible for the plaintiff company to recover in the present suit upon a *quantum vdlebat.*The Government accepted the boxes, retained possession of the same, and they are now in use. We have searched the record in an effort to find sufficient proof upon which to rest such a judgment. Plaintiff company made no effort to prove the value of the boxes furnished other than the bald statement that its profits amounted to $3 on each box. The defendants put in some testimony showing the probable cost of manufacture, but it is so indefinite as to leave the court without a basis of computation upon which to reckon the total cost of the 803 boxes involved in this, litigation. The plaintiff company’s petition is broad enough to have included this feature of the claim, but for lack of proof it must necessarily fail.

The petition is dismissed.