United States v. Zerbey

Background

Zerbey applied for a permit to sell distilled spirits and wines for non-beverage purposes and filed a $100,000 surety bond with the National Surety Company on Form 738. The Commissioner of Internal Revenue issued the permit conditioned on following the National Prohibition Act and related regulations. The United States sued Zerbey and the surety, alleging failures to keep required records, sales for beverage purposes, diversion of spirits, and possession of withdrawn whiskey without required records.

Reasoning

The Circuit Court of Appeals asked whether a Form 738 bond allowed the Government to recover the full penal sum upon any breach or only actual losses. The Supreme Court compared Form 738 to the collateral Form 738A and to later Forms 1408 and 1409. Because the collateral form and the newer forms specifically tied recovery to taxes, interest, fines, and liabilities, the Court concluded Form 738 was intended as an indemnity bond, not a penalty forfeited in full for every breach. Thus the Government may recover internal-revenue taxes, interest, penalties, and liabilities caused by a breach, not the bond’s entire face amount for any violation.

Real world impact

The decision prevents automatic collection of a bond’s full penal sum for minor regulatory breaches and limits recovery to actual tax and penalty liabilities caused by the violation. That result protects permit holders and their sureties from disproportionate forfeitures and clarifies what the Government may claim under Commissioner-prescribed bond forms.