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106 B.R. 223 (1989)
In re Larry L. BASTROM, Sharla S. Bastrom, Debtors.
FIRST NATIONAL BANK OF WHITE SULPHUR SPRINGS, Plaintiff,
v.
Larry L. BASTROM, Sharla S. Bastrom, Defendants.
Bankruptcy No. 87-40419, Adv. No. 487/0074.
United States Bankruptcy Court, D. Montana.
February 13, 1989.
Charles F. Moses, Billings, Mont., for debtors.
Joel E. Guthals, Billings, Mont., for First Nat. Bank of White Sulphur Springs.
ORDER
JOHN L. PETERSON, Bankruptcy Judge.
In this adversary proceeding, a trial was held July 12 and 15, 1988, on the Complaint to Determine Dischargeability filed by First National Bank of White Sulphur Springs against the Debtors/Defendants. The Complaint to Determine Dischargeability was filed on October 14, 1987, and is based on 11 U.S.C. § 523(a)(2), § 523(a)(6), and § 727(a)(2) and (4). The Complaint was subsequently amended on July 12, 1988, to include specificity of the allegations. The Debtors/Defendants have filed Answers to the Complaint and Amended Complaint which deny the material allegations and set forth their affirmative defenses. At the close of trial, both parties were granted leave to file their respective briefs in support of their positions. The briefs have been filed and this matter is deemed submitted.
The Bank and the Debtors originally entered into a loan agreement on October 1, 1985. The loan agreement entitled the Debtors to borrow up to $500,000.00 for the purchase of feeder cattle, feed, and the operation of a feed lot. Pursuant to the *224 loan agreement the Debtors signed a promissory note and granted the Bank a security interest in all of the Debtors' livestock and feed, and pledged the Bank a security interest in certificates of deposit. The Bank properly perfected all of its security interests. The loan agreement contained numerous conditions and restrictions, such as the Bank would only loan up to 75% of the value of the collateral and the Bank had the right to inspect the Debtors' operation and books. The Bank made numerous advances to the Debtors under the loan agreement, and by June, 1986, the Debtors were obligated for a principal balance of $403,793.25. The Bank, through its right of inspection, discovered in June, 1986, that cattle serving as collateral for the loans were missing. Accordingly, in June of 1986, the Bank requested that the Debtors provide information regarding the missing collateral. The Debtors informed the Bank that the cattle were gone and that some of the proceeds had been transferred to commodity trading accounts. However, the Debtors informed the Bank that they were still desirous of continuing their operations and repaying the loans. In that regard, the parties entered into a Memorandum of Understanding on June 17, 1986. In the Memorandum of Understanding the parties agreed that the Debtors' operations could not fund repayment of the Bank's debt. Therefore, the Debtors and Bank agreed that "it is the best interest of the Borrower to have an orderly liquidation over a reasonable period of time in order to secure the highest value from the sale of the Borrower's business and personal property". The Debtors then agreed in the Memorandum to (A) liquidate their certificates of deposit and turn the proceeds over to the Bank, (B) to assign their interests in commodity accounts to the Bank valued at $10,965.00 and $26,352.57, (C) turn over the cash value of life insurance policies to the Bank, (D) give the Bank a security interest in machinery, equipment, crops, and titled motor vehicles as listed in Exhibit "A" attached to the Memorandum, (E) give the Bank a security interest in all real property listed in Exhibit "B" to the Memorandum, and (F) assign certain notes receivable and partnership interests, as listed in Exhibit "C", to the Bank and to liquidate them as rapidly as is prudent. The Debtors further agreed in the Memorandum that they will liquidate additional collateral if the debt level with the Bank was not reduced to the funding ability of the Debtors. The Debtors agreed to properly care for their property and stated in the Memorandum that they will not "sell, exchange or otherwise dispose of any collateral without notice to the Bank". The Memorandum further states that "All proceeds from the sale of collateral shall be remitted to the Bank for application upon the primary loan . . ." and that, "it is expressly understood that this Agreement shall in no way be construed to waive or nullify any of the Bank's rights under the security agreements heretofore given by the Borrower to the Bank". Subsequent to signing the Memorandum on June 17, 1986, the Bank applied the certificates of deposit against the loan, perfected several security interests, and received some payments. The Debtors were unable to liquidate their property fast enough to satisfy the Bank's debt limit and the Bank attempted to repossess some farm machinery, vehicles and equipment in the spring of 1987. The Bank's attempted repossession was unsuccessful and soon thereafter, on June 15, 1987, the Debtors filed a Petition for Relief under Chapter 7 of the Bankruptcy Code. Subsequently, on October 14, 1987, the Bank filed a Complaint to Determine Dischargeability.
The Bank's Complaint, and subsequent Amended Complaint, allege three counts against the Debtors, to-wit: Count I, that the Debtors made false and fraudulent representations in order to obtain credit (§ 523(a)(2)); Count II, that the Debtors did malicious damage and destruction to Plaintiffs' property by conversion (§ 523(a)(6)); and Count III, that the Debtors made false statements under oath by failing to list all of their assets on their bankruptcy schedules and statements (§ 727(a)(2) and (4)). The Debtors/Defendants in their Answer deny all of the material allegations of the Complaint. The Debtors/Defendants set forth an affirmative defense that the Memorandum of Understanding settled and resolved *225 all prior claims of the Bank and, therefore, any claims based on the original loan agreement have no basis to be alleged. The Bank resists the Debtors' affirmative defense based on the language of the Memorandum of Understanding that states that the Bank's rights are not nullified or waived by the Memorandum.[1] A Cross-Complaint was also filed with the Debtors' Answer. The Cross-Complaint was stricken by Order of this Court dated May 19, 1988.
This Court will first address the allegations contained in Count III of the Complaint. Count III of the Complaint is based on 11 U.S.C. § 727(a)(2)(A) and (a)(4)(A). Sections 727(a)(2)(A) and (a)(4)(A) provide:
"(a) The court shall grant the debtor a discharge unless
(2) the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title [11 USCS §§ 101 et seq.], has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed
(A) property of the debtor, within one year before the date of the filing of the petition; or
* * * * * *
(4) the debtor knowingly and fraudulently, in or in connection with the case
(A) made a false oath or account:"
In order to sustain an objection to discharge under § 727(a)(2)(A), the evidence must establish: (1) That the Debtor transferred, removed, or concealed the property; (2) that such property belonged to the Debtor; (3) that the transfer, removal, or concealment occurred within one year before the Petition in Bankruptcy was filed; and (4) that the act was done with an intent to hinder, delay or defraud a creditor. In re Martin, 88 B.R. 319, 322 (D.Colo.1988); In re Shumate, 55 B.R. 489, 493 (Bankr.W. D.Va.1985). As this Court stated in In re Maxted, 107 B.R. 289 (Bankr.Mont.1988), quoting from Colliers:
"[3] Fraudulent Intent.
Section 727(a)(2) provides that the act complained of must be done with intent to hinder, delay, or defraud a creditor, or an officer of the estate.
The interpretation of the elements of `intent to hinder, delay or defraud' on the part of a debtor that evolved under Section 14c(4) of the former Act retains significance for Code cases. This intent must be an actual intent as distinguished from constructive intent. Although the language, drawn from the Uniform Fraudulent Conveyance Act, implies that the debtor must have intent to defraud a creditor or officer of the estate, a careful reading indicates that intent to hinder or delay, even if not fraudulent, may be sufficient for a denial of discharge.
Although actual intent must be shown, a finding of actual intent may be based on circumstantial evidence or on inferences drawn from a course of conduct. This is because a debtor is unlikely to testify that the intent was fraudulent. Thus a court may look to all the surrounding facts and circumstances. A continuing pattern of wrongful behavior is one indication of fraudulent intent. Similarly, reckless indifference to the truth has been held to be the equivalent of fraud under section 727. The fact that valuable property has been gratuitously transferred raised a presumption that such transfer was accompanied by the actual fraudulent intent necessary to bar a discharge under section 727(a)(2)." 4 *226 Collier on Bankruptcy, § 727.02[3] 15th Ed.1984.
Collier's definition of fraudulent intent is in line with the holding of In re Devers, 759 F.2d 751 (9th Cir.1985), which stated that,
"fraudulent intent may be established by circumstantial evidence, or by inferences drawn from a course of conduct."
The Bank asserts that in this case fraudulent intent can either be inferred from the Debtors' course of conduct or actually shown through the Debtors' failure to list numerous assets in their schedules and statements. The burden of proof is on the objecting party. Bankruptcy Rule 4005.
The Court will first address the Debtors' course of conduct in this case. The Debtors' course of conduct was directly brought before this Court during the administration of this adversary proceeding. On January 13, 1988, the Bank sent the Defendants a First Set of Interrogatories and First Request for Production. Then on March 9, 1988, the Bank filed a Motion to Compel Answers to Discovery or for Sanctions due to the Debtors' failure to Answer the Interrogatories or Requests. An Order was issued on March 9, 1988, by this Court directing the Debtors to forthwith answer the Requests and Interrogatories. A hearing was held May 17, 1988, on the Bank's Motion to Compel Discovery and for Sanctions, and at the hearing the Debtors admitted that they had not answered the Interrogatories and Requests as they had been Ordered to do. Accordingly, this Court imposed sanctions (the Debtors' Cross-Complaint was stricken) and ordered the Debtors to appear for a Rule 2004 examination within 15 days of Notice by the Bank and to produce all requested documents. The Debtors subsequently appeared for a 2004 examination on June 7, 1988, but failed to bring any documents as Ordered by this Court. Eventually, the Debtors supplied the necessary documents, but not until another Rule 2004 examination was held on June 20, 1988.
Additional facts relating to the Debtors' course of conduct in this case show that the Debtors transferred a 1978 Wilderness Camper Trailer (trailer) to their daughter within one year of their Petition without advising the Bank or listing the trailer in the schedules. The trailer was specifically listed on Exhibit "A" to the Memorandum of Understanding as security for the Bank. However, the Bank was not advised of the transfer. At trial the Debtors testified that the trailer's title was transferred to their daughter to secure a $10,000.00 personal loan that she had made to the Debtors. The Debtors' daughter testified that she always believed that the Bank was in the first security position on the trailer. In contradiction to the testimony, the Debtors' Schedule A-3, lists the daughter as a creditor having unsecured claims without priority in the undisputed amount of $10,000.00. The Bank, through extensive discovery, became aware of the transfer at one of the Rule 2004 examinations that took place nearly one year after the Debtors' Petition was filed. The Debtors testified that their attorneys advised them not to list the travel trailer. Testimony of the attorneys, however, refutes this allegation. This Court, therefore, does not find the Debtors' testimony credible. Review of the Debtors' records show that they have never amended their schedules to reflect the transfer of the trailer. Accordingly, this Court finds that the Debtors did transfer property of the estate within one year of the filing of the Petition, failed to disclose it, and that the delay in informing the creditor of the transfer is inferred as intentional in that the Debtors only disclosed the fact under examination by the Bank. Although such a finding can bar the Debtors' discharge under § 727(a)(2)(A), this Court will continue to address the Debtors' course of conduct with respect to other § 727(a)(2)(A) allegations.
The Debtors informed the Bank at a Rule 2004 meeting that they had transferred a 1030 Case Tractor, that like the trailer addressed above, was specifically listed as a secured asset of the Bank. No disclosure of the transfer was made on the Debtors' schedules or statements and the transfer occurred within one year of the filing of the Petition. The Debtors' schedules and statements listed their machinery and equipment as zero. The Debtors testified *227 that this was done because the Bank had a security interest in all of the machinery and equipment. The Debtors further testified that their attorneys were aware of the machinery and equipment, but advised the Debtors that it did not have to be listed. Once again, however, the testimony of the attorneys is in direct contradiction to the Debtors' testimony. The Bank, through a 2004 examination, learned that numerous items of the Debtors' machinery and equipment were being kept on the "Swant place" (this land was not the Debtors, but they had access to it regularly). After the Debtors were made aware of the fact that they did in fact have machinery and equipment, they once again did not amend any of their schedules or statements to reflect such a fact.
In this case, this Court finds that the evidence presented at trial shows that the Debtors/Defendants: (1) transferred two items that were given as security to the Bank without listing any reference to the transfers on their schedules; (2) did not cooperate with the Bank's discovery requests or this Court's Order regarding discovery; (3) did not list on their schedules that they had any machinery or equipment, or that some of the machinery and equipment was located on property that was not the Debtors; and (4) never amended their schedules and statements to properly reflect their asset situation. Based on this evidence and the Debtors' course of conduct, this Court finds that the Debtors intended to hinder and delay the Bank and other creditors. As such, the Debtors/Defendants are not entitled to a general discharge of their debts under § 727(a)(2)(A). Although this is dispositive of the dischargeability issue, this Court will address § 727(a)(4)(A).
The primary purpose of § 727(a)(4)(A) is to ensure that dependable information is supplied to those interested in the administration of the bankruptcy estate so they can rely upon it without the need for the Trustee or other interested parties to dig out the true facts through examinations or investigations. Martin, supra, at 323; In re Diodati, 9 B.R. 804, 807 (Bankr.D.Mass.1981). Fraudulent intent will be imputed if non-disclosed or scheduled assets have substantial value. In the Matter of Galbraith, 17 B.R. 302, 305 (Bankr.M.D.Fla.1982); In re Topping, 84 B.R. 840, 842 (Bankr.M.D.Fla.1988). In this case, the Debtors failed to list a limited partnership interest in Las Vegas, certain equipment and machinery pledged to the Plaintiff, a receivable from the Mallard Land Company, and a receivable and guaranty from Robert Klicker. The Bank alleges that the total value of assets not listed is greater than $876,000.00. The Debtors refute the Bank's allegations of fraudulent false oath by stating that all of the assets, except the receivable from Robert Klicker, that the Bank alleges were omitted are listed in the Memorandum of Understanding signed with the Bank on June 17, 1986. Therefore, the Debtors contend that there was no fraud against the Bank because they had knowledge of the omitted assets. With respect to the Klicker receivable, the Debtors admit that "there were claims against Mallard [corporation] and that the same had been guaranteed by Mr. Klicker". Yet, in the same instance, the Debtors assert that the appropriate concern on this matter should be that the Debtors discussed the receivable with their attorney, and thereafter the matter was not put in the Debtors' schedules or statements. The attorneys which had been representing the Debtors testified that they did not tell the Debtors to omit anything from their schedules and that if they had known specifically of the omitted material they would have advised the Debtors to list it.
In order to sustain an objection to discharge under 727(a)(4)(A), the evidence must be established: (1) That the Debtor made a false oath or account in connection with his bankruptcy proceeding; and (2) that such false oath or account was knowingly and fraudulently made. In re Chalik, 748 F.2d 616, 618 (11th Cir.1984). The false oath or account must be related to a material fact. In re Kessler, 51 B.R. 895, 899 (Bankr.D.Kan.1985); In re Bobroff, 58 B.R. 950, 952 (Bankr.E.D.Pa.1986). A material omission from the Debtors' Chapter 7 *228 schedules, or a false answer on a statement of financial affairs may constitute a false oath for purposes of § 727. Martin at 323; Comprehensive Accounting Corp. v. Morgan, 43 B.R. 264, 271 (Bankr.E.D.Tenn. 1984). It may be inferred from the circumstances that the Debtors acted "knowingly and fraudulently" in omitting a material fact. In re Braidis, 27 B.R. 470, 472 (Bankr.E.D.Pa.1983); Bobroff, at 953.
At trial, the Debtor/Defendants acknowledged that they had signed the financial statements and schedules "under penalty of perjury", and that the information supplied was true and correct to the best of their "knowledge, information and belief". This Court finds that the Debtors' failure to list the receivables, machinery and equipment, the transfers of property, and the partnership interest in Las Vegas, was a material omission. Furthermore, the Court finds that there is clear and convincing evidence that the Debtors acted in reckless disregard of both the serious nature of the schedules and statements and the need to disclose with detail and accuracy. In this case, the Debtors have attempted to take advantage of the Bankruptcy Code's liberal fresh start policy, yet they have not performed the requisite obligations that the Code puts on them.
The Bank's first two counts are based on § 523 of the Code. Count I and II are specifically based on § 523(a)(2)(A) and (a)(6) of the Code which state:
"(a) A discharge under section 727, 1141, 1228, 1228(b), or 1328(b) of this title does not discharge an individual debtor from any debt
(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by
(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition;
* * * * * *
(6) for willful and malicious injury by the debtor to another entity or to the property of another entity;"
In this case, the Bank reasonably relied upon the Debtor's financial statements at the time that the parties entered into the Memorandum of Understanding on June 17, 1986. At that time, the Debtors informed the Bank that they did not know where any of their missing cattle were and the Debtors gave the Bank additional security interests in numerous items of collateral. At trial, evidence showed that the Debtors did in fact still have cattle at a feed lot and did not inform the Bank. The evidence further proved that the Debtors pledged several vehicles as collateral (a 1256 International tractor and a 1978 Chevrolet Suburban) that they did not own. The Debtors alleged that the vehicle ownership problem was due to the Debtors' official capacity with the corporation that was shown to own the vehicles. However, this Court finds that the Debtors did not own the two vehicles, listed the vehicles as collateral for the Bank, and either did or should have known (through their corporate affiliation) that the vehicles belonged to the corporation. Accordingly, this Court finds that the Debtors made false and fraudulent representations in order to obtain credit from the Bank in violation of § 523(a)(2)(A).
The evidence before the Court, as outlined above in the discussion with regard to § 727, further shows: (1) That the Debtors willfully and maliciously converted the Wilderness Camp Trailer that was security of Bank; (2) That the Debtors willfully and maliciously converted the 1030 Case tractor; and (3) that the Debtors willfully and maliciously concealed property of the estate, that was pledged to the Bank, when they did not list or disclose the whereabouts of the machinery and equipment that was located on the Swant place. Accordingly, this Court finds that the Debtors did willful and malicious injury to the property of the Bank in violation of § 523(a)(6).
IT IS ORDERED:
(1) That the Debtors/Defendants are denied a general discharge under 11 U.S.C. § 727(a)(2)(A) and (a)(4)(A); and
(2) That the First National Bank of White Sulphur Springs shall have judgment *229 against the Debtors/Defendants Larry L. Bastrom and Sharla S. Bastrom in the amount of $341,871.67, together with interest at a per diem interest rate of $96.29, and that said debt is non-dischargeable under 11 U.S.C. Sections 523(a)(2)(A) and 523(a)(6).
The Clerk shall enter judgment accordingly.
NOTES
[1] With regard to the Bank's allegations under 11 U.S.C. § 523(a)(2), this Court has followed the reasoning of In re Houtman, 568 F.2d 651 (9th Cir.1978), which holds that the creditor must have reasonably relied on the Debtor's false or fraudulent representations before the creditor's objection could be sustained. In this case, no evidence of fraudulent transfers or conversions by the Debtors prior to the June 17, 1987, Memorandum of Understanding could be used against the Debtors, as the Bank knew cattle were unexplainedly missing and entered into a new agreement.
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106 B.R. 602 (1989)
In re Cheryl Z. CLARK, Debtor.
Bankruptcy No. 88-00829-BKC-J13.
United States Bankruptcy Court, E.D. Missouri, E.D.
November 8, 1989.
*603 Eileen Voss, St. Louis, Mo., Trustee.
Curtis L. Mann, Clayton, Mo., for trustee.
Kimberly Forseth, Asst. U.S. Atty. Office of Sp. Litigation Tax Div. Dept. of Justice, Washington, D.C., Frederick J. Dana, Asst. U.S. Atty., St. Louis, Mo.
T.J. Mullin, St. Louis, Mo., Henry J. Mohrman, Jr., Sp. Counsel, St. Louis, Mo., for debtor.
Randall F. Scherck, St. Louis, Mo., for United Sav. & Loan.
MEMORANDUM OPINION
JAMES J. BARTA, Chief Judge.
This matter is before the Court for consideration of the Debtor's Objection to Proof of Claim No. 9 filed on behalf of the United States Internal Revenue Service.
The Debtor, Cheryl Z. Clark, filed this voluntary Chapter 13 Petition on March 16, 1988. The Internal Revenue Service filed a proof of claim on May 5, 1989, requesting payment for back taxes and penalties in the amount of $18,114.17. The amount owed is based upon an assessment for the tax years 1982, 1983, 1984, and 1986.
The Debtor's timely objection to the IRS Claim admits that she is liable for additional taxes for the year 1986, but denies liability for the taxes owed for 1982, 1983 and 1984. The Debtor has argued that she is an innocent spouse under 26 U.S.C. § 6013(e) of the Internal Revenue Code of 1986. Testimony and other evidence was presented during a hearing before the Bankruptcy Court, and the matter was submitted upon the record as a whole without legal memoranda.
The burden of proving that a tax payer qualifies as an innocent spouse lies with the taxpayer. Clevenger v. C.I.R., 826 F.2d 1379, 1382 (4th Cir.1987). To qualify as an innocent spouse, a taxpayer must prove that each of the requirements of Section 6013(e)(1) have been satisfied. Shea v. C.I.R., 780 F.2d 561, 565 (6th Cir. 1986); Ratana v. C.I.R., 662 F.2d 220 (4th Cir.1981); Ballard v. C.I.R., 740 F.2d 659 (8th Cir.1984).
The four requirements of Section 6013(e)(1) or as follows:
(A) A joint return has been made . . . for a taxable year,
*604 (B) On such return there is a substantial understatement of tax attributable to grossly erroneous items of one's spouse,
(C) The other spouse . . . he or she did not know, and had no reason to know, that there was such substantial understatement, and
(D) Taking into account all the facts and circumstances, it is inequitable to hold the other spouse liable for the deficiency in tax for such taxable year attributable to such substantial understatement.
The parties have agreed, and the record clearly shows that the income tax returns in question were filed as joint returns between the Debtor and her spouse.
The Debtor has failed to establish that the understatement of the tax during the years in question was attributable to grossly erroneous items of only one spouse. (Section 6013(e)(1)(B)). The testimony and evidence at trial indicated that the most significant and substantial income which was omitted from the joint returns was produced by rental properties and interest-bearing accounts. A significant percentage of these rental properties were titled in the name of the Debtor and her spouse as tenants by the entirety. The Debtor testified that she and her spouse acquired about ten or eleven parcels of real property between 1981 and 1984 through a process described as "no money down and creative financing." Similarly, at least one savings account, described as the real estate account, was in the name of the Debtor and her spouse. Therefore, the Court finds that the record here has failed to establish that the substantial understatement of tax is attributable solely to the income of the Debtor's spouse.
The third requirement of Section 6013(e)(1) refers to the spouse's knowledge of the substantial understatements. The Debtor in this case has failed to establish that she did not know, and had no reason to know of the substantial understatements. On the 1982 and 1984 tax returns which were signed by the Debtor, the Debtor listed her occupation as "student-rental property", and "rental management". She also submitted Supplemental Income Schedules (Schedule E) reflecting the income and expenses from rental property. The Debtor testified at the hearing on this matter that her responsibilities in connection with the rental property included working on the mortgage applications. She stated further that she accepted checks from tenants of the properties; her office included shelves of books dealing with mortgage financing; she maintained and arranged the files on the rental property in a file drawer in her home; she made deposits into all of the bank accounts owned by she and her husband; she knew that she was designated as the property manager of the rental properties; and she knew that the real estate bank account was not being used exclusively for real estate purposes. The record in this case indicates further that the Debtor appeared in small claims court on various occasions in connection with actions involving the rental properties. The Debtor's husband, Richard Meier, testified that he had consulted with the Debtor at the time of each purchase of income producing property. He also stated that she was aware of the rental amounts and of the maintenance costs. He believed that she enjoyed the activities associated with organizing the files related to the rental properties. Additionally, the Court finds that the Debtor knew or should have known that interest income had been omitted from these tax returns, because portions of this interest were earned from accounts listed solely in the Debtor's name. The records of these accounts were at least available to the Debtor for her inspection. Therefore, the Debtor had reason to know of the activity on these accounts, and knew that no interest income was listed on the returns for the years 1982, 1983 and 1984. Therefore, the Court finds that under the circumstances of the Debtor at the time of signing these returns, a reasonable person in the same position would be expected to know of the substantial understatements.
Lastly, the Court finds and concludes that it would not be inequitable to hold the Debtor liable for these tax deficiencies. The record in this case indicates *605 that the Debtor benefited significantly from the items omitted from the income tax returns. She had control over and wrote checks on certain of the bank accounts into which rental income had been deposited. She and her husband enjoyed the use of motor vehicles and paintings, some of which were acquired after they began receiving rental income. The Debtor and her husband took several trips during their marriage, at least two of which were paid for from income received after they acquired the rental properties. Therefore, it is not inequitable to find her liable for the taxes and other assessments for the omitted income. Gryder v. C.I.R., 705 F.2d 336 (8th Cir.1983) cert. denied, 464 U.S. 1008, 104 S. Ct. 525, 78 L. Ed. 2d 709 (1983).
IT IS ORDERED that this hearing be concluded; and that the Debtor's Objection to the Proof of Claim No. 9 on behalf of the Internal Revenue Service is denied; and that said Claim is allowed in the amount of $18,114.70 as a priority tax claim in this Chapter 13 case.
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826 F. Supp. 471 (1993)
GENERAL TIME CORPORATION, Plaintiff,
v.
BULK MATERIALS, INC., Bulk Materials Investments, Inc., and Fleet Transport Company, Inc., Defendants.
Civ. No. 92-109-ATH(DF).
United States District Court, M.D. Georgia, Athens Division.
June 18, 1993.
*472 *473 Kenneth Lee Millwood, Atlanta, GA, for plaintiff.
Stephen E. O'Day, Clark G. Sullivan, Atlanta, GA, for defendants.
FITZPATRICK, District Judge.
On March 29, 1993, this Court heard oral argument on Defendant Fleet Transport Company, Inc.'s ("Fleet") motion to dismiss[1] under Federal Rule of Civil Procedure 12(b)(6) on the ground that the Plaintiffs have failed to state a claim upon which relief may be granted. A claim should not be dismissed under Rule 12(b)(6) unless it appears beyond doubt that the plaintiff can prove no set of facts entitling it to relief. Luckey v. Harris, 860 F.2d 1012, 1016 (11th Cir.1988). For the purposes of a motion to dismiss this Court must accept the allegations in the complaint as true. Id.
BACKGROUND
This lawsuit arises out of Fleet's spill of trichloroethylene ("TCE"), a listed hazardous *474 substance, onto the ground at Plaintiff's facility in Athens, Georgia. On March 4, 1992, Fleet delivered a bulk shipment of TCE to Plaintiff's plant. During the unloading of the TCE, Fleet's hose failed and came partially loose from the Fleet tanker to which it was attached. As a result, 500 gallons of TCE sprayed onto Plaintiff's property. Despite prompt emergency response efforts, the spilled TCE was not fully recovered, and remains a continuing source of contribution to groundwater contamination at the site.
As part of the emergency response effort, Fleet Transport consented to an order by the Georgia Department of Natural Resources, Division of Environmental Protection ("GEPD"), to engage in a clean-up effort at the site, and to pay a fine for the spill. Georgia EPD did not require General Time to become a party to the Consent Order since Fleet spilled the TCE. Contemporaneous with the emergency response, General Time voluntarily contracted for removal of the contaminated soil necessary to meet the emergency requirements set by the Georgia EPD, which required contaminated soil to be removed from the site until background readings 20 ppb of TCE were achieved. In order to meet these goals under the time constraints imposed by the Georgia EPD, General Time hired USPCI to remove over 3,200 tons of contaminated soil, which cost over one million dollars. The soil removal, which was an integral part of the emergency response ordered by the State, would not have been required absent the spill.
Fleet repeatedly refused General Time's subsequent requests to reimburse it for the costs of the soil removal. Consequently, Plaintiff filed this suit asserting claims pursuant to Section 107 and 113 of the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986 ("CERCLA"), 42 U.S.C. § 9610 et seq., the Georgia Hazardous Site Response Act ("GHSRA"), O.C.G.A. § 12-8-90 et seq., as well as state common law claims, for actual and consequential damages arising out of the TCE spill. Additionally, Plaintiff seeks a declaratory judgment pursuant to 28 U.S.C. § 2201, determining the ultimate relative responsibilities for the past and future costs of investigation and remediation of the environmental contamination.
DISCUSSION
Defendant Fleet asserts that Plaintiff's claims for contribution are barred pursuant to 42 U.S.C. § 9613(f)(2) and O.C.G.A. § 12-8-96.1(f) and that Plaintiff's state law claims are pre-empted by CERCLA.
I. 42 U.S.C. § 9613(f)
CERCLA imposes a scheme of liability whereby certain entities ("potentially responsible parties" or "PRPs") are jointly and severally liable for response costs associated with the clean-up of hazardous materials that have been released into the environment at particular facilities. United States v. Pretty Products, Inc., 780 F. Supp. 1488, 1493 (S.D.Ohio 1991). As originally enacted, CERCLA did not expressly permit a PRP who had incurred response costs to pursue contribution against other PRPs. United States v. Cannons Eng'g Corp., 899 F.2d 79, 92 (1st Cir.1990). In 1986, however, Congress added section 113(f) to CERCLA as part of the Superfund Amendments Reauthorization Act ("SARA") to provide for an express right of contribution among PRPs. See 42 U.S.C. §§ 9613(f)(1)[2]. Section 113(f)(2)[3], however, bars an action for contribution *475 for payment of response costs or performance of response actions against PRPs who have settled their liabilities with the United States or a State in an administrative or judicially approved settlement. Cannons Eng'g, 899 F.2d at 92; 42 U.S.C. § 9613(f)(2).
Plaintiff argues that the Consent Order between Fleet and GEPD is not an "administrative or judicially approved settlement" under section 113(f)(2) because: (1) it does not expressly provide for contribution protection under § 113(f)(2); (2) it does not mention CERCLA liability; (3) the statutory procedural requirements under section 122(i) were not followed; and (4) no notice of or opportunity to be heard on the settlement was provided in violation of General Time's procedural due process rights.
First, Plaintiff contends that § 113(f)(2) does not bar its claim for contribution because the Consent Order, unlike the Model EPA Consent Decree, does not specifically state that section 113(f)(2) contribution protection is provided. The Court rejects this argument. The language in § 113(f)(2) is unequivocal in its grant of contribution protection to PRPs who settle with a State or the federal government. The statutory language does not require the settlement to specifically refer to section 113(f)(2) or to explicitly confer contribution protection.[4] Moreover, in Comerica Bank-Detroit v. Allen Indus., Inc., 769 F. Supp. 1408 (E.D.Mich. 1991), the district court approved a settlement that was silent on the issue of contribution protection. Id. at 1410 ("the State/GM agreement is silent as to contribution protection").[5] Thus, the absence of any contractual language providing contribution protection does not preclude the operation of § 113(f)(2).
Second, General Time contends that the Consent Order is not an "administrative or judicially approved settlement" giving rise to § 113 protection because the Consent Order does not mention CERCLA liability.[6] Fleet, however, implicitly argues that a settlement resolving a party's violation of a state's environmental laws releases a PRP from contribution liability under CERCLA.
In C.P.C. Int'l, Inc. v. Aerojet-General Corp, 759 F. Supp. 1269 (W.D.Mich.1991), the defendants argued that a stipulation and consent order involving responsibility for cleaning up groundwater contamination, which was executed before CERCLA was enacted, barred subsequent CERCLA contribution actions brought by other parties. The district court held that the settlement agreement did not bar the plaintiff's claim for contribution because § 113(f)(2) contemplated a settlement of CERCLA liability. Id. at 1283; Akzo Coatings, Inc. v. Aigner Corp., 803 F. Supp. 1380, 1383 (N.D.Ind.1992) (§ 113(f)(2) "insulates a potentially liable party who has settled a CERCLA action").
The Court notes that every case cited by Fleet in support of its contention that the Consent Order is the type of administrative settlement contemplated by section 113(f)(2) involved settlements of CERCLA liability. See e.g., Cannons Eng'g, 899 F.2d at 92; Pretty Products, 780 F.Supp. at 1492; Comerica Bank-Detroit, Inc. v. Allen Indus., 769 F. Supp. 1408 (E.D.Mich.1991); United States v. Union Gas Co., 743 F. Supp. 1144 (E.D.Pa. 1990); New York v. Exxon Corp, 697 F. Supp. 677, 699 (S.D.N.Y.1988). In the instant case, however, unlike the above cited cases and like Aerojet, the Consent Order does not resolve CERCLA liability. Rather the order specifically states that "the Director of the EPD and Respondent desire to resolve the matter of violations of the Georgia Hazardous Waste Management Act and necessary corrective action at the site." (Emphasis added). Consequently, the Court concludes that the Consent Order does not preclude General Time from seeking contribution from Fleet under § 113(f)(1) because it is not a settlement of CERCLA liability.
*476 The Court acknowledges that Aerojet is distinguishable from the instant action because CERCLA was in effect when the Consent Order was executed and that the overriding policy in enacting section 113(f) was to provide PRPs with an incentive to settle. Cannons Eng'g, 899 F.2d at 92 ("[t]his provision was designed to provide PRPs a measure of finality in return for their willingness to settle."); see generally Note, Superfund Settlements: The Failed Promise of the 1986 Amendments, 74 Va.L.R. 123 (1988). Nonetheless, the Court does not believe Congress intended for settlements effected under a state's environmental statute to confer CERCLA contribution protection. Furthermore, the Court's decision does not circumvent the strong pro-settlement policy underlying SARA because the Georgia Hazardous Site Response Act provides its own incentive to settle. See O.C.G.A. § 12-8-96.1(e) (providing contribution protection to those who enter a voluntary consent order with the director of the GEPD).
Additionally, even if a state consent order resolving liability under a state statute is an administrative settlement recognized by under § 113(f)(2), the Consent Order in the instant case would not confer contribution protection because barring Plaintiff's contribution claim would violate due process. Due process requires an opportunity to be heard "at a meaningful time and in a meaningful manner." Mathews v. Eldridge, 424 U.S. 319, 333, 96 S. Ct. 893, 902, 47 L. Ed. 2d 18 (1976). Although an in-depth hearing concerning a settlement is not required, see Cannons Eng'g, 899 F.2d at 93, Comerica, 769 F.Supp. at 1411, due process concerns are magnified when a PRP seeks to use an administrative settlement to extinguish another PRP's contribution rights. Congress' obvious concern with procedural due process is evidenced by Section 122, which was added, and Section 308, which was amended as part of SARA.
Section 122 of CERCLA[7] authorizes the EPA[8] to "facilitate agreements" with potentially responsible parties "in order to expedite effective remedial actions and minimize litigation." 42 U.S.C. § 9622(a). The section, which is a procedural mechanism for the EPA to enter into settlements and carry out its authority under sections 104, 106 and 107,[9] permits the EPA to enter the following types of settlements: (1) a clean-up settlement in which PRP's agree to do the clean up work, 42 U.S.C. § 9622(d), which must be entered as a consent decree subject to mandatory judicial review, Exxon Corp., 697 F.Supp. at 691, unless it is a de minimis administrative settlement, 42 U.S.C. § 9622(d)(1)(A); (2) a cost recovery settlement under section 107, 42 U.S.C.A. § 9622(h)(1); and (3) a de minimis cash-out settlement, which covers a small percentage of the required response costs, under either section 106 or 107. 42 U.S.C. § 9622(g)(1). The latter two settlements may be administrative or judicially approved.
Pursuant to Section 122(i) the head of the department or agency, which has jurisdiction over the proposed settlement, is required to publish notice of both de minimis and cost recovery settlements in the Federal Register with a 30 day public comment period to follow before the settlement may become final. 42 U.S.C. § 9622(i)(1, 2); 28 C.F.R. § 50.7. Section 122's notice and comment procedure are imposed only on the federal government not other plaintiffs.[10]
Section 308 provides that "[i]f an administrative settlement under section 9622 ... has the effect of limiting any person's right to contribution from any party to such settlement, and if the effect of such limitation would constitute a taking without just compensation *477 in violation of the fifth amendment of the Constitution ..., such limitation on the right to contribution shall not be treated as having no force and effect." 42 U.S.C. § 9657. Thus, the SARA amendments demonstrate that Congress recognized the danger in permitting an administrative settlement to extinguish claims for contribution and sought to ensure that an administrative settlement comply with procedural due process requirements before it could bar claims for contribution. See Handly, "CERCLA Contribution Protection: How Much Protection," 22 Envtl.L.Rep. 10,542 (August 1992); Neuman, "No Way Out? The Plight of the Superfund Nonsettlor," 20 Envtl.L.Rep. 10,295 (July 1990).
Case law also supports the view that the statutorily created right of contribution[11] is a property interest, which cannot be extinguished without procedural due process of law. See Aerojet, 759 F.Supp. at 1283. In Aerojet, after concluding that section 113 did not provide the defendants any protection because it did not resolve CERCLA liability, the district court further noted that the consent order failed to qualify as an "administrative or judicially approved settlement" even though it was signed by the Michigan Department of Resources and the attorney general's office because "the negotiation process was devoid of any public hearings or public comment that might give rise to an argument that the contribution claims should be barred." Id. Similarly, in the instant action the Consent Order is devoid of any due process aspects that would make a bar to General Time's contribution claim fair.
Fleet, however, argues that the alternative holding in Aerojet is pure dicta and in conflict with Cannons Engineering and United States v. Serafini, 781 F. Supp. 336, (M.D.Pa.1992). In Cannons Engineering the First Circuit held that non-settling PRPs do not have a due process right to be included in or kept aware of the settlement process. 899 F.2d at 93. In Serafini the district court held that PRPs do not have a due process right to participate in a settlement that gives rise to the contribution protection conferred under section 113(f)(2). 781 F.Supp. at 339. General Time, however, does not argue that procedural due process requires the right to participate or to kept aware of the settlement process. Rather, Plaintiff argues that due process mandates that a PRP receive notice and an opportunity to comment on the settlement before it can be precluded from seeking contribution.
Moreover, in contrast to the instant action, the settlements in Cannons Engineering and Serafini were both published in the Federal Register. See Serafini, 781 F.Supp. at 339 (plaintiffs received constructive notice of settlement, because, pursuant to section 122(i), the proposed settlement was published in the Federal Register on no less than five separate occasions);[12]Cannons Engineering, 899 F.2d at 83 ("[a]s required by statute, notice of the decrees' proposed entry was published in the Federal Register.") In fact, in Serafini the publication of the proposed settlement effectively foreclosed the non-settlors' due process arguments. 781 F.Supp. at 339. Consequently, neither case contradicts the recognition in Aerojet that a statute barring claims for contribution contemplates that the barred party be provide notice and an opportunity to be heard.
Fleet, however, citing Georgia Rule 391-1-2-.06(4)(a)[13], O.C.G.A. §§ 12-8-73[14] and 12-2-2(c)(2), *478 asserts that General Time had an opportunity to appeal the Consent Order and chose not to do so. O.C.G.A. § 12-8-73 provides a two step test for determining whether an action by the GEPD is reviewable. First, it must be an order or action taken by the Director. Second, it must aggrieve or adversely affect a party. O.C.G.A. §§ 12-8-73, 12-2-2(c)(2).
Although the Consent Order meets the first step of the test, the Court concludes it fails the second step. "Persons are aggrieved or adversely affected, ..., where the challenged action has caused or will cause them injury in fact and where the injury is to an interest within the zone of interests to be protected or regulated by the statutes the director is empowered to administer and enforce." O.C.G.A. § 12-2-2(c). Persons are not aggrieved or adversely affected, however, "by an order of the director issued pursuant to Part 2 of Article 3 of Chapter 8 of this title, the `Georgia Hazardous Site Response Act,' unless or until the director seeks to recover response costs, enforce the order, or recover a penalty for violation of such order." O.C.G.A. § 12-2-2(c)(3)(B) (emphasis added). In the instant case, the Consent Order does not concern any of the italicized exceptions. Therefore, General Time had no opportunity to contest the Consent Order in order to protect its contribution rights.
Furthermore, even if the Consent Order is an action to enforce an order, there is absolutely no evidence that General Time was ever given notice that the Consent Order had been executed so that General Time could challenge the order. Consequently, the Court concludes that section 113(f)(2) of CERCLA does not bar Plaintiff's claim for contribution because General Time was not provided notice or an opportunity to be heard.
II. O.C.G.A. § 12-8-96.1(f)
Fleet further claims that even if it does not have protection from contribution under 42 U.S.C. § 9613, O.C.G.A. § 12-8-96.1(f) bars Plaintiff's claim for contribution. O.C.G.A. § 12-8-96.1(f) provides:
A person who has voluntarily agreed to perform corrective action pursuant to an administrative consent order with the director shall not be liable for claims for contribution regarding matters addressed in the administrative consent order.
Admittedly, Fleet agreed to perform corrective action pursuant to an administrative consent order with the director. Nevertheless, as stated above, General Time was not provided with notice or an opportunity to be heard. Consequently, the Consent Order may not bar Plaintiff's claim.[15]
CONCLUSION
Accordingly, for the reasons stated above, Defendant's motion to dismiss is DENIED.
SO ORDERED.
NOTES
[1] Plaintiff contends that Defendant's motion should be treated as a motion for summary judgment since Fleet attached a Consent Order and a letter to its motion. Nevertheless, since the Court may take judicial notice of the Consent Order, Mullis v. United States Bankruptcy Court, 828 F.2d 1385, 1388 (9th Cir.1987), and Fleet agrees for the Court to decide the motion without reference to the letter, the Court will not convert Fleet's motion to dismiss to a motion for summary judgment.
[2] Section 113(f)(1) and (2) provide in pertinent part:
(1) Contribution
Any person may seek contribution from any other person who is liable or potentially liable under 9607(a) of this title, during or following any civil action under 9606 of this title or under 9607(a) of this title. Such claims shall be brought in accordance with this section and the Federal Rules of Civil Procedure, and shall be governed by Federal Law.
[3] 42 U.S.C. § 9613(f)(2) provides:
(2) Settlement
A person who has resolved its liability to the United States or a State in an administrative or judicially approved settlement shall not be liable for claims in contribution regarding matters addressed in the settlement. Such settlement does not discharge any of the other potentially liable persons unless its terms so provide, but reduces the potential liability of the others by the amount of the settlement.
[4] The same is true for the protection provided for under O.C.G.A. 12-8-96.1(f).
[5] The absence of explicit contribution protection was not at issue in Comerica. Nevertheless, the district court implicitly recognized that such language was unnecessary by approving the settlement.
[6] Plaintiff raised this argument for the first time at oral argument.
[7] The section is titled "Settlements."
[8] The statute specifically gives settlement authority to the President but the power has been subdelegated to the Administrator of the EPA. Cannons Eng'g, 899 F.2d at 83 n. 1.
[9] Section 104 permits the EPA to initiate its own site clean up. 42 U.S.C. § 9604. The Superfund money used to finance the clean-up may then be recovered pursuant to a section 107(a)(4)(A) cost recovery action against PRPs. Under section 106 the EPA may either issue an administrative orders or seek injunctive relief mandating that the PRPs clean up the site themselves. 42 U.S.C. § 9606(a).
[10] Thus, § 9622(i) is inapplicable to the instant action.
[11] The right of contribution does not exist as a matter of federal common law. Texas Indus., Inc. v. Radcliff Materials, Inc., 451 U.S. 630, 638, 101 S. Ct. 2061, 2065, 68 L. Ed. 2d 500 (1981).
[12] The Court questions whether constructive notice is sufficient. See Neuman, "No Way Out? The Plight of the Superfund Nonsettlor," 20 Envtl. L.Rep. 10,295 (July 1990) (discussing Tulsa Professional Collection Service v. Pope, 485 U.S. 478, 490, 108 S. Ct. 1340, 1347, 99 L. Ed. 2d 565 (1988), which held that before a creditor's rights against decedent may be cut off under a probate nonclaim statute, the government is required to give actual notice of the probate proceeding to all known or reasonably ascertainable creditors.)
[13] Georgia Rule 391-1-2-.06(4)(a) provides:
Within thirty days of the issuance of any order, notice, or any other action not covered in paragraphs (1) through (3) above under any of the laws administered by DNR and in which the legal rights, duties or privileges of a person are required by law to be determined by DNR after an opportunity for a hearing, any person aggrieved or adversely affected thereby may file may file a written petition for hearing with the clerk.
[14] The statute provides:
All hearings on and the review of contested matters, orders, or permits and all hearings on and the review of any other enforcement actions or orders under this article shall be provided and conducted in accordance with subsection (c) of Code Section § 12-2-2. The hearing and review procedure provided herein is to the exclusion of all other means of hearing or review.
O.C.G.A. § 12-8-73.
[15] The Court also notes that even if due process requirements were met, the Consent Order explicitly states that it covers "violations of the Georgia Hazardous Waste Management Act and necessary corrective action." The GHWA contains its own provision permitting the director to enter into a consent order for necessary corrective action, O.C.G.A. § 12-8-71(b), without a corresponding section providing for or prohibiting an action for contribution where there is a consent order. General Time, however, is pursuing its statutory state law claim pursuant to § 12-8-96.1(e). Arguably, if 12-8-96(b) is not merely redundant of 12-8-71(b), General Time is not precluded from seeking contribution since Fleet and the GEPD presumably were proceeding under § 12-8-71(b) when they executed the Consent Order.
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814 S.W.2d 400 (1991)
Marie M. CRENSHAW, as Independent Co-Executrix of the Estate of Lewis L. Crenshaw, and Individually, and as Surviving Wife of Lewis L. Crenshaw, and as Co-Trustee and Beneficiary of the Marie M. Crenshaw Trust, Appellant,
v.
Cynthia Crenshaw CHAPMAN, as Independent Co-Executrix of the Estate of Lewis L. Crenshaw, and Individually, and as Trustee and Beneficiary of the Cynthia Crenshaw Chapman Trust, and as Remainder Beneficiary of the Marie M. Crenshaw Trust, et al., Appellees.
No. 10-90-085-CV.
Court of Appeals of Texas, Waco.
April 11, 1991.
Rehearing Denied August 8, 1991.
*401 Donald J. Baker, Baker, Hancock & Pollard, P.C., Waco, for appellant.
Vance Dunnam, Jr., Dunnam & Dunnam, Waco, Jack Welch, Welch & Butler, Marlin, for appellees.
Before THOMAS, C.J., and CUMMINGS and VANCE, JJ.
OPINION
CUMMINGS, Justice.
In this probate case, we must decide if a trial by jury was improperly denied and if a "freeze" order is valid. Because we believe that a jury trial was properly requested and that the "freeze" order constituted an invalid injunction, we reverse the trial court's orders and remand the cause.
Lewis Crenshaw married Marie Crenshaw in May 1983. He was killed in an auto accident in April 1988, leaving a valid will which was admitted to probate in the County Court of Falls County. Marie Crenshaw and Cynthia Crenshaw Chapman, his daughter by a prior marriage, were appointed independent co-executrices of his estate by the county court and named co-trustees of the Marie M. Crenshaw Trust by the will.
On September 11, 1989, Marie filed a declaratory judgment action in the Falls County district court, seeking classification of certain assets of the estate as community property. Cynthia responded with a counterclaim, alleging breach of fiduciary duty and gross mismanagement. Marie filed an answer to the counterclaim on October 4, made a jury demand on December 6, and paid the jury fee on December 7. On December 6, the court coordinator set the case for trial on the jury docket on February 6, 1990, and, alternatively, on March 6 and notified all attorneys of the settings. No other settings had been made at that time.
On December 15, Cynthia filed a motion to remove Marie as co-executrix of the estate and co-trustee of the trust, alleging gross misconduct or gross mismanagement and legal incapacity to serve due to a conflict of interestgenerally the same allegations as stated in the counterclaim. The court then ordered that the motion to remove be set for trial on the non-jury docket on January 3, 1990, 19 days after it was filed.
All of these activities took place in a single cause, no. 30,010 on the docket of the Falls County district court.
The January 3 setting was passed. On January 17 the court, over Marie's objections, conducted a non-jury trial, resulting in her removal as co-executrix and co-trustee and in the order imposing a "freeze" on $250,000 which she had withdrawn from the estate to satisfy a specific bequest of the will.
Marie brings thirty-six points of error. Points one through five complain of the denial of a jury trial. Points six through twelve assert that the "freeze" order is invalid because it is an injunction which does not comply with mandatory requirements of the rules of civil procedure. Point thirteen complains of a lack of personal service of citation when the motion to remove was filed. Points fourteen through sixteen assert procedural errors. Points seventeen through twenty question the sufficiency of the evidence for denial of her attorney's fees. Points twenty-one through thirty-six argue that the evidence is legally and factually insufficient to support the court's findings which led to her removal.
Section 21 of the Probate Code provides that "[i]n all contested probate ... proceedings in the district court ..., the parties shall be entitled to trial by jury as in other civil actions." Tex.Prob.Code Ann. § 21 (Vernon 1980) (emphasis supplied).
When a written request for a jury trial is filed and the jury fee paid a reasonable time before the date set for trial of the cause on the non-jury docket, not less than thirty days in advance, a jury trial has been *402 properly demanded. Tex.R.Civ.P. 216(a), (b). A request for jury and payment of the fee in advance of the deadline creates a presumption that the jury demand was made within a "reasonable time." Wittie v. Skees, 786 S.W.2d 464, 466 (Tex.App. Houston [14th Dist] 1990, writ denied). This presumption may be rebutted, but in absence of rebuttal, the right is absolute. Id. When a jury has been properly demanded, a jury trial should be held on all fact issues which are the proper subject of a jury trial unless any of those issues are within the scope of an order granting a separate trial. Tex.R.Civ.P. 174; Burnett v. Ft. Worth Light & Power Co., 117 S.W. 175, 176 (Tex.Civ.App.1909, no writ); Sheffield v. Scott, 620 S.W.2d 691, 694 (Tex.Civ. App.Houston [14th Dist.] 1981, writ ref'd). By making her demand on December 6 and paying the fee on December 7, Marie made a timely jury demand. See Tex.R.Civ.P. 216(a), (b). In our view (and in the view of Cynthia's counsel who acknowledged on the record that the counterclaim had merged with the motion to remove), the motion to remove was nothing more than an amended pleading and the fact issues asserted in it should have been tried along with all other fact issues to the jury which Marie had demanded. By setting a trial on the motion for removal separate and apart from the rest of the case, the court effectively deprived Marie of her right to a jury trial. Because she had timely requested a jury trial and had timely paid the jury fee in cause no. 30,010, which included the fact issues raised in her declaratory judgment action, the counterclaim, the motion to remove, and all other live pleadings on file, the trial court had no discretion to refuse her a jury trial on those issues. See Tex.Prob.Code Ann. § 21 (Vernon 1980); Tex.R.Civ.P. 216; Burnett, 117 S.W. at 176; Wittie, 786 S.W.2d at 466.
Cynthia argues that the question of Marie's removal is akin to one's "standing" to bring a will contest which is properly heard by the court without a jury. That reasoning is flawed. See Sheffield, 620 S.W.2d at 694. Her right to prosecute the declaratory judgment action is not dependent only upon her capacity as an executrix or trustee, but is also conferred on her as a devisee of the will and a beneficiary under the trust. See Tex.Civ.Prac. & Rem.Code Ann. § 37.005 (Vernon 1991).
Points one through five are sustained.
Crenshaw's point six, which asserts the invalidity of the temporary injunction or "freeze" imposed by the court on the $250,000 in estate assets withdrawn by Crenshaw, is also sustained. To be valid, an order granting a temporary injunction must set a bond to be given as security by the person seeking the injunction. See Tex. R.Civ.P. 684. The order must also set a date for trial on the merits. See id. at 683. The order which imposed the "freeze" in this case neither fixed a bond nor included an order setting the case for trial regarding the ultimate relief sought. The temporary injunction or "freeze" is therefore fatally defective and void ab initio, requiring reversal. See Interfirst Bank San Felipe v. Paz Construction Company, 715 S.W.2d 640, 641 (Tex.1986); Goodwin v. Goodwin, 456 S.W.2d 885, 885-86 (Tex. 1970).
Given our disposition of points one through six, we do not reach the remaining points. We reverse the order of the trial court, dissolve the temporary injunction ("freeze" order), and remand the cause to the trial court for a jury trial on all contested fact issues.
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814 S.W.2d 614 (1991)
Edward J. ALEXANDER, Appellant,
v.
LINK'S LANDING, INC., Respondent.
No. 16914.
Missouri Court of Appeals, Southern District, Division One.
July 23, 1991.
Motion for Rehearing and/or Transfer Denied August 14, 1991.
*615 Rexford H. Caruthers, Patricia N. McCloskey, Caruthers, Herzog, Crebs & McGhee, St. Louis, for appellant.
Charles E. McElyea, Philip J. Morgan, Phillips, McElyea, Walker & Carpenter P.C., Camdenton, for respondent.
Motion for Rehearing and/or Transfer to Supreme Court Denied August 14, 1991.
PER CURIAM.
The claims in this judge-tried case were asserted in the first amended petition of plaintiff Edward J. Alexander against defendant Link's Landing, Inc., and the latter's first amended counterclaim against plaintiff.
Plaintiff's pleading contained three counts. Count I sought rescission of a *616 contract in which plaintiff agreed to buy a boat from defendant. The ground for rescission was an alleged misrepresentation. Count II sought rescission of the same contract because defendant failed to assign the manufacturer's statement of origin of the boat to plaintiff. Count III sought actual and punitive damages for defendant's alleged conversion of the boat some 17 months after plaintiff had taken possession of it under the purported contract.
Defendant's first amended counterclaim sought $3,734.10 (plus interest) from plaintiff for sundry goods and services allegedly supplied plaintiff by defendant.
The trial court received evidence, made comprehensive findings of fact and conclusions of law, and entered judgment awarding plaintiff $10 "nominal damages" and $500 punitive damages on Count III of his first amended petition. The judgment granted no relief on Counts I and II, ruling they were "in the alternative to Count III." The judgment awarded defendant $1,155.88 on its first amended counterclaim.
Plaintiff appeals, but assigns no error regarding the award on the counterclaim. Plaintiff complains the damages awarded him on his conversion claim were too low. He also avers the trial court erred by declining to hold defendant's failure to "fully complete the manufacturer's statement of origin on the boat voided the assignment of title" to him.[1]
At the conclusion of the evidence, the trial court invited the parties to submit proposed findings of fact and conclusions of law. Defendant submitted extensive findings of fact. Plaintiff agreed with most of them. Our account of the facts begins with those on which the parties agreed.
Defendant is a corporation engaged in the business of selling, servicing and storing boats. At all times pertinent herein, plaintiff had a Missouri license "to act as a dealer in the acquisition and sale of boats."
On or about May 22, 1987, plaintiff, as buyer, and defendant (acting by David Logsdon, its general manager), as seller, signed a "sales agreement" for a Trojan boat. In partial payment, plaintiff traded in a Century boat, leaving a balance of $46,067 due defendant. Plaintiff arranged for a loan from Bank of Lake of the Ozarks to pay this sum "or a portion thereof."
A manufacturer's statement of origin to the Trojan boat showed it was a new boat and its first transfer in ordinary trade and commerce was from the manufacturer to defendant. This document was delivered to the bank, but the assignment form on the reverse side was neither filled in nor signed. Simultaneously, the bank paid defendant the balance of the purchase price. The statement of origin was never delivered to the "license bureau" for registration of the Trojan boat in plaintiff's name.
The Trojan boat remained at defendant's marina. During the 1987 summer, plaintiff and his employees used the Trojan boat, and while doing so displayed plaintiff's "dealer number" on it.
In May, 1988, plaintiff's bank loan was "renewed." A bank official noticed the manufacturer's statement of origin had not been signed by a representative of defendant. The following month it was signed by Logsdon at the bank, but his signature was not notarized.
Plaintiff and his employees used the Trojan boat during the 1988 summer. It remained at defendant's marina. Plaintiff never paid any storage charges.
Plaintiff never attempted to sell the Trojan boat, but insisted defendant try to do so. Defendant began trying in the summer of 1987, and attempted to keep the boat clean to facilitate the sale.
*617 As of September 1, 1988, plaintiff owed defendant $1,155.88 for sundry goods and services.
In October, 1988, defendant removed the Trojan boat from the water and placed it in storage. At that time, plaintiff still owed defendant $1,155.88 on account.
If someone had a delinquent account with defendant, it was defendant's normal practice to prevent the debtor from using his boat, and defendant would do no additional work on it unless the account was paid. One of the reasons defendant removed the Trojan boat from the water in October, 1988, was because plaintiff's account was delinquent. Additionally, defendant automatically "winterized" boats when it appeared necessary, even though customers did not authorize it.
The trial court found other facts besides those on which the parties agreed. Two pertinent to this appeal are set forth below. Both are supported by substantial evidence.
The fair market value of the Trojan boat on October 1, 1988, was $80,000.
Defendant's lawyer advised plaintiff's lawyer by letter of June 16, 1989, that plaintiff could take possession of the Trojan boat and use it.
In addition to those findings, we note plaintiff admitted at trial he knew about the letter of June 16, 1989, from defendant's lawyer regarding possession of the Trojan boat.
On plaintiff's conversion claim, the trial court ruled:
"... Defendant did convert the ... Trojan [boat] to its own use from October, 1988 to June, 1989. Defendant did not have a right to retain possession of the boat in question until its statement was paid.... However, Plaintiff has failed to show that he suffered any damages other than nominal.
... Defendant's conduct in refusing to allow Plaintiff to take possession of said boat during October of 1988 was willful, wanton or malicious and Plaintiff is entitled to punitive damages. However, punitive damages are tempered by the facts that Defendant was attempting to sell the boat for Plaintiff and restricted use of the boat to keep it clean and facilitate the sale. Further, one cannot use the boat in the winter months. Plaintiff was allowed use of the boat in June, 1989."
Plaintiff's first point relied on is:
"The trial court erred when it failed to award [plaintiff] damages for conversion measured by the reasonable market value of the converted property on the day of conversion plus interest therefrom."
Plaintiff points out the measure of damages in conversion suits is generally the reasonable market value of the property at the time of conversion. Farmers & Merchants Bank of St. Clair v. Borg-Warner Acceptance Corp., 665 S.W.2d 636, 639[2] (Mo.App.1983); Weldon v. Town Properties, Inc., 633 S.W.2d 196, 198[1] (Mo.App.1982); Breece v. Jett, 556 S.W.2d 696, 709 (Mo.App.1977).
Defendant responds by directing us to Vetter v. Browne, 231 Mo.App. 1147, 85 S.W.2d 197 (1935). There, the owner of an automobile claimed he parked it on a parking lot and surrendered possession to agents of the lot owner, and when he returned for the automobile several hours later the lot owner refused to surrender possession. The automobile owner recovered the automobile five months later. Regarding his measure of damages, the opinion explained:
"Where an automobile has been converted by another and the vehicle has thereafter been returned and accepted by the owner thereof, the measure of damages is the difference between the value of the car at the time of the conversion and the value of the car at the time of the return, plus the reasonable value for the loss of the use of such vehicle during the period of time that the owner has been deprived thereof. (Citations omitted.)" 85 S.W.2d at 199.
Plaintiff maintains that in order to mitigate damages, the tort-feasor must prove return of the property and its acceptance by the rightful owner. Plaintiff asserts he "never accepted return of the tendered [Trojan] Boat." Consequently, insists *618 plaintiff, defendant's attempt to tender return of the boat cannot be considered in mitigation of damages.
The positions of the parties throughout this saga have been prevaricative. In Count III of his first amended petition, plaintiff pled he is the owner of the Trojan boat. At trial, plaintiff disclosed he paid no sales tax on it. Asked why, he responded: "I'm a boat dealer.... And I didn't purchase the boat."
Later, plaintiff testified he acquired the Trojan boat for pleasure and business. He avowed he never tried to sell it, yet he stipulated that he insisted defendant try to sell it.
Elsewhere in his testimony, plaintiff said that on or about May 22, 1987 (the date on the "sales agreement"), Logsdon said he wanted the Trojan boat back in August, 1987, and "he would return the money that the bank has given him for that boat, for the use of that boat." Plaintiff quoted Logsdon as saying he did not sign the manufacturer's statement of origin because "he wanted to sell that boat as a new boat in August or any time prior to August."
If this means (a) Logsdon intended to return to plaintiff the money defendant received from the bank in payment of the balance due on the purchase price of the Trojan boat, and (b) defendant would sell the Trojan boat and keep the proceeds, plaintiff would end up with neither the Trojan boat nor the Century boat he traded ina bizarre result that would leave plaintiff with a substantial loss.
If it means (a) Logsdon intended to return to the bank the money defendant received from it in payment of the balance due on the purchase price of the Trojan boat, and (b) defendant would sell the Trojan boat and keep the proceeds, plaintiff would still end up with neither the Trojan boat nor the Century boat, again sustaining a substantial loss (even assuming the bank applied the returned money against plaintiff's loan).
If it means (a) Logsdon intended to return to plaintiff the money defendant received from the bank in payment of the balance due on the purchase price of the Trojan boat, and (b) defendant would sell the Trojan boat for a commission and remit the balance of the proceeds to plaintiff, defendant would end up with only a sales commission and the Century boat, a substantial loss for defendant.
It requires scant intelligence to recognize none of these scenarios is plausible.
Logsdon's testimony was similarly arcane. He testified that when defendant undertakes to sell a customer's boat, defendant and the customer sign a "brokeraging" agreement. He recalled no such agreement with plaintiff regarding the Trojan boat and avowed defendant had none in its files. Despite that, Logsdon admitted, "I had tried to sell it myself a few times."
Later in his testimony, Logsdon was shown a document dated "4/25/87." He characterized it a "sales agreement" regarding the Trojan boat. He identified handwriting on the document as his. According to Logsdon, it read: "Boat will be put up for sale in August. Alexander will get to 68,000. No storage charges will be incurred."
In Pantz v. Nelson, 234 Mo.App. 1043, 135 S.W.2d 397 (1939), the court cited Ward v. Moffett, 38 Mo.App. 395 (1889), for the following propositions. In actions of trover, if the owner regains his property, the measure of damages is what he has lost by the temporary conversion, and no more. Evidence that the tort-feasor has relinquished all claim to the property, that he never removed it from the place where it originally was, and never in point of fact converted it to his own use, has been held admissible in mitigation of damages. If the tort-feasor came lawfully into possession of the goods and his refusal to surrender them was qualified, or if the conversion was technical only, or without willful wrong on his part, and the property remained entirely in status quo, the tort-feasor may compel the owner to accept it in mitigation of damages. Pantz, 135 S.W.2d at 403.
*619 Given the abstruse tale presented by the record here, we believe the above principles are uniquely suited to this case.
In so deciding, we do not overlook the passage in Pantz indicating tender must be made before suit is filed. 135 S.W.2d at 403. Here, the letter from defendant's lawyer tendering plaintiff possession of the Trojan boat came after suit was filed. However, plaintiff's original petitionfiled October 4, 1988contained only one count; it sought rescission of the contract and judgment against defendant for $78,250, the alleged "contract purchase price" of the Trojan boat. That relief is consistent with defendant's retention of the Trojan boat. Plaintiff's conversion claim was first asserted in the first amended petition. It averred the conversion occurred on or about October 15, 1988. That date was eleven days after plaintiff's original petition was filed. It is thus evident suit was pending before the alleged conversion occurred. Obviously, there can be no tendered return of converted property until conversion occurs. On these facts, the rule that tender must come before suit is filed is patently inapplicable.
Our review of this court-tried case is governed by Rule 73.01(c), Missouri Rules of Civil Procedure (1991), as construed in Murphy v. Carron, 536 S.W.2d 30 (Mo. banc 1976). The judgment of the trial court will be sustained unless there is no substantial evidence to support it, unless it is against the weight of the evidence, unless it erroneously declares the law, or unless it erroneously applies the law. Id. at 32[1].
Here, plaintiff docked the Trojan boat at defendant's marina after the transaction of May 22, 1987. It remained there during the 1987 and 1988 summers, during which plaintiff and his employees used it whenever they chose, displaying plaintiff's "dealer number" on it. During the period defendant withheld the Trojan boat from plaintiff, it remained on defendant's property. Defendant never claimed ownership, but insisted only that plaintiff pay his account. Logsdon testified the Trojan boat was "shrink wrapped"[2] after it was pulled from the water in October, 1988.
On such a record, we cannot convict the trial court of erroneously applying the law by failing to award plaintiff the reasonable market value of the Trojan boat as of the date of the alleged conversion. As indicated earlier, we believe the trial court was justified by Pantz, 135 S.W.2d 397, in holding plaintiff was entitled to only such damages as he sustained by reason of defendant withholding the Trojan boat from him during the period from on or about October 15, 1988, until June 16, 1989.
Plaintiff's first point is denied.
His second point:
"Even if it was proper for the trial court to compel plaintiff to accept tender of the Boat to mitigate damages, the trial court erred by failing to award damages in an amount equal to the diminution in value of the Boat during the period of conversion."
In his reply brief, plaintiff forthrightly concedes he presented no evidence of the fair market value of the Trojan boat at the time defendant tendered its return. However, explains plaintiff, he did not anticipate the trial court would refuse to award him the fair market value of the Trojan boat as of the date of the alleged conversion.[3]
Evidence must be adduced to fix the measure of damages. Grimm v. Sinnett, 567 S.W.2d 418, 421[10] (Mo.App. 1978). Damages can never be presumed. Newton Burial Park v. Davis, 78 S.W.2d 150, 153-54[3] (Mo.App. 1934). Where the measure of damages is the decline in value of property between the date of its conversion *620 and the date of its return, there must be evidence of its value as of those dates. Cf. Misch v. C. B. Contracting Co., 394 S.W.2d 98, 101[4] (Mo.App.1965).
As there was no evidence the Trojan boat declined in value during the time defendant withheld it from plaintiff, the trial court did not err by failing to award plaintiff damages for diminution in value. Plaintiff's second point is denied.
Before leaving it we noteand defendant concedesthat where a conversion is established, the owner of the converted property is entitled to at least nominal damages, and may recover punitive damages if the conversion is malicious. Jackson v. Engert, 453 S.W.2d 615, 617[2] (Mo.App. 1970). Defendant did not appeal and plaintiff does not complain the punitive damages awarded him were too low, hence those damages are not in dispute.
Plaintiff's third (and final) point is:
"The trial court erred by failing to rule that [defendant's] failure to fully complete the manufacturer's statement of origin on the [Trojan] boat voided the assignment of title to [plaintiff]."
In arguing this point, plaintiff proclaims the trial court should have held the attempted transfer of ownership of the Trojan boat was void ab initio for defendant's "failure to complete all necessary documents of title."
To maintain a suit for conversion, a plaintiff must have title to, or a property right in, and a right to immediate possession of, the property concerned at the time of conversion. Osborn v. Chandeysson Electric Co., 248 S.W.2d 657, 663[8] (Mo. 1952); Twellman v. Lindell Trust Co., 534 S.W.2d 83, 97[25] (Mo.App.1976).
Plaintiff neglects to explain what the effect would be on his conversion claim should we sustain his third point and hold he never became owner of the Trojan boat. While that is an intriguing subject, we need not probe it.
Defendant's failure to assign the manufacturer's statement of origin to plaintiff was pled as the ground for rescission of the contract in Count II of plaintiff's first amended petition. As reported earlier, the trial court, upon awarding plaintiff nominal and punitive damages on his conversion claim (Count III), held Counts I and II were in the alternative to Count III.
The trial court was correct. Count II sought rescission of the contract and judgment against defendant for $78,317, the alleged "full amount" of the purchase price of the Trojan boat.[4] Awarding plaintiff this sum in addition to the nominal and punitive damages on Count III would result in his receiving a refund of the entire purchase price, plus free use of the new Trojan boat during the 1987 and 1988 summers, plus nominal and punitive damages for its alleged conversionan obvious windfall.
Rescission of a contract extinguishes it as effectually as if it had never been made, and restores the parties to the positions they occupied before the contract was executed. Henges Co., Inc. v. May, 223 S.W.2d 110, 113[6] (Mo.App. 1949). In other words, the parties are revested with their original rights regarding the subject matter, and they are no longer bound by the contract in regard to their subsequent actions. Id.
It is obvious a judgment rescinding the contract of sale of the Trojan boat and restoring plaintiff and defendant to the positions they occupied before executing it would mean plaintiff never became owner of such boat or entitled to its possession. Consequently, he would have no basis for his conversion claim. We hold plaintiff's claim for rescission and his conversion claim are inconsistent.
Where a party has a right to pursue one of two inconsistent remedies, makes his election, institutes suit and prosecutes it to final judgment, or receives something of value on the claim, he cannot thereafter pursue another and inconsistent remedy. Pemberton v. Ladue Realty & *621 Construction Co., 359 Mo. 907, 224 S.W.2d 383, 385[5] (1949).
Here, plaintiff prosecuted his conversion claim to final judgment and received an award of $10 nominal and $500 punitive damages. The punitive damages were never in dispute in this appeal, and thus will be affirmed. We have rejected plaintiff's complaints that he should have been granted more actual damages than the $10 nominal damages the trial court awarded. That being so, plaintiff is assured a money judgment on Count III of his first amended petition totaling $510. Having won that relief, we hold plaintiff cannot seek reversal of that portion of the judgment denying the rescission claim and pursue it anew on remand. Consequently, we need not, and do not, decide whether the trial court erred in failing to hold plaintiff never became owner of the Trojan boat. Plaintiff's third point is moot.
Judgment affirmed.
NOTES
[1] Plaintiff's assertion that he never acquired ownership of the boat seems repugnant to a claim for conversion of it, as discussed infra. Plaintiff's brief is confusing in other respects. It begins by erroneously identifying Count I as the claim that defendant's failure to assign the manufacturer's statement of origin to plaintiff "voided the attempted transfer of title." It then erroneously identifies Count II as the conversion claim. It ignores the count seeking rescission for misrepresentation (Count I). Additionally, in flagrant disregard of Rule 84.04(h), Missouri Rules of Civil Procedure (1990), the statement of facts contains no page reference to the legal file or transcript.
[2] Logsdon explained "shrink wrapped" is a term "for winter storing of boats." He added: "It's a protective cover that we just literally heat on the boat, and it protects it from the rain, the snow. There is nothing that can get in the boat."
[3] Plaintiff argues that if his first point is denied, he should receive a new trial for the purpose of establishing the fair market value of the Trojan boat at the time of its tendered return. Plaintiff cites no authority demonstrating he is entitled to such novel relief, and we are aware of none.
[4] Plaintiff's original petition, as we have seen, alleged the price was $78,250.
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195 F. Supp. 732 (1961)
Hilda Ruth BORDERS, A Minor, by her Father and Next Friends, Louie Borders, et al.
v.
Dr. Edwin L. RIPPY et al.
Civ. No. 6165.
United States District Court N. D. Texas, Dallas Division.
June 27, 1961.
W. J. Durham, C. B. Bunkley, Dallas, Tex., U. Simpson Tate, Wewoka, Okl., Thurgood Marshall, New York City, J. L. Turner, Jr., Dallas, Tex., Robert L. Carter, New York City, Kenneth F. Holbert, Dallas, Tex., for plaintiffs.
H. W. Strasburger, Mark Martin, Dallas, Tex., for defendants.
DAVIDSON, District Judge.
We are here now faced with the mandate of the Appellate Court directing us *733 to enter a decree setting aside the plans of the School Board of Dallas which gave the child and the parents the right of choice along with integration and instead to enter a decree of forcible integration in disregard of the schools' plans and the constitution and laws of Texas.
Should a judge act when his conscience says no and where every sense of right and fair play says no, or should he under such conditions hold himself disqualified?
To abolish a long established social status or educational system by force is un-American. Such may be amicably done only by consent of the parties affected. The Court's decree may take effect through the office of the United States Marshal or with the soldier's bayonet, it is force just the same.
The people of Dallas by 4 to 1 majority vote stand for segregation. They have integration now not by consent, not by choice, but by force. If the medicine is bad and the result the same, what matters it to those concerned if it is given in twelve doses instead of one?
In a case as recently decided as December 8, 1960, Mallery, Judge, Wash., 357 P.2d 702, 703, in the Price v. Evergreen Cemetery Company, it said:
"This case is more significant for what it reveals, than for what it decides. It reveals an ultimate aspiration of the Negro race, * * *
"This case demonstrates that the Negro desegregation program is not limited to public affairs. The right of white people to enjoy a choice of associates in their private lives is marked for extinction by the N.A.A. C.P. Compulsory total togetherness of Negroes and whites is to be achieved by judicial decrees in a series of Negro court actions."
This unhappy controversy is not of our making. Our white people assuredly did not seek it. Our Negro friends and citizens did not start it. It is here, here by remote origin and control, one of many suits brought throughout the South. The man from afar understands not our problems as do we. Our slogan hath ever been rule by consent of the governed. Our founding fathers could and would have solved this problem without bitterness. To them local self-government was a complete answer. They could cheerfully observe the rule they had helped to make.
Our laws are not unilateral in their operation. Where the colored child may be embarrassed and given an inferiority complex by not being allowed to sit in white classes in the school room, then in the same school room the white child through the same psychological process may be found also subject to inferiority complex by reasons of being required by force to sit in classes which neither she nor her parents desired. The rights of the one are equal to the rights of the other.
Our colored neighbor is not unlike his white brother in the love of authority and the exercise of power. We have in our land a chain of black belt counties reaching from the Potomac to the Brazos in which the blacks hold a majority vote. The denial of the right to rule or the failure of the duty to rule well will in a future day rise to a national controversy. The N.A.A.C.P. will have every reason to be in that controversy and fight that it now has in this.
When state lines are abandoned for one purpose they are broken for all purposes. We cease to be a nation of federated states but a solidified whole.
The right to local self-government is everywhere a right of free men. Crush to earth, 'twill rise again, for 'tis an inseparable part of freedom itself.
The late Justice Brandeis once declared: The most comprehensive and valued right of man is to be let alone. Olmstead v. United States, 277 U.S. 438, 478, 48 S. Ct. 564, 72 L. Ed. 944. Dallas is not being let alone. Her school system is not being let alone. The laws and constitution are not being let alone but are all changed without the consent of those who must live under them.
Movement towards social and economic equality is towards a sameness of existence. *734 The closer we come to what people call "one" the nearer we are to the end beyond which the excellence of achievement halts at a dead eddy.
Never have we at any time entertained one unkind thought toward the colored race. My wet nurse as a child was a Negro woman. My playfellows were often her children. She was good to me. I would not hold back her race but would give them equal opportunity with any other race in matters of choice. I would not hold them back. I would say to the colored child as I would say to the white child, hitch your wagon to a star and rise. Yes rise, rise by the course of excellence and superiority of achievement, and not by force.
Our Constitution was written to forestall unhappy conditions as that which now confronts us. When the Constitution was submitted to the several states for ratification an almost uniform protest went up from the states because it did not contain a bill of rights. Such was especially true in the states of Virginia, New York and North Carolina. The great oratorical powers of Patrick Henry seconded by the outstanding voice of George Mason almost defeated ratification in Virginia. The vote stood 189 to 179. Madison who was pushing the ratification had the backing of Washington else he would have lost. And then to succeed he promised the convention that every effort would be made to amend the Constitution with a bill of rights, and such was true of North Carolina and other states. In fact, North Carolina refused to ratify at all until the amendments were added.
When the Constitution was ratified and most of the states had asked for the adoption of a bill of rights as an amendment thereto, it is worthy of note that the first item in the proposed bill of rights coming up from each state dealt with the rights of the state of local control in language like this:
"The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people."
Nowhere in the Constitution is the matter of education delegated to the Federal government. Our late President Franklin D. Roosevelt, though liberal as he was in thought, declared: "All powers not expressly delegated to the national government still belong to the states."
The Constitution is the compass, the rudder and the anchor of the ship of state. Without it comes tyranny or chaos. It is the citadel of the rights of free men. It must be preserved, it must be preserved as written.
The oath to uphold and defend the Constitution is made a duty of every judge of every court. The decree here entered is one of that line of decisions leveling and annulling constitutional limitation on arbitrary powers of government. It bypasses Article X of the Bill of Rights as though it had never been written. History will mark this as an epoch in the lives of the American people and particularly so as a rift in the judicial powers of our nation. Though we sign the decree as required by the mandate of our higher court, so deeply do we feel the effects upon the future we must let the record show that at least one judge would dissent.
One final word to the people of Dallas: Stand calmly by constituted authority.
To the colored man, you are fully aware of having won in the courts of the land a history-making legal battle. If it calls for a triumph, remember the precept of General Grant at Appomattox: "Never crow over the reverses of an honorable adversary." In our courts your lawyers will tell you never to provoke a difficulty. Sound ethics and good manners tell us not to unnecessarily provoke the ill will of those with whom we live. In this long continued trial your lawyers and your people have conducted themselves with that courteous decorum which commands the respect of the United States Court and the public. It well behooves you to help avoid such untoward scenes *735 and conditions as have prevailed in other cities.
To the white man we would say that while every decision rendered by a Court does not become the law of the land yet if the judgment so rendered puts in motion edicts of the law and agencies of government, do not, though you disapprove, resort to violence in any form. It injures your cause. It does harm and subjects you to ultimate defeat and humiliation. Let the admonition of George Washington in his farewell address be your guide:
"Towards the preservation of government and the permanency of state it is requested that you discountenance irregular opposition to acknowledged authority."
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335 Pa. Super. 289 (1984)
484 A.2d 137
Henry BUXBAUM and Grace Buxbaum, in her own right
v.
Federico A. PEGUERO, M.D. and Federico A. Peguero, M.D., P.A., a Corporation, Thomas Javian, M.D. and Thomas Javian Associates, Inc., a Corporation and Delaware Valley Medical Center.
Appeal of Federico A. PEGUERO, M.D. and Federico A. Peguero, M.D., P.A., a Corporation.
Henry BUXBAUM and Grace Buxbaum, H/W, in her own right
v.
Federico A. PEGUERO, M.D. and Federico A. Peguero, M.D., P.A., a Corporation, and Thomas Javian, Jr., M.D. and Thomas A. Javian, Jr., M.D. & Associates, Inc., a Corp. and Delaware Valley Medical Center, Inc., a Corp.
Appeal of Thomas A. JAVIAN, Jr., M.D. and Thomas A. Javian, Jr., M.D. and Associates, Inc.
Supreme Court of Pennsylvania.
Argued March 15, 1984.
Filed November 9, 1984.
*291 Bernard W. Smalley, Philadelphia, for Peguero, appellants (at No. 2516) and appellees (at No. 2517).
Fredric L. Goldfein, Philadelphia, for Javian, appellants (at No. 2517) and appellees (at No. 2516).
Carl M. Mazzocone, Philadelphia, for Buxbaum, appellees.
Before CAVANAUGH, WIEAND and CIRILLO, JJ.
WIEAND, Judge:
These are appeals from an order opening a judgment of non pros entered in a medical malpractice case after plaintiffs had failed to file a complaint within twenty days following service of a rule directing them to do so. Our examination of the record fails to reveal an abuse of discretion by the trial court. Therefore, we affirm.
The action was commenced by Henry and Grace Buxbaum who caused a writ of summons to issue naming Doctors Federico A. Peguero and Thomas A. Javian, Jr., and their respective professional corporations, as well as Delaware Valley Medical Center, Inc., as defendants.[1] The summons was served on Dr. Javian and his corporation on April 15, 1982 and on Dr. Peguero's corporation on April 17, 1982. Dr. Peguero, however, was not served personally until June 1, 1982. On April 20, 1982, a rule to plead was served upon the plaintiffs on behalf of Dr. Javian and his corporation. The rule was filed in the prothonotary's office *292 on April 26. A similar rule on behalf of Dr. Peguero was served on the plaintiffs on April 29 and filed the following day.[2] When a complaint was not filed in accordance with the rule, judgments of non pros were entered in favor of Dr. Peguero and his corporation on May 25 and in favor of Dr. Javian and his corporation on May 26, 1982. A petition to open or strike these judgments was filed by the plaintiffs on May 28, 1982. After the trial court had opened the judgments of non pros, separate appeals were filed by the physician defendants and their corporations and consolidated for argument before this Court.
"A Petition to Open a judgment of non pros is addressed to the equitable powers of the court. It is a request to open a judgment of non pros by way of grace and not of right. Its grant or refusal is within the [trial] court's discretion, which will not be reversed on appeal absent a showing of abuse of discretion." Walker v. Pugliese, 317 Pa.Super. 595, 599, 464 A.2d 482, 484 (1983). See also: Bottero v. Great Atlantic & Pacific Tea Co., 316 Pa.Super. 62, 64, 462 A.2d 793, 795 (1983); Hutchings v. Trent, 304 Pa.Super. 376, 378, 450 A.2d 729, 730 (1982); Kophazy v. Kophazy, 279 Pa.Super. 373, 375, 421 A.2d 246, 247 (1980); Thompson v. Hahn Motors, Inc., 269 Pa.Super. 271, 273, 409 A.2d 884, 885 (1979). In general, a judgment of non pros will not be opened unless three factors coalesce: "1) the petition must be timely filed; 2) the reason for the default must be reasonably explained or excused; and 3) the facts constituting grounds for the cause of action must be alleged." Vorhauer v. Miller, 311 Pa.Super. 395, 401, 457 A.2d 944, 948 (1983). See also: Wurster v. Peters, 318 Pa.Super. 46, 49, 464 A.2d 510, 511 (1983); Chaplynsky v. Broad Street Hospital, 305 Pa.Super. 497, 501, 451 A.2d 757, 759 (1982); Stawiarski v. Hall, 300 Pa.Super. 67, 70, 445 A.2d 1302, 1303 (1982); Kennedy v. Board of Supervisors, *293 243 Pa.Super. 46, 52, 364 A.2d 442, 445 (1976). There is no dispute that the appellee-plaintiffs in this case have satisfied the first and third requirements. The only issue on appeal is whether the trial court properly concluded that appellees had reasonably explained their failure to file a complaint within the time allowed.
Appellees' amended petition to open, filed June 1, 1982, stated: "Although the complaint to be filed in this matter was prepared for filing by May 10, 1982, plaintiffs were out of town, or otherwise unavailable for almost the entire month of May, 1982 up until May 24, 1982 and counsel for plaintiffs were [sic] therefore unable to obtain the requisite affidavit to be attached to the Complaint in order for it to be filed." This is supported by a separate affidavit by Henry Buxbaum, which stated, in pertinent part, as follows: "On May 6, 1982 I, my wife Grace . . . and our son . . . did embark on a vacation trip in a camper during which trip I and my wife were not reachable by telephone, letter or any other means of communication, and which trip ended upon our return on May 24, 1982." The amended petition stated further: "Counsel for plaintiffs was waiting only for the return of plaintiffs from out of town to prepare the requisite affidavit . . . in order to file the Complaint in this matter. . . ."
Appellants argue that the trial court abused its discretion in opening the judgment because this was not a reasonable excuse for the delay in filing the complaint. Appellants contend that counsel for appellee-plaintiffs could have avoided the judgment of non pros by (1) attaching a verification by a non-party as permitted by Pa.R.C.P. 1024(c); (2) by petitioning the court for an extension of time; or (3) by requesting additional time from appellants or their counsel. Because plaintiff's counsel did none of these things, it is argued, the default cannot be excused. These arguments concede, however, that in any event the default was attributable to an error of counsel. There was no intentional delay by the plaintiff-appellees.
*294 "While, generally speaking, a litigant is bound by the actions or inactions of his counsel . . . when a plaintiff places his case in the hands of reputable counsel he will not be turned out of court if the delay complained of was almost entirely on account of neglect or oversight of his counsel. . . ." White v. Alston, 231 Pa.Super. 438, 443, 331 A.2d 765, 768 (1974), quoting Poluka v. Cole, 222 Pa.Super. 500, 504, 295 A.2d 132, 134 (1972). "Any person entrusting a matter to an attorney in this Commonwealth should be able to believe that the matter will be competently and diligently handled." Therefore, attorney neglect may provide sufficient justification for a party's failure to respond to process, especially where there have been no negotiations or attempts by the opposing party to draw the attention of counsel to the case or to ward off a possible default judgment. Commonwealth, Department of Transportation v. Nemeth, 497 Pa. 580, 584-585, 442 A.2d 689, 691 (1982).
In Toplovich v. Spitman, 239 Pa.Super. 327, 361 A.2d 425 (1976), we explained the overriding importance of equity in applying the three-part test for opening a judgment:
Our consideration as to the presence or absence of these requirements is tempered by our application of equitable principles, for we sit as would a chancellor in equity to determine how best justice can be served. Our deliberations of an equitable nature will be addressed to a weighing of the prejudices inflicted upon the opposing parties by whatever inaction of counsel occasioned the right of the successful party to obtain judgment.
Id., 239 Pa.Superior Ct. at 329, 361 A.2d at 426 (citations omitted). In Toplovich, appellants' counsel had negligently failed to mail an answer to the prothonotary in time to avoid a default judgment. This Court held that the trial court had abused its discretion when it refused to open the judgment.
Here, as the trial court observed, the complaint was filed within two weeks of the time therefor, and no prejudice resulted to the defendant-appellants as a result of the *295 late filing. "Our task on review of discretion is not to substitute our judgment for that of the [trial] court but to determine if the . . . court's action was manifestly unreasonable." Saint Vladimir Ukrainian Orthodox Church v. Preferred Risk Mutual Insurance Co., 239 Pa.Super. 492, 501, 362 A.2d 1052, 1058 (1976). We cannot conclude under the circumstances of this case that it was manifestly unreasonable to excuse the negligence of counsel and open the judgment of non pros.
We agree with appellants that the procedure followed by appellees and by the trial court was deficient. After appellants had claimed insufficient knowledge or information and demanded proof of appellees' absence at the time when their affidavit was required, the proper means by which appellees could establish that fact was as provided in Pa.R.C.P. 209. The depositions required by that rule cannot be avoided by substituting an ex parte affidavit. See: Hutchings v. Trent, supra, 304 Pa.Super. at 382 n. 2, 450 A.2d at 732 n. 2. However, appellants did not file an answering affidavit and have not denied the veracity of the facts recited in the petition or affidavit except via a demand for proof. To remand for the taking of depositions under the circumstances of this case would merely delay disposition by requiring appellees to state anew the fact which they have already stated under oath. See: Bensalem Township v. Terry, 317 Pa.Super. 380, 464 A.2d 371 (1983). Appellants have not suggested on appeal that the default which enabled them to obtain the judgment of non pros was caused by anything other than counsel's neglect. Under these circumstances, we will not remand for depositions. It seems clear that the trial court did not abuse its discretion by opening the judgment of non pros. All the equities required it.
Order affirmed.
CAVANAUGH, J., files a dissenting opinion.
*296 CAVANAUGH, Judge, dissenting:
I respectfully dissent from the majority's determination that appellant's counsel's negligence constitutes a reasonable explanation or excuse to provide a basis for the opening of the judgment of non pros.
Counsel's neglect in this case can not be reasonably explained since there were, as the majority indicates, feasible alternatives available which counsel could have employed in order to avoid the judgment of non pros. Moore v. Heebner, Inc., 321 Pa.Super. 226, 467 A.2d 1336 (1983).
NOTES
[1] Delaware Valley Medical Center, Inc. did not cause a judgment of non pros to be entered and is not a party to the present appeal.
[2] Although an appearance had been entered on behalf of both Dr. Peguero and his corporation, the rule to plead purported to be filed only on behalf of Dr. Peguero individually. Because of the decision we reach, we find it unnecessary to determine whether a judgment of non pros entered in favor of the corporation was susceptible to a motion to strike.
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01-03-2023
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10-30-2013
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https://www.courtlistener.com/api/rest/v3/opinions/1524566/
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195 F. Supp. 385 (1961)
Walter HELSBY, Plaintiff,
v.
ST. PAUL HOSPITAL AND CASUALTY COMPANY and Mutual Benefit Health and Accident Association, Defendants.
No. 4-60 Civ. 200.
United States District Court D. Minnesota, Fourth Division.
June 26, 1961.
*386 *387 Irvin Schermer, Sheldon J. Gensler, Schermer & Gensler, Minneapolis, Minn., for plaintiff.
John P. Vitko, Donald B. Smith, Randall, Smith & Blomquist, St. Paul, Minn., for defendants.
HENLEY, District Judge.
This suit, based upon an alleged breach of contract, was tried to Court and jury. The jury found in favor of plaintiff and assessed his damages at $156,000. Defendants have moved for judgment notwithstanding the verdict or, in the alternative, for a new trial. The case may be stated as follows:
On September 23, 1957, plaintiff entered into a "Broker's Contract" with defendant St. Paul Hospital and Casualty Company, hereinafter called St. Paul, under the terms of which plaintiff was authorized to sell in Minnesota health and accident insurance for the company and was to be compensated on a commission basis. The contract was for an indefinite period, terminable at the death of plaintiff or upon his becoming physically or mentally disabled. It was also terminable at the option of either party upon the giving of six months' written notice.
It was the intention of the parties that plaintiff should occupy himself, at least primarily, with the establishment and operation of the so-called "bank franchise" plan for the sale of health and accident insurance and the servicing of policies sold under that plan. Among other things plaintiff was to recruit, train, and supervise the agents necessary to put the plan into effect and to operate it efficiently and profitably.[1] It was *388 agreed that plaintiff should receive commissions amounting to 20 percent of the original premiums on policies sold by him personally, and a five percent overwrite commission on original premiums on policies sold by agents working under him. The contract provided further that if plaintiff should die or become totally and permanently disabled, or should retire from the insurance business, or if he should faithfully comply with the terms of the contract and should the contract be terminated voluntarily, he should have a vested right to certain commissions on renewal premiums on policies written by him or his agents during the life of the contract. The amount of such commission on renewal premiums was to be based upon the number of years plaintiff remained in the service of St. Paul and upon the gross premiums in force at the end of the calendar year prior to termination of the contract.
The parties operated under the Broker's Contract until December 1958, at which time they entered into an "Agent's Agreement," back-dated to September 23, 1957, the effective date of the original Broker's Contract. The Agent's Agreement, hereinafter at times called the contract, was executed by plaintiff on his own behalf, and on behalf of the company by M. M. Imm, its president, and C. I. Pilot, its assistant treasurer and bookkeeper.
The Agent's Agreement contained in general the same provisions as were set forth in the original Broker's Contract, but there was an important change in the termination provisions. St. Paul's standard form of Agent's Agreement provided for termination upon the death or disability of the agent, and also provided for termination at the option of either party upon the giving of 30 days' written notice of intention to terminate. However, in plaintiff's contract the standard termination provision was modified so as to provide for voluntary termination upon 12 months' written notice "with cause."
In the latter part of August 1959, defendant Mutual Benefit Health & Accident Association, hereinafter called Mutual, purchased all of the stock of St. Paul and assumed control of its operations, with Frank J. Hogan, one of the vice presidents of Mutual becoming president of St. Paul. On August 31, 1959, E. S. Adams, one of Mutual's senior vice presidents and its Agency Director, addressed a letter to plaintiff advising him that Mutual had assumed St. Paul's obligations under the latter's agency contracts.
On June 23, 1960, St. Paul, acting through Oscar A. Lipke, its vice president, and one Gesell, its treasurer, wrote a letter to plaintiff advising him that St. Paul was rescinding the contract on account of alleged nonperformance and breach on plaintiff's part. In the same letter St. Paul assumed an alternative position, namely that if it was not entitled to rescind the contract, nevertheless it had "cause" to terminate the agreement in accordance with the provisions thereof, and that the letter should be considered as a notice of termination effective after 12 months. Nine alleged causes for termination were set forth.
On the same day St. Paul addressed a letter to the Minnesota Department of Insurance cancelling plaintiff's license to sell St. Paul policies. This suit followed.
It is the theory of plaintiff that the contract in suit was a valid and enforceable contract, that he performed his obligations thereunder, that he was guilty *389 of no breach and had given St. Paul no cause for termination under the contract, and that St. Paul's action of June 23, 1960, was wholly wrongful. Plaintiff measures his damages by the present value of the net commissions, including commissions on renewal premiums (at times referred to as vested renewals), which he claims he would have earned but for the alleged wrongful termination of the contract.
Both defendants contend that the contract was void for various reasons, or that, if valid, the plaintiff failed to perform under it and was guilty of breach of contract. It is further contended that the contract was actually terminable at the will of either party notwithstanding the stipulation that voluntary termination should be "with cause" and upon 12 months' written notice. Both defendants also take issue with plaintiff as to damages.
In addition Mutual takes the position that it never assumed St. Paul's obligations under its agency contracts, and that, even if plaintiff is entitled to relief as against St. Paul, he has no claim against Mutual.
Upon the trial of the case the Court took the view, to which it now adheres, that under the evidence all questions of the validity and interpretation of the contract were for the Court. Hence, the case was sent to the jury on the theory that, apart from any questions of nonperformance or breach, the contract was in and of itself a valid enforceable instrument and the jury was so instructed.
The issues submitted to the jury were, in substance, the following: (1) whether plaintiff had performed his obligations under the contract; (2) whether any breach of contract of which plaintiff may have been guilty had been waived by defendants; (3) whether Mutual had assumed St. Paul's obligations to its agents; (4) whether St. Paul had "cause" to terminate the contract on 12 months' notice; and (5) damages.
In their instant motion defendants renew their attacks on the validity of the contract and reassert their position that the contract, if valid, was terminable at will. They also assail the jury's factual findings including the finding as to damages.[2] In addition, defendants complain of alleged errors of the Court in ruling on certain questions of admissibility of evidence and in refusing to give certain instructions. To the extent that defendants challenge the factual findings of the jury, the evidence at the present stage of the proceedings is required to be viewed in the light most favorable to plaintiff, and he is entitled to the benefit of all favorable inferences that may be drawn logically from the evidence.
I.
Taking up first the legal contentions of the defendants directed at the validity and interpretation of the contract, defendants contend that the contract is void for indefiniteness and for lack of mutuality of obligation, that the contract was a modification of the original Broker's Contract and did not comply with the requirements of the earlier agreement with regard to modifications, that the agents of St. Paul who executed the contract on its behalf acted beyond the scope of their authority, and that in any event the contract was terminable at the will of either party. In connection with the contention last mentioned, defendants assert that the provision for termination "with cause," which by implication prohibits a termination without cause, was not supported by any independent consideration or by any consideration at all, and that the phrase "with cause" is vague and indefinite and does not set up a discernible criterion by *390 which a right to terminate may be measured.
Those contentions have been argued earnestly in defendants' thorough brief in support of their motion, but the Court is unable to accept any of them. The Court is convinced that as a matter of law the contract was valid and enforceable and that it was not terminable at the volition of either party without cause.[3]
The evidence discloses that in connection with his performance under the original Broker's Contract plaintiff received substantial assistance from two of St. Paul's home office employees. As time went on, however, those two individuals began to play a more and more active part in the operation of the bank franchise plan, and plaintiff, not without justification, became apprehensive that they would simply take over the plan after he had done the ground work, and that his contract would be terminated as could have been done upon six months' written notice.
Plaintiff repeatedly requested Mr. Lipke, the vice president of St. Paul, to curtail the activities of the two employees above referred to so as to protect the interests of plaintiff, but Lipke failed to do so. As an alternative and for the purpose of satisfying the plaintiff, it was agreed finally that plaintiff would be given a contract which, apart from death or disability, would not be terminable without cause and without a fairly long notice period. The period first discussed was five years, but Mrs. Imm, the company's president, was not willing to agree to so long a period, and the parties finally settled upon a one-year notice period. The contract in suit expressed the ultimate agreement.
While plaintiff did not agree in so many words to sell insurance for St. Paul, or to recruit, train, and supervise agents, he had in fact been performing under his original contract for more than a year, and when he executed the later contract, back-dated to the commencement of his service, he by implication agreed that he would perform under it. That an agreement to perform under a contract is implied rather than express makes it no less real. See 56 C.J.S. Master and Servant §§ 6, 7-8, pp. 67, 73-74; cf. E. I. DuPont De Nemours & Co. v. Claiborne-Reno Co., 8 Cir., 64 F.2d 224, 227, 89 A.L.R. 238.
It is likewise true that the contract did not spell out in detail the duties that plaintiff was to perform or the means and methods that he was to use in achieving the contemplated results. But there was no occasion for such detail. Presumably, plaintiff, as a man of some experience in the insurance field, knew what he was supposed to do and how to do it.
In the Court's view there was mutuality of obligation for the entire contract, and consideration is to be found in the mutual promises of the parties. Further, it cannot be said that St. Paul derived no benefit from the termination provision or that plaintiff suffered no detriment on account thereof. As heretofore indicated, plaintiff was dissatisfied with the existing situation and was insisting that something be done to protect his interests. If nothing had been done, he was free to quit upon the giving of six months' notice, and it cannot be presumed that he would not have exercised that right. Regardless of what St. Paul may have thought of plaintiff and his services after December 1958, it is undisputed that when the second contract was made, St. Paul desired to retain plaintiff's services, and to that end was willing to agree, and did agree, that it would not terminate his employment except upon 12 months' notice with cause. Plaintiff agreed likewise that he would not voluntarily quit his employment without cause and without giving a year's notice, and he remained in the services of St. Paul until the latter terminated the contract more than a year and a half after it was made. St. Paul was willing to bargain for plaintiff's continued services in December 1958, and, for whatever *391 they were worth, it obtained those services.
As a part of their attack on the termination clause, defendants invoke the rule, recognized in Minnesota, that an agreement for "permanent employment" or for "employment for life" or the like, under the terms of which the employee is free to quit the employment at any time, will not be enforced against the employer unless the agreement for tenure is supported by consideration separate and distinct from the services which the employee undertakes to perform. Skagerberg v. Blandin Paper Co., 197 Minn. 291, 266 N.W. 872; see also Maple Island Farm v. Bitterling, 8 Cir., 209 F.2d 867, and Albers v. Wilson & Co., D.C.Minn., 184 F. Supp. 812. Here, however, plaintiff was not free to abandon his agency without cause. He was required to perform for so long as he was physically able to do so or until the contract should be terminated by one party or the other for cause and upon notice. That requirement appears to be sufficient to make inapplicable the rule invoked by defendants. True, both plaintiff and St. Paul had the power to terminate the contract at any time, as St. Paul in fact did, but a power to put an end to an agency relationship is not equivalent to a right to do so. Mason's, Dunnell's Minnesota Digest, § 226 and cases there cited.
It may be conceded that there is authority supporting defendants' argument that the word "cause" is too vague and indefinite to afford a standard for appraising the justification for a termination of an employment or agency contract. See Bushwick-Decatur Motors, Inc. v. Ford Motor Co., D.C.N.Y., 30 F. Supp. 917;[4] Cummer v. Butts, 40 Mich. 322, 29 Am.Rep. 530. However, there is authority the other way. See Quick v. Southern Churchman Co., 171 Va. 403, 199 S.E. 489; Local 205, United Elec., Radio & Mach. Workers of America v. General Elec. Co., D.C.Mass., 172 F. Supp. 53. Since this is a diversity case, it is the duty of the Court to ascertain the law of Minnesota on the subject and to apply that law when ascertained.
Neither side has cited a decision of the Supreme Court of Minnesota bearing on this precise question, but there has been exhibited to the Court a copy of the opinion of Judge Irving R. Brand, one of the judges of the Fourth Judicial District of Minnesota, Hennepin County, in Cederstrand v. Lutheran Brotherhood, Docket No. 524112. In that opinion Judge Brand wrote:
"Apart from the word `cause' as bearing on the question of duration of employment, the word is not vague and indefinite insofar as the grounds for dismissal are concerned. It precludes arbitrary and capricious power in an employer to discharge an employee. Cf. [Quick] v. Southern Churchman Co., 171 Va. 402, [403], 417, 199 S.E. 489, 494-495 (1938) (`just cause'); Cummer v. Butts, 40 Mich. 322, 325 (1879) (`good cause'); Local 205, United Elec., R[adio] & M[ach.] W[orkers] v. General Elec. Co., 172 F. Supp. 53, 56 (D.Mass., 1959) (`cause'); Starin v. United States, 31 Ct. Cl. 65, 88 (1896). (`good and sufficient cause')."
The Court feels justified in accepting Lutheran Brotherhood as an accurate statement of Minnesota law. Cf. Kimble v. Willey, 8 Cir., 204 F.2d 238, *392 242, 38 A.L.R. 2d 814. Moreover, this Court holds the opinion that the interpretation of "cause" as being not fatally vague and indefinite when used as a restriction on the right to terminate an employment contract is the better of the two available choices. In this connection the jury was instructed:
"You are instructed that the `cause' which would justify St. Paul in terminating the contract upon 12 months' notice is not limited to a `legal' cause which would justify a rescission of the contract; and it need not be an act or omission on the part of the plaintiff which would constitute a breach of contract. The provision now under consideration simply protected the plaintiff from an arbitrary or capricious termination of the contract; and the term `cause,' as used by the parties, means anything which has prompted a reasonably prudent insurance company, acting honestly, fairly and in good faith, to put an end to the agency relationship existing between itself and its agent."
That instruction correctly reflects the law of Minnesota as expressed in Lutheran Brotherhood.
The original Broker's Contract provided that the instrument could be modified on behalf of St. Paul only by the action of two of the four of the company's major officers, namely, its president, vice president, secretary, and treasurer, and then only in writing, and it further provided that "failure of the company to insist upon strict compliance with any of the provisions of this agreement or any of the rules of the company shall not be construed as a waiver of such provisions or rules or affect the right of the company thereafter to enforce such provisions or rules."
Defendants point out that while plaintiff's second contract was signed on behalf of St. Paul by its president, C. I. Pilot who also signed for the company was not one of the four officers above mentioned, but merely the assistant treasurer and bookkeeper, and they contend that the second contract was not binding on St. Paul for that reason.
There is no merit in that contention. The parties to a contract always have the right to modify their agreement or abrogate it entirely and make a new one. They may do so by any appropriate means notwithstanding self-imposed restrictions in the original instrument. 12 Am.Jur. Contracts, §§ 427-428; 17 C.J.S. Contracts §§ 374 and 377. Here, aside from any consideration of the statute of frauds, the parties, notwithstanding the provisions contained in the original agreement, could have modified that agreement by word of mouth, and, a fortiori, the later contract is not rendered ineffective merely because it was signed by only one of the officers mentioned in the original agreement.
It is further urged that the agreement not to terminate plaintiff's agency except for cause and upon 12 months' notice was beyond the scope of the authority of both M. M. Imm and C. I. Pilot. The short answer to this argument is that the contract was in fact executed in December 1958, and the plaintiff operated under it until June 23, 1960. The corporation was charged with knowledge of the existence of the contract and of its terms and conditions, and any want of original authority on the part of the corporate personnel who signed the instrument was cured by ratification, St. Paul having permitted plaintiff to operate under the contract and having accepted the fruits of his performance for approximately a year and a half prior to termination. Moreover, it is interesting to note that in the letter of June 23, 1960, whereby the contract was terminated, St. Paul did not even suggest that the contract was defective on account of insufficient corporate execution or on account of any lack of authority on the part of any corporate agent. In fact it recognized in that letter that if it was not entitled to rescind the agreement in its entirety, the termination was required to be for cause and upon a year's notice.
*393 II.
The evidence as to performance, breach, and waiver was conflicting, but there was substantial evidence which justified the jury in finding either that plaintiff fully performed his obligations, or that St. Paul accepted his performance and waived any defects therein or any breaches of contract of which plaintiff may have been guilty.
In this connection, it is noted that by December 1958 St. Paul had had more than a year's experience with plaintiff, and must have been thoroughly familiar with the nature and extent of his performance under the original Broker's Contract. With that knowledge St. Paul with its eyes open entered into the second contract.
In addition to testifying as to his performance, plaintiff introduced in evidence certain letters written to him by Mr. Lipke and a letter from Frank J. Hogan, dated May 12, 1960, after Hogan had become president of St. Paul. The Lipke letters, written both before and after December 1958, one being dated August 31, 1959, were expressly commendatory of plaintiff, and the Hogan letter contains no expression of dissatisfaction with his services, although the occasion for that letter was such as to lead naturally to an expression of dissatisfaction if any existed.
While defendants would brush the Lipke letters aside as mere form "pep letters" sent by an insurance company to all of its agents, the fact remains that the letters were addressed to plaintiff personally, and the jury had the right to consider them, along with all of the other evidence in the case, as bearing on the question of whether plaintiff had performed satisfactorily.
III.
Defendants press hard upon the fact that at a gathering of insurance people held in Minneapolis on April 29, 1960, plaintiff in effect accused Lipke publicly of undertaking to "steal" the bank franchise plan from plaintiff, and threatened that if Lipke did "steal" the plan, plaintiff would sue St. Paul "for everything its got." It is contended that this accusation amounted to a breach of contract or at least afforded St. Paul "cause" for terminating the contract after giving 12 months' notice.
There is no question that unprovoked and uncondoned insulting or insubordinate language used by an employee or agent to an employer or principal, or to the latter's representative, may justify the discharge of the employee or agent. 35 Am.Jur. Master & Servant, § 48; Restatement of Agency, 2d Ed., § 380(b). And where there is no dispute as to the facts, and no question of provocation or condonation, it is for the Court to determine as a matter of law whether discharge was justified (Lubriko Co. v. Wyman, 3 Cir., 290 F. 12); but where the facts are disputed, or where questions of provocation or condonation are involved, the issue of whether discharge was justified is for the jury (ibid).
In Lubriko the ground urged as sustaining discharge was the use by a corporate employee of disrespectful and profane language toward his superiors in the corporate organization. In holding that the question was for the jury the Court said (at pages 15-16 of 290 F.):
"* * * Faithful service is of course a condition precedent to the right of wages. Therefore conduct of a servant involving insolent and disrespectful language, or disobedience of orders of a superior * * *; or tending to prejudice or injure his master's business * * *; or, what is more serious, amounting to insubordination * * * justifies the discharge of the servant. When the servant's conduct is not in dispute and is not affected by mitigating or extenuating considerations it is for the court to determine, as a matter of law, whether it constitutes cause for his discharge * * *. But where the facts are in dispute, what constitutes a ground justifying a discharge is a question for the jury. * * * This must be so, because in determining a question of *394 breach of duty arising from improper language or conduct, and hence in determining a question of justification for a discharge grounded thereon, the element of provocation, in some degree, is more than likely to enter and must be considered. To hold otherwise would mean that although the master may goad the servant into desperation, yet, if the servant does not submit respectfully he forfeits the right to retain his employment under the contract. * * *
"On the law applied to the facts of this case, the question of justifiable discharge was properly one for the jury on the further ground that there was involved a fair question whether the servant's conduct had been in part condoned or was of such continuing character as not to admit of condonation. * * *"
In Griffin Grocery Co. v. Thaxton, 178 Ark. 736, 11 S.W.2d 473, the corporate employer discharged an employee for alleged disrepect and insubordination. It appeared that the employee and the president of the corporation, after years of friendly business association, became estranged, which estrangement was characterized by "reciprocal caustic criticisms in frequent and lengthy letters written by each to the other." (178 Ark. at page 738, 11 S.W.2d at page 473). The employee sued for damages for wrongful discharge, and the jury decided in his favor. In upholding the verdict and the judgment entered thereon, the Supreme Court of Arkansas said (at pages 738-739 of 178 Ark., at page 474 of 11 S.W. 2d):
"Appellant's first contention for a reversal is that the court erred in denying its request for a directed verdict, on the ground that the undisputed evidence justified appellee's discharge. The undisputed evidence referred to consists very largely of the correspondence between appellee and Griffin heretofore referred to, which is too lengthy to be set out in this opinion. We have read these letters carefully, and have reached the conclusion that the letters of appellee constituting the alleged acts of insubordination and insolence were provoked, in a measure, by letters from appellant's president. At least we do not think the court would have been justified in directing a verdict. * * *"
In the case at hand the effect to be given to the accusations made by plaintiff against Lipke, either as amounting to a breach of contract or as affording "cause" for termination of the contract, was properly left to the jury. The jury heard the evidence bearing upon the episode that has been described and the arguments of counsel directed thereto. The jury may well have concluded that plaintiff was not without provocation and some justification in making his charge, and that in any event plaintiff's conduct had been overlooked and condoned by St. Paul. In the latter connection it is noteworthy that the accusations were made on April 29, 1960, and the letter of termination was not mailed until July 23 of that year, almost three months later. Further, in the letter of termination this particular episode was not mentioned specifically, but was included in general terms and as simply one of a number of asserted grounds for termination. The jury might also have been of the opinion, as is the Court, that the episode did not have the significance at the time which defendants have later undertaken to attribute to it.
With regard to whether other matters relied upon by defendants supplied "cause" for termination of the contract, it is sufficient to say that in the Court's view the jury was justified in concluding that no "cause" for termination had been established.
IV.
It is argued on behalf of Mutual that there was no substantial evidence justifying the jury's finding that Mutual had assumed the obligations of St. Paul to the latter's agents. Again, the Court refers to the letter of August 31, 1959, written to plaintiff by Mr. Adams advising *395 that there had been such an assumption by Mutual.
Assumption of St. Paul's obligations by Mutual cannot, of course, be based entirely upon the letter itself, nor is it contended that Adams had any authority to make such an assumption on behalf of Mutual. However, the fact that Mutual's agency director, who was also a senior vice president of that company, wrote such a letter is some evidence that there had been an assumption by Mutual of the obligations in question, and the force of that evidence is increased by the fact that Adams was not called as a witness. Had Adams written the letter under a misapprehension of what Mutual had done in connection with its acquisition of the stock in St. Paul, it would have been easy for him to have taken the witness stand and to have explained his mistake. The jury had a right to infer from the fact that Adams did write the letter and from the fact that he was not called as a witness that Mutual by affirmative corporate act had assumed the agency obligations of St. Paul, and Adams's letter was written advisedly and with authority. Similar letters seem to have been mailed to all of the St. Paul agents, and it is almost inconceivable that Mutual's top management was ignorant of the existence and contents of the letters, yet it does not appear that they were ever repudiated by Mutual, at least until this suit arose.
Mutual introduced in evidence as Exhibit S a certified copy of a resolution adopted by its board of directors on August 27, 1959, which resolution authorized the corporate officers to execute various contracts, one for purchase of stock in St. Paul "without other liability," another for the purchase of the management contract of Wisconsin Casualty Association, and a third to reinsure the business of Group Health Mutual, Incorporated. The officers were authorized "to take such steps as they deem expedient to provide for merger or continued operation of this business."
That resolution, read as a whole and with due regard to the final sentence thereof which has been quoted from, above, is not clearly inconsistent with an assumption by Mutual of St. Paul's agency obligations. The corporate officers may well have decided that such an assumption was "expedient" for the continued operation of St. Paul.
Whether Mutual in fact assumed the obligations in question was a matter peculiarly within Mutual's knowledge and, when plaintiff introduced the Adams letter, it became incumbent on Mutual to bring forward some evidence tending to negative the idea of assumption. The evidence which it did produce simply created a jury question.
V.
On the issue of damages the jury was instructed that if it found for the plaintiff and did not find that St. Paul had "cause" to terminate the contract upon 12 months' notice, plaintiff's measure of recovery would be "the financial loss, if any, which a fair preponderance of the evidence might show that plaintiff has sustained up to this time as a result of St. Paul's rescission of the contract, and the present value of such sum of money, if any, as the evidence may show with a reasonable degree of certainty he will lose in the future resulting from St. Paul's action in undertaking to rescind and terminate the contract." The jury was instructed that if it found for the plaintiff but further found from a fair preponderance of the evidence that St. Paul did have "cause" to terminate the contract upon notice, the measure of plaintiff's recovery would be the financial loss which a fair preponderance of the evidence showed that plaintiff had sustained up to the time of trial as a result of the action of St. Paul in rescinding the contract and in refusing to permit plaintiff to sell its insurance after June 23, 1960, and the present value of such financial loss as the evidence might show with reasonable certainty the plaintiff would sustain in the future as a result of not being retained as St. Paul's agent for the period between June 23, 1960, and June 23, 1961, the 12 months' notice period.
*396 The jury was told that in measuring plaintiff's recovery, if any, it should take into consideration plaintiff's age and life expectancy, the condition of his health, his habits and disposition to labor, the volume of business produced by him in the past and the volume that might reasonably have been expected in the future, the expenses incident to plaintiff's carrying on of his business, the likelihood of policies issued under the bank franchise plan being kept in force or of lapsing, and any other facts and circumstances shown by the evidence which the jury might deem relevant.
As to mitigation of damages, the jury was told, in substance, that if plaintiff's duties under the contract were such as to require substantially all of his time and effort, and that he could not engage in other lines of work or sell other insurance without detriment to the proper performance of his obligations to St. Paul, he would be required to mitigate damages, but that he would not be required to mitigate if his obligations to St. Paul did not require all or substantially all of his time and effort, and if during the period of his agency he was free to engage in other lines of endeavor and could have engaged in such lines without detriment to St. Paul.
The Court has reviewed those instructions and is convinced that they declared the law correctly. The basic problem as to damages with which the Court is confronted is whether the jury's award of $156,000 was excessive.
Plaintiff, to establish the amount of his recovery, relied upon his own testimony and exhibits introduced in connection therewith, and upon the expert testimony of Melvin Harris, a certified public accountant, who made calculations of present values of plaintiff's future income had he remained in St. Paul's employ. Harris's calculations, which were based on certain assumptions made by him, were expressed on two tables which were admitted in evidence over defendants' objections.
The defendants also adduced expert testimony relating to damages. That evidence consisted of the testimony of Richard W. Erdenberger, an actuary in the employ of Mutual, supplemented by certain exhibits.
The starting point of Harris's calculations was the figure $339,308.00 which was the amount of plaintiff's production of bank franchise plan insurance through the calendar year 1960 as shown on plaintiff's Exhibit No. 4.[5] Harris's first set of figures, plaintiff's Exhibit No. 11, was based upon the assumption that the bank franchise business would remain constant at the 1960 level. Harris's second set of figures, plaintiff's Exhibit 12, was based upon the assumption that plaintiff's commissions would increase 10 percent each succeeding year.
While plaintiff's Exhibit 11 assumes that the volume of bank franchise business would remain constant at the 1960 level, it also assumes that commissions received on vested renewals would decrease by 22 percent each year, that plaintiff would have to obtain new business each year to replace the lost renewal business, and that the production of such new business would entail expenses which should be estimated on the basis of those experienced in 1959. Those 1959 expenses, as shown by plaintiff's income tax return for that year, were $7,705.88.
Plaintiff's Exhibit 12, after assuming that commissions would increase 10 percent each year, goes on to assume further that plaintiff's expenses would increase at the same rate, and that his commissions received on vested renewals would decrease 22 percent each year.
In both sets of calculations Harris discounted plaintiff's net commissions and vested renewals at an annual rate of 4 percent computed quarterly.
*397 Having made his assumptions and determined his rate of discount, Harris proceeded to make his calculations of present values, using in that connection the Schedule of Vested Renewal Commissions appearing in the contract.
Both Exhibit 11 and Exhibit 12 show present values of net commission income and vested renewals based upon succeeding years of service commencing with eight, five more than plaintiff actually served, and ending with eighteen, ten more than he actually served.[6] Naturally, as the years of service increase, the present values increase.
Exhibit 11 shows that had plaintiff remained in St. Paul's employ for eight years, the present value of his net commissions and vested renewals would be $81,075.00, and that had his agency lasted for a total of eighteen years, such present value would be $171,926.00. The corresponding figures on Exhibit 12 are $111,272.00 and $392,557.00.
Defendant's witness Erdenberger summarized his testimony as to plaintiff's damages on two exhibits, Q and R. Both of those exhibits assume that plaintiff faithfully performed his duties under the contract. Exhibit Q appears to be based on the further assumption that the contract was terminable at will, and that when it was terminated in June 1963 plaintiff had 42 months' vested renewals. The figure reached on that exhibit was $18,944.92. Exhibit R assumes that the contract remained in force until June 23, 1961 (a year after notice of termination), and credits plaintiff with 48 months' vested renewals. The present value computed on that exhibit is $22,803.92.
As has been said, the jury returned a verdict of $156,000. That exact figure does not appear on any of the exhibits. However, plaintiff's Exhibit 11 reflects that the present value of plaintiff's net commissions and vested renewals based on 16 years of service would be $156,807, and Exhibit 12 reflects that after 10 years' service the present value of plaintiff's net commissions and vested renewals would be $156,723.
In their motion defendants contend that the Court erred in overruling their objections to plaintiff's evidence and exhibits relating to damages on the grounds that plaintiff was not qualified to testify in that connection, that the exhibits were based on assumed facts not in evidence, that no proper foundation was laid for their introduction, that the exhibits do not include all relevant facts in evidence, and that they are conjectural and speculative. It is charged that the verdict is excessive and improper; that it is based upon uncertainty, remoteness, speculation, and conjecture; that it is unsupported by the evidence; and that it "appears to have been given under the influence of passion and prejudice."
It may be conceded that Mr. Harris was not an actuary or an insurance man, and that the assumptions upon which his calculations were based cannot be supported by his testimony, although the mathematics of his calculations is not challenged. He simply proceeded to make his calculations on the assumptions given him. He did not purport to establish the validity of those assumptions.
However, those assumptions find at least some support in the testimony of plaintiff himself, and he had had at least some experience with the bank franchise plan which, in the Court's estimation, qualified him to make predictions as to the future of the plan. Of course, the weight to be accorded to his testimony and the weight to be given to the figures supplied by Harris were matters to be determined by the jury.
In the circumstances the Court does not conclude that the evidence was insufficient to sustain a monetary award of some amount, and defendant's own evidence indicates that plaintiff did sustain substantial damage resulting from *398 the termination of the contract. However, the Court does agree with defendants that the verdict was grossly excessive. Taking into consideration plaintiff's age, health, actual income earned in 1958 and 1959, and employment history, as shown by the evidence, the Court considers that the award of $156,000 as representing the present value of his financial loss resulting from the termination of the agency was completely unrealistic, although there is nothing to indicate that it was the result of any passion or prejudice on the part of the jury.
While the award actually made by the jury cannot be allowed to stand, plaintiff has sustained greater damages than defendants' direct evidence would indicate. Viewing the evidence in the light most favorable to plaintiff, the Court is of the opinion that it would support a verdict and judgment in an amount somewhere between fifty and sixty thousand dollars, and the Court is willing to enter judgment for $55,000 provided plaintiff is willing to enter a remittitur of the amount of the verdict in excess of that amount.
Two incidental questions remain for consideration. In their motion defendants assign as error the action of the Court in refusing to permit them to show that the capital and surplus of St. Paul at the time of its incorporation in 1957 was $150,000, the minimum required by Minnesota law, and that St. Paul sustained an operating loss of $14,229.04 in 1957, $28,845.13 in 1958, $161,757.77 in 1959, and $21.26 in 1960. The Court did not think at the time of trial, and does not think now, that the tendered evidence was competent. There was no showing that St. Paul was or in the future would be unable to pay plaintiff the commissions he would have earned had his contract not been terminated. Overall losses which St. Paul might suffer were of no concern of plaintiff. Nor was St. Paul's financial condition at the time of its incorporation material.
Complaint is made also that the Court refused to permit defendants to show that St. Paul wrote no new business under the bank franchise plan after December 31, 1960, and that the defendant as of that date had terminated all agents of the company who had sold insurance under that plan.
St. Paul's discontinuance of the bank franchise plan took place after it had breached its contract with plaintiff and after this suit had been filed, and evidence of such discontinuance was of doubtful competency. Further, to permit the introduction of evidence of the discontinuance without explanation would have been highly misleading as it would tend to suggest that the plan was not sound or profitable and that the discontinuance would have taken place for that reason in any event. Actually, as was developed in chambers in connection with the proffered evidence, the bank franchise plan of St. Paul was replaced at the beginning of 1961 with a generally similar plan that Mutual had put into operation. The Court was of the opinion that the explanation of the discontinuance neutralized whatever benefit defendants stood to gain by showing the bare fact of discontinuance, and that to let the jury know that Mutual, a much larger and stronger company than St. Paul, was using a generally similar plan would tend to be prejudicial to the defendants as far as damages were concerned. Upon those considerations the evidence was excluded altogether, and the Court adheres to its ruling.
Defendants' motion for judgment notwithstanding the verdict will be denied. The alternative motion for a new trial will be denied if, within thirty days plaintiff enters a remittitur to the extent of $101,000. Should plaintiff refuse to enter such remittitur within the time limited, the verdict will be set aside and a new trial granted. An appropriate order will be entered.
NOTES
[1] The bank franchise plan involved the sale of policies to clients of banks which were willing to participate in the plan. Premiums were to be paid by automatic charges against the insured depositors' bank accounts. The obtaining of the participation of a bank in the plan was called "opening" the bank. When a bank was opened and insurance sold to its depositors, a group policy would be issued covering all of the insured depositors. It was an essential part of the plan that the insurance of no participating depositor would be cancelled except for nonpayment of premiums, unless the insurance of all of the members of the group was likewise cancelled. The plan was intended to be beneficial both to the company and to insured bank depositors. Presumably, the participating banks were to benefit also.
[2] The case was submitted on a general verdict, and in view of the size of the award it appears that the jury found that St. Paul had no cause to terminate the contract. Thus, under plaintiff's theory, the contract was terminable only by his death or disability or upon his voluntary termination of the agreement "with cause" and upon notice.
[3] This determination automatically disposes of defendants' contention that the Court erred in failing to instruct the jury on the question of consideration.
[4] Affirmed 2 Cir., 116 F.2d 675. The district court holding that "cause" is fatally vague and indefinite in the present context is actually dictum since the Court found that there was no agreement that the contract should not be terminated except for cause. The Court of Appeals was divided on the subject. The majority agreed with the district court that defendant had a right to terminate either on the ground that there was never a restriction on that right or that the restriction relied on by plaintiff was fatally vague. Judge Clark, who wrote the opinion, preferred to base his decision on lack of restriction on the defendant's right to terminate and on the further ground that the commitments relied on by plaintiff were beyond the scope of the authority of the defendant's agents who allegedly made such commitments.
[5] Plaintiff's production as shown on his Exhibit 4 consisted of the total of new business written during a given year plus renewal premiums, less return premiums. Plaintiff testified as to the accuracy of that exhibit. Of course, plaintiff's total production included not only his personal sales but the sales of agents working under him, on which sales he was entitled to an overwrite commission of 5 percent.
[6] On the exhibits themselves the years of service begin with "5" and end with "15," but an explanatory note indicates that the the three years of plaintiff's actual service must be added to the numbers of the years actually shown on the tables.
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197 N.J. Super. 22 (1984)
484 A.2d 24
DOMINICK ALESSIO AND CAROL ALESSIO, PLAINTIFFS-RESPONDENTS,
v.
FIRE & ICE, INC., DEFENDANT-APPELLANT.
Superior Court of New Jersey, Appellate Division.
Submitted September 11, 1984.
Decided November 8, 1984.
*24 Before Judges PRESSLER, BRODY and HAVEY.
Hoagland, Longo, Oropollo & Moran, attorneys for appellant (James B. Moran, of counsel; Vincent R. Glorisi, on the brief).
Alfred F. Maurice, attorney for respondents (Alfred F. Maurice, of counsel; Alfred F. Maurice and Raymond F. Flood, on the brief).
The opinion of the court was delivered by PRESSLER, P.J.A.D.
This is an appeal, on leave granted, from the denial of defendant's motion for summary judgment dismissing the complaint. The issue before us involves the so-called fireman's rule. The rule, as originally articulated in Krauth v. Geller, 31 N.J. 270 (1960), denies a firefighter, injured while fighting a fire, a right of recovery from the person whose ordinary negligence caused the fire. In Berko v. Freda, 93 N.J. 81 (1983), the rule was extended to police officers, denying an on-duty officer who is injured while responding to a police emergency a cause of action against the person whose ordinary negligence resulted in the situation which required intervention. The question raised by this appeal is whether the rule applies to *25 off-duty police officers as well. We conclude that this question is not subject to a simple categorical answer but rather that the applicability of the rule depends on a realistic determination of whether, in the particular circumstances, the off-duty officer was acting as a police officer or as a volunteer.
Plaintiff Dominick Alessio,[1] a police officer of the Borough of Fairview, instituted this personal injury action against defendant Fire & Ice, Inc., the owner of a tavern in that municipality. Plaintiff seeks to recover for injuries he sustained when, at the request of a tavern employee, he attempted to quell a disturbance at the tavern to which he had come as a patron while off duty and out of uniform. The gravamen of plaintiff's action is his claim that defendant's negligence in not properly supervising the premises and in serving alcohol to intoxicated patrons was the proximate cause of the injuries he suffered.
Defendant's first motion for summary judgment, based on the contention that this action was precluded by the fireman's rule, was granted. Plaintiff appealed, and we reversed in an unreported decision in which we noted that the fireman's rule had not been extended by the decisional law to "off-duty policemen under all circumstances." It was our conclusion, based on the record then before us, that there was a question of fact as to plaintiff's actual status at the time of the assault. We therefore remanded for "full discovery and trial, if necessary." Following the remand, defendant again moved for summary judgment, this time submitting the full transcript of plaintiff's deposition, which constituted the bulk of pretrial discovery. Its argument was that the record as so supplemented demonstrated beyond factual dispute that plaintiff was acting as a police officer when he was injured and hence that the fireman's rule applied. A different judge considered the second motion and denied it on the ground that the record did not exclude the possibility that the circumstances of the assault *26 rendered the fireman's rule inapplicable. More particularly, he was apparently of the view that the facts, viewed most favorably to plaintiff, would support an inference that the assault may have been caused by an act of negligence committed subsequent to the creation of the original hazard. We affirm the denial of the motion, but for different reasons.
The record shows that plaintiff had been a Fairview police officer for almost fifteen years when this incident occurred. His previous police experience in dealing with tavern disturbances had all been while on duty. On these occasions he was dispatched by his headquarters to the scene with his partner, both presumably in uniform. On the night in question, plaintiff had gone to the tavern while off duty to meet a friend. He was not in uniform but was carrying his badge and his service revolver, as required by department regulation. As he entered the tavern he noticed four or five men standing on the sidewalk just outside the tavern door. These people were engaged in a verbal confrontation with a group of two men and two women who were standing just inside the door. Plaintiff made his way to the bar to look for his friend and was almost immediately approached by the tavern "bouncer" who knew him to be a local police officer. The bouncer, apparently concerned about the escalating intensity of the confrontation, asked him to assist in quieting down the two groups.
Plaintiff accompanied the bouncer to the entrance-way and spoke first to the group inside the tavern. The two men were both drinking and were verbally threatening and cursing at the group outside. Plaintiff believed that they were intoxicated. He showed them his badge, identified himself as a police officer, and tried to quiet them down, telling them they had had enough to drink and should leave. Believing that he had defused that group, plaintiff then went out the door to talk to the group of men on the sidewalk. He spoke to them briefly, suggested that they disperse and started to walk away from the tavern with them. At that point, one or more of the *27 "inside" combatants came rushing out of the tavern, assaulted plaintiff from behind, and brutally beat him.
While the record is not explicit as to the lapse of time between plaintiff's exiting of the tavern and the physical attack upon him, it appears, at least inferentially, that the sequence of the described events was uninterrupted and that only moments had passed. The record also does not indicate any particular reason for the attackers to have taken the action they did. Nor does it indicate whether the attack on plaintiff was part of the course of continuous events which began with the verbal confrontation between the two groups or was induced or motivated by some independent cause. Plaintiff, however, makes no suggestion that there was in fact any such independent cause. We therefore address the issue before us on the assumption that an efficient producing cause of plaintiff's injuries was the ordinary negligence of defendant in permitting the development and escalation of the disturbance which resulted in plaintiff's injuries when he attempted to intervene.
The fireman's rule, applicable to both firefighters and police officers, has become a firmly entrenched principle of negligence law throughout this country, criticized by the academic authorities, but nevertheless almost uniformly embraced by the courts. See, e.g., Prosser, Torts (4th ed., 1971) § 61 at 397-398; 2 Harper & James, Torts (1956) § 27.14 at 1501-1505. But see, extending the rule to police officers, Garcia v. City of Tucson, 131 Ariz. 315, 640 P.2d 1117 (Ct.App. 1982); Walters v. Sloan, 20 Cal.3d 199, 142 Cal. Rptr. 152, 571 P.2d 609 (Sup.Ct. 1977; Tobriner, J., dissenting); Whitten v. Miami-Dade Water and Sewer Auth., 357 So.2d 430 (Dist.Ct.App.Fla. 1978), cert. den. 364 F.2d 894 (Sup.Ct. 1978); Pottebaum v. Hinds, 347 N.W.2d 642 (Sup.Ct.Iowa 1984); Solis v. Civic CTR Site Development Co., Inc., 385 So.2d 1229 (Ct.App.La. 1980), cert. den. 390 So.2d 1343 (Sup.Ct. 1980); Hannah v. Jensen, 298 N.W.2d 52 (Sup.Ct.Minn. 1980; Scott, J., dissenting); Nared v. School Dist. of Omaha in Cty. of Douglas, 191 Neb. 376, 215 N.W.2d 115 (Sup.Ct. 1974); Steelman v. Lind, 97 Nev. 425, 634 P.2d 666 *28 (Sup.Ct. 1981); Scheurer v. Trustees of Open Bible Church, 175 Ohio St. 163, 192 N.E.2d 38 (Sup.Ct. 1963). See also cases collected in Annot., 11 A.L.R.4th 597, "Liability of Owner or Occupant of Premises To Firemen Coming Thereon in Discharge of His Duty." See contra Christensen v. Murphy, 296 Or. 610, 678 P.2d 1210 (Sup.Ct. 1984), rejecting the rule in respect both of policemen and firemen. And see also the dissent by Justice Handler in Berko v. Freda, 93 N.J. at 91. Insofar as we have been able to determine, the question of the applicability of the rule to an off-duty police officer has been addressed in only one jurisdiction, Louisiana, which apparently perceives no distinction in this context between on-duty and off-duty officers. See Weaver v. O'Banion, 359 So.2d 706 (Ct.App.La. 1978). We disagree with that perception.
The cases adopting the fireman's rule and extending it to police officers have done so by relying on a variety of more or less apposite traditional negligence theories. In determining whether the rule should be extended in this jurisdiction to off-duty police officers, we must, however, be guided by the rationale upon which the New Jersey Supreme Court relied in adopting the rule in Krauth and Berko. Our task is to ascertain whether that rationale fairly encompasses the off-duty police officer.
As we read Krauth and Berko, both are essentially based on public policy considerations. Although both speak in terms of the assumption of risk in the primary sense, both ultimately recognize that in balancing the competing public and private interests here implicated, the paramount concern must be public safety. See also Trainor v. Santana, 86 N.J. 403 (1981). Hence, a rule imposing liability must be avoided if its consequence would be the deference or chilling of the citizen's ready willingness, when faced with a threat to public or individual security which he himself has negligently created, to seek the intervention of public safety professionals. The countervailing justification for placing these considerations before the private tort recovery rights of firefighters and police officers is that *29 these public employees are hired for the express purpose of responding to these threats and that their professional undertaking is unaffected, both as to function and risk, by the cause of the threat. We do not, nor could we, argue against this public policy decision. We conclude, however, that it does not necessarily embrace the off-duty officer.
The implicit predicate of the "assumption of the risk" counterweight is the premise that police officers are not only hired to confront public dangers but are also specially trained and equipped to do so, functioning within and as part of a para-military organization whose administration, operational procedures, rules and regulations afford them the maximum available quantum of protection in performing their hazardous duties. In our view, compelling an off-duty officer to confront a public danger outside of the protective organizational structure and unshielded by the protective measures and circumstances which would have obtained had he been acting on duty in the same situation would remove a vital counterweight to the public policy concerns. Where this counterweight is absent, we conclude that the fireman's rule should not apply.
The problem here, as we see it, evolves from the notion that a police officer is always on duty. The fact, of course, is that the status of the off-duty officer is a matter of contextual determination not subject to absolute delineation.
For example, the question of the status of an off-duty police officer is often required to be considered in the context of remedial social legislation. Since such legislation is liberally construed in favor of its subject class, the off-duty officer is, in that context, ordinarily afforded the full benefit of his employment rights on the factual theory that the course of his employment extends beyond the performance of his regular duty. See, e.g., allowing worker's compensation recovery to off-duty officers, Jasaitis v. Paterson, 31 N.J. 81 (1959) (compensation allowed to a policeman injured while returning home from duty but still in uniform on the ground that he was permitted by *30 department regulation to wear his uniform for a period of time after the conclusion of his assigned tour of duty and was also required by regulation to perform duties whenever in uniform if the need for public service arose); Van Ness v. Haledon, 136 N.J.L. 623 (E. & A. 1947) (compensation allowed to a police marshall who sustained a heart attack while responding on an emergency basis to an accident call even though he was not at that time expressly assigned to duty); Kossack v. Bloomfield, 63 N.J. Super. 322 (Cty.Ct. 1960) (compensation allowed to an off-duty officer injured while cleaning his service revolver at home on the ground that an officer is obliged to keep his revolver clean and serviceable at all times). See also Wunschel v. City of Jersey City, 96 N.J. 651 (1984). And see Van Horn v. City of Trenton, 80 N.J. 528 (1979) (allowing indemnification pursuant to N.J.S.A. 40A:15-155 for counsel fees incurred by a police officer in defending charges made against him arising out of police activities he engaged in while off duty).
Where remedial legislation is not involved, the status of an off-duty police officer appears to be more discretely defined and distinctions between on-duty and off-duty are more sharply drawn than the "always on duty" shibboleth would suggest. The statutes themselves indicate a clear demarcation in status. Illustratively, N.J.S.A. 40A:14-133 prohibits the on-duty employment of a police officer in excess of six days in any single week but permits an officer to be retained on duty in the event of an emergency, subject, however, to his right to equivalent compensatory time off. N.J.S.A. 40A:14-135 provides that when a police officer is required to make court appearances outside his assigned duty hours, he is entitled to receive either compensatory time off from regular duty hours or additional compensation. The point, of course, is that these statutes recognize what is in fact the reality, namely, that police officers, even though subject to recall when emergencies arise, are nevertheless not always on duty.
*31 This does not mean, however, that an officer is relieved of all service-related obligations during off-duty hours. While off duty, he must report back to regular duty when directed to do so, he must obey orders given by proper authority, and he must comply with the rules and regulations of his department which are reasonably applicable to that status. See Ward v. Keenan, 3 N.J. 298 (1949); Reiman v. Breslin, 175 N.J. Super. 353 (App.Div. 1980), certif. den. 85 N.J. 147 (1980); Rivell v. Civil Service Commission, 115 N.J. Super. 64, 70 (App.Div. 1971), certif. den. 59 N.J. 269 (1971); Borough of Jamesburg v. Hubbs, 18 N.J. Super. 5 (App.Div. 1952).
The nub of the problem here is the perception of police officers that while off duty they are obliged to respond to direct requests from citizens for assistance. This perception derives not only from the "always on duty" mythology but also from departmental regulations and policies which so suggest. See, e.g., Van Horn v. City of Trenton, supra, 80 N.J. at 532, n. 1; Jasaitis v. Paterson, supra, 31 N.J. at 85-86; Kossack v. Bloomfield, supra, 63 N.J. Super. at 324-325. As a consequence of this obligation, whether actual or reasonably perceived, the off-duty officer is placed in an ambiguous and anomalous situation since he may feel compelled to render assistance at the call of citizens, whether or not the circumstances permit him to do so as effectively as he could have if responding to that call while on duty or with the same degree of personal safety. Thus, the off-duty officer may regard himself as unable to refuse assistance without violating his general obligations as a police officer, but he may nevertheless be unable to render assistance without subjecting himself to undue risk, namely, risk beyond that which his regular duties oblige him to assume in similar situations. His assumption of that undue risk may, therefore, constitute an appropriate and reasonable response, if not an obligatory response, to the situation confronting him. In these circumstances, his status is functionally that of a volunteer, not that of a police officer.
*32 The facts before us demonstrate our point. Plaintiff, while off duty and out of uniform, was asked to assist in quieting a barroom disturbance. We regard that undertaking as inherently dangerous. It is no coincidence that of the cases which have dealt with the fireman's rule as applied to on-duty police officers, a substantial number of them have involved injuries sustained by an officer while dealing with intoxicated people. See Walters v. Sloan, supra; Pottebaum v. Hines, supra; Hannah v. Jensen, supra; Weaver v. O'Banion, supra. See also, Entwistle v. Draves, 194 N.J. Super. 571 (Law Div. 1984). It may be inferred from plaintiff's deposition testimony that when a call of this nature is received by headquarters, a team of uniformed officers is dispatched to deal with it in a marked police car, and with the ability to communicate with headquarters and with back-up units. We note that the publication of the Field Service Division of the International Association of Chiefs of Police, advising on the handling of street and bar disturbances warns against a single officer attempting to intervene in a fight in progress and instructs him to wait for the arrival of his cover car. See Training Key 16, "Handling Disturbance Calls," at 3 (1964).
The reasons for these procedures are obvious. First, the wearing of the uniform itself offers protection to the police officer. As suggested by the Supreme Court in Jasaitis v. Paterson, supra, 31 N.J. at 85-86 a uniformed presence acts as a substantial deterrent to an imminent breach of peace. Clearly, an aggressive drunk is likely to respond more circumspectly to a uniformed officer than to one out of uniform who merely identifies himself as an officer. Several uniformed officers and the presence of a fully equipped police vehicle must surely act as an even greater deterrence, both psychologically and functionally.
This plaintiff, in responding to the assistance call at the bar, out of uniform, alone, and without any department back-up, had none of these protections. His response, therefore, appears to have required him to assume risks which a regularly dispatched *33 officer would not have had to incur. His conduct therefore could, in the circumstances, be properly characterized as that of a volunteer, not a police officer.
In Walsh, et al. v. Madison Park Properties, et al., 102 N.J. Super. 134, 138-139 (App.Div. 1968), we expressed the view that the fireman's rule does not apply where the firefighter is injured as a result of risks beyond those inevitably involved in his professional undertaking. So here. We do not suggest that every off-duty officer in responding to a citizen's call necessarily assumes undue risks which place him outside of the fireman's rule. Whether he does depends on the nature of the call, the manner in which such calls are ordinarily officially responded to, and the manner in which the circumstances require him to respond. If the off-duty officer's response is attended by his having to expose himself to a degree of personal vulnerability against which he would have been protected had he been on duty, we are satisfied that he must, for purposes of the fireman's rule, be regarded as a volunteer and not as a professional officer. Hence, the fireman's rule would not bar him from pursuing his cause of action against the person whose negligence created the need for intervention.
It is well settled that one who negligently creates a risk of harm may be liable to a volunteer whose intervention is reasonably foreseeable and who exposes himself to personal peril in order to avert the danger to others or personal property. See Justice Handler's dissent in Berko v. Freda, supra, 93 N.J. at 91; Harrison v. Middlesex Water Co., 158 N.J. Super. 368, 376 (App.Div. 1978), rev'd on other grounds 80 N.J. 391 (1979); Eyrich For Eyrich v. Dam, 193 N.J. Super. 244, 256 (App.Div. 1984). See also Restatement, Torts 2d, § 472 (1965). A volunteer may himself be negligent if he acts unreasonably in the circumstances. When the volunteer is, however, an off-duty officer responding to a citizen request for assistance, the evaluation of the reasonableness of his conduct must take into account his actual or reasonably perceived obligation to *34 render assistance even if by so doing he was assuming an undue risk of personal injury.
Finally, we hold that the finder of fact must make the determination of whether the off-duty officer, in the circumstances, assumed undue risks and whether he acted reasonably in so doing. While the record before us suggests that, for the reasons herein stated, the fireman's rule would not apply here, we are nevertheless satisfied that the ultimate determination requires the presentation and finding of facts at trial.
The order denying defendant's motion for summary judgment is affirmed, and we remand to the trial court for further proceedings.
NOTES
[1] His wife, plaintiff Carol Alessio, sues per quod.
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814 S.W.2d 751 (1991)
GALVESTON COUNTY COMMISSIOERS' COURT, Galveston County Beach Park Board of Trustees and Galveston County, Appellants,
v.
Phil LOHEC, et al., Appellees.
No. A14-90-0340-CV.
Court of Appeals of Texas, Houston (14th Dist.).
April 25, 1991.
Opinion on Motions for Rehearing August 15, 1991.
*752 Benjamin R. Powel, Kenneth J. Bower, Scott Lyford, Donald S. Glywasky, Galveston, for appellants.
Robert V. Shattuck, Jr., Patrick Reilly, Galveston, for appellees.
Before J. CURTISS BROWN, C.J., and JUNELL and MURPHY, JJ.
OPINION
JUNELL, Justice.
Galveston County Auditor Phil Lohec, appellee, sought a declaration that the Galveston County Beach Park Board of Trustees is a department of the county. He contended that if the Board is a county department, then (1) it must make purchases and pay claims using the county auditor and its purchasing agent, and (2) the Board's contract with the county, which currently allows the Board to avoid the county's purchasing scheme, is void. Declaring that the Board is a subdivision and department of Galveston County, the trial court enjoined the Board from making purchases or paying claims except through the county purchasing agent and auditor, and it ordered the Board to pay attorney's fees incurred by Lohec and by County Commissioner Wayne Johnson, III, who intervened in the suit. We reverse.
Galveston County voters authorized creation of the Beach Park Board on August 3,1973 to finance and operate county beach parks, pursuant to an Act of the Legislature, Tex.Laws, 2nd Spec.Sess.1969, ch. 20, at 136-40, now found at Chapter 62 of the Texas Natural Resources Code. Beginning in 1974, the Board contracted with the county to make its own purchases, with claims for those purchases to be paid upon signature of the Board's chairman and whichever commissioner is sitting on the Board. The 1974 agreement was amended in 1978 to provide that, although purchases were not made by or through the county purchasing agent, Board claims would be subject to approval by the county auditor prior to payment. In December 1989, the Board began paying its claims without first *753 submitting them to the county auditor, and the auditor filed suit against the Board, the commissioners, and the county.
The different purchasing procedures employed by the Board since its creation merely reveal how Galveston officials have interpreted the Act at various times. As such, they are irrelevant to the issue before us, which is whether the Legislature intended to authorize creation of an autonomous body. In arriving at the Legislature's intent, we consider the history of the subject matter, the mischief to be remedied, and the purpose to be accomplished. Burlington Northern R.R. Co. v. Harvey, 717 S.W.2d 371, 375-76 (Tex.App.Houston [14th Dist] 1986, writ ref'd n.r.e.).
A legislative committee charged with studying state coastal considerations explained the need for a new administrative entity to improve Texas beaches:
[C]ounty governments have virtually no powers which they can exercise to improve the beach (sic). Unlike home-rule cities, the counties of Texas are dependent upon precise Constitutional or statutory grants of power which are specific and limited in nature.
Report of the Interim Beach Study Committee, "Footprints on the Sands of Time," p. 19 (1969). Indeed, "[s]everal county officials told the Committee that they seriously doubted whether counties had the authority to clean the beaches." Id. To fill the void of local regulation of beaches, the Legislature gave beach park boards jurisdiction over all lands used as parks in connection with public beaches, excluding those located within city limits and those owned by the State, and all public beaches owned in fee by the county. Act, § 7, at 137; Code § 62.091(a). The Act empowered a beach park board to sue and be sued in its own name, Act, 7(j), at 138; Code § 62.054; issue revenue bonds, Act § 1(1), at 138-39; Code § 62.131; and hire employees, including financial personnel and a manager "subject only to the direction and orders of the board." Act § 7(i), at 138; Code §§ 62.047 and 62.049.
Contracts made by county park boards in place at the time the enabling statute was passed required approval by the commissioners' court to become effective. However, beach park boards were granted authority to contract with adjacent counties, beach park boards in adjacent counties, or beach park boards of any city in the same county. Act, § 7(o), at 139; Code § 62.-098. Having authorized them to contract with adjacent counties, the provision allowing them to contract with beach park boards in adjacent counties would be redundant if a beach park board is a county department. This is further proof that the Legislature did not intend a beach park board to simply be a subdivision of a county.
The Act also specifically empowered a board to keep its own records or to contract with its own county to the exclusion of other entities to keep and maintain the board's records. Act, § 6, at 137; Code § 62.051(a), (b). A board also may contract with persons, associations, and corporations. Act § 7(g), at 138; Code § 62.097. Therefore, a board may contract with its own county for other services, since a government or governmental subdivision is a "person." Tex.Gov't.Code Ann. § 311.-005(2) (Vernon 1988). Here, for example, the Board contracted to include its employees in Galveston County's personnel and pension systems.
It is hornbook law that a party cannot contract with or be bound to himself: "[a] contract requires, and there must always be, at least two parties to the contract." Am.Jur.2d, Contracts, § 15, at 352. Thus, a board's authority to contract with its own county, regarding its records or other services, is the single most convincing indication of the Legislature's intent to establish the park board as an entity separate from the county. Therefore, we hold that the court erred in concluding that the Board is a department of the county.
In its second point of error, the county challenges the trial court's conclusion that the Board must use Galveston County's purchasing agent and auditor. Appellees contend that, regardless of whether the Board is a subdivision of the county, the Board must follow the county *754 purchasing scheme because the county auditor has statutory control over purchases made with county funds. Each year, the commissioners' court allocates some $1.5 million of county funds to the Board's $1.8 million operating budget. However, the Act established the Board's separate ownership of its funds, referring to "money belonging to or under control of the board." Act, § 5, at 137; Code § 62.052. The Act also authorized a board to expend funds to improve, equip, and maintain lands within its jurisdiction. Act, § 7, at 137-39; Code §§ 62.093, 62.095, and 62.096. However, the Legislature did not require the Board to file a financial statement or annual budget with county commissioners, as it had mandated existing county park boards to do. Tex.Rev.Civ.Stat.Ann. arts. 6079e, § 16, and 6079c, § 17, now found at Tex.Local Gov't Code Ann. §§ 320.047(a), (c)(2), and 321.047(a), (c), respectively.
Differences between the authority of the Board and the powers and duties of county park boards in place at the time the Act was passed further illustrate the Legislature's intent to authorize the creation of a new, independent administrative entity to accomplish tasks that counties lacked the authority to perform. Previous boards were subject to the supervision of their commissioners' courts. Tex.Rev.Civ.Stat. Ann. art. 6079e, § 4, now at Tex.Local Gov't.Code Ann. § 320.050 (Vernon 1988). However, by design, the Legislature endowed beach park boards with extensive independent powers characteristic of an autonomous body without limiting their purchasing scheme to the county budget process.
In reversing the judgment of the trial court, we render judgment that the Board is an independent unit of state government, separate from Galveston County; as such, its contract with the county, which does not require the Board to use Galveston County's purchasing agent or auditor, is not void. The cause is remanded for a determination regarding attorney's fees in light of our opinion.
OPINION ON MOTIONS FOR REHEARING
On motions for rehearing, appellees Phil Lohec, the Galveston County auditor, and Wayne Johnson, a Galveston County commissioner, contend they should not have been assessed costs and fees because they filed suit in their official capacities. Appellants contend, as they did in the trial court, that Johnson had no standing to intervene in an official capacity and no justiciable interest as an individual. Further, the Galveston County Beach Park Board of Trustees contends that Lohec and Johnson are liable for the board's attorneys' fees and court costs.
Lohec brought suit in his official capacity to seek a judicial declaration of his rights and duties as county auditor. Appellants never contended that Lohec was before the Court in any capacity other than as county auditor, nor that he lacked standing or the necessary justiciable interest to bring the suit. Costs and attorneys' fees may not be assessed against Lohec, individually, in a suit brought in his official capacity. See Driscoll v. Harris County Comm'rs Court, 688 S.W.2d 569, 583 (Tex. App.Houston [14th Dist.] 1984, writ ref'd n.r.e.)
Johnson intervened in the lawsuit "individually ... as both a County Commissioner and a taxpayer." The beach park board moved to strike Johnson's intervention on "no standing" grounds. In response to the motion to strike, Johnson stated:
[I]t is Intervenor's fervent belief ... that he has a sworn duty to advocate his legal position ... and ... if he were not to intervene ... he would be derelict in his duty and subject ... to possible civil and/or criminal liability in the event [the trial court] should rule that the [beach park board] is a department of the County[.]
The trial court found that Johnson intervened as a commissioner, not as a taxpayer. However, we hold that Johnson had no standing to intervene in his official capacity. Bee County v. Roberts, 437 S.W.2d 62 (Tex.Civ.App.Corpus Christi 1968, no *755 writ). Like the commissioners in Bee County, Johnson has no justiciable interest in the litigation apart from the county, through a majority of the commissioners' court. Id. at 64.
Johnson also claimed to be intervening in an individual capacity as a taxpayer. Any party may intervene, subject to being stricken out by the Court for sufficient cause on the motion of the opposite party. Tex.R.Civ.P. 60. It is the intervener's burden to show a justiciable interest in the lawsuit by proving that adjudication of contested issues will conclusively affect him. Further, "if the sole object of a suit is for the benefit of the public at large and no citizen would be affected differently from all other citizens by the result of the suit, an individual does not have a justiciable interest that confers standing to prosecute the suit." Dorsaneo, 2 Texas Litigation Guide § 45.02[2], p. 45-12 (1989); see also Marshall v. City of Lubbock, 520 S.W.2d 553, 554-55 (Tex.App. Amarillo 1975, writ ref'd n.r.e.) In his capacity as a taxpayer, Johnson failed to establish an interest peculiar to him individually and not as a member of the general public. Hunt v. Bass, 664 S.W.2d 323, 324 (Tex.1984). Because Johnson had no standing to intervene either as a county commissioner or as a taxpayer, the trial court abused its discretion in refusing to strike Johnson's intervention.
In a proceeding for declaratory judgment, the court may award costs and reasonable and necessary attorneys' fees as are equitable and just. Tex.Civ.Prac. & Rem.Code Ann. § 37.009 (Vernon 1986). Certainly, it is an abuse of discretion to award attorneys' fees to a party not entitled to any relief. Houston v. Harris County Outdoor Advertising Assoc., 732 S.W.2d 42, 56 (Tex.App.Houston [14th Dist.] 1987, no writ). Since Lohec and Johnson were not entitled to declaratory relief, we reverse the ruling of the trial court ordering appellants to pay costs and attorneys' fees incurred by Lohec and Johnson. Further, the trial court found that the beach park board reasonably and necessarily incurred $20,675 in attorneys' fees and that an additional $7,500 would be reasonable in the event of an appeal. However, we decline the beach park board's request to render judgment that Lohec and Johnson pay the board's attorneys' fees, or to remand the cause with instructions that the trial court so order. Although the amount of attorneys' fees is not in dispute, it remains within the trial court's discretion to award costs and attorneys' fees as are equitable and just. As previously noted, costs and attorneys' fees may not be assessed against Lohec; however, they may be assessed against Johnson. We reverse and remand to the trial court for a determination, in light of our opinion, as to whether costs and attorneys' fees incurred by the prevailing parties should be assessed against Johnson.
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814 S.W.2d 213 (1991)
Richard Leon WOODS, Appellant,
v.
The STATE of Texas, Appellee.
No. 12-90-00331-CR.
Court of Appeals of Texas, Tyler.
July 26, 1991.
*214 Kurt Noell, Tyler, for appellant.
Michael Sandlin, Dist. Atty's. Office, Tyler, for appellee.
RAMEY, Chief Justice.
On November 1, 1990, a jury convicted appellant of the offense of burglary of a habitation and assessed his punishment at eight years confinement. The court suspended imposition of the sentence and placed the appellant on probation for five years.[1] Appellant raises two points of error. We will affirm the conviction.
Appellant's first point of error alleges that the trial court erred in failing to grant appellant's motion for directed verdict because the evidence was insufficient to establish that appellant entered the habitation. While appellant concedes that the evidence shows that the screens on several windows and possibly one screen door were cut, he states that these acts did not constitute entering the habitation.
In reviewing the sufficiency of the evidence, the relevant question is whether, after viewing the evidence in the light most favorable to the prosecution, any rational trier of fact could have found the essential element of the crime beyond a reasonable doubt. Jackson v. Virginia, 443 U.S. 307 at 320, 99 S. Ct. 2781 at 2789, 61 L. Ed. 2d 560 (1979); Dickey v. State, 693 S.W.2d 386, 387 (Tex.Cr.App.1984). Tex. Penal Code Ann. § 30.02 (Vernon 1989) sets forth the elements of burglary; the relevant portions of this section provide that:
(a) A person commits an offense if, without the effective consent of the owner, he:
(1) enters a habitation[2], or a building (or any portion of a building) not then open to the public, with intent to commit a felony or theft:
(b) For purposes of this section, "enter" means to intrude:
*215 (1) any part of the body; or
(2) any physical object connected with the body.
The evidence shows that on or about the night of August 5, 1989, Belinda Ann Lasley was awakened from sleep by the sound of scraping at her window. Upon wakening, she continued to hear the scraping sound accompanied by a "grunt noise" consistent with the sounds made by a person who was straining or trying to perform a physical task such as attempting to open a window. Upon confirming that the scraping sound was made by a person rather than an animal, Ms. Lasley called "911" and reported that she was home alone and that someone was outside her window cutting her screen. The police arrived approximately five to ten minutes later. Ms. Lasley testified that appellant had cut screens on a total of four windows, and that she had heard his feet on the back steps and had heard him cut the screen on the back door as well. When the police officers arrived, Ms. Lasley heard appellant attempt to flee the scene. Ms. Lasley further testified that she had not given appellant consent to enter her residence, that the screens were not cut when she came home that night, and that since all of the window screens were bolted to the wood window frames and both the front and back screen doors were hooked, the only means of entrance would have been through the screens.
Officer Tom Hrobar of the Tyler Police Department testified that he and Officer Clay Allen responded to Ms. Lasley's 911 call. Officer Hrobar also testified to the following with regard to his investigation:
Q. (By the State's attorney) Now, you have testified just then that y'all arrived with reference to a possible burglary, that you went around to the right or would that be the East side of that residence?
A. (By Officer Hrobar) That is the East side, yes, sir.
Q. All right, and when you went around the East side of that house, what did or if anything did you did were you able to locate?
A. As I started around the corner of the house I observed a man standing at the last window on that corner on that side toward me on the South side of the house.
Q. All right.
A. Southeast of that side.
Q. Now, what did you see this man doing?
A. He had his hand up like this bringing it back down from the screen.
Q. Okay, and how could you see this at that particular time?
A. Well, he was against a white house and we had street lights and at that time I turned on my flashlight once I observed him and put him in the beam of my flashlight.
Q. All right, sir. What did you see next? Did he have anything in his hand? Did you see anything at this point?
A. Yes, sir. He had a knife in his hand?
Q. All right, sir. And again the way that you saw that was by virtue of your flashlight and the lighting situation?
A. Yes, sir.
Q. Okay. Could you tell us at that point what kind of knife it was? Was it large or small or what?
A. It appeared to be fairly small. It was not a long blade but it was still a knife and at that time I placed which I had my weapon out and I placed it on him and told him to drop it.
Q. All right sir. Did you ascertain that individual's identity on that particular night?
A. Yes, sir, I did.
Q. All right, sir, and what was that individual's name? A. Richard Woods.
Following Officer Hrobar's testimony, Officer Allen testified with regard to the apprehension of appellant. Although Officer Hrobar was the first officer to come into contact with appellant, Officer Allen *216 arrived shortly thereafter, and his testimony was essentially the same as that of Officer Hrobar. Following the State's case, appellant moved for a directed verdict on the basis of the State's failure to prove "entry" into the habitation. Appellant's motion was overruled by the court, and the appellant rested without putting on any evidence.
In Ortega v. State, 626 S.W.2d 746, 747 (Tex.Cr.App.1981), the appellant was seen prying with a screwdriver on the wooden door of a house, and an investigation revealed that the latch on the screen door had been pulled off, the door knob on the wooden door had been disabled, and there were pry marks on the wooden door. The evidence also showed that none of these conditions had existed when the owner had left for work that day. Based upon these facts, the court found that an entry into the part of the house between the screen door and the wooden door was sufficient to constitute "entry" under section 30.02.
Given the holding in Ortega and the definition of "entry" provided in section 30.02(b)(2), we find the evidence sufficient beyond a reasonable doubt to support a jury's finding that appellant entered the habitation. Appellant's first point of error is overruled.
Appellant's second point of error alleges that the trial court erred in failing to grant appellant's motion for directed verdict based upon the State's failure to prove appellant's intent to commit theft, and that insufficient evidence exists to prove such intent.[3] The intent of an accused is a fact question which the jury may resolve from the surrounding circumstances. Ortega, 626 S.W.2d 749; Moreno v. State, 702 S.W.2d 636, 641 (Tex.Cr.App. 1986); McDonald v. State, 750 S.W.2d 285, 286 (Tex.App. Houston [14th Dist.] 1988, pet. ref'd). In the instant case, appellant entered Ms. Lasley's habitation at night without her consent. A non-consensual entry of a habitation at night, creates a rebutable presumption that the actor intended to commit theft. Moss v. State, 51A S.W.2d 542, 544 (Tex.Cr.App.1978). This rebuttable presumption may be considered by an appellate court in determining the sufficiency of the evidence to support a finding of intent. Browning v. State, 720 S.W.2d 504, 506 (Tex.Cr.App.1986); Aguilar v. State, 682 S.W.2d 556, 558 (Tex.Cr.App. 1985). In addition to the fact that appellant's entry occurred at night, the evidence indicated that Ms. Lasley heard a "grunt noise" consistent with a person straining to open a window. Appellant introduced no evidence to rebut the presumption of intent to commit theft. We find that the evidence was sufficient beyond a reasonable doubt to prove that appellant entered the habitation with intent to commit theft. Appellant's second point of error is overruled.
The judgment of the trial court is affirmed.
NOTES
[1] Appellant's brief incorrectly states that appellant received a sentence of ten years' confinement probated over a period of ten years, and incorrectly states that this is part of an appeal from a revocation hearing.
[2] . Texas Penal Code Section 30.01(1) defines "habitation" as, "a structure or vehicle that is adapted for the overnight accommodation of persons, and includes: (A) each separately secured or occupied portion of the structure or vehicle; and (B) each structure appurtenant to or connected with the structure or vehicle."
[3] Upon examination of the Statement of Facts, we note that although the trial court questioned the issue of "intent," appellant's motion for directed verdict pertained only to the issue of "entry." However, we will treat the point of error as a challenge to the sufficiency of the evidence to prove the element of intent to commit theft.
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814 S.W.2d 287 (1991)
Deborah H. JONES, Appellant,
v.
Ernie HANNA, Individually and d/b/a Econo-Self Storage and Robert Ziegler, Appellees.
No. 90-CA-1670-MR.
Court of Appeals of Kentucky.
August 16, 1991.
Pamela Yvette Hourigan, Landrum & Shouse, Lexington, for appellant.
R. Craig Reinhardt, Fowler, Measle & Bell, Lexington, for appellees.
Before CLAYTON, HOWERTON and McDONALD, JJ.
McDONALD, Judge.
This is an appeal from a summary judgment which denied Appellant/Plaintiff Deborah Jones' claim for loss of personal property valued at $16,241.00 that was stored in a "mini-warehouse" owned by Appellee Ernie Hanna, d/b/a Econo-Self Storage.
On September 2, 1987, Deborah Jones, along with her father, signed a "Storage Rental Space Agreement" with Econo-Self Storage. Jones needed to store her personal belongings and furniture because of the flooding of her apartment. By deposition Jones testified that Econo-Self Storage was selected because its manager, Robert Ziegler, assured her that twenty-four hour security was provided at the facility. She *288 admitted that she did not read the agreement very well.
On May 2, 1988, Deborah Jones learned that the lock to her storage unit had been cut and that virtually all of her possessions were stolen. The date and time and other circumstances of the theft are not known by any of the parties.
Deborah Jones filed suit alleging that appellees failed to maintain a safe and secure storage area for her goods.
Summary judgment was entered in favor of the appellees based on the signed agreement between the parties. The self-storage agreement is written as a lease and designates the parties as landlord and tenant. Deborah Jones as tenant leased a warehouse storage space which was 10 feet by 10 feet, on a monthly term of $45. The agreement, in part, provides:
2. Use: The premises may be used and occupied only for the purpose of storing personal property. . . . All property kept, stored or maintained within the premises by Tenant shall be at Tenant's sole risk.
3. Insurance and Indemnity: . . . Each party hereby waives its right of subrogation against the other party. Landlord shall not be liable to Tenant or to any other person on the premises for any loss or damage to Tenant, its employees, agents or guests, to the personal property of Tenant or such other person, caused by any acts of negligence whatsoever,. . . .
The trial court dismissed the complaint, thereby rejecting the argument that the facts created a bailment. The trial court construed the contract as creating a lease between the parties.
The first issue on appeal is that summary judgment was inappropriate in this case.
The argument fashioned is the traditional one that a summary judgment, being a drastic remedy, takes away the right to have factual issues resolved by a jury. Naturally, we agree with Jones' argument as far as it goes, and the latest pronouncement by our Supreme Court in Steelvest, Inc. v. Scansteel Service Center, Inc., Ky., 807 S.W.2d 476 (1991), does give a great amount of comfort to the appellant. Steelvest reaffirms the Kentucky standard for granting summary judgments, ". . . as a matter of law, it appears that it would be impossible for the respondent to produce evidence at the trial warranting a judgment in his favor . . . is only proper where the movant shows that the adverse party could not prevail under any circumstances." See also, Paintsville Hospital Company v. Rose, Ky., 683 S.W.2d 255 (1985).
We would agree with Jones if the circumstances created a bailment. However, if the circumstances and agreement made a lease, then the summary judgment was proper because the lease agreement placed all the risk of loss on Jones, the tenant. If a lease be established, then summary judgment was warranted.
Public Policy Argument
Jones argues that the agreement by virtue of the provision that waived each party's right of subrogation along with the landlord's future negligence is against the public policy of the Commonwealth. No authority was cited for this argument; however, our research produced several cases giving direction on this issue. We might say the case law is inconsistent and constitutes misdirected guidance.
In Greenwich Ins. Co. v. Louisville & N.R. Co., 112 Ky. 598, 66 S.W. 411 (1902), our highest court construed a similar exculpatory lease provision as presented in our case. It was provided that the railroad would be held harmless by the lessor if injury or loss was caused "by reason of fire from locomotives, or from any cause whatsoever." (Emphasis added). The lessor built a cold storage house on the railroad's right-of-way, which was later destroyed by fire. The opinion said in part:
The Court is of opinion that appellee railroad company is not liable for the destruction or damage to the building under the contract quoted, except for wilful or wanton negligence of its servants. For mere carelessness, however gross, short of wantonness or wilfulness, it will not be liable.
*289 On the other hand, the case goes on to say that to secure in advance indemnity against the result of your own negligence is clearly against public policy. But the case pivoted on the point that if the parties are dealing at arm's length and upon an equal footing, then the following principle is imposed at page 413: "It is not so much that the railroad company contracts against its own negligence as that the [tenant] agrees to alone bear all risks from fire." The aforesaid quote certainly applies to our case.
Zeitz v. Foley, Ky., 264 S.W.2d 267 (1954), also limits the public policy argument by the following declaration:
However, contracts voluntarily made between competent persons are not to be set aside lightly. As the right of private contract is no small part of the liberty of the citizen, the usual and most important function of courts is to enforce and maintain contracts rather than to enable parties to escape their obligations on the pretext of public policy or illegality. If the legality of the contract can be sustained in whole or in part under any reasonable interpretation of its provisions, courts should not hesitate to decree enforcement.
However, a different rule is found in Meiman v. Rehabilitation Center, Inc., Ky., 444 S.W.2d 78 (1969), where a release for future negligence (an exculpatory clause) for causing personal injury was prohibited as against public policy. But an exculpatory clause was found not to be unconscionable in a claim over a negligently handled yellow page ad in Louisville Bear Safety Service, Inc. v. South Central Bell Telephone Company, Ky.App., 571 S.W.2d 438 (1978).[1]
On bringing this issue to a close, a federal circuit court analyzed the Kentucky case law and became perplexed at its disarray, but did conclude that one may contract away future negligence if such is not wilful and wanton, and not resultant in personal injury. See Donegan v. Beech Bend Raceway Park, Inc., 894 F.2d 205 (6th Cir.1990). We agree and adopt this admonition found in Greenwich Ins. Co., supra, at 413, "We cannot see that the public are in any wise affected by such a contract, nor can they be."
Next, the appellant claims that a bailment situation was created when she delivered her personal property in trust to the appellee's place of business.
A "bailment," in its ordinary legal signification, imports the delivery of personal property by one person to another in trust for a specific purpose, with a contract, express or implied, that the trust shall be faithfully executed, and the property returned or duly accounted for when the special purpose is accomplished, or kept until the bailor reclaims it.
8 Am.Jur. Bailments § 2. See also, Commonwealth v. Polk, 256 Ky. 100, 75 S.W.2d 761 (1934).
The question is whether a bailment was created, notwithstanding the lack of a contract. Because a bailment is created by contract, we assume that its creation may be limited or exterminated by contract as well, which was done in this instance. The subject matter of the agreement herein clearly was for the rental of a definite space.
While the fact that one rents a definite space in which to store goods does not show conclusively that the arrangement is a lease rather than a bailment, one who merely grants storage room, without assuming, expressly or impliedly, any duty or responsibility with respect to the care or control of the property stored, is not a bailee.
8 Am.Jur.2d Bailments 31.
In our fact pattern, the storage units, 180 in all, were protected by a 6 ft. fence and a locked gate. The tenants placed their own locks on the units. No security dogs or watchmen were provided. Access could be made to the units between 6 a.m. and 9 p.m. daily. No inventory was made of the goods by the facility owner, and the goods were never placed in the hands of *290 the landlord. In fact, it is unknown by the landlord what was stored.
Appellee, Ernie Hanna, by deposition explained: "Just storage units that you control. You put your own lock on and come and go as you please when the gates are open."
In summary, there was no delivery of Jones' personal property to the appellees, no exercise of control over the property by the appellees and no actual possession by the appellees. Therefore, basic elements of conventional bailment are lacking in conjunction with a clear agreement that only space was being rented. This plainly leads us to the conclusion that the rental agreement controls the rights of parties.
Because public policy does not prohibit making a bad bargain, summary judgment was proper as a matter of law based on the agreement. See Bonded Elevator, Inc. v. First National Bank of Louisville, Ky., 680 S.W.2d 124 (1983), and Bennett v. Southern Bell Telephone and Telegraph Company, Ky., 407 S.W.2d 403 (1966).
All concur.
NOTES
[1] For a discussion of exculpatory clauses and the doctrine of unconscionability under the Uniform Commercial Code, consult 41 Vanderbilt Law Review, Commercial Bailments, 129 (1988).
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814 S.W.2d 887 (1991)
HSAM INC., d/b/a HSA Mortgage Company, Appellant,
v.
Dale GATTER and Betty Gatter, Appellees.
No. 04-90-00575-CV.
Court of Appeals of Texas, San Antonio.
August 28, 1991.
Rehearing Denied August 28, 1991.
*888 P. Keith O'Gorman, Dale Weyand, Michael Black, Burns & O'Gorman, San Antonio, for appellant.
Robert P. Stecher, Peter Koelling, San Antonio, for appellees.
Before CHAPA, BIERY and CARR, JJ.
ON APPELLEE'S MOTION FOR REHEARING
BIERY, Justice.
Appellee's motion for rehearing is denied; our opinion of July 10, 1991, is withdrawn and this opinion is substituted.
"Laws are made for men of ordinary understanding, and should, therefore, be construed by the ordinary rules of common sense. Their meaning is not to be sought for in metaphysical subtleties, which may make anything mean everything or nothing, at pleasure."[1] We are presented with the issue of whether a common sense construction of the Consumer Credit Code requires a multi-thousand dollar recovery for a potential two cent loss. HSAM, Inc., d/b/a HSA Mortgage Company, appellant, appeals from a judgment against it in the amount of $16,500.00 and in favor of Dale and Betty Gatter, appellees. By crosspoint, the Gatters seek to have the judgment reformed to the amount of $80,048.40. We reverse and render judgment that the Gatters take nothing.
In March 1985, the Gatters entered into a retail installment contract for the purchase of a manufactured home. The right to receive payments under the contract was subsequently assigned to HSA Mortgage Company (HSA). The amount financed was $24,585.00 with a finance charge, the aggregate amount for the entire fifteen year term of the loan being $40,024.20. The contract provided that the Gatters would make payments of $358.94 on the first day of each month beginning May 1, 1985. A late charge of $17.95 would be due and owing for any payments not made by the fifteenth day of any particular month. In fact, the undisputed record reflects that of the fifty-six payments made by the Gatters, twenty of them, or approximately thirty percent, were late and the late charge assessed. In June 1989, the Gatters received a letter from Robert Stecher,[2] a lawyer who eventually filed suit *889 for the Gatters against HSA in October 1989. Approximately six weeks after receiving the attorney's letter, the Gatters requested from HSA "a payoff quote" of the total sums due and owing by the Gatters to HSA. The Gatters then filed suit, through Mr. Stecher, against HSA alleging the payoff quote to be excessive and therefore, a violation of the provisions of the Texas Consumer Credit Code. TEX.REV. CIV.STAT.ANN. art. 5069-6A (Vernon 1987).
The Gatters went to trial on their third amended original petition which alleged as a basis for recovery: (1) the breach of an agreement by HSA not to charge a late fee for the installment payment due March 1, 1989, even if the installment payment was made more than fifteen days after its due date; (2) the $71.80 reflected on the payoff quote as being owed for accrued and unpaid "late charges" was excessive; and (3) the amount reflected on the payoff quote as the outstanding balance owed for insurance on the manufactured home was excessive.
HSA went to trial on its first amended original answer which contained, in addition to other defensive matters: (1) a specific denial of any agreement to waive the March 1989 late charge; (2) a specific denial that the $71.80 stated as the amount owing for accrued and unpaid "late charges" was excessive; (3) an affirmative defense that the financing of the insurance for the manufactured home was not regulated by TEX.REV.CIV.STAT.ANN. art. 5069-6A; (4) an affirmative defense that the payoff quote given to plaintiffs was less than the maximum amount which could have been stated pursuant to the terms of the retail installment contract and the Texas Credit Code; and (5) an affirmative defense that principles of equity precluded any recovery by the Gatters. HSA's equitable defenses specifically included the doctrines of de minimis non curat lex and "unclean hands."
Following presentation of evidence to the jury and a stipulation by counsel for HSA that the undated payoff quote in August of 1989 contained an assessment of a $17.95 late charge for the August 1989 installment, the trial judge submitted only two questions to the jury.[3] Trial counsel Stecher requested additional questions based upon the plaintiffs' other theories of recovery. The trial judge refused to submit these questions; the Gatters do not complain of such refusal on appeal.
Following the verdict, the trial judge denied the Gatters' motion for judgment for *890 the full amount of the statutory forfeiture of $80,048.40 under TEX.REV.CIV.STAT. ANN. art. 5069-8.01(a) (Vernon 1987). The trial judge did award the Gatters judgment for $16,500.00, apparently reducing the statutory forfeiture amount because of the jury's answer to question two and HSA's equitable defenses.
The evidence reflects that Mrs. Gatter testified she received the free legal services offer from Mr. Stecher prior to the time of requesting the payoff quote. She also admitted that two late charges were owed by the Gatters to HSA, including a late charge for the August 1989 payment. Mrs. Gatter stated she received the payoff quote from HSA on August 12, 1989, five days before a late charge could lawfully be assessed for the August 1989 payment. Julie Brown, an employee of HSA, testified she prepared the payoff quote on August 23, 1989, and the information in the payoff quote was good as of August 23, 1989, although the actual payoff quote form stated the amount was "good through" August 23, 1989. HSA contends, therefore, that the August 1989 late charge was lawfully assessed after August 16,1989, based upon Ms. Brown's testimony. The payoff quote form itself was not dated, and the Gatters did not retain the postmarked envelope in which the quote was sent. Thus, the Gat ters' cause of action can be distilled to a conflict in testimony between Mrs. Gatter and Ms. Brown over when the payoff quote was given. If, in fact, the payoff quote was given after August 16, 1989, there is no dispute that it was lawfully assessed. The jury, however, resolved the conflict in testimony in favor of the Gatters. The Gatters therefore contend they are entitled to $80,048.40 in statutory penalties because the jury found the payoff quote was given on August 12, 1989, five days early.
We first address HSA's contention that the payoff quote is not a "charging" under Chapter 8 of the Texas Consumer Credit Code. While we agree with HSA that Danziger v. San Jacinto Savings Ass'n, 732 S.W.2d 300 (Tex.1987), is distinguishable on its facts from the present case, we believe the supreme court clearly addressed the legal issue when it said that "a pay-off quote which reflects a charge of interest in excess of that allowed by law constitutes a `charging' of usurious interest." Danziger, 732 S.W.2d at 304. Points of error one and two are overruled.
We next address HSA's equitable arguments that the Gatters are not entitled to judgment because the jury found the payoff quote was requested for the purpose of creating a cause of action and more specifically, the doctrine of de minimis non curat lex.
Equitable defenses are available in cases brought pursuant to the provisions of the Texas Consumer Credit Code. Yates Ford, Inc. v. Ramirez, 692 S.W.2d 51 (Tex. 1985) (monthly overcharge of $.002 and $.074 spread over 42 months held de minimis); General Elec. Credit Corp. v. Smail, 584 S.W.2d 690 (Tex.1979) (court found parties in pari delicto and award of damages an unjustifiable windfall); Gawlik v. Padre Staples Auto Mart, Inc., 666 S.W.2d 161 (Tex.AppCorpus Christi 1983, writ ref'd n.r.e.) (overcharge of $1.62 did not warrant recovery under Credit Code, overcharge de minimis); Wayne Strand Pontiac-GMC v. Molina, 653 S.W.2d 45 (Tex.AppCorpus Christi 1983, writ ref'd n.r.e.) ($5.53 overcharge and charging of $2.50 official fee were de minimis; doctrine applicable to miscalculated or unauthorized overcharges); Starness v. Guaranty Bank, 634 S.W.2d 325 (Tex. App.Dallas 1982, writ ref'd n.r.e.) ($0.21 a month excess equalling $7.56 excess over life of loan de minimis); Thornhill v. Sharpstown Dodge Sales, Inc., 546 S.W.2d 151 (Tex.Civ.App.Beaumont 1976, no writ) (no recovery when $0.42 overcharge used to get into court).
Mrs. Gatter admitted that the August 1989 payment, which became the only issue in the case submitted to the jury, was in fact late. Her admission is corroborated by the Gatters' canceled check which shows it was prepared by the Gatters on August 23, 1989, and in fact, included the late payment amount. The evidence also shows that the August 1989 late payment was only one of twenty late payments out of *891 fifty-six payments made during the credit relationship between the Gatters and HSA.
The Gatters have cited us to portions of the Declarations of Legislative Intent of the Texas Consumer Credit Code:
(1) Many citizens of our State are being victimized and abused in various types of credit and cash transactions
(3) [Penalties imposed for usury do not provide effective or workable safeguards...
(4) These unregulated practices bring great social and economic hardship to many citizens of our State. They impose intolerable burdens on those segments of our society which can least afford to bear themthe uneducated, the unsophisticated, the poor and the elderly.
(5) These facts conclusively indicate a need for a comprehensive code of legislation to clearly define interest and usury, ... and to provide firm and effective penalties for usury and other prohibited practices.
14D TEX.REV.CIV.STAT.ANN., TITLE 79, § 1, pp. 1-2 (Vernon 1987). We agree with the Gatters that the Texas Consumer Credit Code is a proper manifestation of the declared legislative intent. We are troubled, however, by what appears to be a hypertechnical perversion of legislative intent, an exaltation of form over substance, and a misallocation of social and judicial resources. We find absolutely no evidence in the record to suggest that HSA was the proverbial loan shark which victimized and abused the Gatters nor any evidence which suggests that HSA engaged in unscrupulous practices in its relationship with the Gatters or imposed any social or economic hardship upon them. To the contrary, the evidence supports the argument that HSA was "set up" to commit a technical violation in order to create a cause of action. Given the technology now available in the area of computer assisted telephone dialing, a logical extension of the creation of this cause of action would allow random calls to lenders with requests for payoff quotes in the hope that a deputy assistant clerical person would give an erroneous amount thereby triggering the severe penalties of the Texas Consumer Credit Code. The mere statement of the proposition demonstrates its lack of merit. We believe the fair and rational enforcement of the Texas Consumer Credit Code and other well-intentioned statutory schemes should be grounded on the firm foundation of the common law: common sense, reasonableness, and wisdom.[4] In yielding to a tendency to *892 make complex that which is simple, we sometimes overlook our history and the rudimentary principles which gave enlightened birth to our peaceful system of resolving disputes.[5] A fundamental teaching of those common law principles of reasonableness, wisdom, and common sense is the doctrine of de minimus non curat lex. The doctrine advocates the proposition that the law does not care for, or take notice of, very small or trifling matters. Anguiano v. Jim Walter Homes, Inc., 561 S.W.2d 249, 255 (Tex.Civ.App.San Antonio 1978, writ ref'd n.r.e.). In a misplaced zeal to create litigation, some have lost sight of the true and majestic purpose of the law to strike a reasonable balance and to do justice.
While the Gatters contend, and we agree, that $17.95 multiplied by the thousands of contracts which lenders such as HSA service is not necessarily a de minimis amount, that is not the issue before us. Rather, the issue is what harm, victimization, abuse, or economic hardship has been suffered by the Gatters, given the jury finding that the payoff quote was received on or about August 12, 1989, five days before the August late payment could have been lawfully assessed. Considering the undisputed fact that the August 1989 payment was in fact made late (August 23, 1989), one way of analyzing any potential harm to the Gatters is to inquire how much they would have lost even if they had paid the undisputedly owed $17.95 five days before it could have been legally assessed. At ten percent interest, the hypothetical loss of the use of the money would have been a little over two cents for the five day period. We hold the record before us, particularly the jury's verdict that the payoff quote was requested for the purpose of creating a cause of action, supports the application of the equitable doctrine of de minimis non curat lex.[6]
The judgment of the trial court is reversed, and judgment is rendered that the Gatters take nothing.
NOTES
[1] Letter dated June 12, 1823, from Thomas Jefferson to United States Supreme Court Justice William Johnson. S. PADOVER, THE COPLETE JEFFERSON 323 (1943).
[2] June 21, 1989
Re: LIMITED OFFER OF FREE LEGAL SERVICES TO TEXAS MANUFACTURED HOME OWNERS
Dear Friend:
I am a San Antonio lawyer who has been practicing law for about seven years. I have an offer of free legal services to make to all owners of manufactured homes in Bexar County, which will be effective for the next thirty (30) days only.
Your rights as a consumer are very important. It has come to my attention that some banks and finance companies may be over charging manufactured homeowners on their monthly home payments. Under certain provisions of Texas law, a home owner may be able to recover many thousands of dollars (twice his/her contracted interest) and attorney's fees if there are certain over charges.
I am offering to review your loan and financing documents for free. I will tell you whether, in my opinion, your rights may have been injured. Even if you do not call me, I encourage you to contact an attorney of your choice to make sure you are being treated right when it comes to your home payments.
TELL YOUR FRIENDS about my offer. If you know someone that has had their manufactured home taken by the bank, please tell them of this offer. They have important rights they need to know about.
Call my telephone recorder at (512) 590-3050 24-hours a day and leave your name and telephone number, or call my office at 829-8900 and leave your name and number. You may also send copies of your loan documents to me at the above addresses. LETS HEAR FROM YOU SOON.
I am not board certified for any legal specialty by any Texas Board of legal specialty. Sincerely, Robert P. Stecher
[3] The questions and the jury's answers are as follows:
Question No. 1:
On what date do you find by a preponderance of the evidence that the payoff quote was given by the Defendant to the Plaintiffs?
Answer: On or about August 12, 1989.
Question No 2: Do you find from a preponderance of the evidence that the Plaintiffs solicited the payoff quote from the Defendant for the purpose of creating a cause of action against the Defendant? Answer Yes or No.
Answer: Yes.
[4] The law is called upon to act as arbiter when conflicts arise. The administration of the laws becomes a process of weighing the interests between the plaintiff and defendant. Its primary purpose is "to make a fair adjustment of the conflicting claims of the litigating parties." See W. KEETON, D. DOBBS, R. KEETON & D. OWEN, PROSSER AND KEETON ON THE LAW OF TORTS § 3 (5th ed. 1984). While specifically applicable to tort law, see generally W. KETON, D. DOBBS, R. KEETON & D. OWEN, PROSSER AND KEETON ON THE LAW OF TORTS § 32 (5th ed. 1984) (discussion of the reasonable man).
Blackstone wrote that the fairest and most rational method of interpreting the will of the legislator is to explore the intentions at the time the law was made. 1 BLACKSTONE, COMENTARIES 59 (Dawsons of Pall Mall London 1966). The intentions may be discovered by the words, the context, the subject matter, the effects and consequences, or the spirit and reason of the law. The most universal and effectual way of discovering the true meaning of a law is by considering its reason and spirit. For exampie, there was a law that those who abandoned ship would forfeit all property, and the ship would belong entirely to those who stayed with it. During a storm, all the mariners abandoned ship except one sick passenger who could not escape because of his disease. After the ship made it safely back to port, the sick man claimed possession under the law. All agreed that the sick man was not within the reason of the law because the reason for the law was to encourage the shipman to save the ship. The sick man never pretended to have stayed aboard to save the ship or to have contributed in any manner to its preservation. Id at 61. (Emphasis added.)
Likewise, if the effects and consequences of a law bring about an absurd result, we must deviate from its perceived interpretation. Id at 60. Thus, the Bolognian law which stated "that whoever drew blood in the streets should be punished with the utmost severity," was not applicable to a surgeon who opened the vein of a person who fell ill in the street. Id. Laws in all cases cannot be foreseen or expressed. When the application of the law to a particular case brings about circumstances which the legislator would have excepted if they had been foreseen, it is necessary that a power somewhere should be vested with excepting those circumstances from the law. Id. at 61.
[5] Although a great many rules are explained by their "manifest good sense," some rules may only be understood by reviewing the history from which they came. O.W. HOLMES, THE COMMON LAW 2 (1881). It is common knowledge that the early forms of legal procedure were based upon vengeance. Id. "The courts were interested primarily in keeping the peace between individuals by providing a substitute for private vengeance." W. KEETON, D. DOBBS, R. KEETON & D. OWEN, PROSSER AND KEETON ON THE LAW OF TORTS § 4 (5th ed. 1984).
[6] The equitable rule of "unclean hands" is normally used as a defense against a party seeking affirmative equitable relief and hence, has no direct applicability here. However, the jury's answer to question two clearly supports the notion that the Gatters did not come before the court clothed in pristine innocence.
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240 B.R. 24 (1999)
In re PMI-DVW REAL ESTATE HOLDINGS, L.L.P., an Arizona limited liability partnership, Debtor.
Maricopa County, a political Subdivision, et al., Plaintiff,
v.
PMI-DVW Real Estate Holdings, L.L.P., an Arizona limited liability partnership, Defendant.
Bankruptcy No. B-99-01969-PHX-RGM. Adversary No. 99-00128.
United States Bankruptcy Court, D. Arizona, Phoenix Division.
August 27, 1999.
*25 *26 Brian R. Winski, Michael G. Tafoya, Winski, Lustig & Tafoya, Phoenix, AZ, for debtor.
Debra Sirower, Jean Rice, Phoenix, AZ, Tamalyn E. Lewis, Ridenour, Swenson, Cleare & Evans, Phoenix, AZ, for Maricopa County.
ORDER REGARDING APPLICABILITY OF THE AUTOMATIC STAY TO MARICOPA COUNTY'S PROCEEDINGS TO CONDEMN DEBTOR'S PROPERTY THROUGH EMINENT DOMAIN; AND ORDER REGARDING THE POLICE AND REGULATORY POWER EXCEPTION TO THE AUTOMATIC STAY; AND ORDER REQUIRING THE PARTIES TO FILE A JOINT PRETRIAL STATEMENT WITHIN 30 DAYS
ROBERT G. MOOREMAN, Bankruptcy Judge.
This matter is before the Court pursuant to Maricopa County's Motion for Relief from the Automatic Stay and Debtor's Response thereto. Prior to the final hearing on the Motion for Relief from the Automatic Stay, the parties requested that the hearing be limited to the legal issues raised by the Motion for Relief from the Automatic Stay, including the Bankruptcy Court's jurisdiction, the issue of whether this was a "core" or "non-core" proceeding, and whether the County's condemnation proceedings were an exercise of its police and regulatory power which is excepted from the automatic stay.
A hearing was held on May 18, 1999 after which the matter was taken under advisement. After due consideration of the pleadings, the record herein, and under the present posture of the case, the Court finds and concludes the following in making its decision.
PROCEDURAL HISTORY
1. On October 23, 1998, Maricopa County offered to purchase 1.469 acres of land owned by the Debtor and which is a portion of the approximately 38 acres of land owned by the Debtor in the subject area. The County offered to purchase the property for a total of $51,415.00, which equates to $35,000.00 per acre.
*27 2. On November 2, 1998 the Debtor responded by letter and rejected the County's offer.
3. On November 4, 1998, the Maricopa County Board of Supervisors held a public hearing which resulted in a finding for the need of a realignment of the present Deer Valley Road and the creation of a county highway. The Board of Supervisors found the highway to be a public necessity.
4. On November 9, 1998 the County acknowledged receipt of the Debtor's letter rejecting the offer and again urged the Debtor to reconsider the County's offer of $51,415.00.
5. On February 4, 1999 the County filed a Complaint in Condemnation (Eminent Domain) in the Maricopa County Superior Court, Maricopa County v. PMI-DVW Real Estate Holdings, L.L.P., case no. CV 99-01925. The Complaint sought to condemn 1.4773 acres of the Debtor's land.[1] On the same day, the County also filed an Application for Order of Immediate Possession, which sought the immediate possession of the subject property.
6. The Maricopa County Superior Court issued an Order to Show Cause requiring the Debtor to appear before that Court to show cause, if any, as to why the Application for Order of Immediate Possession should not be granted. The Superior Court set the Order to Show Cause hearing for February 24, 1999.
7. On February 24, 1999 the Debtor filed a voluntary Chapter 11 Bankruptcy petition and a Notice of Removal of the Condemnation litigation to the Bankruptcy Court. The filing of the Notice of Removal established the instant Adversary proceeding, ADV. No. 99-00128.
8. On March 2, 1999 Debtor filed its Answer and Counterclaim to the Condemnation Complaint
9. On March 25, 1999, Maricopa County filed a Motion to Remand and also filed a Motion for Relief from the Automatic Stay.
10. The County requested an accelerated hearing on the Motion to Remand.
11. The Bankruptcy Court held an accelerated hearing on April 5, 1999. At the hearing, the Court heard arguments from Debtor concerning the propriety of the condemnation and the facts surrounding the County's desire to realign Deer Valley Road. The Court also heard arguments concerning the remand. The Court consolidated the Motion for Relief from the Automatic Stay with the Adversary Proceeding on the Removed Condemnation Complaint and directed the parties to file a Joint Pretrial Statement. The Court also allowed the parties to file briefs concerning the issue of jurisdiction and/or the "core" and "non-core" issues.
12. On May 10, 1999, Maricopa County filed a Motion requesting that the Court use the scheduled final hearing on the Motion for Relief from Automatic Stay for purposes of hearing oral arguments on the jurisdictional issues.
13. On May 12, 1999, the Debtor filed a joinder to the County's Motion regarding the May 18, 1999 hearing.
14. On May 17, 1999 the Court entered the lodged order directing that the May 18, 1999 hearing was to be used for purposes of resolving the legal issues presented in the Adversary proceeding.
THE BANKRUPTCY COURT'S JURISDICTION IN THESE PROCEEDINGS
The Court finds and concludes that the United States Code, including the Bankruptcy Code,[2] provides a wide range of jurisdiction over property and assets of the Bankruptcy estate. Upon the filing of *28 a Bankruptcy petition, an estate is automatically created which contains all of the legal or equitable interests that the Debtor possesses in property as of the commencement of the Bankruptcy case. See 11 U.S.C. § 541(a)(1). The Bankruptcy Court's jurisdiction extends to all property of the Bankruptcy estate, wherever such property is located. See, 11 U.S.C. § 541(a).
The Court finds and concludes that on February 24, 1999, when the Debtor filed the present Bankruptcy petition, that the property that includes the approximately 38 acres of land near Deer Valley Road was, and remains, property of the Debtor and is therefore property included in the Bankruptcy estate. The Court further finds and concludes that the subject 1.4773 acres of land which Maricopa County seeks to condemn is property of the Bankruptcy estate. The Court finds and concludes that it has subject matter jurisdiction over the property which the County is now seeking to condemn for the proposed realignment of Deer Valley Road.
"CORE" vs. "NON-CORE"
The Bankruptcy Court recognizes that it is the County's position that the entire condemnation proceeding is a "non-core" proceeding because the condemnation is brought under Arizona state law. Pursuant to 28 U.S.C. § 157(b)(1), Bankruptcy Judges may "hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11 . . ." Core proceedings include, but are not limited to: matters concerning the administration of the estate; orders to turn over property of the estate; motions to terminate, annul, or modify the automatic stay; order approving the use or lease of property of the estate; order approving the sale of property of the estate; and other proceedings affecting the liquidation of the assets of the estate. See 28 U.S.C. § 157(b)(2)(A), (b)(2)(E), (b)(2)(G), (b)(2)(M), (b)(2)(N), and (b)(2)(O). Bankruptcy Judges also may hear a proceeding that is not a core proceeding, but which is otherwise related to a case under Title 11 of the United States Code; however the Bankruptcy Judge must submit proposed findings of fact and conclusions of law to the District Court, and the final order thereon shall be entered by the District Court. 28 U.S.C. § 157(c)(1). The parties may also consent to the Bankruptcy Judge entering final orders on matters related to a case under Title 11. 28 U.S.C. § 157(c)(2).
The Court finds and concludes that the issues presented in the present matter are core proceedings. Although the Court recognizes that the County's condemnation action is based on non-Bankruptcy, Arizona law, the Court finds and concludes that the matter involves property of the Bankruptcy estate and that the County's use of legal process is intended to remove property or assets from the Bankruptcy estate. The Court finds and concludes that the effect of an Immediate Possession Order and the condemnation of the subject property would be a forced sale upon property of the Bankruptcy estate.
Therefore, based on all of the foregoing, because the County is attempting through its state court proceedings to use, sell, or otherwise liquidate assets of the estate, the Court finds and concludes that this matter involves a core proceeding and that the Bankruptcy Court, pursuant to 28 U.S.C. § 157(b), may hear and determine this matter, and enter appropriate orders and judgments thereon.
APPLICABILITY OF THE AUTOMATIC STAY
Maricopa County has argued that the Automatic Stay imposed by 11 U.S.C. § 362 does not apply to the condemnation proceedings because such proceedings are within the governmental police and regulatory power exception of § 362(b)(4). The Debtor argues that the governmental police and regulatory power exception does not apply to these facts because the County *29 is not "exercising authority under the Convention on the Prohibition of the Development, Production, Stockpiling and Use of Chemical Weapons and on Their Destruction," which is the only applicable police powers exception remaining after Congress recently amended 11 U.S.C. § 362. The Debtor also argues that the County is abusing its powers under the facts of this case because the County is attempting to condemn the subject property for what amounts to a private use or for the benefit of a private entity. The Court finds and concludes that both the County and the Debtor have misinterpreted the applicable statute.
Except as specifically provided under the statute, 11 U.S.C. § 362(a) provides that the filing of a Bankruptcy petition under Title 11 of the United States Code operates as a stay, applicable to all entities of:
(1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title;
(2) the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under this title;
(3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate;
(4) any act to create, perfect, or enforce any lien against property of the estate;
(5) any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this title;
(6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title;
(7) the setoff of any debt owing to the debtor that arose before the commencement of the case under this title against any claim against the debtor; and
(8) the commencement or continuation of a proceeding before the United States Tax Court concerning the debtor.
11 U.S.C. § 362(a).
First, the Court finds and concludes that Congress did not amend the statute in such a way to only include enforcement of violations of the Convention on the Prohibition of the Development, Production, Stockpiling and Use of Chemical Weapons and on Their Destruction (the "Convention Prohibiting Chemical Weapons") as the only police or regulatory power exception to the automatic stay. On October 21, 1998 Congress amended subsections (b)(4) and (b)(5) of 11 U.S.C. § 362. Previously, subsection (b)(4) indicated that the filing of a Bankruptcy petition did not operate as an automatic stay:
under subsection (a)(1) of this section, of the commencement or continuation of an action or proceeding by a governmental unit to enforce such governmental unit's police or regulatory power.
11 U.S.C. § 362(b)(4).
Subsection (b)(5) previously indicated that the filing of a Bankruptcy petition did not operate as an automatic stay:
under subsection (a)(2) of this section of the enforcement of a judgment, other than a money judgment, obtained in an action or proceeding by a governmental unit to enforce such governmental unit's police or regulatory power.
11 U.S.C. § 362(b)(5).
Under the previous reading of section 362, the Ninth Circuit held that the police and regulatory power exceptions created under subsections (b)(4) and (b)(5) are not applicable to 11 U.S.C. § 362(a)(3) and therefore there is no exception that allows a government to obtain possession of property of the Bankruptcy estate or that allows *30 a government's attempt to exercise control over property of the Bankruptcy estate. Therefore, under that rationale, the automatic stay applied to the government, even if it was attempting to enforce its police or regulatory power, and the automatic stay prohibited the government from attempting to obtain possession or exercise control over property of the Bankruptcy estate. See Hillis Motors, Inc. v. Hawaii Auto. Dealers Assoc., 997 F.2d 581, 590-91 (9th Cir.1993).
On October 21, 1998 Congress amended 11 U.S.C. § 362. Congress combined subsections (b)(4) and (b)(5) and added some important language. Subsection (b)(5) was deleted and the new subsection (b)(4) states that the filing of a Bankruptcy petition did not operate as an automatic stay:
under paragraph (1), (2), (3), or (6) of subsection (a) of this section, of the commencement or continuation of an action or proceeding by a governmental unit or any organization exercising authority under the Convention on the Prohibition of the Development, Production, Stockpiling and Use of Chemical Weapons and on Their Destruction, opened for signature on January 13, 1993, to enforce such governmental unit's or organization's police and regulatory power, including the enforcement of a judgment other than a money judgment, obtained in an action or proceeding by the governmental unit or enforce such governmental unit's or organization's police or regulatory power. 11 U.S.C. § 362(b)(4) (Act of October 21, 1998).
The Court finds and concludes that subsection (b)(4) of 11 U.S.C. § 362 does not apply to only those situations where the Convention Prohibiting Chemical Weapons has been involved. Instead, the Court finds and concludes that Congress merely expanded and/or redefined the previous police and regulatory power exceptions to include any organization exercising authority under the Convention Prohibiting Chemical Weapons. The Court also finds and concludes that the amendment to 11 U.S.C. § 362(b)(4) legislatively overruled the Ninth Circuit's holding in Hillis Motors, 997 F.2d at 590-91, that there is no governmental police or regulatory power exception to section 362(a)(3). Now, because the amended statute also includes an exception to section 362(a)(3), the police and regulatory power exception applies to acts by the government to obtain possession of property of the Bankruptcy estate or to exercise control over Bankruptcy estate property. Accordingly, the Court overrules and rejects the Debtor's interpretation that a government's police and regulatory power exception to the automatic stay applies only in situations where the governmental unit is acting under the Convention Prohibiting Chemical Weapons. The Court finds and concludes that the exception stated in 11 U.S.C. § 362(b)(4) applies whenever a governmental unit is exercising a valid and traditional police or regulatory power.
Second, the Court also finds and concludes that the police and regulatory power exception of 11 U.S.C. § 362(b)(4) does not apply to the facts of this case as argued by Maricopa County. Maricopa County has filed an action for condemnation of Debtor's property in the Arizona state courts. The County has argued that the action is an exercise of the County's power to obtain property by eminent domain. A governmental unit exercising such power may accomplish the taking of private property if the taking is for a public use. U.S. Const., amends. V, XIV; Ariz. Const. art. II, § 17. The Maricopa County Board of Supervisors found the proposed realignment of Deer Valley Road, and therefore the taking of Debtor's property was a "public necessity." However, the public use standard of a government's eminent domain power is different than the government's police and regulatory power.
The government's eminent domain power is different than the police or *31 regulatory power, and actions to acquire property by eminent domain are not excepted from the automatic stay under 11 U.S.C. § 362(b)(4). Redevelopment Agency of the City of Long Beach, California v. Altamirco (In re Altamirco), 56 B.R. 199, 200-01 (Bankr.C.D.Cal.1986) (citing Hawaii Housing Auth. v. Midkiff, 467 U.S. 229, 104 S. Ct. 2321, 81 L. Ed. 2d 186 (1984)). The United States Supreme Court has held that the public use requirement of eminent domain is "coterminous" with the government's police power. Midkiff, 467 U.S. at 240, 104 S. Ct. 2321. However, even though requirements under the eminent domain powers and the police or regulatory powers may be the same, or may share the same range of permissible uses and would be similar in scope, the two powers are not necessarily identical. Altamirco, 56 B.R. at 200. The standards to allow for a taking of private property pursuant to the power of eminent domain and for a taking of private property pursuant to a government's police and regulatory power is different. The standard for an eminent domain taking is whether the taking is for a public use; the standard for a regulatory taking is whether the taking substantially advances a legitimate state interest. Chevron U.S.A., Inc. v. Cayetano, 57 F. Supp. 2d 1003, 1008 (D.Haw.1998).
The Court finds and concludes from the record herein, and the arguments presented, that there is a current Deer Valley Road that services the needs of the County in this area and that there is an existing right of way for the Deer Valley Road. However, the County has though its political process determined that the current roadway should be redirected across Debtor's property. The Court notes that the record in this case includes the Minutes from the Maricopa County Board of Supervisors November 4, 1998 meeting regarding the proposed Deer Valley Road realignment, attached hereto. The Board of Supervisors have made declarations and findings that the proposed roadway is in the best interests of Maricopa County and that the proposed roadway is a public necessity. However, the Court also specifically notes that there is no mention of a specific public health, safety or welfare issue which would traditionally involve the government's police and regulatory power.
The Court has a duty to scrutinize the governmental unit's claims that it is acting under its police and regulatory power and to determine that a valid exception to the automatic stay exists, rather than simply assuming the police and regulatory power is involved because the governmental unit has made an appearance. Corporacion de Servicios Medicos Hospitalarios de Fajardo v. Mora (In re Corporacion de Servicios Medicos Hospitalarios de Fajardo), 60 B.R. 920, 932-33 (D.P.R.1986). The Court finds and concludes on this record that there has been no showing that the proposed condemnation of Debtor's property is an exercise in anything other than eminent domain, and there has been no showing that the proposed condemnation is a valid exercise of the County's traditional police or regulatory power.
The Court recognizes that traditionally in situations where there is an imminent health, welfare, or safety issue, that the government has a special interest in protecting its citizens and that the government may use its special police and regulatory power to afford such protection to its citizens. The exception allowed by 11 U.S.C. § 362(b)(4) allows a governmental unit to pursue actions to protect public health and safety, however Congress intended this exception to be given a narrow construction. H.R.Rep. No. 595, 95th Cong., 1st Sess. 342 (1977) U.S.Code Cong. & Admin.News 1978, p. 5787. An example of a situation where the automatic stay does not apply to a government's exercise of its power of condemnation has been noted in the case of Manuel v. City of Jacksonville (In re Blunt), 210 B.R. 626 (Bankr.M.D.Fla.1997). In the Blunt case, the Chapter 7 Debtor owned and managed several rental properties, including an apartment complex that the City of Jacksonville *32 demolished post-petition, and while the Debtor was protected by the automatic stay of 11 U.S.C. § 362. The City demolished the apartment complex because the property was condemned as a fire hazard. The Debtor was given notice of the proposed condemnation, and notice that the City had determined that the apartment complex was a fire hazard. The Bankruptcy Court in Blunt found that the City of Jacksonville's actions in violation of the automatic stay fell under the government's police and regulatory power exception. 210 B.R. at 634.
The Court finds and concludes on the record presented that Maricopa County has failed to show that the realignment of the existing Deer Valley road is a valid exercise of its police and regulatory power such that the County may continue to act to take possession of Debtor's property, which is property of the Bankruptcy estate, without violating the automatic stay imposed by 11 U.S.C. § 362.
CONCLUSION
Therefore, based on the foregoing, and the record herein, the Court finds and concludes that the Debtor had an interest in the subject property at the time of the filing of the Bankruptcy petition. The Court also finds and concludes that the subject property is part of the Bankruptcy estate and that the County's attempt to condemn the property would effectively be a forced sale of property of the Bankruptcy estate, that the Bankruptcy Court has jurisdiction over this matter as a core proceeding and that the Court may hear and determine this matter and may enter such orders or judgments as necessary. The Court also finds and concludes that the County's efforts to condemn the subject property by eminent domain are prohibited by the automatic stay and that there has been no showing of a valid exception to the automatic stay under the County's police or regulatory power.
The Court notes that it present findings are based solely on the legal and jurisdictional issues presented by the parties, and that the parties previously stipulated to limit the May 18, 1999 hearing to those issues. The Court's ruling does not affect the ability of the County to receive relief on either its Motion for Remand, or Motion for Relief from the Automatic Stay. The Court therefore directs the parties to file a joint pretrial statement on all remaining issues regarding the remand and/or relief from stay within 30 days. The parties are directed to include a statement of all material issues which are not in dispute, to separately list all issues of fact or law which are disputed, and the parties respective positions on each issue. Further the parties are directed to include an estimate of the time necessary to try the remaining issues. Upon the filing of the joint pretrial statement, the Court will set the remaining matters for trial.
The Court finally notes that 11 U.S.C. § 362(b)(4) only provides an exception to the imposition of the automatic stay in Bankruptcy case. The Court finds and concludes that even if the exception had been valid in this case, which it was not, that the Court could have imposed a separate stay through the broad powers granted to the Court under 11 U.S.C. § 105 to protect the property or interests of the Bankruptcy estate and thereby prevent the government from using its police or regulatory power. The Bankruptcy Courts have the power to prevent a government unit's bad faith exercise of its police or regulatory power against the Bankruptcy estate. Javens v. City of Hazel Park (In re Javens), 107 F.3d 359, 366 (6th Cir.1997).
Accordingly,
IT IS ORDERED that the automatic stay imposed by 11 U.S.C. § 362 applies to the Maricopa County's proceedings to condemn Debtor's property through eminent domain;
IT IS FURTHER ORDERED that Maricopa County's claim of a police and *33 regulatory power exception to imposition of the automatic stay is hereby overruled;
IT IS FURTHER ORDERED directing the parties to file a joint pretrial statement within 30 days on all remaining issues regarding the County's Motion for Remand and Motion for Relief from the Automatic Stay. The parties are further directed to include a statement of all material issues which are not in dispute, and separate list all issues of fact and law which are in dispute and to state the parties respective positions on each disputed issue; the parties should also include an estimate of the amount of time necessary to try the remaining issues;
IT IS SO ORDERED.
APPENDIX
COUNTY OF MARICOPA
State of Arizona
Office of the Clerk
I, Fran McCarroll, clerk of the Board of Supervisors do hereby Certify that the attached is a true and correct excerpt from the minutes of the meeting of the Board of Supervisors held November 4, 1998:
ROAD DECLARED (ROAD FILE NO. 5043)
Motion was made by Supervisor Wilcox, seconded by Supervisor Stapley, and unanimously carried that the following resolution be adopted:
WHEREAS, pursuant to A.R.S. § 18-201 through 18-203, on the 7th day of October, 1998, the County Engineer and others filed with the Board of Supervisors of Maricopa County, Arizona, a petition praying the Board to establish, open and declare as a county highway the following described lines, to-wit:
A roadway lying within the East 50 feet of the Southeast quarter and south of Deer Valley Drive, in Section Eighteen (18), Township Four (4) North, Range One (1) West of the Gila and Salt River Base and Meridian, Maricopa County, Arizona.
Said roadway also known as Reems Road, from South line of said Section 18 (being the alignment of Deer Valley road), north to Deer Valley Drive, lying within Supervisorial District No. Four (4) and within the unincorporated area.
WHEREAS, the day and hour set by the Board for a public hearing on said petition has arrived, and notice of said hearing has been given to the public by advertising once a week for two consecutive weeks in the Record Reporter; and
WHEREAS, no objections to the establishment, opening and declaration of said highway have been filed; and
WHEREAS, the Board believes that the granting of said petition and the establishment, opening and declaration of the highway as prayed for in said petition, are for the best interests of Maricopa County, and said highway is a public necessity; NOW, THEREFORE,
BE IT RESOLVED that there is hereby established, opened and declared a county highway, more fully set forth hereinabove, and the County Engineer is hereby directed to make a plat of the survey of said highway and cause the same to be recorded in the Office of the County Recorder of Maricopa County as provided by law.
BE IT FURTHER RESOLVED that the Board accept any right-of-way or property donated to the State or County for said highway. The Board hereby accepts all U.S. Patent easement reservations, right-of-way or properties along this alignment into the Department of Transportation's Highway system.
BE IT FURTHER RESOLVED that the County Engineer be directed and authorized, and he is hereby so directed and authorized, to negotiate with owners of parcels of private property required for the right-of-way of said public highway with the view of obtaining for Maricopa *34 County said private property, subject to the ratification and approval of this Board.
BE IT FURTHER RESOLVED that the County Attorney be directed and authorized, and he is hereby directed and authorized, to initiate and prosecute actions and proceedings in the manner required by law to condemn all property required for right-of-way which cannot be obtained by donation or purchase.
DATED this 4th day of November, 1998.
NOTES
[1] The Court notes that at sometime between the County's initial offer to purchase Debtor's property and the filing of the Condemnation Complaint that the amount of land in question increased from 1.469 acres to 1.4773 acres.
[2] See 11 U.S.C. § 101, et seq.
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195 F. Supp. 653 (1961)
Quinta M. DURANDETTI, Charles Bunton, Thomas A. Haycraft and George L. Slappey, Plaintiffs,
v.
CHRYSLER CORPORATION, a foreign corporation, International Union, United Automobile, Aircraft and Agricultural Implement Workers of America, affiliated with the Congress of Industrial Organizations (UAW-CIO), a voluntary unincorporated association, Local No. 227 (UAW-CIO), a voluntary unincorporated association, and Syl Sumeracki, jointly and severally, Defendants.
Civ. A. No. 18967.
United States District Court E. D. Michigan, S. D.
June 30, 1961.
*654 Theodore G. Albert, Wisok, Albert & Giglio, Detroit, Mich., for plaintiffs.
Daniel J. Tindall, Jr., Dickinson, Wright, McKean & Cudlip, Detroit, Mich., Kelley, Drye, Newhall & Maginnes, New York City, of counsel, for defendant Chrysler Corp.
Harold A. Cranefield, Redmond H. Roche, Jr., Gordon A. Gregory, Detroit, Mich., for defendants International Union, UAW, Local 227, and Syl Sumeracki.
LEVIN, Chief Judge.
This motion to dismiss asserts that the complaint and amended complaint fail to establish diversity of citizenship of the parties or the presence of a federal question.
The amended complaint alleges that the action "* * * is brought under the provisions of 28 U.S.C.A. Sec. 2201, as amended, being 68 Stat. 890; and 29 U.S. C.A. Sec. 157, et seq., 61 Stat. 140, et seq." The plaintiffs, citizens of the State of Michigan, initiated this action on behalf of themselves and other members of Local 227 of the International Union, United Automobile, Aircraft and Agricultural Implement Workers of America (hereinafter referred to as the International Union). The defendant Chrysler Corporation, a Delaware corporation, has its principal place of business in Michigan. The International Union and Local 227 are voluntary unincorporated associations. The defendant Sumeracki, president of Local 227, is a citizen of the State of Michigan. The complaint on its face establishes a lack of diversity of citizenship.
The plaintiffs were employed at Chrysler's DeSoto Plant and were members in good standing of Local 227 on March 27, 1957. On that date, an agreement was signed between Chrysler and the International Union and its Locals 3, 227, and 372, providing for the transfer of certain employees from the DeSoto and Dodge Main Plants to Chrysler's Trenton Plant. Only those eligible employees desiring to move to the Trenton Plant were placed on the transfer list. The plaintiffs were among those employees requesting a transfer.
The agreement stated that employees electing to transfer would be entered on the Trenton Plant seniority list in accordance with their accumulated seniority. It also provided that additional manpower for a temporary period might be needed due to non-standard operating conditions during the "break-in" period. The temporary employees were to be selected equally from the three factories, except that only the employees from DeSoto and Dodge Main who had agreed to transfer to the Trenton Plant would be considered. Such temporary employees would, for seniority purposes, be regarded as new employees of the Trenton Plant but would retain their seniority at their former establishments.
Following their transfer to the Trenton Plant, the plaintiffs were informed that, being temporary employees, they were considered "new hires" and were entitled to their accumulated seniority only at the DeSoto Plant. They allege a subsequent lay off by Chrysler and an unlawful discharge by the employer on November 22, 1957, with the consent of the International Union, Local 227, and Sumeracki.
In substance, the plaintiffs allege that, by virtue of the Labor Management Relations Act, the International Union, Local 227, and Sumeracki owed a duty of "fair *655 representation" to the union members with respect to the negotiation and day-to-day administration of collective bargaining agreements; that the agreement of March 27, 1957, was not submitted to a vote of Local 227 members; that the defendants fraudulently represented to the plaintiffs that they would be transferred with retention of accumulated seniority; that Sumeracki refused to process their grievances; and that they were wrongfully discharged from employment by Chrysler.
Beginning with Steele v. Louisville & Nashville Railroad Co., 1944, 323 U.S. 192, 65 S. Ct. 226, 89 L. Ed. 173, the Supreme Court has repeatedly ruled that an exclusive bargaining agent under the Railway Labor Act, 45 U.S.C.A. §§ 151-188, is obligated to represent all employees in the bargaining unit in a fair manner. The United States District Courts have jurisdiction to protect such employees against irrelevant, invidious, hostile, and arbitrary discrimination by the union. The discrimination practiced by a union against some members or employees has been extended beyond the racial factor in the Steele case and encompasses situations where the "hostile discrimination" involves the validity of a contract. Mount v. Grand International Brotherhood of Locomotive Engineers, 6 Cir., 1955, 226 F.2d 604, certiorari denied 1956, 350 U.S. 967, 76 S. Ct. 436, 100 L. Ed. 839.
This doctrine of "fair representation" has been carried over from the Railway Labor Act to the Labor Management Relations Act, apparently derived from Section 9(a) of the Act, 29 U.S.C.A. § 159(a). See Ford Motor Co. v. Huffman, 1953, 345 U.S. 330, 73 S. Ct. 681, 97 L. Ed. 1048; Syres v. Oil Workers International Union, Local No. 23, 1955, 350 U.S. 892, 76 S. Ct. 152, 100 L. Ed. 785, per curiam reversing 5 Cir., 1955, 223 F.2d 739. However, because the Railway Labor Act fails to provide administrative remedies comparable to those available under the provisions of the LMRA, Sections 8(a), 8(b), and 10 (a), 29 U.S.C.A. §§ 158(a), 158(b), and 160(a), some activities included within a breach of the "fair representation" duty under the Railway Labor Act might well fall within the exclusive jurisdiction of the National Labor Relations Board over "unfair labor practices." Only where a union, in exercising its wide range of discretion, bases its discriminatory practices upon "irrelevant" and "invidious" factors does a District Court, rather than the NLRB, have jurisdiction over the subject matter. Whitfield v. United Steelworkers of America, Local No. 2708, 5 Cir., 1959, 263 F.2d 546, certiorari denied 1959, 360 U.S. 902, 79 S. Ct. 1285, 3 L. Ed. 2d 1254.
The plaintiffs in this case plead a duty of fair representation, but fail to allege a breach of that duty. However, construing the pleadings liberally, I shall consider all the plaintiffs' assertions as pertaining to the question of the breach of the duty.
The Constitution of the International Union states that no international representative or officer or local union officer has authority to negotiate or supplement the terms of a contract without first obtaining the approval of the local union. The collective bargaining agreement between Chrysler and the International in effect at the time of the agreement of March 27, 1957, permitted transfer of operations and employees to other plants and provided, in certain instances, for discussion between Chrysler and the International Union and Local Unions regarding the movement. In addition, the contract by Section (52) allowed local supplementary seniority agreements, subject to approval by the Central Labor Relations Department of the Corporation and the Chrysler Department of the International Union. It appears that the agreement of March 27, 1957, was designed to effectuate the national collective bargaining agreement and was not the type of agreement requiring approval of the local membership body.
The alleged misrepresentations by Local 227 officials and Chrysler to the plaintiffs regarding the retention of seniority *656 rights by temporary transferees to Trenton, even if true, and the alleged refusal of Sumeracki to process the grievances do not indicate any "hostile discrimination." At best, the activities might form the basis for a claim of an unfair labor practice. As this Court said in Holman v. Industrial Stamping and Manufacturing Company, D.C.E.D.Mich. 1956, 142 F. Supp. 215, at page 218:
"Congress has vested jurisdiction to determine which activities are unfair labor practices within the meaning of the National Labor Relations Act, as amended, in the National Labor Relations Board and not in the United States District Courts. Amazon Cotton Mill Co. v. Textile Workers Union of America, 4 Cir., 1948, 167 F.2d 183.
"Thus, the adjudication of a complaint of discrimination involving seniority rights brought about by a company's consolidation of plants, as are complaints of other types of discrimination by either a union or an employer, is within the exclusive jurisdiction of the National Labor Relations Board." [Citing cases.]
See also Adams v. International Brotherhood of Boilermakers, Iron Ship Builders, Blacksmiths, Forgers, and Helpers, 10 Cir., 1958, 262 F.2d 835.
The plaintiffs have, at best, stated a cause of action containing a mixture of unfair labor practices, violation of seniority rights, or breach of contract, none of which indicate "hostile discrimination" or differences based upon "irrelevant" and "invidious" factors. See Berman v. National Maritime Union, D.C.S.D.N.Y. 1958, 166 F. Supp. 327, 332.
In addition, the plaintiffs claim that the Labor-Management Reporting and Disclosure Act, enacted September 14, 1959, 29 U.S.C.A. § 401 et seq., permits commencement of the action in the United States District Court. However, the events in question in this case occurred in 1957, and the action was filed on March 27, 1959. That Act was designed to be prospective in nature. Robertson v. Banana Handlers International Longshoremen's Association, Local Union 1800, AFL-CIO, D.C.E.D.La.1960, 183 F. Supp. 423; Smith v. General Truck Drivers, Warehousemen and Helpers Union Local 467 of San Bernardino and Riverside Counties, D.C.S.D.Cal.1960, 181 F. Supp. 14.
Nor may this action be considered under Section 301 of the Labor Management Relations Act, 29 U.S.C.A. § 185. That provision is applicable where the union organization, rather than the members or employees, brings an action against the employer for violation of a contract. Holman v. Industrial Stamping and Manufacturing Company, D.C. E.D.Mich.1956, 142 F. Supp. 215.
In any event, the complaint and amended complaint fail to establish any claim against Chrysler cognizable in this Court. The allegations against Chrysler might form the basis of an unfair labor practice charge, but, as already stated, only the National Labor Relations Board has authority to examine such a charge.
Perhaps it was unnecessary to have the foregoing extended discussion because it appears that this action was commenced before there was an exhaustion of procedures prescribed by Article 32 of the Constitution of the International Union for the presentation and adjudication of grievances by members against union officials. It is no excuse, as the plaintiffs allege, that it would have been futile to present their grievances to the local officers because of their "hostility" to the plaintiffs' claim. They were obliged to comply with the intraunion appeal procedures, and absent compliance, this Court lacks jurisdiction to hear the complaint. Stringfield v. International Union of United Rubber, Cork, Linoleum, and Plastic Workers of America, D.C.E.D.Mich.1959, 190 F. Supp. 380, affirmed 6 Cir., 1960, 285 F.2d 764.
The motion to dismiss is granted. An appropriate order may be presented.
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106 B.R. 451 (1989)
In re Stephen M. ZIMPEL, Marilyn M. Zimpel, Debtors.
Bankruptcy No. 88-00239-AT.
United States Bankruptcy Court, E.D. Virginia, Alexandria Division.
October 6, 1989.
Rust, Rust & Silver, Fairfax Va., for Crestar Bank.
Richard G. Hall, Brook and Hall, Annandale, Va., trustee.
Brian F. Kenney, Adams, Porter & Radigan, Ltd., Arlington, Va., for First American Bank of Virginia.
C. Thomas Brown, Fairfax, Va.
MEMORANDUM OPINION
DOUGLAS O. TICE, Jr., Bankruptcy Judge.
This matter is before the Court on the motion of the trustee in bankruptcy to compromise a lien claim against the debtors by First American Bank ("First American"). Crestar Bank ("Crestar"), an unsecured creditor of both debtors, objects to the proposed compromise.
The debtors, who are husband and wife, are in separate chapter 7 cases which were substantively consolidated on October 27, 1988. The petition in Mr. Zimpel's case was filed as an involuntary chapter 7 by Crestar on February 10, 1988; the order for relief was entered on June 23, 1988.[1] Mrs. Zimpel's voluntary chapter 7 petition was filed on June 27, 1988.
First American claims to hold a judgment lien against real property located in Fairfax County, Virginia, and owned by the debtors as tenants by the entireties. The judgment arose out of a loan made on February 17, 1987, which was guaranteed by the debtors. On December 8, 1987, after the loan went into default, First American obtained its judgment against the debtors under a confession of judgment provision in the continuing guaranty document executed by them. The judgment was duly docketed against the debtors in the Fairfax County Circuit Court.
On March 27, 1989, the trustee in bankruptcy filed a motion to sell the debtors' real property free of liens pursuant to 11 U.S.C. § 363. From the proceeds the trustee proposed to pay First American the sum of $93,591.00 which represents a 50% compromise payment by the trustee from the excess sale proceeds (over mortgage liens and expenses of sale). The Court by order entered March 30, 1989, approved the trustee's *452 sale of the property; however, approval of the distribution of the compromise payment to First American was withheld pending the trustee's compliance with Bankruptcy Rules 9019 and 2002(a) which provide for notice and opportunity for a hearing on a compromise or settlement of a claim.
Crestar's objection to the compromise is contained in its objection to the trustee's proposed distribution of $93,591.00 to First American and is based upon the assertion that First American's judgment lien against Mr. Zimpel was a preference avoidable under 11 U.S.C. § 547(b)(4).
In weighing the merits of a compromise of a claim, the Court must determine whether the proposal gives due consideration to the hazards of litigating legal issues related to the claim. Although First American may be technically correct in its argument that Crestar is not in position to assert a voidable preference, the Court must nevertheless disapprove the proposed compromise if it clearly appears that First American received a preference, the avoidance of which would wipe out its claim of lien against the subject realty.
First American's judgment of December 8, 1987, against both debtors was obtained and docketed within 90 days prior to the involuntary bankruptcy petition filed on February 10, 1988, against Mr. Zimpel. Therefore, as to him a crucial threshold test for preference avoidability is met, and it is more than likely that the other tests are met also. § 547(b)(4)(A). See King, Collier On Bankruptcy, Par. 547.03[1][A] (15th ed. 1989). The docketing of the judgment in December 1987 was not a preference as to Mrs. Zimpel since she did not file her chapter 7 petition until June 27, 1988.
If the judgment lien were to be avoided as to Mr. Zimpel then First American would have a lien against only one spouse. The Virginia cases make clear that a judgment against one spouse may not be enforced against real property both spouses hold as tenants by the entireties. Vasilion v. Vasilion, 192 Va. 735, 66 S.E.2d 599 (1951). See also Reid v. Richardson, 304 F.2d 351 (4th Cir.1962); In re Hayden, 41 B.R. 21 (Bankr.E.D.Ky.1983); Oliver v. Givens, 204 Va. 123, 129 S.E.2d 661 (1963); 9B Michie's Jurisprudence, Husband And Wife, § 29 at 279-80 (Repl. Vol.1984); Annotation, Husband and Wife, 75 A.L.R. 2d 1172 (1931).
A case close in point is Ades v. Caplan, 132 Md. 66, 103 A. 94 (1918), cited by Crestar's counsel. There, the husband had been the subject of an involuntary bankruptcy petition within four months of the entry of a judgment against him and his wife. Under § 67(f) of the Bankruptcy Act of 1898, then in effect, that judgment was deemed null and void as to the bankrupt husband. Subsequent to the bankruptcy the judgment creditor of the bankrupt and his wife attempted to execute against their realty held as tenants by the entireties. The Court ruled against the judgment creditor based upon Maryland law which precludes the subjecting of entireties property to a judgment lien of just one spouse. In Ades, the Maryland Court of Appeals held that with the bankruptcy statute voiding the judgment against the husband, the effect was "practically the same as if the judgment had been recovered against the wife alone". 132 Md. at 70, 103 A. at 95.
The Virginia law on this point is essentially the same as that of Maryland. In fact, Ades v. Caplan was cited by the Virginia Supreme Court in support of its holding in Vasilion v. Vasilion, 192 Va. at 741, 66 S.E.2d at 602.
In its memorandum of law, First American relies primarily upon the line of cases involving one spouse in bankruptcy in which joint creditors have sought relief from the automatic stay to enable them to pursue entireties property of a debtor and nondebtor spouse. See Davidson v. Virginia Nat'l Bank, 493 F.2d 1220 (4th Cir. 1974); Phillips v. Krakower, 46 F.2d 764 (4th Cir.1931); Virginia Nat'l Bank v. Martin (In re Martin), 20 B.R. 374 (Bankr. E.D.Va.1982). The courts in these cases found it appropriate to grant relief from stay to the joint creditors in order to prevent what has been described as "legal fraud". Otherwise, under the tenancy by entireties law discussed above, one spouse could file bankruptcy and because that spouse in bankruptcy becomes immune from suit defeat the legal rights of a joint *453 creditor in the entireties property of the debtor and the nondebtor spouse. See Phillips v. Krakower, 46 F.2d at 764. However, the rationale for these cases is peculiar to situations of only one spouse in bankruptcy. These holdings therefore have no applicability to the instant case since both Mr. and Mrs. Zimpel are in bankruptcy. The separate filing dates of their petitions have no bearing on the issue before this Court.
Neither does Reid v. Richardson support First American. To the contrary, the court there recognized that an "execution can be had against entireties property only under a joint judgment." Reid v. Richardson, 304 F.2d at 351 (citing Vasilion v. Vasilion).
Since it appears probable to the Court that First American's judgment lien is an avoidable preference as to Mr. Zimpel under § 547(b), and since this avoidance would invalidate First American's judgment against realty held by the debtors as tenants by the entireties, the Court cannot approve the trustee's motion to approve compromise.
An order denying the trustee's motion will be entered.
NOTES
[1] Originally Mr. Zimpel's case was a chapter 7; it was converted to a chapter 11 case and then converted back to a chapter 7.
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195 F. Supp. 786 (1961)
Ellis H. WILNER and Lucille Shachtman, Executors of the Estate of Isidore Wilner, deceased, and Martha Wilner, individually and as Executrix of the Estate of Isidore Wilner, Plaintiffs,
v.
UNITED STATES of America, Defendant.
United States District Court S. D. New York.
July 5, 1961.
Helfat & Helfat, New York City, J. Nathan Helfat, New York City, of counsel, for plaintiffs.
Robert M. Morgenthau, U. S. Atty., New York City, Morton L. Ginsberg, Asst. U. S. Atty., New York City, of counsel, for defendant.
WEINFELD, District Judge.
These are cross-motions for summary judgment in an action to recover alleged income tax overpayments. The controversy revolves about the nature of payments made by a corporation to the widow of an employee. The facts are stipulated and are supplemented on this motion by affidavits of the widow and the directors of the corporation who voted in favor of the resolution pursuant to which the payments were made.
Isidore Wilner, the husband of the taxpayer plaintiff, at the time of his death in June 1955, had been in the employ of Henry Glass & Co., a corporation, for over forty years. His annual salary for the five years preceding his death had been $28,000. He also had been a director, vice president and stockholder for many years. Wilner owned 800 out of a total of 3650 shares of common *787 stock, and 212 out of 2441 preferred shares. Except for a nephew who owned 870 shares of common stock, he and another were the largest individual stockholders. The plaintiff widow herein was never an officer, director or employee of the corporation, and, until her husband's death, was not a stockholder.
On July 5, 1955, the Board of Directors passed a resolution directing the payment to Wilner's widow of a sum equal to one year's salary, spread over a two-year period. Pursuant thereto, the corporation paid Wilner's widow $7,000 in 1955, $14,000 during 1956 and $7,000 in 1957. The only payments involved in this litgation are those made in 1955 and 1956.
The payments were entered on the books of the corporation as "Administrative Expenses" under the caption of "Payment to Widows of Former Employees," and were deducted by the corporation as ordinary and necessary business expenses for income tax purposes. On two previous occasions, one in 1945 and another in 1946, pursuant to corporate resolutions, payments of one year's salary were made to the widows of deceased officers. The payments were entered on the corporate books in the same manner as those in the instant case. However, in the only other instances where officers of the corporation passed away while in office, in 1916 and 1939, no payment was made to the widows.
No gift tax was paid on the moneys received by the plaintiff widow. In fact, she reported the sums as income on her 1955 and 1956 income tax returns, and after a deduction of $5,000 pursuant to section 101(b) of the Internal Revenue Code of 1954, 26 U.S.C. § 101(b), paid the taxes due thereon. Thereafter, she filed a claim for refund, contending that the payments were gifts and hence tax exempt. Upon rejection of her claim, the instant suit was filed.
Two separate issues are presented (1) whether, as plaintiff contends, the payments constituted a gift, excludable from gross income under section 102(a)[1] of the Internal Revenue Code of 1954, 26 U.S.C. § 102(a), and (2) whether, as the Government urges, even if the payments qualify as gifts under section 102(a), nonetheless they are excludable from gross income only up to $5,000 under section 101(b) of the 1954 Code,[2] since they were paid to the widow by the employer "by reason of the death of the employee." Essentially, the Government's position, however variously stated, is that as to such payments the general exclusion of gifts from gross income contained in section 102(a) is now controlled by the specific limitation of section 101(b). This view, if upheld, would be dispositive of the entire case; accordingly, we consider it first.
The Government acknowledges, as has also been recognized by the Internal Revenue Service,[3] that under the Internal Revenue Code of 1939 voluntary payments to widows by their deceased husbands' *788 employers, which qualified as gifts under section 22(b) (3) of the Code, 26 U.S.C. § 22(b) (3), were excludable without limitation from gross income and not subject to income tax.[4] But it contends that this was changed by the employees' death benefit provision, section 101(b) of the Internal Revenue Code of 1954, which revised section 22(b) (1) (B), the comparable section of the 1939 Code.
Section 22(b) (1) (B) of the 1939 Code[5] provided that death benefits paid under a contract of employment to the beneficiary of a deceased employee were taxable only to the extent that they were in excess of $5,000. However, the benefit of the $5,000 exemption did not apply to like payments when made by the employer, not under the force of a legal commitment, but voluntarily, and which did not qualify as a gift. Section 101(b) (1) of the 1954 Internal Revenue Code omitted the reference to the contractual obligation, and generally provided for a $5,000 exclusion from gross income on "amounts received * * * by the beneficiaries or the estate of an employee, if such amounts are paid by or on behalf of an employer and are paid by reason of the death of the employee."[6]
The Government contends that this change in the 1954 Code manifests a congressional purpose to treat as gross income all payments, in excess of $5,000, made by an employer to a beneficiary by reason of the death of an employee, whether or not such payments would otherwise qualify as gifts under section 102(a)in short, that the latter section excluding gifts from gross income is inapplicable in those instances where payments are made by reason of the death of an employee.
To adopt this construction would mean that gifts, the motivation for which sprang from a deceased employee's relationship to an employer, would become taxable income (beyond $5,000), whereas all other gifts would continue to enjoy, as previously, full tax exemption. Apart from a serious constitutional issue which would arise if such discriminatory treatment were recognized,[7] neither the statutory language of section 101(b), nor the legislative history, supports the Government's position.
We start with the proposition that the various revenue actsbeginning with the Act of 1913[8]have consistently excluded gifts from gross income and recognized them as nontaxable. Similarly, section 102(a) of the 1954 Code left unchanged the comparable provision of the 1939 Code, section 22(b) (3).[9] The Government would deny force to this exclusion provision simply because a gift has its origin in the employer-employee relationship; it would abandon the dichotomy between a gift, and those payments which do not qualify as gifts, merely because both are made "by or on behalf of an employer and are paid by reason of the death of the employee." Thus, indirectly, it would make the business motive the test of whether such payments qualified as giftsa criterion which it unsuccessfully sought to persuade the Supreme Court to adopt.[10]
To buttress its position, the Government relies upon the rule of statutory construction, that "general language of a statutory provision, although broad enough to include it, will not be held *789 to apply to a matter specifically dealt with in another part of the same enactment."[11] However, its reliance is misplaced, for the rule is inapplicable in the instant situation. Gifts are declared excludable from gross income under section 102(a) without limitation or exception. The term is all-inclusive. On the other hand, gifts are neither mentioned nor "specifically dealt with" in section 101(b), and neither section makes any reference to the other. Nothing in the language of either provision indicates that Congress singled out for special treatment gifts which an employer is moved to make upon the death of an employee "out of affection, respect, admiration, charity or like impulses."[12]
Moreover, the legislative history of section 101(b) abundantly demonstrates that it had no relationship to the "gift-compensation" controversyon the contrary, it was enacted to eliminate discriminatory treatment against those recipients of payments from employers which were made on a voluntary basis, but which did not qualify as gifts under section 102(a).
As already noted, the $5,000 exemption under section 22(b) (1) (B) of the 1939 Code, came into play only when the payments were made under a contract between the employer and the deceased employee. This produced anomalous and inequitable results. Many employers made payments to widows or other beneficiaries of such employees, not under the compulsion of a legal commitment, but on a voluntary basis. Consequently, those receiving such payments were subject to income tax on the full amount. Leaders of finance, industry and professional groups appeared before the congressional committee conducting hearings on the proposed 1954 Revenue Code, and urged that the inequity be removed.[13] Typical of the many statements submitted is the following:
"Some * * * companies are desirous of contributing an amount to the widows and dependents of their employees to ease the shock, hardship, and financial burden inevitably associated with the death of a wage earner of a family group. However, they do not wish to be bound to the payment of a fixed sum regardless of the needs of the widows and dependents, but wish to have the amount of the payment regulated by the requirements of the recipients in each specific case. These payments have all of the characteristics of a death or insurance payment; however, under section 22(b) of the Internal Revenue Code, such payments are taxable to the recipient, unless the payment is made pursuant to a firm contract as stated above.
"The needs of the widows and dependents of wage earners who die are the same regardless of whether the employer is bound by contract to make a payment, and it is manifestly inequitable to consider these payments as taxable income to the widows and dependents in some cases and to treat such amounts as non-taxable to widows and dependents in other substantially identical situations."[14]
The Committee report makes it unmistakably clear that the elimination of the contractual requirement in section 101 (b) (1) was made in response to these pleas. Thus, the House Committee report states:
"Present law provides a special exclusion of up to $5,000 for payments *790 by an employer to beneficiaries of a deceased employee. Under existing law, however, this exclusion is available only where the employer is under a contractual obligation to pay the death benefits.
* * * * * *
"Restricting the exemption to benefits paid under a contract discriminates against those who receive benefits where this contractual obligation does not exist. To avoid this problem your committee's bill extends this exclusion to death benefits whether or not paid under a contract."[15]
This Court has not found, nor has Government counsel directed its attention to, a single statement in any report or the debates which even remotely suggests that the change in the 1954 Code was intended to override the consistent congressional policy of excluding gifts from gross income, simply because made by an employer to a beneficiary by reason of the death of an employee. To hold, as the Government contends, that such payments which otherwise qualify as gifts under section 102(a) are subject to the $5,000 limitation of section 101(b) would not only rewrite the law, but would ascribe to Congress a purpose to make a radical departure from consistent and long-standing treatment of gifts. Neither the language of the Act, nor its history, supports such a construction. This conclusion is in accord with those few cases which have considered and passed upon the precise issue.[16] The Court is aware of contrary obiter dicta in two cases,[17] but with the utmost respect to the two distinguished jurists who noted concurrence with the Government's view, I most respectfully disagree. Thus, we reach the next question of whether or not the payments in the instant case qualify as gifts under section 102(a).
In addition to the facts already adverted to, the parties have stipulated to other matters, and each urges that upon all the undisputed facts, the inferences conclusively favor its position. However, the fact that the parties agree that the case is ripe for summary judgment is not conclusive upon the Court if a material fact remains at issue.[18]
The taxpayer, in urging summary judgment in her favor, relies upon the following: the absence of any obligation upon the corporation to make the payment; the voluntariness of the payments; the adequacy of the compensation paid to decedent for his services; the direct payment of the moneys to the widow and not to his estate; the fact that, with respect to a loan owed by decedent to the corporation, no deductions were made from the payments to the widow, but on the contrary, his accrued salary and dividends on his stock were offset against the loan and the balance was paid by decedent's estate, thereby emphasizing a definite intent to treat the payments to the widow as gratuitously made and solely for her benefit; and finally, that no services were rendered by the widow.
The Government, in urging summary judgment in its favor, stresses, in part, the identity in amount between the payment *791 to the widow and the decedent's annual salary; the adequacy of provision made for the widow as beneficiary of a $20,000 insurance policy paid for by the corporation; the designation of the payment as "compensation" in the resolution of the Board of Directors; the voting of the payments by the Board of Directors without stockholders' approval; the deduction of the payment as a corporate business expense; and finally, that the resolution noted that for many years it had been the practice of the corporation to make payments to the widows of deceased officers and employees measured by the last year's compensation of the deceased.
No one of these factors, in and of itself, is conclusive.[19] The relative importance of each must be evaluated in terms of its relationship to all other factors insofar as it may shed light on the ultimate issue in the gift-compensation controversy the intent of the donor.[20] The trier of the fact is called upon to make an objective inquiry as to what in fact was the dominant reason for the payment "whether what is called a gift amounts to it in reality."[21] Intent involves a state of mind and is a question of fact to be determined from all the surrounding circumstances and the inferences to be drawn therefrom. And in this focus, neither the statements which accompanied various events, nor the interpretations drawn from them by the parties are necessarily binding upon the trier of the facts.
The Court is of the view that a reference in the corporate resolution authorizing the payment, requires an evaluation by the trier of the fact which properly can be made only upon an oral examination of those who voted for its adoption. The resolution, in addition to eulogistic references to the deceased employee's valuable services on behalf of the corporation and his contribution to its success, includes the following preamble:
"Whereas, for many years past it has been the practice of the Corporation to continue the compensation of faithful deceased officers and employees by making periodic payments to the widow of such deceased officer or employee, a sum equivalent to the compensation paid him for the year preceding his death, * * *."
To constitute a gift, the payment must be grounded upon the donor's "`detached and disinterested generosity.'"[22] And if it stems "from `the incentive of anticipated benefit' of an economic nature, * * * it is not a gift."[23] Applying these principles, the Government concludes that the acknowledgment in the resolution of a long-standing practice to make payments to widows of deceased, faithful officers and employees measured in terms of their last annual compensation indicates a predetermined plan and compels the conclusion that the real purpose *792 of the corporation was economic self-benefit, and consequently that the payments here made fail to meet the test enunciated in Duberstein.
If such a plan did exist, it might well be decisive of the issues in the instant case, for it has been held that such a program encourages those persons whose survivors would benefit upon their death to remain in the corporate employ, thereby bestowing a benefit upon it with the consequence that the corporation is under moral compulsion to make the payments in order to retain the confidence of potential beneficiaries of the plan or policy.[24] Contrariwise, if a plan is found not to have existed, the plaintiff's claim that the payments in fact constituted a gift is strengthened.
The plaintiff, to overcome the force of the resolution, with its implicit suggestion of the existence of a plan or a policy, has submitted affidavits which she asserts supplement "only to a minor extent" the stipulated facts. These affidavits by the directors who voted for the resolution, in substance, set forth that on the three occasions, including the instant one, when payments were made to widows, they were voluntary, were intended as gifts and that there was no obligation, legal or moral, on the part of the corporation to make any such payments. Further, by way of contrast, the taxpayer emphasizes that in the earlier years of the corporate existence, when two directors died, no payments to the widows were authorized.
It may readily be acknowledged that the statement in the resolution is not conclusive of the existence of a plan;[25] nor does the fact that two of four widows of earlier deceased officers also were recipients of death-benefit payments which equalled the last annual salary of the deceased employee establish that a plan was in effect.[26] On the other hand, the mere fact that a director who voted the payment asserts it was intended as a gift does not establish that in fact such was the intent of the donor.[27] It is the trier of the fact who must make an objective determination against the totality of all events and circumstances. And in deciding the issue, demeanor evidence becomes an important, if not a determinative factor. That one swears under oath that his action was motivated by instincts of generosity or other subjective factors, does not necessarily conclude the trier of the fact, who, on the basis of a witness' manner and appearance in testifying, might well conclude that the opposite of his sworn assertions is indeed the truth.[28]
Were the affidavits drawn to bolster the plaintiff's position to insure nontaxability of the payment, or did they in fact express the intent of the directors at the time they voted the resolution? In the light of the facts here presented, this cannot be determined upon affidavits.
The matter is not ripe for summary judgment and the respective motions are denied.
NOTES
[1] Section 102. "Gifts and inheritances.
"(a) General rule.Gross income does not include the value of property acquired by gift, bequest, devise, or inheritance."
[2] Section 101. "Certain death benefits.
* * * * *
"(b) Employees' death benefits.
"(1) General rule.Gross income does not include amounts received (whether in a single sum or otherwise) by the beneficiaries or the estate of an employee, if such amounts are paid by or on behalf of an employer and are paid by reason of the death of the employee.
"(2) Special rules for paragraph (1)
"(A) $5,000 limitation.The aggregate amounts excludable under paragraph (1) with respect to the death of any employee shall not exceed $5,000."
[3] Indeed, in view of many adverse court decisions in cases arising under the 1939 Code, the Internal Revenue Service adopted an administrative policy that "in cases involving voluntary payments to widows by their deceased husbands' employers * * * it will no longer litigate, under the Internal Revenue Code of 1939, cases involving the taxability of such payments unless there is clear evidence that they were intended as compensation for services, or where the payments may be considered as dividends." T.I.R. 87, Aug. 25, 1958, CCH 1958 Stand.Fed.Tax Rep. ¶ 6662.
[4] E. g., Bounds v. United States, 4 Cir., 1958, 262 F.2d 876; Rodner v. United States, D.C.S.D.N.Y.1957, 149 F. Supp. 233; Luntz v. Commissioner, 1958, 29 T.C. 647; Estate of Hellstrom v. Commissioner, 1955, 24 T.C. 916.
[5] 65 Stat. 483.
[6] 26 U.S.C. § 101(b) (1).
[7] It is open to question whether Congress has the power under the Constitution to impose a direct and unapportioned tax on amounts received as gifts. U.S.Const. Art. I, sec. 2, cl. 3; Art. I, sec. 9, cl. 4; Amend. XVI.
[8] 38 Stat. 167. See C. I. R. v. Duberstein, 1960, 363 U.S. 278, 284, 80 S. Ct. 1190, 4 L. Ed. 2d 1218.
[9] See H.R.Rep. No. 1337, 83rd Cong., 2d Sess., in 3 U.S.Code, Cong. and Admin. News 4168 (1954).
[10] C. I. R. v. Duberstein, 1960, 363 U.S. 278, 284, 80 S. Ct. 1190, 4 L. Ed. 2d 1218.
[11] D. Ginsberg & Sons, Inc. v. Popkin, 1932, 285 U.S. 204, 208, 52 S. Ct. 322, 323, 76 L. Ed. 704. See United States v. Chase, 1890, 135 U.S. 255, 260, 10 S. Ct. 756, 34 L. Ed. 117.
[12] Robertson v. United States, 1952, 343 U.S. 711, 714, 72 S. Ct. 994, 996, 96 L. Ed. 1237, cited with approval in C. I. R. v. Duberstein, 1960, 363 U.S. 278, 285, 80 S. Ct. 1190, 4 L. Ed. 2d 1218.
[13] See Hearings on General Revenue Revision, House Committee on Ways and Means, 83rd Cong., 1st Sess., pp. 363-382 (July 14, 1953).
[14] Id. at 374.
[15] H.R.Rep. No. 1337, 83rd Cong., 2d Sess., in 3 U.S.Code, Cong. and Admin. News 4038 (1954).
[16] United States v. Kasynski, 10 Cir., 1960, 284 F.2d 143; Frankel v. United States, D.C.Minn.1961, 192 F. Supp. 776; Cowan v. United States, D.C.N.D.Ga. 1960, 191 F. Supp. 703; Reed v. United States, D.C.W.D.Ky.1959, 177 F. Supp. 205, affirmed on opinion below, 6 Cir., 1960, 277 F.2d 456. See also Note, 36 N.Y.U.L.Rev. 693, 711 (1961).
Although the Reed case was affirmed on appeal, the Internal Revenue Service has indicated that it will not be followed as a precedent pending further developments. T.I.R. No. 252, Sept. 12, 1960, CCH 1960 Stand.Fed.Tax Rep. ¶ 6615.
[17] Bounds v. United States, 4 Cir., 1958, 262 F.2d 876, 878 note 2; Rodner v. United States, D.C.S.D.N.Y.1957, 149 F. Supp. 233, 237.
[18] Colby v. Klune, 2 Cir., 1949, 178 F.2d 872, 873; Walling v. Richmond Screw Anchor Co., 2 Cir., 154 F.2d 780, 784, certiorari denied 1946, 328 U.S. 870, 66 S. Ct. 1383, 90 L. Ed. 1640.
[19] The stipulated facts relied upon by the Government are merely items of varying degrees of importance. E. g.: tax treatment of payment by corporation, C. I. R. v. Duberstein, 1960, 363 U.S. 278, 287-288, 80 S. Ct. 1190, 4 L. Ed. 2d 1218; Bounds v. United States, 4 Cir., 1958, 262 F.2d 876; making of gift of corporate assets, C. I. R. v. Duberstein, supra; denominating payments as "compensation," Bounds v. United States, supra. But see Estate of Pierpont v. Commissioner, 1960, 35 T.C. 65; identity between the sum voted and decedent's salary, without reference to widow's individual needs, Estate of Hellstrom v. Commissioner, 1955, 24 T.C. 916. See United States v. Kasynski, 10 Cir., 1960, 284 F.2d 143.
Those stipulated facts stressed by taxpayer are given somewhat greater weight by the courts, but are still only factors in the overall picture. Luntz v. Commissioner, 1958, 29 T.C. 647, 650; Estate of Hellstrom v. Commissioner, supra. See Bounds v. United States, supra.
[20] C. I. R. v. Duberstein, 1960, 363 U.S. 278, 286, 80 S. Ct. 1190, 4 L. Ed. 2d 1218; Bogardus v. Commissioner, 1937, 302 U.S. 34, 58 S. Ct. 61, 82 L. Ed. 32.
[21] C. I. R. v. Duberstein, 80 S. Ct. 1190, 1197, supra, note 19.
[22] Id. 363 U.S. at page 285, 80 S.Ct. at page 1197.
[23] Ibid.
[24] Simpson v. United States, 7 Cir., 1958, 261 F.2d 497, certiorari denied 1959, 359 U.S. 944, 79 S. Ct. 724, 3 L. Ed. 2d 677. See Bausch's Estate v. Commissioner, 2 Cir., 1951, 186 F.2d 313; Estate of Russek v. Commissioner, C.C.H.1961 Tax Ct.Mem. ¶ 24,648(M).
[25] See United States v. Allinger, 6 Cir., 1960, 275 F.2d 421; Packard v. United States, D.C.S.D.N.Y.1959, 179 F. Supp. 508; Estate of Hellstrom v. Commissioner, 1955, 24 T.C. 916. Cf. Bogardus v. Commissioner, 1937, 302 U.S. 34, 42-44, 58 S. Ct. 61, 82 L. Ed. 32.
[26] See Rodner v. United States, D.C.S.D. N.Y.1957, 149 F. Supp. 233.
[27] See Subin v. Goldsmith, 2 Cir., 224 F.2d 753, 758-61, certiorari denied, 1955, 350 U.S. 883, 76 S. Ct. 136, 100 L. Ed. 779; Colby v. Klune, 2 Cir., 1949, 178 F.2d 872, 873-74.
[28] Cf. Arnstein v. Porter, 2 Cir., 1946, 154 F.2d 464, 468, 469-70; Dochler Metal Furniture Co. v. United States, 2 Cir., 1945, 149 F.2d 130, 135.
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195 F. Supp. 321 (1961)
Brenda EVANS et al., Plaintiffs,
v.
Madeline BUCHANAN et al., Defendants.
Civ. A. Nos. 1816-1822.
United States District Court D. Delaware.
June 26, 1961.
*322 Louis L. Redding and Leonard L. Williams, Wilmington, Del., for plaintiffs.
Januar D. Bove, Jr., Atty. Gen., of State of Delaware, for State Bd. of Education and State Superintendent of Public Instruction.
James M. Tunnell, Jr., of Morris, Nichols, Arsht & Tunnell, Wilmington, Del., for Local Bds. of Milford, Laurel and Seaford Special School Dists.
Everett F. Warrington, Georgetown, Del., for Bd. of Trustees of Milton Consolidated School Dist. No. 8; Ellendale Elementary Public School Dist. No. 195; Lincoln Elementary Public School Dist. No. 194; Milton Elementary Public School Dist. No. 196 and Slaughter Neck Elementary Public School Dist. No. 193.
N. Max Terry, Dover, Del., for Bd. of Trustees of Caesar Rodney Special School Dist.
CALEB M. WRIGHT, Chief Judge.
This is a class action instituted by Negro children to compel their admission into public schools of the State of Delaware on a racially nondiscriminatory basis. Summary judgment for plaintiffs was granted by Judge Leahy in 1957. Evans v. Buchanan, D.C.D.Del.1957, 152 F. Supp. 886. In 1959 a proposed plan of integration submitted by the State Board of Education was approved by Judge Layton with certain modifications. D.C., 172 F. Supp. 508; D.C., 173 F. Supp. 891. Plaintiffs appealed, and the Court of Appeals found the approved plan "does not effect desegregation `with all deliberate speed' and is not a `reasonable start toward full compliance' with the ruling of the Supreme Court in its Brown opinion of May 17, 1954 [Brown v. Board of Education of Topeka, 347 U.S. 483, 74 S. Ct. 686, 98 L. Ed. 873]." Evans v. Ennis, 3 Cir., 1960, 281 F.2d 385, 387.
The mandate of the Court of Appeals required that defendants admit the individual, named, infant plaintiffs actively seeking integration. It further ordered the members of the State Board of Education of Delaware and the State Superintendent of Public Instruction to submit a plan for approval by this Court providing generally:
(A) for the integration at all grades of the public school system at the fall term 1961, and at all subsequent school terms, of all Negro school children who desire integration subject to the usual processing of the school system; and
(B) for a "wholly integrated" school system, whereby adequate school facilities at all grades will be provided on a racially nondiscriminatory basis.
The mandate of the Court of Appeals envisages two separate but parallel streams flowing concurrently toward the same goal, a "wholly integrated" school *323 system in which all students compelled by law to attend Delaware public schools will receive education on a racially nondiscriminatory basis.[1] Part (A) of the plan must allow Negro students desiring integration to transfer immediately to white or integrated schools as a matter of right subject only to the usual and nondiscriminatory processing of the school system. Part (B), however, looks to the future and must provide for the ingredients of a wholly integrated system. It must further look to the interim period when the number of Negro students desiring integration increases and provide adequate facilities and procedures to accommodate them.
With certain modifications, the plan submitted by defendants is approved as to both aspects.
(A) - Plan of Integration for Students Presently Desiring It.
Part (i) of defendants' proposed plan provides for the registration of Negro students desiring to transfer to white or integrated schools. Plaintiffs have objected to this "special registration" as they term it. Their objection is not well-taken for two reasons. First, defendants have in their brief[2] and at oral argument assured the Court this registration applies to all pupils, white and Negro, entering the first grade or transferring within a school district. Second, because the Court of Appeals has ordered immediate integration only of those pupils actively seeking it, some procedure must be devised so as to determine who they are.[3] Plaintiffs have not suggested any method which would be more satisfactory to them. Part (i), with certain other modifications as to form rather than substance, will be approved.
Part (ii) of defendants' plan provides that such transfers shall be subject to the usual processing of the school system which shall take into account the adequacy of the facilities of the receiving schools and such rules and regulations as relate to the capabilities of the pupils desiring transfer, their scholastic attainments, and geographical location. Several modifications must be made. First, the Court of Appeals concluded the number of Negro pupils who will presently seek integration will not overtax the educational facilities of the State. In view of this finding, transfers should not be subject in the first instance to such a test. Nevertheless, the Court is retaining jurisdiction of this cause, and should it appear that the influx is greater in particular instances than was anticipated, the Court will entertain an appropriate motion for temporary relief from its decree.[4] Second, it must be made clear that the standard of geographical location relates only to the question of which white or integrated school the pupil desiring transfer shall attend. It may not, for instance, be used by local authorities to deny integration because the pupil seeking it lives nearer to a presently wholly colored school than to white or *324 integrated facilities. This must be made clear in the plan. Third, part (ii) should explicitly provide that the "usual processing" be conducted on a nondiscriminatory basis.
Part (iii) of defendants' plan provides that in districts having both white and Negro schools, attendance areas shall be established on a nondiscriminatory basis. It establishes other procedures not relevant here. While the Court does not disapprove these provisions, it is not appropriate to include such generalized schemes in this plan. Because the Court is retaining jurisdiction, any school district, or other appropriate body, desiring to establish such attendance areas or other procedures designed to effectuate integration, may appear before this Court at any time and present its plan. Upon approval, the district will then be exempted from the transfer provisions of this Court's decree.
Part (iv) of defendants' plan relates to the so-called Tuition Act, 14 Del. C.Ann. § 602 (1960 Cumm.Supp.),[5] which prohibits the transfer of a pupil from one district to another when the sending district has instruction at his grade level. It further conditions permissible transfers on the payment of tuition by the sending district. Because school districts in some instances have been established on a segregated basis and are thus wholly Negro or wholly white, this statute would effectively prohibit or qualify some transfers contemplated by this plan. Part (iv), as submitted by defendants, provides in effect the provisions of the Tuition Act shall apply to all transfers under this plan absent an act of the Delaware General Assembly or an order of this Court. The Tuition Act is not discriminatory on its face, for it is applicable to all transfers between districts, whether they be segregated or integrated. Because of this, it does not violate the 14th Amendment of the United States Constitution, except to the extent it prohibits or conditions effectuation of the plan presently before the Court. But to that extent, and that extent only, it can be of no effect. The plan should so provide.
Part (v) of defendants' plan purports to establish nondiscriminatory rules relating to "migrants". Nothing in the present plan is intended to prohibit nondiscriminatory procedures for the education of so-called migrant children. There is also no authority in this Court to establish or approve any such procedures so long as they do not relate to the problem of integration. Because of this, part (v) must be excluded.
Part (vi) relates to transportation and will be approved with one modification. It should explicitly state that the transportation for pupils transferred to white or integrated schools pursuant to this plan will be provided on a racially nondiscriminatory basis.
Part (A), therefore, as modified and renumbered, will read as follows:
(A) Commencing with the start of the fall term, 1961, all public school districts in the State of Delaware shall admit all Negro school children who desire desegregation as pupils on a racially nondiscriminatory basis subject to the following rules and regulations:
(i) The State Board of Education will provide for a registration in the State Board Unit Schools for Negro pupils desiring to transfer and enroll in white or integrated schools, which registration shall be conducted by the State Department of Public Instruction each year. In the Special School Districts, a similar registration will be conducted by the superintendents who shall be charged with *325 the responsibility of securing such information as may be required by the State Board of Education.
(ii) All such transfers shall be allowed subject only to the usual processing of the school system relating to the capabilities of the pupils desiring transfer, their scholastic attainments, and geographical locations, providing nonetheless, that the processing is conducted on a racially nondiscriminatory basis. No pupil desiring to transfer from a colored school to a white or integrated school shall be denied admission on the grounds that the Negro school is nearer to his place of residence.
(iii) Transportation for students transferred pursuant to this plan shall be provided according to the Rules and Regulations of the State Board of Education and on a racially nondiscriminatory basis.
(iv) To such extent as 14 Del.C.Ann. § 602 (1960 Cumm.Supp.) would prohibit, condition, or otherwise qualify the pupil transfers contemplated under this plan, it is hereby declared violative of the 14th Amendment of the United States Constitution and of no effect.
(B) - Plan Looking Toward a Wholly Integrated School System.
The main element of this aspect of defendants' proposed plan lies in their submission and recommendation of a proposed new school code to the General Assembly of the State of Delaware. The details of the proposed code are not important here, for it suffices to say racial discrimination in public education is eliminated. Nor does the Court find it necessary or proper to dissect and evaluate all aspects of the proposed code. So long as it eliminates all distinctions in public education based on race, it satisfies the requirements of the Constitution of the United States.
The principal legal question here is whether, at this stage, the mere submission of proposed legislation to the General Assembly satisfies the mandate of the Court of Appeals. Plaintiffs object to this aspect of the plan on the grounds that it conditions total integration upon speculative legislative action. This objection is not well-taken for several reasons.
In its opinion, the Court of Appeals stated it believed the people of Delaware would perform their duties under the law. Such a presumption alone justifies this method as a first step toward the ultimate goal of a wholly integrated school system. Moreover, the present Delaware school system is a crazy-quilt pattern of districts and laws governing education. Even aside from the problem of integration, it may well be in need of a legislative overhaul. In any case, the most orderly process of integration, and clearly the one having the least adverse effects upon all students, white and Negro, can be achieved through legislative action. There is no doubt in the Court's mind but that the Delaware General Assembly, acting with the advice of the State Board and State Superintendent, should have the first opportunity to examine and pass upon the many different methods by which the ultimate goal can be achieved.
Plaintiffs are correct, however, in asserting that state legislative action cannot be a prerequisite to the effectuation of the constitutional rights in question. In oral argument, the Attorney General has necessarily agreed with this legal principle. Nevertheless, it cannot be stressed too much that there is nothing in either aspect of the plan herein approved by the Court which is not subject to change should change appear warranted. Indeed, the Court anticipates many modifications will become necessary in the future. But the practicability and effectiveness of any plan can be determined only through experience gained while it is in operation. Indeed, there is probably no legal problem today in which speculation, although at times unavoidable, is of so little value, and actual experience more necessary, than in the one now before the Court. This Court cannot, and will not, presume at this time that the appropriate authorities *326 will fail in their duties. Nor can finalized preparations for a wholly integrated system be outlined until the Court and the parties know fully what practical educational problems, involving facilities, teachers, redistricting and the like, will arise and how the proper authorities, with their years of experience in the field of education, will act to meet them. Part (A) of this plan, as contemplated by the Court, will answer many of these questions and crystallize many of these problems. In many respects, it will serve as the laboratory in which Part (B) will be conceived and reduced to practice. It may also, in some areas, actually result in the ultimate goal of a wholly integrated system.[6]
The plan submitted by defendants, as modified, is approved.
An order should be submitted in conformity with this opinion.
NOTES
[1] The Court of Appeals noted there are presently a sufficient number of schools and teachers, white and Negro, to accommodate all Delaware school children. It did not order total integration only because some Negro schools are substantially inferior to corresponding white schools. 281 F.2d 385, 392 note 2.
[2] Brief of State Board, p. 2.
[3] Special registration will be necessary where the transfer is from one district to another and there is instruction at the pupil's grade level in the sending district. Delaware law presently prohibits such transfers, although they must now be allowed where applied for pursuant to this Court's decree. See note 5, infra, and accompanying text. Such a registration appears necessary, however, for this is the only workable scheme for ascertaining those desiring integration which has been presented to the Court.
[4] It should be noted in passing that the availability of adequate facilities cannot be a permanent prerequisite to integration. The weight to be given this factor by a court necessarily lessens as time passes. Moreover, even in the event of overcrowding such as to require a temporary modification of this decree, the determination as to which transfer applicants will be accepted must be made in a nondiscriminatory fashion as between white and Negro transfers.
[5] "* * * The Board of Education or Board of School Trustees of any sending district shall not approve the transfer of any pupil to any receiving district when such sending district provides instruction at the grade level for which application for transfer is made. A school district receiving any pupil who is a resident of another school district shall collect a tuition charge * * * such tuition charge shall be paid by the Board * * * of the school district in which the pupil is a resident * * *." 14 Del.C.Ann. § 602(a) (1960 Cumm.Supp.).
[6] There has been some indication that certain districts would prefer to institute orderly, total integration now rather than proceed further with the transfer provisions of Part (A). This, of course, may be done by submitting the local plan to this Court for approval.
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814 S.W.2d 789 (1991)
The STATE of Texas, Appellant,
v.
David James MARSHALL, Appellee.
No. 05-91-00258-CR.
Court of Appeals of Texas, Dallas.
July 22, 1991.
Rehearing Overruled September 6, 1991.
*790 Gary A. Udashen, Dallas, for appellant.
Sue Korioth, Dallas, for appellee.
Before ENOCH, C.J., and LAGARDE and MALONEY, JJ.
OPINION
LAGARDE, Justice.
The State of Texas appeals the trial court's order granting David James Marshall relief under a pretrial writ of habeas corpus. In a single point of error, the State contends that the trial court erroneously granted relief under the writ on double jeopardy grounds. We agree. Accordingly, we reverse the trial court's order. We hold that the State is not barred from prosecuting cause number F88-90590 in the 291st District Court of Dallas County. We vacate the trial court's order and remand this cause to the trial court for trial.
On November 11, 1988, Marshall, while intoxicated, was driving an automobile when it collided with Brian Scott Carpenter's *791 motorcycle, injuring Carpenter. As a result, the State charged Marshall with driving while intoxicated ("DWI"), enhanced under article 6701l-1(f) of the Texas Revised Civil Statutes, and with failure to stop and render aid ("FSRA"). The misdemeanor DWI charge was filed in County Criminal Court No. 4 of Dallas County. The felony FSRA charge was filed in the 291st District Court of Dallas County. Marshall pleaded guilty to the DWI charge on January 28, 1991. The trial court sentenced him to sixty-three days' confinement and a $600 fine. Thereafter, Marshall filed an application for a pretrial writ of habeas corpus in the 291st District Court claiming that the Texas[1] and U.S.[2] Constitutions' prohibitions against double jeopardy barred his FSRA prosecution. The trial court granted Marshall relief under the writ and entered an order specifically barring his FSRA prosecution.
The constitutional prohibition of double jeopardy consists of three separate guarantees: (1) "It protects against a second prosecution for the same offense after acquittal. [(2) I]t protects against a second prosecution for the same offense after conviction. [(3) ] And it protects against multiple punishments for the same offense." Illinois v. Vitale, 447 U.S. 410, 415, 100 S. Ct. 2260, 2264, 65 L. Ed. 2d 228 (1989) (quoting North Carolina v. Pearce, 395 U.S. 711, 717, 89 S. Ct. 2072, 2076, 23 L. Ed. 2d 656 (1969) (footnotes omitted)); Ex parte Peterson, 738 S.W.2d 688, 689 (Tex.Crim.App. 1987). Marshall asserts that the second and third double jeopardy protections set out above bar the State from prosecuting him on the FSRA charges.
Multiple Punishments
We address whether the Double Jeopardy Clause's third prohibition, against multiple punishments, precludes Marshall's FSRA prosecution. The controlling test in determining whether Marshall's potential conviction for FSRA would subject him to multiple punishments for the "same offense" is set forth in Blockburger v. United States, 284 U.S. 299, 304, 52 S. Ct. 180, 182, 76 L. Ed. 306 (1932). Blockburger provides:
The applicable rule is that, where the same act or transaction constitutes a violation of two distinct statutory provisions, the test to be applied to determine whether there are two offenses or only one is whether each provision requires proof of an additional fact which the other does not.
Id. The Blockburger test is simply a "rule of statutory construction," a guide to determining whether the legislature intended multiple punishments. Grady v. Corbin, 495 U.S. 508, 110 S. Ct. 2084, 2091, 109 L. Ed. 2d 548 (1990) (quoting Missouri v. Hunter, 459 U.S. 359, 366, 103 S. Ct. 673, 678, 74 L. Ed. 2d 535 (1983)). The Blockburger test is satisfied if each statutory offense requires the proof of a fact that the other does not. Ex parte McWilliams, 634 S.W.2d 815, 824 (Tex.Crim.App.1982), cert, denied, 459 U.S. 1036, 103 S. Ct. 447, 74 L. Ed. 2d 602 (1982). At trial there may be substantial overlap in the proof of each offense; however, it is the separate statutory elements of each offense which must be examined under this test. Brown v. Alabama, 619 F.2d 376, 378 (5th Cir.1980).
Marshall's DWI information alleges that on or about November 11, 1988, he:
[D]id then and there drive and operate a motor vehicle in a public place in Dallas County, Texas, to-wit: a street and highway, while intoxicated, in that the defendant did not have the normal use of his mental and physical faculties by reason of the introduction of alcohol, into defendant's body, and defendant had an alcohol concentration of at least 0.10, and as a direct result of this offense, to-wit: by colliding with said complainant, caused serious bodily injury to Brian Carpenter, the victim.
See Tex.Rev.Civ.Stat.Ann. art. 6701l-1 (Vernon Supp.1991). Marshall's FSRA indictment alleges that on or about November 11, 1988, Marshall:
[D]id unlawfully while the driver of and in control of an automobile and while *792 operating and controlling the said automobile, did [sic] strike Brian Scott Carpenter, hereinafter called complainant, with the said automobile and did thereby injure the person of complainant, and the said defendant, did then and there knowingly and intentionally fail to stop and render to the said complainant all reasonable assistance, and did then and there knowingly and intentionally fail to stop and carry and fail to make arrangements for the carrying of the said complainant to a physician and surgeon and hospital for medical and surgical treatment which appeared necessary by reason of the said injury received as aforesaid.
See Tex.Rev.Civ.Stat.Ann. art. 6701d, §§ 38 & 40 (Vernon 1977 & Supp.1991).
The State asserts, and Marshall concedes, that each offense requires proof of a statutory element not required by the other. A DWI conviction requires proof that Marshall was "intoxicated." See Tex.Rev. Civ.Stat.Ann. art. 6701/-1 (Vernon Supp. 1991). A FSRA conviction requires proof that Marshall knowingly and intentionally failed to stop and render aid or failed to carry the complainant to medical assistance. See Tex.Rev.Civ.Stat.Ann. art. 6701d, §§ 38 & 40 (Vernon 1977 & Supp. 1991). Hence, DWI and FSRA each requires proof of a fact that the other does not. The Blockburger test does not bar imposition of multiple punishments under these circumstances.
Marshall contends that, although the charged offenses do not violate the Blockburger test, the "unique history of Texas jurisprudence calls for a different result than that strictly mandated by Blockburger." He asserts that, because Texas's original DWI and FSRA statutes pre-dated Texas's abolition of "the carving doctrine" in double jeopardy analysis, the legislature did not intend to permit punishment for each offense when the offenses arose from one transaction. See Ex parte McWilliams, 634 S.W.2d 815 (Tex.Crim. App.1982), cert, denied, 459 U.S. 1036, 103 S. Ct. 447, 74 L. Ed. 2d 602 (1982) (abolishing the carving doctrine in Texas). We disagree. The legislature has had ample opportunity to amend or alter the DWI and FSRA statutes since Texas's abolition of the carving doctrine. Moreover, we have found no Texas case supporting Marshall's position that a different multiple-punishments double jeopardy analysis is required for statutes in effect prior to Texas's abolition of the carving doctrine. Finally, we find no authority for Marshall's contention that Texas's Constitutional prohibition against multiple punishments for the "same offense" is broader than that guarantee under the Double Jeopardy Clause of the U.S. Constitution.
We hold that the double jeopardy protections of the United States and Texas Constitutions do not preclude Marshall's punishment for both DWI and FSRA.
Multiple Prosecutions
We now turn to the primary issue in this appeal: under the indictment and information presented in this case, are DWI and FSRA the "same offense" for purposes of a successive-prosecutions double jeopardy analysis? The parties focus on the recent Supreme Court case of Grady v. Corbin, 495 U.S. 508, 110 S. Ct. 2084, 109 L. Ed. 2d 548 (1990). According to Grady, a double jeopardy analysis of whether successive prosecutions impermissibly involve the "same offense" must extend beyond rote application of the "elements of the offense" test enunciated in Blockburger. See, e.g., Grady, 110 S.Ct. at 2093 ("a technical comparison of the elements of the two offenses as required by Blockburger does not protect defendants sufficiently from the burdens of multiple trials"); see also Brown v. Ohio, 432 U.S. 161, 166-67 n. 6, 97 S. Ct. 2221, 2226 n. 6, 53 L. Ed. 2d 187 (1977); Harris v. Oklahoma, 433 U.S. 682, 682-83, 97 S. Ct. 2912, 2912-13, 53 L. Ed. 2d 1054 (1977); Ex parte Ramos, 806 S.W.2d 845, 847 (Tex.Crim.App.1991); Ex parte Peterson, 738 S.W.2d at 690; May v. State, 726 S.W.2d 573, 576 (Tex.Crim.App. 1987). The Blockburger test is still the starting point in double jeopardy analysis. Ex parte Ramos, 806 S.W.2d at 847. However, even if a Blockburger comparison of the elements of proof reveals statutes sufficiently *793 different to permit imposition of multiple punishments, "successive prosecutions will be barred in some circumstances where the second prosecution requires the relitigation of factual issues already resolved by the first." See Ex parte Peterson, 738 S.W.2d at 690 (emphasis added) (quoting Brown, 432 U.S. at 166-67 n. 6, 97 S.Ct. at 2226 n. 6). Consequently, the term "same offense" as used in relation to the second guarantee of double jeopardy protection cannot be determined by applying the meaning of the term "same offense" as used in relation to the third guarantee of double jeopardy protection. January v. State, 695 S.W.2d 215, 222 (Tex. App.Corpus Christi 1985), affd and opinion adopted, 732 S.W.2d 632 (Tex. Crim. App.1987).
Having determined that Marshall's prosecution for FSRA is not barred under the traditional Blockburger test, we must determine whether, in this case, DWI and FSRA constitute the "same offense" for purposes of a successive-prosecutions double jeopardy analysis. Our difficulty lies in defining the term "same offense" and in deciding exactly what analysis, beyond Blockburger, is required. We examine Supreme Court authority and Texas authority.
a. Supreme Court authority
The Supreme Court has used several terms to explain when a successive prosecution is for the "same offense." See Grady, 110 S.Ct. at 2093 ("Double Jeopardy Clause bars subsequent prosecution in which the government, to establish an essential element of an offense charged in that prosecution, will prove conduct that constitutes an offense for which the defendant has already been prosecuted") (emphasis added); Brown, 432 U.S. at 166 n. 6, 97 S.Ct. at 2226 n. 6 (second prosecution barred when it requires "relitigation of factual issues" resolved in the first prosecution) (emphasis added); In re Nielsen, 131 U.S. 176, 188, 9 S. Ct. 672, 676, 33 L. Ed. 118 (1889) (when first prosecution is for a crime which has "various incidents in it," the defendant may not subsequently be tried for one of those incidents) (emphasis added). Despite the Supreme Court's inconsistent wording, its analyses of the Double Jeopardy Clause's protection against multiple prosecutions are consistent. The Supreme Court examines not only the statutes defining the offenses, but also the charges which form the basis of the governments's prosecution in the case. Garrett v. United States, 471 U.S. 773, 786, 105 S. Ct. 2407, 2415, 85 L. Ed. 2d 764 (1985). The Supreme Court focuses its analyses on whether the statutes and the charges pending against the defendant require the State to twice prove conduct constituting an offense. See Grady, 110 S.Ct. at 2087 ("We hold that the Double Jeopardy Clause bars a subsequent prosecution if, to establish an essential element of an offense charged in that prosecution, the government will prove conduct that constitutes an offense for which the defendant has already been prosecuted."); Illinois v. Vitale, 447 U.S. 410, 420-21, 100 S. Ct. 2260, 2267, 65 L. Ed. 2d 228 (1980) ("because Vitale has already been convicted for conduct that is a necessary element of the more serious crime for which he has been charged, his claim of double jeopardy would be substantial") (emphasis added); Harris, 433 U.S. at 683, 97 S.Ct. at 2913 (to obtain a conviction for felony murder, State was required to prove "all the ingredients" of the underlying felony of robbery with firearms); Brown, 432 U.S. at 169, 97 S.Ct. at 2227 (prosecution for joyriding, a lesser included offense of auto theft, barred prosecution for auto theft). The test, stated another way, is: does conduct constituting an offense for which the defendant has been convicted comprise an essential element of the successively prosecuted offense? If so, the defendant is being prosecuted twice for the "same offense" as prohibited by the second guarantee of the Double Jeopardy Clause.
In Grady, the defendant veered his automobile across a double yellow centerline and hit a car in the opposite lane of traffic head-on. Grady, 110 S.Ct. at 2087. The driver of the car hit by the defendant died as a result of injuries from the accident. The defendant pleaded guilty to two traffic *794 tickets for misdemeanor driving while intoxicated and failing to keep to the right of the median. The State of New York subsequently attempted to prosecute him for reckless manslaughter, second-degree vehicular manslaughter, criminally negligent homicide, third-degree reckless assault and driving while intoxicated. Id. at 2089. At some point, the State conceded that the driving while intoxicated and vehicular manslaughter charges were barred under State law pursuant to a strict Blockburger test. The issue presented to the Supreme Court was whether criminally negligent homicide and third-degree reckless assault were the "same offenses" as the traffic offenses for purposes of a multiple-prosecutions double jeopardy analysis. The Supreme Court reviewed a bill of particulars filed by the State and noted that the State intended to prove the offenses of driving while intoxicated and veering across the median in the subsequent prosecution. The Court emphasized that "[b]y its own pleadings, the State has admitted that it will prove the entirety of the conduct for which Corbin was convicteddriving while intoxicated and failing to keep right of the medianto establish essential elements of the homicide and assault offenses." Id. 110 S.Ct. at 2094 (emphasis added). Accordingly, the prosecutions were barred by double jeopardy. However, the Court recognized that, if the State chose to prove recklessness or negligence only by evidence that the defendant was driving too fast in heavy rain, the defendant's prosecution for reckless manslaughter and third-degree assault would not be barred because driving too fast in heavy rain was not an offense for which the defendant had been previously convicted. Id. at 2094.
Supreme Court decisions prior to Grady also focus on whether conduct for which the defendant has already been convicted constitutes an essential element of the subsequently prosecuted offense. In Illinois v. Vitale, the defendant was convicted on charges of failure to reduce speed to avoid a collision. Illinois, 447 U.S. at 421, 100 S.Ct. at 2267-68. The State then attempted to prosecute him for involuntary manslaughter. The Supreme Court noted that if the State "relies on and proves a failure to slow to avoid an accident as the reckless act necessary to prove manslaughter, Vitale would have a substantial claim of double jeopardy under the Fifth and Fourteenth Amendments of the United States Constitution." Id. at 421, 100 S.Ct. at 2267. The Supreme Court in Harris v. Oklahoma held that when conviction of a greater crime cannot be had without conviction of the lesser crime the Double Jeopardy Clause bars prosecution for the lesser crime after conviction of the greater one. Harris, 433 U.S. at 683, 97 S.Ct. at 2913.
b. Texas authority
The Texas Court of Criminal Appeals likewise applies the term "same offense" in a successive-prosecutions double jeopardy analysis to mean that the State will be required to again prove conduct, constituting an offense, for which the defendant has previously been convicted. See Ex parte Ramos, 806 S.W.2d at 847; Ex parte Peterson, 738 S.W.2d at 691; May, 726 S.W.2d at 576-77; January v. State, 732 S.W.2d 632 (Tex.Crim.App.1987), adopting, 695 S.W.2d 215 (Tex.App.Corpus Christi 1985). In Ex parte Ramos, the State charged Ramos with burglary of a habitation with the intent to commit sexual assault and with sexual assault. A jury convicted Ramos of burglary of a habitation with the intent to commit sexual assault. Ramos subsequently pleaded guilty to sexual assault. He filed a postconviction writ of habeas corpus asserting that his sexual assault conviction was void based on the Double Jeopardy Clause's prohibition against multiple prosecutions. The Court of Criminal Appeals, holding that double jeopardy did not void Ramos's sexual assault conviction, stated:
We must look at the underlying conduct to determine whether: (1) this is conduct constituting an offense (hence, `criminal conduct'); (2) the defendant has already been prosecuted for this offense; and (3) this `criminal conduct' will be used to establish an essential element of the offense charged at the subsequent prosecution. Only if the conduct meets all three *795 parts of this test will the latter prosecution be barred by double jeopardy.
Id. (emphasis original). Ex parte Ramos further clarified multiple-prosecutions double jeopardy law by overruling Garcia v. State[3] to the extent it conflicted with Ramos's holding that the Double Jeopardy Clause's prohibition against multiple prosecutions is triggered only when conduct, comprising an offense for which the defendant has been previously convicted, constitutes an essential element of the subsequent prosecution. See Ex parte Ramos, 806 S.W.2d at 848 ("[t]o the extent that Garcia v. State, supra, is in conflict, it is expressly overruled").
In Ex parte Peterson, the defendant pleaded guilty to DWI and was convicted. Subsequently, the State attempted to prosecute the defendant for involuntary manslaughter. After setting forth the elements of involuntary manslaughter, the involuntary manslaughter indictment alleged that the defendant drove and operated a motor vehicle in a public place while intoxicated. 738 S.W.2d at 691. Recognizing that the involuntary manslaughter indictment "clearly shows that the State will rely on and seek to prove ... the same `reckless act' of driving while intoxicated that was necessary to prove the lesser DWI charge," the Court of Criminal Appeals concluded the defendant's prosecution for involuntary manslaughter was barred by double jeopardy. However, the Court of Criminal Appeals specifically limited its holding to the facts and indictments before it. Id. ("Finding the present indictment as worded places appellant in jeopardy for the same offense ... [A]ppellant is entitled to the relief prayed for.") (emphasis added). In Ex parte Peterson, if the State was able to prove involuntary manslaughter, without also proving that appellant was DWI, double jeopardy would not bar the defendant's subsequent prosecution for involuntary manslaughter. Id. In May v. State, the Court of Criminal Appeals emphasized the "same offense" test to be applied in subsequent prosecution double jeopardy cases when Blockburger is not dispositive:
Thus the record, including charging instruments, judgment of conviction for involuntary manslaughter and habeas testimony, demonstrates that appellant has been convicted of a crime having several elements included it [sic] and is now facing a trial for a lesser offense consisting solely of one or more of the elements of the crime for which she has already been convicted.
May, 726 S.W.2d at 577 (emphasis added). Because the second prosecution of the defendant required the State to prove conduct constituting an offense for which the defendant had been previously convicted, double jeopardy barred the prosecution.
In a case factually similar to this case, the First Court of Appeals affirmed the trial court's denial of habeas corpus relief and found that double jeopardy did not preclude the defendant's prosecution for DWI after he was convicted of FSRA. Ex parte McCullough, 746 S.W.2d 29 (Tex. App.Houston [1st Dist] 1988, pet. ref'd). Despite the fact that the prosecutor's jury argument in the FSRA case emphasized the defendant's intoxication at the time of the accident, the First Court held that double jeopardy did not bar the defendant's subsequent prosecution for DWI. The First Court stated:
In our case, the State is not required to prove any ultimate issue in its DWI case that it was necessarily required to prove in the FSRA case. The fact that in the FSRA trial appellant was shown to be intoxicated when he drove his car into another car and left the scene of the accident does not preclude the State from subsequently trying its DWI case any more than it would have had the first offense been murder with the evidence showing that appellant was intoxicated when he committed the act.
We have found no case that holds that presenting proof of conduct which is not an essential element of the offense charged would preclude the prosecution of the same conduct on the trial of an *796 offense for which the conduct is an essential element.
Ex parte McCullough, 746 S.W.2d at 3132.
The Fourteenth Court of Appeals determined that a defendant's guilty plea and conviction for DWI did not bar his subsequent prosecution for driving while his license was suspended even though the two offenses arose from the same event. Rakestraw v. State, 765 S.W.2d 873 (Tex. App.Houston [14th Dist.] 1989, pet. ref'd). The Fourteenth Court rejected the appellant's argument that because the two offenses shared a "common essential element," driving on a public roadway, double jeopardy barred relitigation of that factual element. Id. at 873. The Court affirmed the trial court's denial of habeas corpus relief to the appellant.
c. Application of law to facts
We now apply the above Texas and Federal case law to the present case. Neither the FSRA statute nor the FSRA indictment in this case requires the State to prove that Marshall was intoxicated at the time of the accident. See Tex.Rev.Civ.Stat. Ann. art. 6701d, §§ 38 & 40 (Vernon 1977 & Supp.1991). Conversely, neither the DWI statute nor the DWI information required the State to prove Marshall's failure to carry the complainant to receive medical treatment. See Tex.Rev.Civ.Stat.Ann. art. 6701l-1 (Vernon Supp.1991). The fact that the two offenses share some common elements does not mean that the common elements constitute an offense as required by Grady. See Grady, 110 S.Ct. at 2093 ("Double Jeopardy Clause bars subsequent prosecution in which the government, to establish an essential element of an offense charged in that prosecution, will prove conduct that constitutes an offense for which the defendant has already been prosecuted.") (emphasis added). The FSRA charge simply does not require the State to prove conduct constituting an offense for which Marshall has been previously convicted. Although in the FSRA case the State must prove some of the elements of the DWI conviction: that Marshall was driving an automobile, that he struck the complainant, and that the complainant was injured, these elemental facts alone do not constitute an offense for which Marshall has been previously convicted. Unless the State is required to prove every element of DWI, including Marshall's intoxication, as a prerequisite to a conviction in the FSRA charge, the successive prosecutions are not for the "same offense" as defined under the Double Jeopardy Clause's second guarantee. See Grady, 110 S.Ct. at 2093; Illinois v. Vitale, 447 U.S. at 420-21, 100 S.Ct. at 2267-68; Harris v. Oklahoma, 433 U.S. at 683, 97 S.Ct. at 2913; Ex parte Ramos, 806 S.W.2d at 847; Ex parte Peterson, 738 S.W.2d at 691; May v. State, 726 S.W.2d at 576-77; Ex parte McCullough, 746 S.W.2d at 31.
Marshall asserts that his "conduct" was driving an automobile and striking the complainant. He argues that "intoxication" was merely his "status" at the time of the accident, not his "conduct." He argues that Ex parte Ramos precludes proof of the same "conduct" in a subsequent prosecution. Therefore, he concludes that in the FSRA case the State will rely on the same "conduct," i.e., driving an automobile and striking and injuring the complainant, for which he has already been convicted. We disagree. We decline to engage in a semantical argument addressing whether "intoxication" was Marshall's "status" or his "conduct" at the time of the accident. That inquiry is neither helpful nor relevant. The crucial point is that proof of Marshall's driving the automobile and striking the complainant, without proof of his intoxication, is not an offense for which Marshall has been previously convicted. Contrary to Marshall's assertion, Ex parte Ramos does not support his position that intoxication was his "status" not his "conduct."
The Court in Ex parte Ramos held that Ramos's subsequent conviction for sexual assault did not violate the Double Jeopardy Clause's multiple-prosecutions prohibition despite Ramos's previous conviction for burglary of a habitation with the intent to commit sexual assault that arose from the same incident. 806 S.W.2d at 847-48. The Court noted that, even if the sexual assault *797 prosecution required proof that Ramos had the intent to commit sexual assault, intent does not constitute an offense. Id. Double jeopardy did not bar Ramos's prosecution because the sexual assault did not require proof of conduct constituting an offense for which Ramos had been previously convicted. Id.
In this FSRA case, the State will be required to "reprove" only that Marshall drove a car and hit and injured the complainant. The State is not required to prove intoxication or that Marshall operated his car while he was intoxicated. The overlapping conduct the State is required to "reprove" in the FSRA case does not constitute an offense for which Marshall has been prosecuted.
A sister court recently recognized the distinction between the phraseology "element of the offense" and "conduct that constitutes an offense" as those phrases are used in successive-prosecutions double jeopardy analysis. See State v. Garcia, 810 S.W.2d 240, 241 (Tex.App.El Paso 1991, no pet.). In Garcia, the appellee made an argument very similar to Marshall's "conduct" argument. The appellee, who had been convicted of running a red light, asserted that double jeopardy barred his subsequent DWI prosecution because the State would reprove his "conduct" in "driving a vehicle." Id. at 241. Rejecting the appellee's argument, the El Paso Court emphasized that "driving a vehicle," although an element of both running a red light and DWI, did not constitute an offense for which the appellee had been convicted. Id. at 241 (emphasis added). Analyzing Grady, the court stated, "Driving was a common element, but illegal driving (i.e. driving while intoxicated and failure to drive to the right of the median, as units of criminal conduct) was the conduct constituting an offense or offenses which had already been prosecuted." Id. at 241 (emphasis original).
Similarly, in Rakestraw, the defendant pleaded guilty to DWI. Rakestraw, 765 S.W.2d at 873. The State subsequently sought to prosecute him for driving while his license was suspended. The Fourteenth Court found that the second prosecution was not barred by double jeopardy because the offenses merely had a common element: driving an automobile. Applying Marshall's analogy to the Rakestraw facts, the subsequent prosecution for driving while his license was suspended should have been barred because not having a license is simply a "status," not overt, objective conduct by the defendant. The fact that intoxication involves no objective conduct by Marshall at the time of the accident has no bearing on the fact that it is an element of DWI which must be proved by the State to obtain a DWI conviction. Logically, Marshall will not be placed twice in jeopardy by successive trials because the State is not required in the second trial to "reprove" the first offense, but is required to "reprove" only conduct that by itself does not constitute an offense and for which Marshall has not been convicted. Because the State is not required to "reprove" the offense of DWI as a prerequisite to obtaining a FSRA conviction, the second guarantee of the Double Jeopardy Clause does not bar Marshall's prosecution for FSRA. See Garcia, 810 S.W.2d at 241.
Finally, we note that this is an appeal from the trial court's granting of relief under a pretrial writ of habeas corpus. We do not, as the Court of Criminal Appeals in Ex parte Ramos did, have the benefit of the record from the subsequent prosecution, here, the FSRA trial. We decline to speculate whether the outcome of an appeal from the FSRA conviction, if any, could differ based on proof actually admitted at the subsequent trial. We hold that, on the record before us, the State is not required to prove, as an essential element of the FSRA prosecution, conduct constituting an offense for which Marshall has been previously convicted.
Because the trial court should not have granted Marshall's habeas corpus relief or barred prosecution of the FSRA case, we sustain the State's point of error. We hold that the State is not barred from prosecuting Marshall on the FSRA indictment in cause number F88-90590. We reverse and remand to the trial court with instructions to that court to vacate its order granting *798 Marshall habeas corpus relief. We remand this cause to the trial court for trial.
NOTES
[1] Tex. Const, art. I, § 14.
[2] U.S. Const, amends. V and XIV.
[3] 806 S.W.2d 835 (Tex.Crim.App. 1990).
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195 F. Supp. 208 (1961)
H. H. SCOTT, INC., a Massachusetts corporation,
v.
ANNAPOLIS ELECTROACOUSTIC CORP., a Maryland corporation, also trading as Scott Laboratories, Inc., Division, Defendant, and
Scott Radio Laboratories, Inc., Intervening Defendant.
Civ. No. 12669.
United States District Court D. Maryland.
June 16, 1961.
*209 Melvin J. Sykes, Baltimore, Md., and Robert H. Rines, David Rines, and Rines & Rines, Boston, Mass., for plaintiff.
William L. Marbury, John Martin Jones, Jr., Piper & Marbury, Baltimore, Md., Barham R. Gary, Annapolis, Md., and Stewart W. Richards, New York City, for defendant and intervening defendant.
THOMSEN, Chief Judge.
Plaintiff, H. H. Scott, Inc. (H. H. Scott), a manufacturer of high fidelity components since 1946, seeks to enjoin defendant Annapolis Electronics Corp. (Annapolis) and intervening defendant Scott Radio Laboratories, Inc. (Scott-N.Y.), a wholly owned subsidiary of Annapolis, from using the name or trademark SCOTT or
in connection with the manufacture or sale of audio-reproduction equipment. Defendants rely upon the prior use and registration of those trade-marks by an Illinois corporation formerly known as Scott Radio Laboratories, Inc. (Scott-Ill.), and the acquisition of those marks by Scott-N.Y. in the late 1950's as the result of a series of transfers; they seek to limit plaintiff to the use of the name or mark H. H. SCOTT, and to prevent its use of the name or mark SCOTT, by which its products are generally known in the market. The case involves rights and obligations under the common law and under the Lanham Act, questions of alleged transfers in gross, of abandonment, of use of the assigned marks by Scott-N.Y. and its owners to misrepresent the source of its products, of laches, acquiescence and estoppel, and of unclean hands.
Facts
Both sides proposed many detailed findings of fact, upon which I have ruled. The following statement, which includes a number of inferences and conclusions based on the detailed findings, is sufficient for an understanding of the issues.
The Market
Although the term high fidelity was used before World War II to describe a characteristic of the finest phonographs, AM radios and combinations of the two, the term high fidelity (or hi-fi) in its presently accepted sense came into general use in the late 1940's with the development of FM radio and long-playing records. The first hi-fi equipment was developed and used by engineers and by hobbyists with technical training or skill. It usually consisted of separately packaged components of a sound-reproduction system, such as amplifiers, tuners, pre-amplifiers, pickups and speakers, which were manufactured and sold by a number of small companies, and were so designed that a component made by one company could readily be used in association with components made by other companies as well as with components made by the same company.
The large concerns continued to manufacture and sell consolesradios, phonographs *210 or combinationseach of which comprised a single cabinet housing an integrated sound-reproduction system designed to operate as a unit. The amplifier or the tuner of such a system could not ordinarily be used with the tuner or amplifier of another manufacturer. The two markets were generally discrete, the hi-fi equipment being sold largely through specialty shops, and the consoles through department stores and music stores, although some music stores carried both lines, usually in separate departments. Occasionally some or all of the parts of a large unit would be taken out of the cabinet and scattered around a room in a custom installation, and some hi-fi dealers would assemble components into cabinets for their less talented or more conventional customers.
Several factors, however, have served to unify the markets. The development of television brought about a sharp decline in the manufacture and sale of radio-phonograph consoles. Then, in the mid-50's, hi-fi developed a general appeal. The large console manufacturers began to describe their highest quality products as hi-fi, and some of them began to sell components which could readily be used with the components of other manufacturers. Some of the best component manufacturers began to mount their products firmly into cabinets, which were sold as consoles or component consoles. Dealers began to assemble into a single cabinet components produced by various manufacturers, and to sell the unit under the name of the manufacturer of the amplifier, the tuner, or other important component. The retail distribution channels of the component manufacturers and the console manufacturers have merged to a considerable degree, and many consumers are now likely to consider both types of systems. Since 1956 there has been a unified market.
Scott-Ill.
In 1929 an Australian named E. H. Scott organized an Illinois corporation named Scott Transformer Co. (Scott-Ill.). Its name was changed to E. H. Scott Radio Laboratories, Inc. in 1937, to Scott Radio Laboratories, Inc. in 1945, and to Electrovision Corp. in 1959, after it had passed through bankruptcy. Before World War II, Scott-Ill. produced a radio-phonograph console which was one of the best, if not the best available.[1] In 1932 it registered the trademark SCOTT on the Supplemental Register under the Act of March 19, 1920, for the use on various basic items of audio-reproduction equipment. That mark was renewed under its original number (296,757) on the Supplemental Register in 1952. During World War II Scott-Ill. produced short wave radios for the armed forces, but spent large sums for "institutional advertising". After the war E. H. Scott sold his stock to a new group, headed by Hal Darr, who continued to produce high quality radio-phonograph combinations. In 1948 Scott-Ill. registered the trade-mark
on the Principal Register (504,824).
In 1950-51 John Meck of Chicago bought a controlling interest in Scott-Ill. and merged John Meck Industries into it. The merged corporation continued to produce some radio-phonographs but its principal products were TV sets, many of which were cheap and were sold under trade-marks other than SCOTT.[2] It went into bankruptcy in 1956.
*211 H. H. Scott
Herman Hosmer Scott is a well-known and respected electronic engineer. In 1946 he patented a dynaural noise suppressor, which eliminated scratch and surface noises from phonograph records, and licensed its use by several manufacturers, including Scott-Ill. The licensing agreement with Scott-Ill. permitted the use of the noise suppressor as part of phonographs sold under the brand name or trade-mark SCOTT, and required Scott-Ill. not to create the impression that the noise suppressor was an original development of Scott-Ill., but to make sure that in advertising copy the full name Herman Hosmer Scott would be used.
In 1946 H. H. Scott developed the first true high fidelity amplifiers, and began to manufacture and sell them through a corporation he had organized, the name of which was changed to Herman Hosmer Scott, Inc. in 1947 and to H. H. Scott, Inc. in 1958. The products of that corporation, the plaintiff herein, were marked H. H. SCOTT, even before the name of the corporation was changed. By 1954 plaintiff had a line of high fidelity components, including amplifiers, pre-amplifiers and a speaker crossover, a device for channeling high frequency sounds to the "tweeter" and low frequency sounds to the "woofer". In 1954 tuners were added to the line, and in 1955 a record turntable.
Plaintiff's products have consistently been of the highest grade. They were sold under the trade-mark H. H. SCOTT in the nationwide component market until it merged into the unitary market. However, plaintiff's components have been generally referred to by dealers and by writers in the trade press and in magazines of general circulation as SCOTT amplifiers, tuners, etc. In the many dealers' catalogues offered in evidence, about half of plaintiff's items were referred to as SCOTT Amplifiers, etc., the other half as H. H. SCOTT Amplifiers, both designations often appearing in the same catalogue. In the component market since 1946, and in the unitary market since the bankruptcy of Scott-Ill. in 1956, the name SCOTT has come to mean the products of the plaintiff corporation, H. H. Scott, Inc.
In recent years plaintiff's officers have been planning to enter the console field; its first consoles have been designed and advertised; they are now being manufactured and will be sold on a nationwide basis in a short while.
The Bankruptcy Sale
A bankruptcy petition against Scott-Ill. was filed in the Northern District of Indiana in August, 1956. The corporation was adjudicated a bankrupt in September, 1956, and on October 30-31, 1956, its assets were sold in separate lots. One lot consisted of "the good-will and trade names of Scott Radio Laboratories, Inc., including copyrights, if any, and patents, if any, trademarks, if any, and all engineering data, if any, blue prints, drawings, lists of customers, if any, together with the right to use the name `Successors to Scott Radio Laboratories, Inc.'". No inventory was included in that lot. The capital stock of the company was not sold, and after its discharge in 1959, Scott-Ill. resumed business under the name Electrovision Corp.
The lot referred to above was sold for $8,000 to Benjamin Kaye, Jerome Wiesenthal and Richard S. Wiesenthal (the K-W group), the prinicipal owners of Liberty Music Shops, Inc. (Liberty), a large retailer in New York City, having several branches in that city and its suburbs. The sale was approved by the referee in bankruptcy on November 2, 1956, and the trustee in bankruptcy executed a bill of sale to Liberty, which had *212 actually put up the money. The bill of sale was delivered in March, 1957, and the trade-marks a month or two later. Liberty had at one time carried the Scott-Ill. line of consoles and was then and had been for some time carrying plaintiff's line of components. The K-W group was not interested in any part of its purchase except the SCOTT trademarks and the good will associated therewith. They used none of the other trademarks, and none of the patents or customers' lists; they discarded the blueprints and engineering data and junked the tools and dies. Liberty assigned to the K-W group, by an instrument bearing the same date as the trustee's bill of sale, the assets transferred to it.
Neither the trustee's assignment nor the assignment by Liberty was recorded in the Patent Office. In 1957 the K-W group organized a New York corporation named Scott High Fidelity Laboratories, Inc. (Scott-N.Y.), and on May 25, 1957, Liberty, purportedly acting as agent for the K-W group, executed an assignment, likewise unrecorded, to Scott-N.Y. of the assets purchased from the bankrupt estate.
Activities of the K-W Group, Liberty and Scott-N.Y.
Shortly thereafter Scott-N.Y., Liberty and the K-W group arranged to assemble in the name of Scott-N.Y., and to sell exclusively through Liberty's retail stores in metropolitan New York a line of consoles. The equipment in those consoles was made up of components purchased from various manufacturers. Most of the manufacturers were well known in the field, but the components were generally selected from their cheap lines. These consoles were marked SCOTT or
, and were sold by Liberty under that name.
H. H. Scott learned of the retail sales of such consoles by Liberty in September 1957, but since Liberty was then a large dealer in plaintiff's components, since H. H. Scott thought Liberty had acquired the right to use the mark in that way, and since Liberty assured plaintiff that it would make every reasonable effort to avoid confusion, plaintiff took no action to prevent such use of the mark by Scott-N.Y. or by Liberty, and continued to sell its components to Liberty.
In 1959 the K-W group, Liberty and Scott-N.Y. caused to be manufactured and sold in the Liberty retail stores some components marked SCOTT. When plaintiff learned that Liberty was selling components under that name, it immediately ceased doing business with Liberty and began to consider the desirability of legal action.
In various ways which are set out in the detailed findings of fact, the K-W group, Liberty and Scott-N.Y., during the period 1957 to 1960, combined and conspired to pass off as plaintiff's components, the components in their SCOTT consoles and the separate components which they began to sell in 1959. They used the registered marks which they had purchased to misrepresent the source of the goods in connection with which the marks were used.
The K-W group had not purchased the trade-marks and other assets from the trustee in bankruptcy of Scott-Ill. with the intention of continuing its business, i. e. the business of developing and manufacturing audio-reproduction equipment and distributing the same nationally. The K-W group bought the trade-marks and other assets with the intent to use only the SCOTT marks, and to use them only in connection with Liberty's retail business in metropolitan New York. In fact they used the marks solely for that purpose. Theythe K-W group and their corporation, Scott-N.Y., the intervening defendant hereinabandoned the national use of the trade-marks SCOTT and
and allowed the mark SCOTT to acquire in the market a special significance as identifying the goods of the plaintiff, H. H. Scott, Inc.
Annapolis Electroacoustic Corp.
Defendant Annapolis Electroacoustic Corp. (Annapolis) was organized in October 1958 by a group associated with *213 Chesapeake Instrument Corp., a company specializing in research and development of electroacoustic devices for the government. The group originally engaged in the sale of high fidelity products at retail in Annapolis, Maryland, but in 1959 decided to enter the field of manufacturing audio-reproduction equipment. Leon Knize, who had been manager of consumer products for the Stromberg Carlson Company, became associated with the Annapolis group, and capital of over $200,000 was subscribed. Knize suggested that Annapolis could enter the market more rapidly and inexpensively if it had a name that was already known and suggested that the SCOTT name and trade-marks might be available. The Chesapeake group felt that if a trademark of that type could be acquired for less than the cost of creating a comparable image for Annapolis through extensive advertising, it should be done. Knize was authorized to look into the matter and he approached the K-W group. Patent counsel for Chesapeake checked the legal aspects. After negotiations, Annapolis entered into an agreement dated July 25, 1960, with the K-W group, as owners of all the outstanding shares of Scott-N.Y. The agreement provided for the sale of all the capital stock of Scott-N.Y. by the K-W group to Annapolis for $255,000, payable $15,000 on August 3, 1960, $15,000 on November 1, 1960, and the balance in quarterly instalments on the basis of one percent of the net sales, with stipulated minimum quarterly payments and a requirement that the full balance be paid by March 1, 1969. As a further consideration for the sale of the stock, the K-W group obtained 5,000 shares of the stock of Annapolis and options for 2,500 more. The agreement contained the following provisions:
"6. * * *
"(a) Between the date of this agreement and the date of closing the corporation [Scott-N.Y.] will not enter into any agreements or incur any obligations which will survive the date of closing.
"(b) Before the date of closing, the corporation will divest itself of all of its assets, except those set forth in Schedule A annexed hereto, and will satisfy all of its obligations and liabilities. The sellers will cause the corporation's liabilities and obligations, including but not limited to its liability for taxes, which are not satisfied as of the date of closing, to be paid and/or discharged."
Schedule A, set forth on page 9 of the agreement, read as follows:
"Trademarks registered in the United States Patent Office, Nos. 296,757, 504,826, 557,313, 571,715, all foreign trademark registrations acquired by Scott Hi Fidelity Laboratories still unexpired. No representations concerning validity or freedom from claims, license encumberances, are made with respect to said foreign trademark registrations."
Only the corporate shell as owner of the trade-marks passed to the new owner of the stock. No employees, equipment, blueprints, engineering or specifications went along. The entire inventory of Scott-N.Y. had been transferred to Liberty. A separate agreement, also dated July 25, 1960, provided that Liberty should dispose of this inventory by March 1, 1961, or by the date of the first shipment of "Annapolis Scott" products, whichever was later. If the inventory was not disposed of by the later of the two dates, the parties would renegotiate with respect to the disposition of the merchandise so that Liberty would not take a loss on it. Liberty continued to sell its "Scott inventory" as SCOTT after July 25, 1960. By the same marketing agreement, Liberty was designated the exclusive franchisee in New York of the products manufactured by Scott-N.Y., now controlled by Annapolis, so long as it takes a fixed percentage of the output of that corporation.
Shortly thereafter Annapolis, as sole stockholder of Scott-N.Y., had the name of that corporation changed to "Scott *214 Radio Laboratories, Inc.", the exact name of the Illinois corporation at the time of its bankruptcy. This was done because the Annapolis group "wanted to tell the public that Annapolis was the Illinois company", and that they wanted "to be and continue the good reputation and quality of the corporation".
The Annapolis group wrote a letter to dealers saying: "The first thing we did was purchase the assets of Scott Laboratories of Chicago. We will operate Scott Laboratories as a division of Annapolis Electroacoustic Corp. and Scott will be our brand name." On December 4, 1960, Annapolis and Liberty placed an advertisement in the New York Times advertising Scott-N.Y.'s products as being made by "the original Scott, producers of high fidelity equipment for thirty-four years".
In the fall of 1960, Scott-N.Y., under the direction of the Annapolis group, brought out its first product, a high quality revolutionary speaker system, which has been sold under the name and mark
by Liberty in the metropolitan New York market and by some dealers elsewhere.
Both the Annapolis and the K-W groups knew of plaintiff's activities and reputation in the market. Liberty had handled plaintiff's products for many years. The Annapolis group "did not concern themselves" with the problem of two Scotts in the field. Knize testified: "Our objectives in the high fidelity or in the audio-reproduction field are so much larger in scope in terms of market potential, in terms of market penetration, than the very narrow area that H. H. Scott operates within, that we just never considered it as a factor in our future * * we felt that we would be operating in a much larger arena, that we were going to be a much larger company, and that they would not affect us that much."
Based upon all the evidence, I find that a substantial segment of the consuming public would be confused by defendants' use of the name SCOTT as describing any equipment in the high fidelity field, whether components or consoles, produced by defendants.
Discussion
At the date of its bankruptcy in 1956, Scott-Ill. had the right to use the trade-marks SCOTT and
on all equipment, including both consoles and components, in the audio-reproduction field, which had only recently become a unitary market. Its right to use the mark
was incontestable except on grounds which constitute exceptions to incontestability under the Lanham Act. See 15 U.S.C.A. §§ 1064, 1065, 1115. At the same time the name SCOTT was becoming more and more associated with plaintiff's components in the minds of the public.
The validity and effect of the sale and assignment by the trustee in bankruptcy of Scott-Ill. will be discussed first.
I.
The Bankruptcy Sale
The assignment of registered marks is controlled by 15 U.S.C.A. § 1060, which provides in pertinent part:
"A registered mark or a mark for which application to register has been filed shall be assignable with the goodwill of the business in which the mark is used, or with that part of the goodwill of the business connected with the use of and symbolized by the mark, and in any such assignment it shall not be necessary to include the goodwill of the business connected with the use of and symbolized by any other mark used in the business or by the name or style under which the business is conducted: Provided, That any assigned registration may be canceled at any time if the registered mark is being used by, or with the permission of, the assignee so as to misrepresent the source of the goods or services in connection with which the mark is used. Assignments shall be by instruments in writing duly executed * * *."
*215 The common law on the subject is set out in the Restatement, Torts, secs. 755 and 756:
"§ 755. Transfer in Gross
"A right to the use of a trade-mark or trade name cannot be transferred in gross.
"§ 756. Transfer with Subject Matter Associated With Trade-Mark or Trade Name
"A right to the use of a trade-mark or trade name can be transferred along with a subject matter with which the trade-mark or trade name is associated, if that subject matter is itself transferrable.
"Comment:
"a. General principle. When one who has a trade-mark or trade name transfers to another the subject matter with which it is associated, he may also effectively assign to the other his right to the use of the trade-mark or trade name. Thus, one who sells his business to another may include in the transfer the trade-mark or trade name used in the business. Even in such a case, it is possible that some misrepresentation may be involved in the subsequent use of the symbol by the transferee. But in so far as the purchaser continues the business of the transferor, the misrepresentation is not material and the symbol can, with substantial truth, attract the good will with which it was previously associated. It is assumed that the successor will maintain the qualities which the mark has come to identify. The possibility that he will change them is no greater than the possibility of a change in the absence of such a transfer. Under modern conditions, the personnel of a business is frequently shifting, and marketing methods are largely impersonal. The practice of transferring trade-marks or trade names along with the business in which they are used is well recognized, and purchasers of goods or services are probably aware of it."
See also additional comments to sec. 756 and secs. 752 and 753, discussed below.
So far as this case is concerned there is little difference between the statute and the common law rule, but they are not easy to apply in practice. The principles which have governed the development of the law are discussed in 3 Callman, Unfair Competition and Trade-Marks, 2d ed., p. 1272. They are: "(1) The transfer of a trade-mark is the transfer of the good will it symbolizes * * *; (2) Good will is not an indivisible unit, but may vary with the association of ideas that the trade-mark generates * * *; (3) In every transfer, the Court must determine the function of the particular trade-mark, viz., whether it indicates origin, guarantees properties of the article, or is merely an advertising device, or whether several of these functions are combined; (4) A transfer which is likely to work a deception upon the public will not be tolerated."
Callman continues: "Analytically, the latter consideration is the most significant; the others are merely explanations of or bases for legal reasoning. If a prospective transfer is otherwise lawfule. g., not violative of the anti-trust lawsthe only limitation on it is that which is dictated by public policy. It is a cardinal rule that the public must not be deceived by the effect of a transfer. It should not be assumed, however, that this can be readily predicted. The commercial significance and function of the particular trade-mark must be appreciated and recognized in determining public reaction and the likelihood of deception." Op. cit. pp. 1272-1273.
As we have seen, the marks SCOTT and
had been used by Scott-Ill. since the early 1930's on radio-phonographs of high quality, manufactured by it and distributed throughout the country. The sale of such consoles had fallen off rapidly during the 1950's and although Scott-Ill. may have offered some components for sale, the name SCOTT *216 in the component market had become associated in the minds of the public with the high quality components sold by plaintiff H. H. Scott, Inc.
Scott-Ill. ceased operations early in 1956 and was adjudicated a bankrupt in September of that year. Its assets were sold at a receiver's sale on October 30-31, 1956. One of the lots consisted of "the good-will and trade names of Scott Radio Laboratories, Inc., including copyrights, if any, and patents, if any, trade-marks, if any, and all engineering data, if any, blueprints, drawings, lists of customers, if any, together with the right to use the name `Successors to Scott Radio Laboratories, Inc.'" That was the only lot purchased by the K-W group. The other assets were sold in other lots to other purchasers.
There are substantial reasons of public policy, illustrated by the evidence in this case, why such a bare sale of a bankrupt's good will and trade-marks apart from the business in which they are used should not be made and should not be held valid.[3]
But we are dealing here with a sale made under the jurisdiction of another federal court, in which other items were sold along with the trade-marks and good will. The law seems to be that such a transfer is valid, subject to the proviso in 15 U.S.C.A. § 1060, quoted above, and to the obligation on the buyer to use the marks in accordance with the rules of fair competition. Callman, op. cit., p. 1334; Andrew Jergens Co. v. Woodbury, Inc., D.Del., 273 F. 952, 959, affirmed 3 Cir., 279 F. 1016.
We must consider therefore: (II) whether the assignees abandoned the marks within the meaning of the statute, or ceased to use them in the business with reference to which the interest in the marks was protected; and (III) whether the marks were used by or with the permission of the assignees so as to misrepresent the source of the goods in connection with which the marks were used.
II.
Abandonment and Cessation of Use
The term "abandoned" is defined in 15 U.S.C.A. § 1127, as follows:
"A mark shall be deemed to be `abandoned'
"(a) When its use has been discontinued with intent not to resume. Intent not to resume may be inferred from circumstances. Nonuse for two consecutive years shall be prima facie abandonment.
"(b) When any course of conduct of the registrant, including acts of omission as well as commission, causes the mark to lose its significance as an indication of origin."
As we have seen, the K-W group did not buy the trade-marks, good will, etc. from the trustee in bankruptcy with the intention of continuing the business of Scott-Ill. They were only interested in using the trade-marks in connection with the retail business of Liberty in metropolitan New York. With this intention in mind, the K-W group incorporated the intervening defendant, Scott-N.Y., in 1957 and transferred the marks to it.
During the period 1957 to 1960, while the K-W group was in control of Scott-N.Y., they discontinued the use of the marks SCOTT and
in the national market in which the marks had been used by Scott-Ill., but in which the name SCOTT had increasingly become associated with the products of the plaintiff, H. H. Scott, Inc. During that period *217 the K-W group and their two corporations used the marks only in connection with the retail business of Liberty in metropolitan New York, for which use the marks had been purchased.
During the very same period the plaintiff, H. H. Scott, Inc., greatly increased its sales and the advertisement of its products throughout the country, and the name SCOTT acquired in the market a special significance as indicating the goods of the plaintiff rather than the goods of the intervening defendant Scott-N.Y.
Under these facts, the limited local retail use of the name and the marks by Scott-N.Y. and Liberty constituted an "abandonment" of the marks in the national market. 3 Callman, Unfair Competition and Trade-Marks, sec. 79, pp. 1352, 1353. The case of Dawn Donut v. Hart's Food Stores, Inc., 2 Cir., 267 F.2d 358, upon which defendants rely, presented the converse of the present fact situation. There the plaintiff had regularly continued its business in many parts of the country, and merely discontinued the use of its marks in a few counties in New York State. Here the most that can be said for the defendants is that the business was continued in a few counties but discontinued elsewhere in the United States. Any dictum in the Second Circuit's opinion must be considered in the light of this distinction.
The cessation of use of the mark in the national market prevented Scott-N.Y. from resuming the discontinued use. Restatement, Torts, sec. 753 states:
"§ 753. Resumption of Discontinued Use
"One is not privileged to resume the use of a trade-mark or trade name or the physical appearance of goods previously used but discontinued by him, if, after the discontinuance and prior to the resumpion,
"(a) another had adopted the designation or appearance in a competing business, and
"(b) the designation or appearance has acquired in the market a special significance as identifying the goods, services or business of the other rather than of the actor."
III.
Misrepresentation of Source
During the period 1957 to 1960, while both corporations were controlled by the K-W group, Scott-N.Y. and Liberty used the marks so as to misrepresent the source of the goods or services in connection with which the marks were used. In various ways listed in the detailed findings of fact they attempted to persuade and persuaded prospective purchasers to believe that (a) the components in the consoles which they were selling under the SCOTT name and mark, and (b) the other components which they began to sell in 1959 under the SCOTT name and mark, were the product of the plaintiff, H. H. Scott, Inc. Under the Lanham Act this is a ground for canceling the registration of the mark even though it has become otherwise incontestable. 15 U.S.C.A. §§ 1060, 1064, 1065, 1115(b) (3). See also Restatement, Torts, sec. 749.
The use of the mark since July 1960 will be discussed in the next section.
IV.
The Sale to Annapolis
The sale of the stock of Scott-N.Y. by the K-W group to Annapolis in July 1960 may be looked at in either of two ways: (a) as it technically was, a sale of the stock of an existing corporation so that the corporation continued in existence with whatever rights and impediments it had theretofore acquired; or (b) as essentially a sale of the trade-marks by the K-W group to Annapolis.
Looked at in the latter way, it is as bare a sale, as clearly a transfer in gross, as can be imagined. Such a transfer is invalid. Restatement, Torts, sec. 755. The right to use a trade-mark can be transferred only with the "goodwill of the business in which the mark is used, or with that part of the goodwill of the *218 business connected with the use of and symbolized by the mark." 15 U.S.C.A. § 1060. See also Restatement, Torts, sec. 756.
From 1956 until the sale in July 1960, the K-W group used the mark, only in connection with the retail sale by Liberty in metropolitan New York of equipment purchased, assembled and marked by Scott-N.Y. and Liberty for that purpose. The Annapolis group contemplated and has begun a different use in a different kind of business. Looked at as a sale of the trade-marks from the K-W group to the Annapolis group, therefore, the transfer would appear to be invalid.
Looked at the other way, it was a sale of stock in an existing continuing corporation, Scott-N.Y. The new management must take the corporation, cursed with the misrepresentations made by it, its stockholders and their associated corporation, Liberty, during the years 1957 to 1960. That is particularly true here, because although Annapolis became the only stockholder, the K-W group received a small stock interest in Annapolis and a substantial group of interests in the continuing success of Scott-N.Y.
Moreover, after the stock was purchased by the Annapolis group, they made efforts to persuade the public that the corporation is continuing the business of Scott-Ill. and to trade on the reputation of Scott-Ill. beyond the limits of equity and good conscience.[4]
Finally, whichever way the transfer of the stock is regarded, the abandonment of the mark by Scott-N.Y. while it was under the control of the K-W group is not cured.
V.
Laches, Acquiescence and Estoppel
Mere delay is ordinarily no defense to a claim for injunctive relief in trade-mark and unfair competition cases, although it may preclude a claim for damages. Rothman v. Greyhound Corp., 4 Cir., 175 F.2d 893; Sears, Roebuck & Co. v. Allstates Trailer Rental, Inc., D. Md., 188 F. Supp. 170, 959; Nims Unfair Competition and Trade-marks, 4th ed., p. 1302, et seq. Where, however, laches or acquiescence is combined with elements of estoppel, plaintiff may also be barred from injunctive relief. Ambrosia Chocolate Co. v. Ambrosia Cake Bakery, 4 Cir., 165 F.2d 693; Landers Frary & Clark v. Universal Cooler Corp., 2 Cir., 85 F.2d 46. Defendant's good faith is an element to be considered when the defense of estoppel is raised. See Menendez v. Holt, 128 U.S. 514, 9 S. Ct. 143, 32 L. Ed. 526; McLean v. Fleming, 96 U.S. 245, 24 L. Ed. 828; Greyhound Corp. v. Rothman, D. Md., 84 F. Supp. 233, 242, affirmed 4 Cir., 175 F.2d 893; Callman, op. cit., vol. 4, sec. 87.3(b), pp. 1794-1799, and cases cited therein.
By September 1957 plaintiff had learned, or was charged with knowledge[5] that the K-W group had bought the Scott-Ill. trade-marks at the bankruptcy sale, and were causing their new corporation, Scott-N.Y., and their old corporation, Liberty, to assemble and sell at retail in the Liberty stores in metropolitan New York consoles under the SCOTT name and marks. Plaintiff acquiesced in that use, upon the assurance that reasonable efforts would be made to avoid confusion of source between those consoles and plaintiff's line of components, which Liberty continued to carry. When, in 1959, the K-W group caused Scott-N.Y. and Liberty to purchase, label and sell components under the SCOTT name, plaintiff did not demand that such sales be stopped, but refused thereafter to sell its line of components to Liberty, and began to consider the possibility of suit. Meanwhile Liberty continued to advertise *219 the retail sale of those products in metropolitan New York. Plaintiff learned from various sources that instead of making reasonable efforts to avoid confusion, as promised, Liberty had been palming off its consoles as products of plaintiff or as containing components which were products of plaintiff. When the Annapolis group made their first public announcement, in the latter part of 1960, indicating that they had purchased the SCOTT mark and intended to manufacture and sell on a national scale, plaintiff promptly brought this action to restrain such use of the mark.
Under these circumstances plaintiff may have been estoppedby its laches and acquiescence and by Liberty's expenditures for advertisingto prevent the continued sale of SCOTT consoles and possibly even SCOTT components by Liberty, at retail, in metropolitan New York. The answer to that issue would turn on the time when plaintiff is charged with knowledge that the K-W companies were violating their promise to try to avoid confusion between their consoles and plaintiff's components and were in fact palming off their products as plaintiff's.
But that is not the issue in this case. We are dealing here with a proposed national use of the SCOTT name and mark by a manufacturer which now intends to distribute consoles and components in the same market in which plaintiff's products are sold, and in which the name SCOTT has come to signify the high quality products manufactured and distributed by plaintiff. That distinctive meaning became increasingly significant and important during the period between the bankruptcy of Scott-Ill. in 1956 and the first advertisements of the Annapolis group in late 1960. During that period Scott-N.Y. and its then owners, the K-W group, limited the use of the Scott name and marks to retail sales by Liberty in the New York area, abandoned the business of Scott-Ill., i. e. the manufacture of goods for sale to and through dealers in the nationwide market.
Before considering the question of relief, one additional point raised by defendants must be decided.
VI.
Unclean Hands
Some allegations in the complaint and the affidavit in support of plaintiff's motion for a preliminary restraining order (which was not pressed when an early trial date was agreed upon) appear very close to, if not beyond the limits of permissible inference. These documents were prepared and drafted solely by plaintiff's Massachusetts counsel after consultation with officers of the plaintiff.
However, after carefully considering all the facts and law cited by the defendants, I cannot find as a fact nor hold as a matter of law that plaintiff's hands are unclean. It must be recognized that all counsel worked under great pressure; both sides sought an early trial; each side had to examine a great mass of documents, located in at least five states, and neither side was able to supply the other before trial all of the documents which it had promised to supply. Moreover, I found H. H. Scott to be a generally credible witness; and, certainly, the average credibility of plaintiff's witnesses did not fall below the average credibility of defendants' witnesses.
VII.
Relief
Plaintiff seeks to prevent any further use of the SCOTT or
name or marks by defendants. On the other hand, defendants seek to restrict plaintiff to the use of the name and mark H. H. SCOTT. Although contending that plaintiff is barred from all relief by unclean hands, laches, acquiescence and estoppel, defendants proposed a decree which would (1) require Scott-N.Y. to change its corporate name to "Scott Radio Laboratories of Annapolis, Inc."; (2) prohibit defendants from referring to Scott-Ill. except in conjunction with an explanatory phrase indicating that Scott-N.Y. is the *220 successor to that company; (3) permitting defendants to use the trade-marks
and SCOTT in the entire field of audio-reproduction equipment, except with regard to high fidelity components, other than speaker systems; (4) requiring their advertising to include their corporate name; and (5) enjoining defendants from palming off their goods as those of H. H. Scott, Inc.
These proposals do not go far enough to protect the public from the confusion which would inevitably occur. See Callman, op. cit., p. 1272, quoted at length in I. above, and the cases cited in note 3, supra. Nor do defendants' proposals adequately protect the good will which plaintiff has built up over the years by producing and selling high quality components under the name H. H. Scott, which the public has come to call SCOTT to such an extent that throughout the country the name SCOTT in the now unitary audio-reproduction field has acquired a special significance as identifying goods produced by plaintiff. See Restatement, Torts, sec. 753. The only use of the SCOTT name or mark by defendants from 1956 to late 1960, just before this suit was filed, was in connection with the retail business of Liberty in the metropolitan New York area. During that period, plaintiff greatly expanded its national sales and advertising, while defendant Scott-N.Y. ceased to use the name and marks in the business in which they had been used by Scott-Ill., namely, the manufacture and distribution of radio-phonographs, throughout the country. The name SCOTT has become identified in the minds of the public with the products of the plaintiff.
Under these circumstances, aside from a possible estoppel, plaintiff is entitled to an injunction preventing the resumption of the discontinued use. Restatement, Torts, sec. 753. And because the marks have been used by defendants to misrepresent the source of the goods, plaintiff is entitled to have the registration canceled. 15 U.S.C.A. § 1060.
The question of estoppel was considered in V., above. There is clearly no estoppel with respect to the use of the marks on a nationwide scale, outside of metropolitan New York. Whether the injunction should contain an exception permitting sales either in Liberty's retail stores or in metropolitan New York generally, presents a difficult question.
If this case involved only the relative rights and equities of the two parties, it might be proper to hold that such an exception should be included in the decree. But this is not such a case; the public also has a substantial interest in avoiding the confusion which would result from the sale in New York of two lines under the same name. It is true that in some cases a party may be estopped notwithstanding the public interest. But the elements of estoppel and the equities favoring the defendants would have to be much stronger than they are here.
An unqualified injunction is supported by the fact that defendants have spent little money in advertising their new SCOTT speaker system, or in promoting their proposed new line. They can change to a non-confusing name with relatively little difficulty or expense. The capital for Annapolis was subscribed before the stock of Scott-N.Y. was purchased and that purchase was admittedly made so that the Annapolis group could trade on the reputation of the old Scott-Ill. company. It appears that Annapolis signed an agreement to purchase an asset which the K-W group did not then own or have the right to sell, because it had lost the right to use the marks by abandonment, cessation of use, and use of the marks to misrepresent the source of the goods. The respective rights and obligations of the K-W group and the Annapolis group inter sese are not before the court in this case.
Decree
It is this 16th day of June, 1961, by the United States District Court for the District of Maryland,
Ordered, adjudged and decreed as follows:
1. That defendants Annapolis Electroacoustic Corporation and Scott Radio Laboratories, Inc., their agents, servants, *221 employees, and all persons acting in concert with them be and they are hereby permanently restrained and enjoined in connection with the sale, manufacture, distribution or marketing of radio wave apparatus, record players and any and all audio-reproducing equipment, from directly or indirectly advertising, displaying, affixing or otherwise using or referring to the trade-mark or trade name SCOTT and any and all variations, combinations or colorable imitations thereof; provided, however, that this injunction is subject to the following interim provisions:
(a) For a period of seven months and fifteen days, commencing with the date of this decree, defendants may refer to the trade-mark or trade name SCOTT, or variations thereof, and may refer to defendant Scott Radio Laboratories, Inc., by its present name, in advertisements, circulars, or announcements designed to inform the trade and/or public of the fact that products previously marketed under the aforesaid trade names or marks will thereafter be marketed under such new trade names or marks as may be selected by defendants, so long as each such advertisement, or circular or announcement (i) clearly states the fact that the Scott marks or names will be changed, and (ii) contains no statement that defendant Scott Radio Laboratories, Inc., is the same company as the Illinois corporation which previously had the same corporate name or that defendant Scott Radio Laboratories, Inc., has purchased the assets of the aforesaid Illinois corporation.
(b) For a period of seven months and fifteen days, commencing with the date of this decree, defendants may sell and distribute the inventory of products marked with the SCOTT marks which they have on hand at the time of the entry of this decree and which defendants represent does not exceed 400 units of speaker systems, 200 radio-phonograph consoles and 2,000 television sets.
(c) For a period of forty-five days, commencing with the date of this decree, defendants may manufacture, market and sell under the SCOTT trade-marks or trade names additional speaker systems and television sets, if, but only if, defendants' inventory referred to in subparagraph (b) above is not sufficient to meet the demands of their customers during said forty-five day period, and provided that such additional production shall not exceed 200 units of speaker systems, 100 radio-phonograph consoles and 1,000 television sets.
2. The provisions of paragraph 1 shall not be deemed to require defendant to recall any trade notices which may have been released prior to the entry of this decree, or to reclaim any instruments which may be in the hands of dealers or other purchasers at the time of the entry of this decree or which may be sold to dealers thereafter pursuant to the provisions of paragraph 1, above. Similarly, the provisions of paragraph 1 shall not be deemed to prevent any dealer from selling any inventory of products marked with the SCOTT marks which he may have on hand at the time of the entry of this decree or which he may buy thereafter pursuant to the provisions of paragraph 1, above, nor shall it prevent any such dealer from advertising the same under the trade-mark or trade name SCOTT, as affixed thereon, in connection with the sale of such products. In connection with the sales of Scott products permitted in paragraph 1, defendants shall have the right to distribute to purchasers the usual printed materials which defendants customarily give to the purchasers of their products, regardless of the fact that certain of such materials may bear the Scott marks or trade names or the corporate name of defendant Scott Radio Laboratories, Inc.
3. That defendants Annapolis Electroacoustic Corporation and Scott Radio Laboratories, Inc., their agents, servants, employees, and all persons acting in concert with them be and they are hereby permanently restrained and enjoined from passing off, or attempting to pass off, or wilfully suffering or permitting to be passed off by any device whatsoever any audio-reproducing equipment manufactured, *222 assembled, sold, distributed or marketed by defendants, as being goods manufactured, assembled, sold, distributed or marketed by plaintiff H. H. Scott, Inc.
4. That United States Trade-mark Registration Numbers 296757 (Supplemental Register), 504826 (Principal Register), 557313 (Principal Register) and 571715 (Principal Register) be and the same are hereby ordered canceled.
5. That defendant Scott Radio Laboratories, Inc., within forty-five days from the date of the entry of this decree, change its corporate name so that the word SCOTT, or any combination, variation or colorable imitation thereof does not appear in or constitute a part of its corporate name.
6. That the counterclaim of the defendant and intervening defendant be and the same is hereby dismissed.
7. That plaintiff is not entitled to damages or attorneys' fees and that each party shall bear its own costs.
NOTES
[1] Some equipment was sold in the form of separate assemblies for custom installation, in gardens as well as in houses.
[2] In 1952 the SCOTT line represented about 18% of Scott-Ill.'s total sales of $4,000,000. Its sales dropped to $2,143,000 in 1954, to $892,000 in 1952, and even lower in 1956, when it went into bankruptcy. It is not possible to tell from the evidence whether the quality of the SCOTT line sold by Scott-Ill. from 1954 to 1956 was high or low, how large a volume was sold, and whether Scott-Ill. ever entered the component market, as distinguished from the sale of replacement parts and the occasional sale of unmounted systems for deluxe custom installations. So far as it may be important for either side to prove any of those facts, I find against the party having the burden of proof; particularly, I find that defendants have not shown that Scott-Ill. entered the component market as it existed before 1956.
[3] Interstate Distilleries, Inc. v. Sherwood Distilling & Distributing Co., 173 Md. 173, 181, 182, 195 A. 387; In re Jaysee Corset Co., S.D.N.Y., 201 F. 779; Mayer Fertilizer & Junk Co. v. Virginia-Carolina Chemical Co., D.C.Cir., 35 App.D.C. 425, 428; Macmahan Pharmacal Co. v. Denver Chemical Mfg. Co., 8 Cir., 113 F. 468, 475; Ward-Chandler Building Co. v. Caldwell, 8 Cal. App. 2d 375, 47 P.2d 758; Avon Shoe Co. v. David Crystal, Inc., S.D.N.Y., 171 F. Supp. 293, affirmed 2 Cir., 279 F.2d 607; La Fayette Brewery v. Rock Island Brewing Co., Cust. & Pat. App., 87 F.2d 489.
[4] Plaintiff argues that defendants are also trying to trade on plaintiff's good will. However, the evidence on this question is not sufficient to satisfy me that this is true.
[5] Johnston v. Standard Mining Co., 148 U.S. 360, 370, 13 S. Ct. 585, 37 L. Ed. 480; International Silver Co. v. Oneida Community, Ltd., 2 Cir., 73 F.2d 69, certiorari denied 295 U.S. 741, 55 S. Ct. 653, 79 L. Ed. 1688.
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10-30-2013
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https://www.courtlistener.com/api/rest/v3/opinions/1524703/
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240 B.R. 166 (1999)
In re CRYSEN/MONTENAY ENERGY COMPANY, Debtor.
Crysen/Montenay Energy Company, Plaintiff,
v.
Shell Oil Company and Scallop Petroleum Company, Defendants.
No. 97 Civ. 5072 MGC.
United States District Court, S.D. New York.
August 31, 1999.
*167 Becker, Glynn, Melamed & Muffly LLP by Richard N. Chassin, Matthew W. Woodruff, Zeb Landsman, New York City, for Debtor/Plaintiff.
Anderson Kill & Olick, P.C. by Mark L. Weyman, Noah H. Charlson, New York City, for defendants.
OPINION
CEDARBAUM, District Judge.
This is a non-core adversary proceeding arising out of a contract for the sale of fuel oil from Crysen/Montenay Energy Company ("Crysen") to Scallop Petroleum Company. *168 After filing for bankruptcy, Crysen sued Scallop and Shell Oil Company, Scallop's former parent company and successor-in-interest, for breach of contract. Following more than eight years of litigation, Bankruptcy Judge Blackshear referred the proceeding to arbitration. The arbitration panel found for defendants, and Judge Blackshear issued proposed findings of fact and conclusions of law confirming the arbitration award and granting defendants' motion to dismiss the adversary proceeding with prejudice. Crysen now files objections to the proposed findings of fact and conclusions of law pursuant to 28 U.S.C. § 157(c)(1), arguing, inter alia, that the bankruptcy judge lacked the power to order arbitration and, in any event, erred in ordering arbitration because defendants had waived any right they had to arbitration. For the reasons set forth below, I accept Judge Blackshear's proposed conclusions of law and dismiss the adversary proceeding with prejudice.
BACKGROUND
In January of 1986, Scallop contracted with Crysen for the purchase of 300,000 barrels of fuel oil with a maximum sulfur content of 0.7 percent, at a price of $24.55 per barrel. (Pl.App.[1] 420.) After a portion of the contracted-for oil was discharged from the transporting vessel to Scallop's appointed port, Scallop asserted that the oil did not conform to the contract and refused to accept the remainder. While contesting Scallop's assertion, Crysen "cured" the allegedly non-conforming oil which had been discharged from the vessel by supplying a cargo of low-sulfur fuel oil for blending. However, Scallop allegedly refused to allow Crysen to "cure" the balance of the cargo, which had not been discharged from the vessel. According to Crysen, it ultimately sold this cargo to another customer at a lower price.
The contract between Crysen and Scallop provided: "All disputes arising or in connection with this contract will be determined by arbitration in New York, New York in accordance with the Rules of the American Arbitration Association by (3) three arbitrators." (Pl.App. 420b.)
In June of 1986, Crysen filed a petition for reorganization under chapter 11 of the United States Bankruptcy Code. On March 16, 1987, Crysen commenced an adversary proceeding against Scallop pursuant to 11 U.S.C. § 521 et seq., asserting a claim based on Scallop's rejection of the fuel oil.[2] The complaint alleged that the action was a "core proceeding" under 28 U.S.C. § 157(b)(2). (Pl.App. 18.) Scallop's answer to the complaint, dated May 7, 1987, asserted a "First Affirmative Defense of Arbitration as to All Claims." On May 29, 1987, Bankruptcy Judge Blackshear denied Scallop's motion to stay the proceeding and submit the claims to arbitration. (Pl.App. 57-59.) Scallop did not appeal Judge Blackshear's order, and the parties now dispute whether that order was appealable at the time.
Scallop then served amended answers dated December 15, 1987, March 11, 1988, and August 25, 1988, none of which asserted a defense of arbitrability. (Pl.App. 60, 66, 78.) By stipulation dated November 15, 1988, Scallop and Crysen agreed that ShellScallop's parent company which had assumed Scallop's rights and liabilities in December 1987would be added as a defendant. (Pl.App. 88.) Pursuant to that stipulation, Crysen served an amended complaint dated December 19, 1988 naming Scallop and Shell as defendants. (Pl. App. 93.) Scallop and Shell served an answer to the amended complaint and demanded *169 a trial by jury on Crysen's claims. (Pl.App. 102.) Scallop and Shell did not assert a defense of arbitrability in this pleading.
Crysen moved for partial summary judgment in April 1990, arguing that even if the oil was non-conforming, Scallop wrongfully rejected the undischarged fuel by denying Crysen the right to cure under N.Y.U.C.C. § 2-508(2). (Pl.1990 App.[3] 1-2, 141.) In May of 1990, defendants "cross-moved" for partial summary judgment, arguing that N.Y.U.C.C. § 2-508(2) is inapplicable because the time-of-the-essence clause in the contract effectively eliminated Crysen's right to cure after the time set for performance. (Id. at 161-63, 555-80.) Defendants also sought a declaration that the fuel oil was non-conforming. (Id. at 551-55.) In a decision dated September 24, 1991, Judge Blackshear held that whether the oil conformed was a genuine issue of disputed fact. He also ruled that because the finder of fact might ultimately determine that the oil was conforming, thus mooting the cure issue, it was appropriate not to decide the legal question of whether Crysen had a right to cure. "[A] determination by this Court after trial that the oil does not conform to the contract specifications, would allow either party to again move for summary judgment on the issue of cure." (Pl.App. 128.)
In November of 1993, defendants sought to compel additional discovery. Judge Blackshear denied defendants' application, but permitted defendants to designate two additional expert witnesses for trial. (Pl. App. 199-200.)
On August 12, 1994, upon defendants' motion, Judge Blackshear ruled that the adversary proceeding was non-core. (Pl. App. 201-202.)
By notice of motion dated September 27, 1994, the defendants moved in the district court for an order withdrawing the reference from the bankruptcy court. The defendants argued that the claims should be adjudicated in the district court in light of the non-core determination and defendants' demand for a jury trial. Judge Duffy denied the motion, without opinion, on November 14, 1994. Defendants sought reargument, and Judge Duffy denied that application on January 5, 1995.
At the same time, Crysen moved in the bankruptcy court to strike defendants' demand for a jury trial. Defendants filed a "cross-motion" demanding a jury trial. At a December 7, 1994 hearing, Judge Blackshear denied Crysen's motion. (Pl.App. 278, 728.)
In October of 1995, the defendants renewed their 1987 application to stay the adversary proceeding and to compel arbitration of the claims. By order dated November 20, 1995, Judge Blackshear granted defendants' motion. (Pl.App. 394-95.)
A panel of three arbitrators issued an award on January 29, 1997 denying Crysen's claims in their entirety. (Pl.App. 396-97.) In proposed findings of fact and conclusions of law, Judge Blackshear recommended confirmation of the arbitration award.
DISCUSSION
I. Standard of Review
In non-core proceedings, the district court reviews de novo those portions of a bankruptcy judge's proposed findings of fact and conclusions of law to which any party has made timely and specific objection. 28 U.S.C. § 157(c)(1); see also Fed. R.Bankr.P. 9033(d).
II. Bankruptcy Court's Power to Compel Arbitration
Crysen argues that the bankruptcy judge did not have the power to compel arbitration, because sections 3 and 4 of the *170 Federal Arbitration Act ("FAA"), 9 U.S.C. § 1 et seq., authorize only a United States district court to direct the parties to arbitrate, and because the power to compel arbitration is not one of the designated powers of a bankruptcy judge under chapter 6 of title 28 of the United States Code. Crysen also points to references in the FAA to the Federal Rules of Civil Procedure and jury trials as confirming that bankruptcy judges are not empowered to stay proceedings and compel arbitration. Crysen does not, however, cite any case holding or implying that a bankruptcy judge does not have the power to stay proceedings and compel arbitration.
The FAA provides that "courts of the United States" may stay an action pending arbitration:
"If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration."
9 U.S.C. § 3.
It is debatable whether the term "courts of the United States" as used in the FAA should be interpreted to refer directly to bankruptcy courts. The term "courts of the United States" is not defined in the FAA. Moreover, the pertinent section of the FAA was enacted prior to the reconfiguration of the bankruptcy courts in 1978 and 1984. Act of July 30, 1947, Pub.L. No. 80-282, 61 Stat. 669. In construing the statutory language "courts of the United States" in other contexts, appellate courts have disagreed as to whether the term includes bankruptcy courts. Compare Grewe v. United States (In re Grewe), 4 F.3d 299, 304-05 (4th Cir.1993), and United States v. Yochum (In re Yochum), 89 F.3d 661, 668-69 (9th Cir.1996) (holding that a bankruptcy court may award attorneys' fees under 26 U.S.C. § 7430(a)), with I.R.S. v. Brickell Inv. Corp. (In re Brickell Inv. Corp.), 922 F.2d 696, 698-702 (11th Cir.1991) (holding that "court[s] of the United States," as used in 26 U.S.C. § 7430, refers only to Article III courts).
Even if Crysen is correct that the language of the FAA should not be construed to refer directly to bankruptcy courts, bankruptcy judges have the power to stay proceedings and compel arbitration by virtue of the district courts' referral of jurisdiction. Section 1334(b) of title 28 of the United States Code provides that the district courts shall have original jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11. The district court may, in turn, refer these proceedings to the bankruptcy judges for the district. 28 U.S.C. § 157(a). Bankruptcy judges are empowered to "hear and determine" all core proceedings arising under title 11, or arising in a case under title 11, and to enter appropriate orders and judgments. 28 U.S.C. § 157(b)(1). A bankruptcy judge is also empowered to "hear a proceeding that is not a core proceeding but that is otherwise related to a case under title 11." 28 U.S.C. § 157(c)(1). However, in such a proceeding, the bankruptcy judge must submit proposed findings of fact and conclusions of law to the district court, which has the power the enter final orders or judgments. Id.
Bankruptcy judges do not have an independent source of jurisdiction. Their power is derived from district courts. See 28 U.S.C. §§ 1334(a) and (b); 28 U.S.C. § 157(a); see also 1 Lawrence P. King, Collier on Bankruptcy ¶ 3.02[1] (15th Ed. Rev.1999) ("The entire grant of jurisdiction to the district courts made by section 1334(a) and (b)title 11 cases, and any or all proceedings arising under title 11 or arising in or related to a case under title *171 11may be referred to the bankruptcy judges."); 1 William L. Norton, Jr., Norton Bankruptcy Law & Prac.2d (1999) § 4:18 (the "1984 Bankruptcy Amendments, in 28 U.S.C.A. § 1334(a), (b), and (e) . . . initially vest all bankruptcy jurisdiction in the District Courts, but contemplate that their jurisdiction will be exercised in major part, if not entirely, by the bankruptcy judges of the district"). Indeed, the Judiciary Act provides that "the bankruptcy judges in regular active service shall constitute a unit of the district court." 28 U.S.C. § 151.
By implication, the statute gives a bankruptcy judge all powers needed to adjudicate a non-core proceeding except the power to enter a final order or judgment. Compare 28 U.S.C. § 157(b)(1) (specifying a bankruptcy judge's powers in core proceedings) with 28 U.S.C. § 157(c)(1) (specifying a bankruptcy judge's powers in non-core proceedings); see also 11 U.S.C. § 105(a) ("The [bankruptcy] court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of [title 11]."); Celotex Corp. v. Edwards, 514 U.S. 300, 310 n. 7, 115 S. Ct. 1493, 131 L. Ed. 2d 403 (1995) (bankruptcy court "did not lack jurisdiction under § 157(c)(1) to" stay execution of supersedeas bond "because that injunction was not a `final order or judgment'"); 1 Norton Bankruptcy Law & Prac.2d § 4:18 ("When a case is referred under § 157(a), Congress surely intends that all jurisdiction otherwise vested in the District Courts be exercised by the bankruptcy judges, except to the extent that § 157(c)(1) requires the entry of the final order in a proceeding related to a bankruptcy case by the District Court or that § 157(d) contemplates a withdrawal by the District Court.").
In order for Crysen to be correct, a bankruptcy judge's derivative power to "hear" a non-core proceeding would not include the power to enter an interlocutory order staying the action and compelling arbitration in accordance with a contractual agreement to arbitrate. There is no reason to construe a bankruptcy judge's power so narrowly. A district court clearly has such powerby virtue of both its inherent power and statute[4]and the bankruptcy judge's jurisdiction derives from the district court. Moreover, courts have recognized that in non-core proceedings, a bankruptcy judge has the power to enter other types of interlocutory orders that are not specified by statute. See, e.g., Elkins v. X-Alpha Int'l, Ltd. (In re Kennedy), 48 B.R. 621, 623, 622 (Bankr.D.Ariz. 1985) (holding that bankruptcy court had authority to remand action to state court; "bankruptcy interlocutory orders in non-core proceedings need not be submitted to District Court").
Finally, the parties do not seriously dispute that, in this case, the bankruptcy judge's order compelling arbitration is subject to de novo review by the district court. As a result, the bankruptcy judge's enforcement of an arbitration clause under these circumstances does not even indirectly run afoul of 28 U.S.C. § 157(c)(1), which prohibits a bankruptcy judge from entering a final order or judgment in a non-core proceeding. For similar reasons, a bankruptcy judge's enforcement of an arbitration clause does not offend the teaching of Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S. Ct. 2858, 73 L. Ed. 2d 598 (1982).
These conclusions are consistent with the common assumption as well as the practice in Article III courts and bankruptcy courts. Bankruptcy judges regularly compel arbitration. See, e.g., James P. Barkman, Inc. v. Granger Constr. Co. (In re James P. Barkman, Inc.), 170 B.R. 321 (Bankr.E.D.Mich.1994); Hupp Indus., Inc. v. Environmental Prod. Amalg. Pty., Inc. (In re Hupp Indus., Inc.), 157 B.R. 360 (Bankr.N.D.Ohio 1993); Midwest *172 Communications Corp. v. Black Entertainment Television (In re Midwest Communications Corp.), 144 B.R. 354 (Bankr. E.D.Ky.1992). District judges in this circuit have impliedly held that bankruptcy judges have the power to compel arbitration. See Bousa Inc. v. Neste Oy (In re Bousa Inc.), No. 92 Civ. 6194, 1993 WL 78019, at *3 (S.D.N.Y. March 16, 1993) ("[s]ince Article III judges are bound to honor agreements to arbitrate, presumably non-core proceedings involving non-executory contracts should place bankruptcy judges under similar restriction") (vacating the bankruptcy judge's denial of a motion to compel arbitration and remanding for further proceedings); United States Lines, Inc. v. American Steamship Owners Mutual (In re United States Lines, Inc.), 220 B.R. 5, 13 (S.D.N.Y.1997) (vacating the bankruptcy judge's denial of a motion to compel arbitration and remanding for further proceedings). In fact, in applying Supreme Court cases requiring rigorous enforcement of agreements to arbitrate, see, e.g., Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 107 S. Ct. 2332, 96 L. Ed. 2d 185 (1987) and Rodriguez de Quijas v. Shearson/American Express, Inc., 490 U.S. 477, 109 S. Ct. 1917, 104 L. Ed. 2d 526 (1989), courts have held that bankruptcy judges are required to enforce an applicable arbitration provision unless enforcement would conflict with the purpose or provisions of the Bankruptcy Code. See, e.g., Insurance Company of North America v. NGC Settlement Trust & Asbestos (In re National Gypsum Co.), 118 F.3d 1056 (5th Cir.1997).
For the foregoing reasons, the bankruptcy judge had the power to stay the proceeding and compel arbitration in this case.
III. Waiver
Crysen also argues that defendants (1) expressly waived their right to arbitration by abandoning the affirmative defense of arbitrability in all amended pleadings subsequent to the 1987 denial of Scallop's initial application to arbitrate, and (2) impliedly waived their right by actively participating in the litigation despite defendants' right to appeal the 1987 denial of the application to arbitrate.
A. Amended Pleadings
Following the bankruptcy judge's denial of Scallop's motion to stay the proceeding and submit the claims to arbitration on May 29, 1987, Scallop, and then Scallop and Shell, did not assert a defense of arbitrability in any of the four amended answers.
In support of its argument that this failure to re-plead constitutes an express waiver, Crysen relies on Gilmore v. Shearson/American Express Inc., 811 F.2d 108 (2d Cir.1987). That case is not on point. There, the defendant had voluntarily and expressly withdrawn a pending motion to compel arbitration and later tried to renew the motion after the plaintiff amended its complaint. The Court of Appeals held that the defendant's withdrawal of the motion which the defendant did not dispute was an express waiver of its right to arbitrate the claims in the original complaintprecluded it from reviving its arbitration demand in its response to the amended complaint. Id. at 111-12.
In this case, defendants did not withdraw the motion to arbitrate. Rather, they omitted the affirmative defense of arbitrability in their subsequent answers after the bankruptcy judge had denied their motion to arbitrate and ruled that the defense of arbitration was unavailable. Under such circumstances, it would be unreasonable to call the amended pleadings an express waiver of arbitration.
Courts of appeals have differed over the analogous issue of whether a party may appeal the dismissal of a claim in the original pleading in cases in which the amended pleading did not reassert the claim. Compare Davis v. TXO Prod. Corp., 929 F.2d 1515, 1517-18 (10th Cir.1991) (holding that a party does not waive its right to appeal *173 dismissal of the claim in such circumstances) and Wilson v. First Houston Inv. Corp., 566 F.2d 1235, 1237-38 (5th Cir. 1978), vacated on other grounds, 444 U.S. 959, 100 S. Ct. 442, 62 L. Ed. 2d 371 (1979), (same) with Marx v. Loral Corp., 87 F.3d 1049, 1055-56 (9th Cir.1996) (holding that a party may not attack the dismissal of a claim in such circumstances; noting also that "other courts, as well as legal scholars, have criticized this Circuit's rule as `formalistic', `rigid,' and `too mechanical.'"); see also United States v. Bonanno Organized Crime Family, 695 F. Supp. 1426, 1432 (E.D.N.Y.1988) ("The logical rule should be that filing an amended complaint omitting claims that the court has dismissed on substantive grounds does not waive the plaintiff's right to appeal the court's dismissal of those claims.") (citing 3 Moore, Moore's Federal Practice ¶ 15.08[8] (2d ed.1987) and 6 Wright & Miller, Federal Practice & Procedure § 1476 (1971)). Crysen suggests no reason to believe that the Second Circuit would follow the aberrational rule of the Ninth Circuit. In fact, in its memorandum of law, Crysen effectively conceded that if the bankruptcy judge had not ultimately stayed the proceeding to permit arbitration, defendants could have appealed the denial of the motion to arbitrate at the end of the proceeding.[5]
Crysen also relies on Second Circuit opinions stating the general rule that "an amended complaint ordinarily supersedes the original and renders it of no legal effect." International Controls Corp. v. Vesco, 556 F.2d 665, 668 (2d Cir.1977). None of the cases cited by Crysen are analogous to this case. For instance, in Vesco, the issue was whether a default judgment based on the original complaint was valid where an amended complaint was filed but not properly served on the defendant.
Accordingly, the defendants' failure to continue to plead a defense of arbitrability following the denial of their motion to arbitrate was not an express waiver of their demand to arbitrate.
B. Implied Waiver
Standard for Waiver. Federal policy strongly favors arbitration as an alternative means of dispute resolution. PPG Indus., Inc. v. Webster Auto Parts Inc., 128 F.3d 103, 107 (2d Cir.1997). "The Arbitration Act establishes that, as a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense to arbitrability." Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25, 103 S. Ct. 927, 74 L. Ed. 2d 765 (1983). Similarly, the Second Circuit has "emphasized that . . . waiver of the right to arbitration is not to be lightly inferred," Cotton v. Slone, 4 F.3d 176, 179 (2d Cir. 1993) (internal citation omitted), and that the issue of waiver should be evaluated "with a healthy regard for the policy of promoting arbitration," Doctor's Assocs., Inc. v. Distajo, 107 F.3d 126, 130 (2d Cir.), cert. denied, ___ U.S. ___, 118 S. Ct. 365, 139 L. Ed. 2d 284 (1997) (internal citation omitted).
Nonetheless, where a party does not (1) take "appropriate steps to secure" its right to arbitrate and (2) engages in protracted litigation that prejudices the opposing party, it waives its right to arbitrate. Cotton, 4 F.3d at 179; see also 9 U.S.C. § 3 (on application, a court shall stay the trial of an action subject to arbitration, "providing the applicant for the *174 stay is not in default in proceeding with such arbitration").
Few reported decisions address the first element of waiver, because in most waiver cases, the party ultimately seeking arbitration, unlike Scallop in this case, delayed taking any steps to secure its contractual right. Here, Scallop promptly demanded arbitration and moved for a stay pending arbitration.
By contrast, the "prejudice" element of waiver has been construed repeatedly. "[P]rejudice . . . refers to the inherent unfairness in terms of delay, expense, or damage to a party's legal positionthat occurs when the party's opponent forces it to litigate an issue and later seeks to arbitrate that same issue." PPG Indus., Inc., 128 F.3d at 107 (quoting Doctor's Assocs., 107 F.3d at 134). Incurring legal expenses inherent in litigation, without more, is insufficient evidence of prejudice to justify a finding of waiver. Id. (citing Leadertex, Inc. v. Morganton Dyeing & Finishing Corp., 67 F.3d 20, 26 (2d Cir.1995)). The Second Circuit has found prejudice where the party invoking arbitration engaged in extensive pre-trial discovery and forced its adversary to respond to substantive motions before seeking arbitration, see ComTech Assocs. v. Computer Assocs. Int'l, Inc., 938 F.2d 1574, 1576-77 (2d Cir.1991), filed multiple appeals and substantive motions before seeking arbitration while an adversary incurred unnecessary delay and expense, see Kramer v. Hammond, 943 F.2d 176, 179 (2d Cir.1991), and engaged in discovery procedures not available in arbitration before seeking arbitration, see Zwitserse Maatschappij Van Levensverzekering En Lijfrente v. ABN Int'l Capital Mkts. Corp., 996 F.2d 1478, 1480 (2d Cir. 1993) (per curiam).
While these are factors to consider, there is no bright-line rule for determining when a party has waived its right to arbitration. PPG Indus., Inc., 128 F.3d at 107-08.
"Prejudice." There is no question that after the bankruptcy judge denied Scallop's prompt motion to stay the proceeding and compel arbitration, the defendants actively litigated the dispute and engaged in conduct that was inconsistent with arbitration.
In opposing Crysen's motion for summary judgment, defendants filed a partial summary judgment motion in 1990 on the central issue of whether the oil conformed to contractual specifications. See Sweater Bee by Banff, Ltd. v. Manhattan Indus., Inc., 754 F.2d 457, 465 (2d Cir.1985) (stating that motion for summary judgment on a particular issue would constitute waiver of right to arbitrate that issue) (citing Weight Watchers of Quebec Ltd. v. Weight Watchers Int'l, Inc., 398 F. Supp. 1057, 1061 (E.D.N.Y.1975)). Defendants also (successfully) litigated their right to a jury trial and (unsuccessfully) moved to withdraw the reference, which was relief inconsistent with arbitration. See generally Leadertex, 67 F.3d at 25 (defendant's "conduct has been largely inconsistent with its present assertion of its right to compel arbitration"). In addition, defendants engaged in substantial discovery, see ComTech, 938 F.2d at 1576-77 (taking of ten pre-trial depositions was factor in finding prejudice), although it is not clear whether they obtained discovery that would have been unavailable in arbitration.
Unlike most waiver cases, however, the party seeking to arbitrate did not delay in seeking arbitration. Accordingly, the prejudice inquiry here is less dispositive. The more difficult issue is whether defendants took appropriate steps to preserve their right to arbitration.
Failure to Take Interlocutory Appeal. A party that fails to take an authorized appeal from an interlocutory order is generally permitted to raise the question on appeal from the final judgment. In Drayer v. Krasner, 572 F.2d 348, 353 (2d Cir.1978), the district court granted defendants' motion for a stay pending arbitration, and plaintiff made no attempt to appeal the stay order. The parties thereafter *175 arbitrated the wrongful termination claim, and the arbitrators issued an award for the defendants. The district court confirmed the award, and the plaintiff appealed, arguing, inter alia, that the arbitration clause was invalid. Judge Friendly noted that plaintiff could have appealed the district court's interlocutory order staying the action pending arbitration under 28 U.S.C. § 1292(a)(1) and the doctrine of Enelow v. New York Life Ins. Co., 293 U.S. 379, 55 S. Ct. 310, 79 L. Ed. 440 (1935), and Ettelson v. Metropolitan Life Ins. Co., 317 U.S. 188, 63 S. Ct. 163, 87 L. Ed. 176 (1942). Nevertheless, Judge Friendly concluded that plaintiff could attack the stay order after the arbitration had been completed: "Failure to take an authorized appeal from an interlocutory order does not preclude raising the question on appeal from the final judgment." Drayer, 572 F.2d at 353.
The Second Circuit has, sub silentio, modified this rule in light of the 1988 amendment to the Federal Arbitration Act. In Cotton v. Slone, the Second Circuit held that a party waives its right to arbitrate when it does not file an interlocutory appeal, under FAA § 16, of a denial of its application to arbitrate and thereafter actively litigates the dispute. 4 F.3d 176 (2d Cir.1993). In Cotton, the defendant moved to compel arbitration and to stay the proceeding pending arbitration. The district court denied the motion, and the defendant then moved for certification of an interlocutory appeal under 28 U.S.C. § 1292(b). The district court denied the motion to certify, and the defendant thereafter answered the complaint and pleaded arbitrability as a defense. The defendant proceeded to "participate actively in discovery and motion practice concerning [plaintiff's] claims over the next three years." Id. at 178. The Court of Appeals held that the defendant waived his right to arbitrate by actively participating in the litigation without having sought immediate appellate review available under the FAA, with which the defendant was "demonstrably familiar." Id. at 179-80. Such review, while not available as of right under 28 U.S.C. § 1292(b), was available as of right under section 16(a) of the FAA.
Section 16(a) of the FAA provides that an interlocutory appeal "may be taken" from an order that denies a motion either to compel arbitration or for a stay pending arbitration, and explicitly disallows an appeal as of right from an interlocutory order that grants a stay. 9 U.S.C. §§ 16(a)(1) and (b). Section 16(a) is designed both "to streamline the appellate aspect of the litigation process so that parties may realize their arbitration rights at the earliest possible moment," and to further the liberal federal policy favoring arbitration by authorizing interlocutory appeals only from orders denying arbitration. Cotton, 4 F.3d at 180. Applying section 16(a) to the facts of that case, the Cotton Court stated that "[t]he aims of section 16(a) would be defeated if a party could reserve its right to appeal an interlocutory order denying arbitration, allow the substantive lawsuit to run its course (which could take years), and then, if dissatisfied with the result, seek to enforce the right to arbitration on appeal from the final judgment." Id.
In this case, Scallop could not have utilized section 16(a) to appeal the bankruptcy judge's May 1987 order denying its motion to stay proceedings and compel arbitration. Section 16(a) was enacted 18 months after that order, on November 19, 1988. Judicial Improvements and Access to Justice Act, Pub.L. No. 100-702, § 1019(a), 102 Stat. 4642 (1988) (enacting the text of section 15, which was subsequently renumbered as section 16). Cf. Hays and Co. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 885 F.2d 1149 (3d Cir.1989) (section 16 applied retroactively to an appeal that was pending on the date of the enactment of that section); Delmay v. Paine Webber, 872 F.2d 356 (11th Cir. 1989) (same).
It is arguable but not clear that defendants may have been able to file an interlocutory *176 appeal pursuant to the "Enelow-Ettelson" doctrinethe same doctrine under which the plaintiff in Drayer could have appealed. Under that doctrine, an order staying or refusing to stay "proceedings in federal district court pending arbitration [was then deemed] an appealable interlocutory order [granting or] refusing an injunction, 28 U.S.C. § 1292(a)(1), if the action in which the order was made is an action which, before the fusion of law and equity, was by its nature an action at law." Gilmore v. Shearson/American Express Inc., 811 F.2d 108, 110 (2d Cir.1987); Manning v. Energy Conversion Devices, Inc., 833 F.2d 1096, 1101 (2d Cir.1987). The Enelow-Ettelson doctrine was good law, albeit much criticized, until the Supreme Court overruled the precedents on which it was based in March of 1988. See Gulfstream Aerospace Corp. v. Mayacamas Corp., 485 U.S. 271, 108 S. Ct. 1133, 99 L. Ed. 2d 296 (1988). It would have afforded Scallop a right to appeal if the action were deemed one at law (which seems likely) and if the doctrine were applied to appeals from a bankruptcy court to a district court. It is not clear, however, whether the doctrine would have been so applied. Appeals may be taken from interlocutory orders of a bankruptcy judge only "with leave of the court." 28 U.S.C. § 158(a). While the statute does not provide guidance as to when leave should be given, courts have looked by analogy to the standards set forth in 28 U.S.C. §§ 1292(a) and (b), which govern appeals of interlocutory decisions from the district courts to the courts of appeals.[6]See, e.g., Clark v. Sanders (In re Reserve Prod., Inc.), 190 B.R. 287, 290 (E.D.Tex.1995); 48th St. Steakhouse, Inc. v. Rockefeller Group, Inc. (In re 48th St. Steakhouse, Inc.), 46 B.R. 227, 228-29 (S.D.N.Y.1985).
If Scallop could not appeal as of right from the initial order denying arbitration, its failure to seek an appeal could not be considered a waiver, even under Cotton. If Scallop could have appealed the initial order denying arbitration under the Enelow-Ettelson doctrine, this case would not differ materially from Drayer: Scallop would have had a right to challenge Judge Blackshear's order on appeal from the final judgment. In that case, Crysen would have suffered even greater prejudice if the defendants had not renewed their motion to arbitrate. The case would have been tried in the bankruptcy court, and on appeal, the district court or the court of appeals could have vacated the judgment and compelled arbitration. See Clark v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 924 F.2d 550 (4th Cir.1991) (vacating judgement following a jury verdict because district court erred in denying defendant's motion to compel arbitration; defendant had not waived right to raise issue on appeal, although interlocutory denial of arbitration motion had been appealable).
The ability to appeal the denial of a motion to arbitrate at the end of the case admittedly can delay the realization of arbitration rights and lead to inefficient results. But, as Cotton makes clear, eliminating this inefficiency was one of the aims of Congress in enacting section 16(a) of the FAA. For Crysen, Congress acted one-and-a-half years too late.
Crysen does not argue that defendants had an obligation to renew their motion to arbitrate earlier than they did. I have found no authority for imposing such an obligation on a party seeking arbitration.[7]
*177 Because defendants would have had a right to challenge the bankruptcy judge's denial of their 1987 motion to arbitrate on appeal from the final judgment, they did not waive their right to arbitrate by failing to file an interlocutory appeal under the Enelow-Ettelson doctrine.
IV. Review of the Arbitration Award
Crysen argues that the bankruptcy judge erred by refusing to vacate the arbitration award, which Crysen contends was entered in manifest disregard of the law. Crysen also claims that the arbitrators, by certain evidentiary rulings, effectively refused to hear evidence "pertinent and material to the controversy." 9 U.S.C. § 10(a).
A. Manifest Disregard of the Law
An arbitration award may be vacated if it is in manifest disregard of the law. Halligan v. Piper Jaffray, Inc., 148 F.3d 197, 202 (2d Cir.1998), cert. denied, ___ U.S. ___, 119 S. Ct. 1286, 143 L. Ed. 2d 378 (1999). The Second Circuit has cautioned that the reach of this doctrine is "severely limited," and that manifest disregard "clearly means more than error or misunderstanding with respect to the law." Id. (citations omitted). To modify or vacate an award on this ground, a court must find both that (1) the arbitrators knew of a governing legal principle yet refused to apply it or ignored it altogether, and (2) the law ignored by the arbitrators was well defined, explicit and clearly applicable to the case. Id. The burden of proving a ground for vacating an arbitration award rests on the party who seeks to vacate it. Application of National Assoc. of Broadcast Employees & Technicians, 707 F. Supp. 124, 128 (S.D.N.Y. 1988).
Where arbitrators give no explanation for their decision, the award must be affirmed if a ground for the decision can be inferred from the facts of the case. Willemijn Houdstermaatschappij, BV v. Standard Microsystems Corp., 103 F.3d 9, 13 (2d Cir.1997). This is so even if the ground for their decision is based on an error of fact or an error of law. Id. If there is even a barely colorable justification for the outcome reached, the court must confirm the arbitration award. Id.
According to Crysen, the arbitration panel disregarded case law holding that where a neutral tester fails to follow the methods set out in a contract, his test results are invalid and not binding on the parties. Crysen argues that the third party charged with testing the quality of the fuel oil, E.W. Saybolt & Co., Inc., did not follow the testing methods set out in the parties' contract. Accordingly, the conclusion that the oil did not conform to the contract should not have been binding on Crysen.
The contract provided, "Inspection: At disport costs to be shared 50/50.Quality based on vessel composite." (Pl.App. 420a.) The contract further specified that, for the fuel oil's sulfur content, the ASTM Test Method was to be D-1552. (Id. 420.) The parties agree that these provisions *178 required that vessel composite sampling occur prior to discharge, and further agree that such a sampling was not taken at the disport. (After discharge was stopped, however, a vessel composite was eventually taken of the portion of the oil that had not yet been discharged.)
Defendants argued to the arbitrators that a full vessel composite sampling could not be taken because the ship's hatch domes were sealed and that ladders blocked the ullage holes on that ship. (Resp. Post-Hearing Memo. of Law 9-10.) Defendants argued that the hatches had been sealed because the ship did not satisfy United States Coast Guard requirements. The contract provided that Crysen "warrants that the ship used to carry the cargo shall satisfy the maritime legal requirements of the United States of America." (Pl.App. 420a.) Defendants argued that because the specified method of inspection was not possible, it was proper to use alternate, reasonable inspection methods. It relied on N.Y.U.C.C. § 2-513(4)[8] and testimony of its experts as to the reasonableness of the alternate testing procedures. Defendants also argued that under the contract, the parties had a joint responsibility to inspect the oil, and the fact that some of the oil was discharged prior to inspection did not amount to a waiver by Scallop of its right of inspection.
Crysen relies primarily on Cities Service Co. v. Derby & Co., 654 F. Supp. 492 (S.D.N.Y.1987). That case held that a plaintiff seller was not bound by test results of an independent third-party inspector, where the sampling techniques were not in accordance with the contract or generally accepted practice, and the errors were of sufficient magnitude to justify an inference of fraud, bad faith or gross error. Cities Service is distinguishable from this case. In Cities Service, there was no question that the inspector could have performed the tests in accordance with the contract. In this case, the arbitrators were presented with evidence that Saybolt could not have conducted a full vessel composite sampling at the time the ship arrived at Scallop's port. The arbitrators did not manifestly disregard the law by concluding that this case fell outside the principle enunciated in Cities Service.
Crysen also argues that Scallop was not justified in rejecting Crysen's offer to cure after the January 29 contract deadline for delivery. Crysen asserts that it could have delivered enough low-sulphur fuel oil for blending by February 4 which was a reasonable time following the January 29 deadline. Crysen relies on N.Y.U.C.C. § 2-508(2) (McKinney 1993), which provides: "Where the buyer rejects a nonconforming tender which the seller had reasonable grounds to believe would be acceptable with or without money allowance the seller may if he seasonably notifies the buyer have a further reasonable time to substitute a conforming tender." Defendants argued to the arbitration panel that the time-of-the-essence clause effectively eliminated Crysen's right to cure after the time set for performance. That clause provided: "With respect to the dates of delivery of the oil hereunder, time is of the essence of this agreement. In the event delivery is not effected within the dates agreed, [Scallop] may cancel this contract or hold [Crysen] responsible for any damages for [Crysen's] failure to deliver the oil timely hereunder." (Pl.App. 420b.) Crysen has not shown that the *179 arbitrators' interpretation of this clause was erroneous. In any event, "simple misinterpretations of contracts" are not a basis to vacate an arbitration award. I/S Stavborg v. National Metal Converters, Inc., 500 F.2d 424, 432 (2d Cir.1974).
Crysen argued that Scallop acted in a manner inconsistent with the time-of-the-essence clause and effectively waived its rights thereunder. (Pl.1990 App. 152-53.) This issue depends upon factual and credibility determinations that were within the arbitrators' discretion. Crysen has made no showing that the arbitrators exercised that discretion in manifest disregard of the law.
Because there was a barely colorable justification for the outcome reached, the arbitration award must be confirmed.
B. Refusal to Hear Evidence
Under section 10(a) of the FAA, an arbitration award may be vacated "[w]here the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy." 9 U.S.C. § 10(a). Arbitrators are afforded broad discretion to determine whether to hear evidence, and a court may vacate an arbitration award only if the complained-of evidentiary ruling deprived the parties of a fundamentally fair hearing. Areca, Inc. v. Oppenheimer & Co., 960 F. Supp. 52, 54 (S.D.N.Y.1997).
Crysen argues that the arbitrators "refus[ed] to hear evidence pertinent and material to the controversy" by restricting the scope of cross-examination of Bruce Abugel, one of defendants' experts. Crysen asserts that its cross-examination of other of defendants' experts was restricted as well, but it does not point to the hearing transcript or otherwise specify what cross-examination was restricted. Crysen has not shown clearly how its cross-examination was limited. Crysen points to only one question that the arbitrators did not permit Crysen to ask, after having ruled that Abugel could not testify about factual matters outside his personal knowledge but that his expert opinions could stand. Crysen objects to the following:
Q: [Quoting from Abugel's deposition] "`. . . there is an automatic sampling called a McFarlane drip sampler that does allow automatic sampling taken from the line on a drip basis, and if that is what he was referring to, then that was automatic sampling.' [D]o you know for a fact whether Saybolt or the [receiving port] was using a McFarlane drip sampler?"
A: "No, based on what I've seen, no, I don't. Just a drip sampler. I don't know who manufactured it."
Q: "You go on to say, `If he was referring. . . . "
Arbitrator: "Excuse me. Aren't you doing just what we said we didn't want to hear? He doesn't know what was coming out of this pipe. All he knows you're asking him what does this testimony mean, and is this really helpful to us?"
(Pl.App. 724.)
Moreover, Crysen cross-examined Abugel extensively and took his deposition prior to the hearing. A party does not have an absolute right to cross-examination at an arbitration hearing. Sunshine Mining Co. v. United Steelworkers of America, 823 F.2d 1289, 1295 (9th Cir. 1987).
Crysen objects to the arbitrators' receipt of the experts' affidavits on similar grounds. Defendants made clear, however, that they were not proffering the affidavits as evidence of any facts, but that the affidavits merely set out the record evidence on which the experts were relying in formulating their opinions. (Resp. Opp. to Claimant's Motion to Strike Affs. 11-12.)
Crysen has failed to show that the limitation on cross-examination and the admission *180 of the affidavits deprived it of a fair hearing.
CONCLUSION
For the reasons set forth above, I accept the proposed findings of fact and conclusions of law of the bankruptcy judge to the extent that I hold that the bankruptcy judge had the power to compel arbitration, defendants did not waive their right to arbitration, and the arbitrators did not enter their award in manifest disregard of the law. The adversary proceeding is dismissed with prejudice.
SO ORDERED.
NOTES
[1] "Pl.App." refers to the "General Appendix" submitted in support of Crysen's objections.
[2] Crysen also asserted claims (claims two and three) based on two other contracts that the parties had entered into in January and February of 1986. (Pl.App. 17-24.) Claim three was withdrawn by stipulation in 1990. A portion of claim two was apparently resolved by the arbitrators, but neither party now objects to the disposition of that claim.
[3] "Pl.1990 App." refers to the appendix submitted by Crysen relating to the 1990 motions for partial summary judgment.
[4] A district court's power to order a stay of proceedings pending arbitration is inherent in the court itself. Gavlik Constr. Co. v. H.F. Campbell Co., 526 F.2d 777 (3rd Cir.1975), overruled on other grounds, Zosky v. Boyer, 856 F.2d 554 (3rd Cir.1988).
[5] Crysen states that it "does not contend that defendants were precluded from challenging the 1987 Order on direct appeal to the district court at the end of the case." (Pl.Memo. of Law at 25 n. 6.) At oral argument, however, Crysen suggested that defendants in fact would have been precluded from appealing the original order at the end of the case. (7/10/98 Tr. at 4; but see id. at 19-20.)
[6] 28 U.S.C. § 158(c)(2) provides that "An appeal under subsections (a) and (b) of this section shall be taken in the same manner as appeals in civil proceedings generally are taken to the courts of appeals from the district courts and in the time provided by Rule 8002 of the Bankruptcy Rules." Some courts have interpreted this language to mean that the decision whether to grant leave to appeal should be guided by the standards applicable to interlocutory appeals to the courts of appeals. See, e.g., North Fork Bank v. Abelson, 207 B.R. 382, 389 (E.D.N.Y.1997); K-Mart Corp. v. Swann Ltd. Partnership (In re Swann Ltd. Partnership), 128 B.R. 138, 141 (D.Md. 1991).
[7] Metz v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 39 F.3d 1482 (10th Cir.1994), which in any event is not binding in this Circuit, is distinguishable. In that case, Merrill Lynch appealed the initial denial of the motion to compel arbitration pursuant to FAA § 16, but then filed a "motion to dismiss" that interlocutory appeal because a number of circuits had held that Title VII claims were not arbitrable. One year later, a bench trial was held and judgment was entered. Thereafter, Merrill Lynch filed a notice of appeal and a Rule 60(b)(6) motion to vacate the judgment on the ground that the law had become clear that Title VII claims are arbitrable. The Tenth Circuit held that Merrill Lynch's withdrawal of its interlocutory appeal did not "without more" constitute waiver because, at the time of the withdrawal, the arbitrability issue "was an open question" in that circuit and had been ruled on adversely in other circuits. The court noted, however, that the change in law on which Merrill Lynch relied on appeal occurred one month before the trial. Nonetheless, Merrill Lynch "waited until after trial . . . to reassert its right to arbitrate." Id. at 1490. The court held that "the totality of Merrill Lynch's conduct constituted waiver of its right to compel arbitration." Id.
[8] N.Y.U.C.C. § 2-513(4) (McKinney 1993) provides: "A place or method of inspection fixed by the parties is presumed to be exclusive but unless otherwise expressly agreed it does not postpone identification or shift the place for delivery or for passing the risk of loss. If compliance becomes impossible, inspection shall be as provided in this section unless the place or method fixed was clearly intended as an indispensable condition failure of which avoids the contract." N.Y.U.C.C. § 2-513(1) provides that "where goods are tendered or delivered or identified to the contract for sale, the buyer has a right before payment or acceptance to inspect them at any reasonable place and time and in any reasonable manner."
The contract is governed by New York law.
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814 S.W.2d 862 (1991)
Donald McKINNEY, Individually, Mary McKinney, Individually, and Donald McKinney and Mary McKinney as Next Friends for Wendy McKinney and Tammy McKinney, Minors, Appellants,
v.
CITY OF GAINESVILLE, Texas, Appellee.
No. 2-90-097-CV.
Court of Appeals of Texas, Fort Worth.
August 23, 1991.
*863 Jeff C. Wilson, Stagner & Stagner, Sherman, for appellants.
Nancy O. Williams, Henderson, Bryant & Wolfe, Sherman, for appellee.
WEAVER, C.J., and HILL and MEYERS, JJ.
OPINION
WEAVER, Chief Justice.
Appellants, Donald McKinney, individually, Mary McKinney, individually, and Donald McKinney and Mary McKinney as next friends for Wendy McKinney and Tammy McKinney, minors, appeal from a summary judgment in favor of the City of Gainesville, Texas, ("City"). We affirm.
Appellants sued the City, together with five other individual defendants, seeking damages for personal injuries. The McKinney family attended a Christmas parade in the City of Gainesville on November 21, 1987. One of the entrants in the parade was a horse drawn buggy driven by one of the defendants, Parker Yarbrough. Mr. Yarbrough owned the buggy, while two other defendants, Steve and Jane Kohler, owned the horse, and the entry of the horse and buggy in the parade was sponsored by Wallace and Barbara Inglish who were also named as defendants.
During the parade, the bits on the horse's bridle became loose. The driver was unable to control the horse, and the horse and buggy veered over into the crowd causing the injuries and the resulting damages sought to be recovered by appellants in this action. The appellants alleged various acts of negligence on behalf of the defendants and claimed that the City violated duties owed to the appellants in failing to provide adequate crowd control, in failing to inspect the parade entrants' vehicles, in failing to provide adequate assistance to prevent a mishap, and in failing to provide necessary protection to citizens attending the parade.
On January 23, 1990, the City filed a motion for summary judgment, together with excerpts from six depositions attached thereto as constituting its summary judgment evidence. The City claimed by such motion for summary judgment, and claims on this appeal, that appellants' claims against the City are barred by governmental immunity afforded to the City. Appellants filed a response to the motion for summary judgment and also attached thereto excerpts from two depositions. On March 20, 1990, the trial court signed a summary judgment ordering that appellants take nothing against the City.
Appellants bring three points of error alleging that the trial court erred in granting the motion for summary judgment. By point one they claim that the governmental immunity asserted by the City is specifically waived by the provisions of section 101.0215 *864 of the Texas Civil Practice and Remedies Code.
Under point two appellants assert that the trial court erred by not ruling that the failure of the City to provide barricades along the parade route was "a condition or use of tangible property" within the meaning of the waiver provision of section 101.-021. Under point three appellants urge that the trial court erred in denying them their day in court. It is undisputed that the City placed some barricades at the fairgrounds, but did not place barricades along the parade route. Appellants appear to argue under this point that if the failure of the City to place barricades along the parade route was discretionary with the City, then the City is not liable; however, if such failure was not discretionary then the City is liable, and its claim of governmental immunity was waived. They then claim that the question of whether the City's failure to place barricades along the parade route was discretionary is a fact matter to be determined by the trier of facts, which precludes summary judgment. The summary judgment evidence consists of excerpts from depositions attached to the motion for summary judgment and to the response. Charles Sullivan, the owner of a shoe store in Gainesville, testified that he was chairman of the parade and ran the 1987 Christmas parade and that he was asked to do so by the downtown merchants association. When questioned as to who put on the Christmas parade, Sullivan testified that it was a combination of businesses and the City and the people, and that money is asked to be donated by all the merchants of the area and that money is what funds the parade. He assumed that the rules of the parade were passed to him from the chamber, and to his knowledge the City had nothing to do with the rules of the parade. He testified that the City had nothing to do in determining who would be an entrant in the parade, and Lyle H. Dresher, the City Manager, testified that he did not know who decides what entrants are going to be allowed in the parade. Parker Yarbrough, the driver of the horse and buggy, testified that as far as he knew the parade was sponsored by the downtown merchants.
The City Manager also testified that the City escorts the parade and provides manpower to assist by at least having a person at each of the cross-street intersections; that they block off California Street at the entrance of the parade where it begins; that they see that the parade is turned off of California at the termination point of the parade; and that the City does have some involvement as far as the safety of the route when the parade is going on from the traffic standpoint. He testified that the City provides "some barricades for the area where the parade is being staged for the people participating in the parade where the floats are assembled, horses or cars or whatever they might be, to keep ... vehicular traffic or whatever from driving through there, ..." He testified that the City does barricade off a few of the streets and reserves that area for the staging of the parade, and that is basically the involvement of the public works department as far as barricades are concerned. He also testified that the police department escorts the parade and has someone at the back of the parade just as it finishes up; that the City provides traffic control at the entrance of the parade to stop the traffic from entering the parade route or entering or going down eastbound on California; that the City does not detour the traffic, just simply stops traffic; that the City provides an officer or a volunteer at each one of the cross-street intersections along the parade route just to try to insure that no vehicular traffic crosses during the parade.
Charles Sullivan also testified that he contacted Claud Tamplin with the Department of Public Works to have barricades brought down to the parade ground, that they (apparently meaning the City) dropped the barricades off and that for the 1987 parade ten barriers were dropped off and were just used for the fairgrounds. There is no testimony that the City provided, or attempted, or intended to provide, barriers along the parade route to hold back the spectators, and that the City did not do so appears to be uncontested.
*865 Under appellants' first point of error, they argue that the trial court erred in granting the City's motion for summary judgment because the 1987 amendment to the Texas Torts Claims Act (TTCA) (section 101.0215 of the Texas Civil Practice and Remedies Code) waives governmental immunity for a municipality if one of the governmental functions listed in the new section is involved. Appellants cite us no cases interpreting the scope of this amendment.
Section 101.0215 states:
A municipality is liable under this chapter for damages arising from its governmental functions, which are those functions that are enjoined on a municipality by law and are given it by the state as part of the state's sovereignty, to be exercised by the municipality in the interest of the general public, including but not limited to:
(1) police and fire protection and control;
(20) warning signals;
(21) regulation of traffic;
Tex.Civ.Prac. 101.0215(a) (Vernon Supp.1991). Appellants argue that since the City of Gainesville, a municipality, provided police protection, traffic control, and delivered barricades it has waived any claim of governmental immunity and is liable for damages arising from those governmental functions contained in section 101.0215.
Nevertheless, even assuming that the City's actions fall within section 101.-0215, we do not view this as waiving the City's governmental immunity. This section clearly provides that "[a] municipality is liable under this chapter for damages arising from its governmental functions, ..." Id. (emphasis added). "Under this chapter" refers to the TTCA. When analyzing a cause of action brought under the TTCA against a municipality, the initial determination to be made is whether the municipality's action or omission involved its proprietary function or governmental function. This determination is crucial because section 101.0215(b) states that the TTCA "does not apply to the liability of a municipality for damages arising from its proprietary functions, ..." Whereas if the action engaged in by a municipality is considered to be a governmental function, the TTCA does apply, and further analysis under the Act is required to determine a municipality's potential liability. The Texas Legislature took the initiative to statutorily list those municipal activities that fall within a municipality's governmental function in section 101.0215(a), and those activities that fall within a municipality's proprietary function in section 101.0215(b). Neither list is inclusive.
This interpretation, that section 101.0215 did not waive governmental immunity merely because a governmental action fell within the list of section 101.0215, is furthered by representative Toomey's statement relating to the enactment of the section: "Section 3.02 concerns municipalities. Liabilities from activities in the list of governmental functions in the new proposed section (Sec. 101.0215) arise only out of those areas listed in Sections 101.021 and 101.022 of the Code (Civil Practice and Remedies Code)." H.J. of Tex. 70th Leg. 1st Called Sess. 10 (1987).
"Accordingly, the provision in section 101.0215(a) regarding the municipality being `liable under this chapter" requires, and was intended to require, that liability arising out of a governmental function (including those so classified in the section 101.0215(a) list) be established under one of the three areas in which the TTCA has waived sovereign immunity." Montford, Barber, 1987 Texas Tort Reform: The Quest for a Fairer and More Predictable Texas Civil Justice System, 25 Hous. L.Rev. 117, 121 (1988) (emphasis original) (footnotes omitted). Hence, merely because a governmental action falls within section 101.0215, this does not mean that governmental immunity is waived. Appellant's first point of error is overruled.
Under their second point of error, appellants argue that the trial court erred in granting the City's motion for summary *866 judgment because, under section 101.021(2) of the TTCA, the City waived its governmental immunity. Under this section, a governmental unit waives its immunity if:
(2) personal injury and death so caused by a condition or use of tangible personal or real property if the governmental unit would, were it a private person, be liable to the claimant according to Texas Law.
Tex.Civ.Prac. 101.021(2) (Vernon 1986). Appellants assert that the trial court erred in not finding that their injuries arose and were caused by a condition or use of tangible property belonging to the City since the City failed to provide barricades along the parade route to keep citizens out of the streets. However, we view appellants' attempt to fall within section 101.021(2) as premature. Initially, before we reach the issue of whether the appellants' injuries were caused by a condition or use of tangible property, we must first determine whether the City's failure to provide barricades along the parade route involved the City's discretionary power.
This initial distinction must be made because the TTCA does not apply to a claim based on:
(1) the failure of a governmental unit to perform an act that the unit is not required by law to perform; or
(2) a governmental unit's decision not to perform an act or on its failure to make a decision on the performance or nonperformance of an act if the law leaves the performance or nonperformance of the act to the discretion of the governmental unit.
Tex.Civ.Prac. 101.056 (Vernon 1986). We know of no clear-cut test for determining when a claim is precluded by this statute. See Tarrant Cty. Water Control v. Crossland, 781 S.W.2d 427, 433 (Tex.App.Fort Worth 1989, writ denied); Comment, The "Policy Decision" Exemption of the Texas Tort Claims Act: State v. Terrell, 32 BAYLOR L.REV. 403, 410 (1980). However, cases have stated that decisions made at a policy level instead of an operational level are exempt as policy decisions. Tarrant Cty. Water Control, 781 S.W.2d at 433; Trinity River Authority v. Williams, 659 S.W.2d 714, 723 (Tex. App.Beaumont 1983), affd in part, rev'd in part, 689 S.W.2d 883 (Tex.1985). The purpose behind this distinction and section 101.056 is "to avoid a judicial review that would question the wisdom of a government's exercise of its discretion in making policy decisions. The interests to be served by these provisions are severale.g., effective, unfettered performance of officials in making policy decisions and the maintenance of the separation of powers between the executive, legislative, and judicial branches of government." State v. Terrell, 588 S.W.2d 784, 787 (Tex.1979).
Appellants have not shown us that the City was under a mandatory duty to provide barricades along the parade route. Also, it appears that the common law holds that a city has no duty to provide barricades along a parade route. Morris v. City of Houston, 466 S.W.2d 851, 856 (Tex.Civ. App.Houston [14th Dist.] 1971, no writ). In City of El Paso v. Ayoub, 787 S.W.2d 553 (Tex.App.El Paso 1990, writ denied), the El Paso Court of Appeals held that the design, placement, and upgrading of guardrails and barricades is an exercise of discretionary power. Id. at 554. We view the decision whether to place barricades along the parade route as a policy decision.
Appellants contend that since the City made a conscious decision to provide barricades at the fairgrounds, but not along the parade route, that any claim of government immunity under this statute is waived. We disagree. The summary judgment evidence shows that the City was requested to provide barricades for the fairgrounds, but not along the parade route. We do not view the City's decision to comply with the request for having barricades at the fairgrounds as waiving the City's governmental immunity in this case. If the City had decided to provide the barricades along the parade route, the City may have been liable for those decisions incidental to the formation of that policy. However, we consider the City's decision to supply barricades at the fairgrounds as separate from any determination of the City regarding barricades along the parade route. We hold *867 that such a decision falls within the City's discretionary power, and it is therefore immune from liability. Appellants' second point of error is overruled.
Appellants complain, under their third point of error, that whether the City engaged in an exercise of its discretionary power (i.e. its failure to provide a traffic or road sign or other devices, such as barricades) is a factual question which should have been submitted to the trier of fact. Appellants cites us to Villarreal v. City of San Antonio, 657 S.W.2d 175 (Tex.App. San Antonio 1983, no writ), which held that the question of whether a city has discretion to initially place traffic barricades is a fact question. While that court held that the jury should determine whether an activity engaged in by a city involved its discretionary power, the majority of cases, while not explicitly so stating, have handled this issue as a legal question and one for the court to make. See State v. Terrell, 588 S.W.2d at 787-89; Tarrant Cty. Water Control, 781 S.W.2d at 433; University of Texas at Arlington v. Akers, 607 S.W.2d 283, 285-86 (Tex.Civ.App.Fort Worth 1980, writ ref'd n.r.e.); Norton v. Brazos County, 640 S.W.2d 690, 693 (Tex.App. Houston [14th Dist.] 1982, no writ). We hold that the question of whether a city's actions fall within its discretionary power is for the court to determine. The appellants' third point of error is overruled. The judgment of the trial court is affirmed.
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98 N.J. 92 (1984)
484 A.2d 675
RICHARD F. ARONSOHN AND DEBORAH ARONSOHN, PLAINTIFFS-APPELLANTS,
v.
SALVATORE MANDARA AND WILLIAM S. MANDARA MASONRY CORPORATION, DEFENDANTS-RESPONDENTS.
The Supreme Court of New Jersey.
Argued April 30, 1984.
Decided December 12, 1984.
*95 Seymour Chase argued the cause for appellants (Chase & Chase, attorneys; Seymour Chase, Anthony N. Gallina and James P. Gagel, on the briefs).
Frank G. Alster argued the cause for respondents.
The opinion of the Court was delivered by SCHREIBER, J.
Edward Kawash and Theresa A. Kawash, who owned a home at 479 Weymouth Drive, Wyckoff, New Jersey, decided to add a patio to the rear of their house. They entered into a contract with the Mandara Masonry Corporation (Corporation)[1] for the construction of that patio at a cost of $5,000. The Corporation was owned by William S. Mandara, who constructed the addition with his father, Salvatore Mandara, and three other employees. According to the complaint, the patio was constructed in 1974.
*96 Plaintiffs, Richard F. Aronsohn and Deborah Aronsohn, purchased the home from Mr. and Mrs. Kawash in August 1975. The purchase agreement provided that the contract was subject to "a satisfactory engineering inspection," that the agreement was made "upon the knowledge of the parties as to the value of * * * whatever buildings are upon the [land] and not on any representations made as to character or quality," and that "no representations have been made by any of the parties * * * except as set forth herein."
In 1978, plaintiffs noticed that the patio was beginning to separate from the wall of the house; that some of the slate slabs that formed the patio floor were beginning to rise; and that the outside patio wall was beginning to buckle. Plaintiffs then commenced this action against the defendant Corporation and Salvatore Mandara alleging strict liability, negligence, and breaches of express and implied warranties.
At the trial plaintiffs introduced evidence establishing the aforementioned facts and also produced as their expert a building contractor who had made visual inspections of the patio. The patio floor consisted of slate slabs resting on concrete, which had been poured over a dirt foundation. The patio extended along the entire rear of the house, and since the land sloped sharply down away from the house, it had been necessary to build up the ground. The patio was surrounded by a cinder-block wall with brick facing.
The expert's ultimate conclusion was that the construction was improper, in part because the ground supporting the patio had not been adequately compacted. The expert asserted that because the dirt had been improperly compacted, it had pushed out the wall. He also testified that the penetration of water beneath the slabs had contributed to the problem. The water was unable to escape, according to him, because no weepholes had been provided to permit drainage. He estimated that it would cost $16,000 to remove the existing patio and install a new one.
*97 Salvatore Mandara testified on behalf of defendants. He explained how the patio had been built and stated that the construction method accorded with industry standards. He also stated that the patio could have been built in another fashion, but that cost had been a factor for Mr. and Mrs. Kawash. In his opinion the problem was due to the owners' failure to patch up cracks as they appeared; had they done so, he said, water would not have seeped beneath the slabs into the ground, causing the slabs to rise and the wall to buckle.
The trial court granted defendants' motion to dismiss.[2] It found that plaintiffs' claim on express warranty was flawed because defendants' contract to construct the patio had been with Edward and Theresa Kawash and not the plaintiffs. It ruled that the negligence claim was also defective, reasoning that it was really a suit on the contract as well, since plaintiffs were seeking economic loss, rather than personal injury or property damage. The trial court also held that no implied warranty of habitability or strict liability applied because the philosophy of the law with respect to mass producers of goods or homes was inapplicable to a situation like this one, which involved a service contract.
The Appellate Division affirmed. It agreed that recovery for economic loss on a negligence theory was inappropriate. It also found that neither express nor implied warranty was justified since there was no privity of contract, though it disagreed with the trial court that this was a service contract. Lastly, the Appellate Division agreed that the concept of strict liability was inappropriate under these circumstances.
We granted plaintiffs' petition for certification. 95 N.J. 202 (1983).
*98 I
Plaintiffs are seeking the benefit of the bargain they made in their agreement to purchase the home. That benefit is based on the previous owners' contract with defendants to construct the patio. This case does not involve sale and distribution of personal property; nor does it involve personal injury or property damage arising out of a traumatic event.
Analysis must start with the agreement defendants made with the Kawashes since that contract, presumably oral, would set forth the nature and scope of the contractor's duties. The repair agreement could describe, among other things, the grade and quality of materials to be used, the manner of installation, and the extent and nature of a warranty. The record does not disclose whether the Kawashes discussed these items with the contractor, although the contractor testified that his method of construction and choice of materials were influenced by the price of the job.
When, as in this case, there is no express contractual provision concerning workmanship, the law implies a covenant that the contract will be performed in a reasonably good and workmanlike manner. The agreement between defendant and the Kawashes concerning the building of the patio thus contained an implied promise by defendant to construct the patio in a workmanlike fashion. See Minemount Realty Co. v. Ballentine, 111 N.J. Eq. 398, 399 (E. & A. 1932) ("Where a party contracts to build a building for a specified purpose, the law reads into the contract a stipulation that the building shall be erected in a reasonably good and workmanlike manner and when completed shall be reasonably fit for the intended purpose."); Schipper v. Levitt & Sons, Inc., 44 N.J. 70, 91 (1965) (home buyer relies on mass housing developer's "implied representation that the house will be erected in a reasonably workmanlike manner"). If the Kawashes, while they still owned the property, had discovered that the patio had been negligently built, defendants would have been liable to them for damage to the property flowing *99 from a breach of that implied promise of reasonable workmanship. The question in this case is whether the contractor should be immunized from his contractual obligation to have performed his work in a workmanlike, non-negligent manner simply because the original owner or buyer transferred the property to a successor. We think not, at least in the absence of a nonassignability clause in the contract.[3]
Ordinarily, rights for breach of contract are assignable. There would certainly be no problem with enforcing such an assignment if the contract between the contractor and the homeowner contained an express provision authorizing assignment to a successor owner of the homeowner's rights against the contractor. See Restatement (Second) of the Law of Contracts § 317 (1981). If the contract contains no prohibition on assignment, such rights may be assigned in the absence of any public policy reason to the contrary. See 4 A. Corbin, On Contracts § 857, at 410; § 872, at 485-86; § 873, at 494 (1951). Here, there has been no proof of any provision in the Kawashes' contract with defendant prohibiting assignment of the Kawashes' contractual rights, and there are no compelling policy reasons justifying a bar to the assignment of those rights.
*100 Moreover, one can infer from the circumstances that the Kawashes did in fact assign those rights to plaintiffs. Once they sold their house to plaintiffs, the Kawashes no longer had any interest in retaining for themselves the right to have had their patio built in a non-negligent manner. Rather, it is reasonable to infer that they transferred any such claim to plaintiffs. The transfer or conveyance of their property is indicative of their intent to assign to the buyers their right of action to enforce promises made with respect to that property. See 3 H. Tiffany, Real Property § 849, at 444 (3d ed. 1939). Defendants' contention that the provision in the purchase agreement that "[t]his contract contains the entire agreement of the parties" impliedly negates any assignment of the contract between defendants and the Kawashes misses the point. The implied covenants and terms of a contract are as effective components of the agreement as those expressed.
Of course, the sales contract between the Kawashes and plaintiffs could conceivably have limited any claim by plaintiffs against the contractor. For example, if the purchase agreement referred expressly to certain limitations in the contractor's contract with the Kawashes concerning the extent and nature of the contractor's warranty, plaintiffs might equitably be bound by those restrictions. In addition, if the purchaser were aware of a defective condition after making a reasonable inspection of the home, he presumably would have fixed the price of the house with that condition in mind. Here, the contract provided that plaintiffs had the right to make "a satisfactory engineering inspection" and to cancel the contract if the report were unsatisfactory. Thus, if any defective condition were readily apparent or discoverable upon a reasonable inspection before or at the time plaintiffs took title (the precise time being dependent upon the terms of the purchase contract), then recovery for that defective condition might not be appropriate, on the theory that the purchaser would have taken this factor into account in the price. Cosmopolitan Homes, Inc. v. Weller, 663 P.2d 1041, 1045-46 (Colo. 1983).
*101 Defendants' implied promise to construct the patio in a workmanlike manner may also be analogized to a real property covenant that runs with the land. What happens when a vendor has had a new roof installed, accompanied by a ten-year warranty, and the vendor sells the home within one year after the installation? Should not covenants of this type, which benefit the property, continue to run with the land? Although the technical elements of covenants that run with the land may not be satisfied,[4] the policy reasons for not requiring contractual privity are fully applicable to promises by contractors properly to perform their work on residential homes. The benefits of such covenants touch and concern the property and should flow with the ownership despite the absence of privity between the contractor and the present owner. This policy was expressed in Horn v. Miller, 136 Pa. 640, 20 A. 706 (1890), as follows:
The obligation of contracts is, in general, limited to the parties making them. Where privity of contract is dispensed with, there must ordinarily be privity of estate; but justice sometimes even requires that the right to enjoy such contracts should extend to all who have a beneficial interest in their fulfillment, not to impose a burden upon an ignorant and innocent third person, but to enable purchasers of land to avail themselves of the benefit to which they are in justice entitled. [Id. at 654, 20 A. at 708.]
See also Weintraub v. Krobatsch, 64 N.J. 445 (1974) (discussing sellers' implied warranties to buyers of homes), in which Justice Jacobs commented:
Our courts have come a long way since the days when the judicial emphasis was on formal rules and ancient precedents rather than on modern concepts of justice and fair dealing. While admittedly our law has progressed more slowly in the real property field than in other fields, there have been notable stirrings even there. [Id. at 456.]
*102 There is some precedent for extending the contractual liability of a home builder to a third person who may buy that home despite the absence of contractual privity between the contractor and the buyer. In Keyes v. Guy Bailey Homes, Inc., 439 So.2d 670 (Miss. 1983), a subsequent purchaser of a home sued the builder-vendor for breach of an implied warranty of good workmanship resulting in a cracked foundation. The court noted that if a home has latent defects as a result of poor construction, the purchaser may be subjected to financial losses against which he had no practical means of protecting himself, and opined that an innocent purchaser should not suffer when the builder failed to construct the house in a workmanlike manner. The court quoted approvingly the following language from Moxley v. Laramie, 600 P.2d 733, 736 (Wyo. 1979):
Let us assume for example a person contracts construction of a home and, a month after occupying, is transferred to another locality and must sell. Or let us look at the family which contracts construction, occupies the home and the head of the household dies a year later and the residence must, for economic reasons, be sold. Further, how about the one who contracts for construction of a home, occupies it and, after a couple of years, attracted by a profit incentive caused by inflation or otherwise, sells to another. No reason has been presented to us whereby the original owner should have the benefits of an implied warranty or a recovery on a negligence theory and the next owner should not simply because there has been a transfer. Such intervening sales, standing by themselves, should not, by any standard of reasonableness, effect an end to an implied warranty or, in that matter, a right of recovery on any other ground, upon manifestation of a defect. The builder always has available the defense that the defects are not attributable to him. [439 So.2d at 672.]
We agree with the Mississippi Supreme Court that the privity requirement should be abandoned in suits brought by a homeowner against a contractor for violation of an implied promise of good workmanship. To require privity between the contractor and the homeowner in such a situation would defeat the purpose of the implied warranty of good workmanship and could leave innocent homeowners without a remedy for negligently built structures in their home. The contractor should not be relieved of liability for unworkmanlike construction simply because of the fortuity that the property on which he did the construction has changed hands. Nor should an innocent *103 buyer of property be deprived of recourse against a contractor who made improvements on the property if the buyer suffers financial loss as a result of the contractor's negligent workmanship. This is not to say that a contractor, in his agreement with the owner, could not have imposed limitations or restrictions on his obligations that could be binding on a subsequent purchaser, provided they did not contravene public policy. Such a distribution of risks comports with the original negotiation. See Epstein, "Commentary on Product Liability Passage of Time," 58 N.Y.U.L.Rev. 930, 933 (1983).
II
Although we find that defendants may be liable to plaintiffs for violating an implied provision of their contract with the Kawashes, we agree with the trial court and the Appellate Division that plaintiffs may not sustain a cause of action against defendants on any express provision in that contract. Plaintiffs did not establish that defendants had violated any express provisions in the Kawashes' agreement.[5]
We also hold that plaintiffs may not maintain a suit against defendants on a theory of implied warranty of habitability. Plaintiffs urge that such an implied warranty, as established in McDonald v. Mianecki, 79 N.J. 275 (1979), should be extended to include a suit for damages brought by a subsequent purchaser of a home against an independent contractor.[6] However, plaintiffs have misperceived the basic nature and scope of the implied warranty of habitability.
*104 In McDonald, the plaintiff entered into a contract with the defendant, who had offered to construct a home on defendant's land. The contract provided that the defendant would also dig a well that would service the house with water. The water proved to be discolored and nonpotable. We held that builder-vendors "impliedly warrant that a house which they construct will be of reasonable workmanship and habitability," 79 N.J. at 293, and that the implied warranty of habitability included potable water, id. at 298. We noted that the sale of personal property generally carried with it an implied warranty of merchantability and often an implied warranty of fitness for a particular purpose, citing N.J.S.A. 12A:2-314 and -315; that the doctrine of caveat emptor was outmoded; and that sales of real property should be placed on a footing equal with those of personal property. Id. at 283-85, 299.
The contract in this case, however, does not involve a defect affecting the essential habitability of the home.[7] Habitability is synonymous with suitability for living purposes; the home must be occupiable. See Trentacost v. Brussel, 82 N.J. 214, 225 (1980) ("At a minimum, the necessities of a habitable residence include sufficient heat and ventilation, adequate light, plumbing and sanitation and proper security and maintenance."); *105 Marini v. Ireland, 56 N.J. 130, 146 (1970) (habitability covers "vital facilities necessary to maintain premises in a livable condition"); Chess v. Muhammad, 179 N.J. Super. 75, 77 (App. Div. 1981) (referring to habitability in terms of "facilities vital to the use of the premises"); Campbell v. Randville Const. Corp., 172 N.J. Super. 93, 96-97 (App.Div.), certif. denied, 84 N.J. 405 (1980) (implied warranty did not include health of trees on property of new home). The record here is devoid of any evidence that the patio, only parts of which were damaged, constituted a vital living element in the home. Apparently, the home had been lived in for many years without a patio. The doctrine of implied warranty of habitability is therefore inapplicable under the circumstances here. That does not mean, of course, that in other situations a breach of an implied warranty of reasonable workmanship could not also constitute a breach of an implied warranty of habitability, if the condition were sufficiently serious to affect the home's habitability.
III
With respect to plaintiffs' negligence claim, the central question is whether a person who purchases a house, including a patio, from a prior owner may have a valid negligence action against the builder of the patio for loss of the benefit of his bargain damages due to the defective condition of the patio.
Under well-established principles a contractor has a duty to persons, other than the one with whom the contractor has made the contract, to carry out his undertaken work in a careful and prudent manner, and he may be responsible to third persons for their personal injuries and property damages proximately caused by his failure to exercise that care. This duty exists irrespective of privity. Bacak v. Hogya, 4 N.J. 417, 422-23 (1950); Barbero v. Pellegrino, 108 N.J.L. 156, 158-59 (E. *106 & A. 1931); Sarno v. Gulf Ref. Co., 99 N.J.L. 340, 344 (Sup.Ct. 1924), aff'd per curiam, 102 N.J.L. 223 (E. & A. 1925).
It is the contractor's undertaking that gives rise to his duty. Dean Prosser has explained the theory in the following manner:
In other words, the absence of "privity" between the parties makes it difficult to found any duty to the plaintiff upon the contract itself. But by entering into a contract with A, the defendant may place himself in such a relation toward B that the law will impose upon him an obligation, sounding in tort and not in contract, to act in such a way that B will not be injured. The incidental fact of the existence of the contract with A does not negative the responsibility of the actor when he enters upon a course of affirmative conduct which may be expected to affect the interests of another person. [W. Prosser, Handbook of the Law of Torts § 93 (4th ed. 1971) (footnotes omitted).]
This principle has been applied to make contractors liable in tort to all those who may be injured by a negligently-built structure. Schipper v. Levitt & Sons, Inc., 44 N.J. 70 (1965).
Schipper v. Levitt & Sons, Inc., supra, 44 N.J. 70, extended the tort liability of a home developer to the family of a lessee of a home that the developer had sold to the lessee's landlord. Justice Jacobs, writing for the Court in Schipper, held in a comprehensive opinion that liability could be sustained under a theory of negligence in the absence of privity between the parties. In support, he relied on numerous decisions in other jurisdictions that had applied ordinary negligence principles to permit recovery by third persons, including successor owners, against building contractors. For cases decided subsequent to Schipper to the same effect, see Coburn v. Lenox Homes, Inc., 173 Conn. 567, 573-77, 378 A.2d 599, 602-03 (1977); McDonough v. Whalen, 365 Mass. 506, 510-14, 313 N.E.2d 435, 438-40 (1974); Newman v. Tualatin Development Co., 287 Or. 47, 50-54, 597 P.2d 800, 802-03 (1979); Terlinde v. Neely, 275 S.C. 395, 399, 271 S.E.2d 768, 770 (1980); Moxley v. Laramie Builders, Inc., 600 P.2d 733, 736 (Wyo. 1979).
Until Schipper, supra, 44 N.J. 70 and Totten v. Gruzen, 52 N.J. 202 (1968), the contractor's duty to third persons terminated when his work was finished and accepted by the party who engaged him. See Miller v. Davis & Averill, Inc., 137 N.J.L. 671, *107 673-75 (E. & A. 1948). Totten applied negligence principles to individual builders in addition to the Schipper mass developers and rejected the completed-and-accepted principle, holding that the contractor's duty continued after the work was done. 52 N.J. at 210. Now, therefore, a contractor may be liable to third persons who suffer personal injury and property damages as a proximate result of a contractor's negligent workmanship after he has completed the job.
However, what is involved here is essentially a commercial transaction, and plaintiffs' claim is rested on the violation of the implied contractual provision that the patio would be constructed in a workmanlike fashion. We do not intend to exclude the possibility that a cause of action in negligence would be maintainable. See Rosenau v. City of New Brunswick, 51 N.J. 130 (1968) (holding valid a negligence suit in which a consumer of water supplied by the city sued the manufacturer of a defective meter which allegedly caused water damage to the meter as well as to his home). However, we do not need to decide the validity of plaintiffs' negligence claim, since, as discussed above, the contractor's negligence would constitute a breach of the contractor's implied promise to construct the patio in a workmanlike manner.
IV
There was conflicting evidence in the instant case as to whether the defendant Corporation built the patio in a workmanlike manner. Since the evidence should have been judged in the light most favorable to the plaintiffs on the defendant's motion for judgment, Dolson v. Anastasia, 55 N.J. 2, 5-6 (1969), we are of the opinion, for the reasons stated, that plaintiffs made a prima facie showing of a cause of action. Therefore, the matter should be remanded for a new trial.
On retrial several other matters will undoubtedly be clarified. Plaintiffs' purchase contract provided that they could have an engineering inspection of the premises. The record does not *108 disclose the nature and extent of that inspection. A building contractor who had examined the patio for the plaintiffs at the time of their purchase, but did not testify, made no comment to them with respect to the condition or construction of the patio. Presumably the examination was satisfactory. If, as previously stated, a defective condition had been readily apparent or discoverable upon a reasonable inspection before or at the time plaintiffs took title, then recovery for the defective condition would not be appropriate. For example, plaintiffs' complaint about the lack of weepholes, a condition that was readily apparent on visual inspection, is not well founded.
The record is not clear whether the other allegedly defective condition, inadequate compaction of the ground, was apparent or discoverable upon a reasonable inspection. It is also uncertain whether plaintiffs might have prevented the damage if they had acted promptly when cracks first appeared. In addition, there was some evidence of the cost of a new patio, but that evidence did not take into account depreciation. These and other matters to which we have referred should be explored on the retrial.
The case is reversed and remanded for a new trial, with costs to abide the event.
For reversal and remandment Chief Justice WILENTZ and Justices CLIFFORD, SCHREIBER, HANDLER, POLLOCK, O'HERN and GARIBALID, 7.
NOTES
[1] The complaint alleges the name of the defendant Corporation as William S. Mandara Masonry Corporation. This may be erroneous. If so, the complaint should be amended to designate the correct name. The defendants have never questioned the misnomer. The trial court mistakenly placed the burden of proof of the identity of the contractor on the defendant.
[2] Defendants had other evidence. The trial judge, who had permitted defendants to produce only one witness before the noon recess, mistakenly believed that he could not reserve decision on the defendants' motion. The trial court therefore granted the motion immediately after the recess.
[3] The New Home Warranty and Builders' Registration Act, N.J.S.A. 46:3B-1 to 46:3B-12, provides that builders of new homes must provide warranties of one, two, and ten years on various parts of the homes to the owners, meaning any person for whom the new home is built. N.J.S.A. 46:3B-2d, -2e, -3b. Interestingly, while the regulations delineating the subject matter of these warranties exclude "unattached" patios from required warranties, N.J.A.C. 5:25-3.3(d)2, they do require a one-year warranty on attached patios, N.J.A.C. 5:25-3.2(a)1i. The regulations note that "[c]racks in excess of 1/4 inch width or in vertical displacement are considered excessive" in attached patios, N.J.A.C. 5:25-3.4(c)1v(1), and the responsibility imposed upon the builder for such excessive cracks is "to repair as required," N.J.A.C. 5:25-3.4(c)1v(2). This and other warranties under the Act extend to the owner's "successors in title to the home." N.J.S.A. 46:3B-2e. However, the definition of "new home" in N.J.S.A. 46:3B-2d refers only to the initial occupants of a new home.
[4] Tiffany, in his treatise on property, has described the requirements for covenants running with the land as follows:
Generally, to create a covenant running with the land, there must be a writing which satisfies the statute of frauds; the parties must intend that the covenant run with the land; the covenant must touch and concern the land; and privity of estate must exist between the original and the grantee at the time the covenant is made. [H. Tiffany, Real Property § 848, at 264-65 (3d ed. Supp. 1984) (footnote omitted).]
[5] The record indicates that the contractor and the Kawashes entered into an oral agreement and that a sketch of the patio had been prepared in advance. However, the sketch was not produced at trial, and the terms of the oral agreement, including the specifications, were not described.
[6] Neither party considered the effect, if any, of The New Home Warranty and Builders' Registration Act, N.J.S.A. 46:3B-1 to -12, on the McDonald implied warranty of habitability. The Act contains two plans to protect the initial owner-occupier of new homes with respect to various types of defects. Under one plan a new home warranty security fund is maintained by the State Treasurer and administered by the Commissioner of the Department of Community Affairs. N.J.S.A. 46:3B-7. An alternative plan is a new home warranty insurance program approved by the Commissioner of Insurance. N.J.S.A. 46:3B-8. The owner-occupier of a new home may elect to pursue rights and remedies other than the warranties under the Act. N.J.S.A. 46:3B-9.
[7] See Hermes v. Staiano, 181 N.J. Super. 424 (Law Div. 1981), holding that when a new home was built in 1969 for purchaser who sold to plaintiff in 1973 and plaintiff encountered difficulty from 1976 on with septic tank and cellar wall, the doctrines of implied warranty of habitability and strict liability applied to plaintiff. 181 N.J. Super. at 432-33. We neither approve nor disapprove of the application of these principles to the circumstances of that case.
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909 F. Supp. 767 (1995)
Ron ROHMAN, Plaintiff,
v.
CITY OF PORTLAND, a municipal corporation, Charles Hales, and Pioneer Courthouse Square, Inc., an Oregon nonprofit corporation, Defendants.
Civil No. 95-1096-HA.
United States District Court, D. Oregon.
November 22, 1995.
*768 Herbert G. Grey, Kelly E. Ford, Beaverton, Oregon, Steven T. McFarland, Gregory S. Baylor, Center for Law and Religious Freedom, Annandale, Virginia, for Plaintiff.
Harry Auerbach, Office of City Attorney, Portland, Oregon, for Defendants.
OPINION AND ORDER
HAGGERTY, District Judge:
Plaintiff, Ron Rohman, brings this action challenging the Pioneer Courthouse Square Free Speech Policy (the "Free Speech Policy") under both the United States and Oregon Constitutions. Specifically, plaintiff alleges that the Free Speech Policy abridges his constitutionally protected rights to free speech and free exercise of religion. Plaintiff further alleges that the Free Speech Policy, as enforced, unconstitutionally infringes *769 on his due process and equal protection rights. Plaintiff seeks declaratory and injunctive relief, as well as money damages.
The jurisdiction of this court has been properly invoked under 28 U.S.C. § 1331. The matters now before the court are plaintiff's motion for a preliminary injunction, and if preliminary injunctive relief should issue, his request for an order waiving the attendant security requirement. In his motion, plaintiff seeks to enjoin the enforcement of the Free Speech Policy during the pendency of the instant action. For the reasons provided below, plaintiff's motion for a preliminary injunction and his request for a waiver of security are both granted.
BACKGROUND
Pioneer Courthouse Square (the "Square") is a public park situated in downtown Portland, Oregon. The Square, inclusive of its surrounding sidewalks, encompasses an entire square block. The Square is bordered by Yamhill street to the south, by Morrison street to the north, by Sixth Avenue to the east, and by Broadway to the west. The Square is primarily an open plaza, which is used by the public for a myriad of purposes.[1] The Square also contains several commercial establishments.[2] According to the drafters of the Free Speech Policy, the Square "is the City of Portland's premier public gathering spot," and has been described as "the City's living room." Pioneer Courthouse Square Free Speech Policy § 1.1.
The Square is owned by the City of Portland (the "City"), and operated on behalf of the City by Pioneer Courthouse Square of Portland, Inc. ("Pioneer Square, Inc."), an Oregon nonprofit corporation. In June 1994, the Board of Directors of Pioneer Square, Inc. adopted the Free Speech Policy. Shortly thereafter, in August 1994, the Portland City Council ratified the Free Speech Policy, thereby giving it operative effect.[3]
In essence, the Free Speech Policy provides that when in the Square,[4] a person must be within a designated "Public Speech Area" if intending to audibly communicate (either by spoken word or musically) with another person who is within the confines of the Square and is more than ten (10) feet away.[5] It follows that there is no restriction on an individual's ability to communicate audibly within the Square, provided that the individual has no intention of communicating with persons beyond a ten foot radius. The Free Speech Policy contains the following definitions:
§ 2.1 "Speaker" includes speakers, musicians, or any other person who intends to communicate audibly with users of the square.
§ 2.2 "Immediate Vicinity" means an area within ten (10) feet of the Speaker.
The Free Speech Policy's operative provisions state, in part:
§ 3.2 Speakers who do not intend to communicate with users beyond the Speaker's immediate vicinity may speak or perform at any location in the Square ...
§ 3.3 Speakers who intend to communicate with users of the Square beyond the Speaker's immediate vicinity must use the Public Speech Area and comply with the *770 procedures ... for the Public Speech Area.
As indicated above, speakers or performers who are confined to the Public Speech Area must comply with certain procedures prescribed under the Free Speech Policy. Specifically, any such person may use the Public Speech Area, to the exclusion of other similarly situated persons, for a period of thirty (30) minutes.[6] Pioneer Courthouse Square Free Speech Policy § 3.4.2. After the Public Speech Area is used for two consecutive 30-minute periods, a mandatory 15-minute silent period follows. Id. Although there is no set restriction on the number of 30-minute periods any individual can use the Public Speech Area on a given day, people who have not yet spoken or performed on that day, and who wish to be heard, are given preference. Id. § 3.4.3. Notwithstanding the above, no person is allowed to use the Public Speech Area when the Square is under permit.[7]Id. § 3.6.
An individual's compliance with the procedures set forth under the Free Speech Policy does not exempt the individual from the City's noise disturbance ordinance; rather, any user of the Square remains subject to that ordinance, "which prohibits the creation of any noise that annoys or disturbs a reasonable person of normal sensitivity." Id. § 3.5. A person found to be in violation of either the Free Speech Policy or the City's noise ordinance may be excluded from the Square for a period of time.[8]
Plaintiff is an ordained minister who has been involved in "open air preaching" since 1970. Affidavit of Ron Rohman, at 3. Plaintiff believes that he has been commanded by God to spread the Gospel or "Good News" of salvation through Christ to the world at large.[9]Id. In pursuit of that objective, plaintiff has been preaching in the Square on a regular basis since the Square's inception in 1984. Id. at 5-6.
Plaintiff admits that he preaches in a loud voice. Plaintiff contends, however, that the amount of ambient noise generally present in the Square forces him to preach loudly in order to preach effectively (that is, to have his message be heard). Plaintiff explains:
At the Square, I preach my Christian beliefs publicly and out loud. It is necessary to use a fair amount of volume on the sidewalks and in the Square for passersby and Square users to hear well, due to the high noise level at the Square during the day. Sixth Avenue east of the Square is part of Tri Met's downtown bus mall, and the noisy diesel Tri Met ... buses pass within a short distance from my preaching location.... School and tour buses bringing visitors [to the Square] make similar amounts of noise, as do delivery trucks using the streets. Of course, the large numbers of pedestrians on the sidewalks *771 and people using the Square also generate a lot of noise. Two waterfalls on the Square ... are extremely noisy, and can be heard at many locations throughout the Square.
Id. at 6-7. Despite the volume, plaintiff contends that his preaching style is nonconfrontational. Id. at 4. Instead, it is plaintiff's contention that he simply preaches loud enough for people in his vicinity to hear him, thereby affording people the opportunity to stop and engage in a more intimate conversation if they are interested in his message. Id.
Between August 1994 and May 1995, plaintiff has been issued four separate "exclusions" from the Square for violating the Free Speech Policy. The first two exclusions were dismissed on appeal for reasons not germane to the instant action. Pursuant to each of the two more recent exclusions, plaintiff was ordered to stay out of the Square for a period of thirty days.[10] With regard to these two later exclusions, plaintiff admits that he intentionally violated the Free Speech Policy because he believed the policy to be unconstitutional. Id. at 15-16.
Even during those times when plaintiff has not been banished from the Square, he claims that the Free Speech Policy has had a profound effect on his ability to communicate. Plaintiff expressly contends that:
The Free Speech Policy has directly harmed my ministry by preventing me from preaching to the hundreds and thousands of people who use the sidewalks on the square, and by precluding me from any preaching anywhere on the Square during its highest use times.... The location of the [Public Speech Area] ... has made it virtually impossible to use preaching as a method of attracting Square users to the Gospel.
Id. at 13-14.
LEGAL STANDARD
To obtain preliminary injunctive relief in the Ninth Circuit, a party must meet one of two alternative tests. Under the "traditional" test, preliminary relief may be granted if the court finds:
(1) the moving party will suffer irreparable injury if the preliminary relief is not granted;
(2) the moving party enjoys a likelihood of success on the merits;
(3) the balance of potential harm favors the moving party; and
(4) the advancement of the public interest favors granting injunctive relief.
Burlington N. R.R. v. Department of Revenue, 934 F.2d 1064, 1074 n. 6 (9th Cir.1991).
Under the alternative standard, the moving party may meet its burden by showing either (1) probable success on the merits and the possibility of irreparable injury, or (2) that serious questions are raised and the balance of hardships tips sharply in the moving party's favor. Id.; Associated Gen. Contractors of Cal., Inc. v. Coalition for Economic Equity, 950 F.2d 1401, 1410 (9th Cir. 1991), cert. denied, 503 U.S. 985, 112 S. Ct. 1670, 118 L. Ed. 2d 390 (1992). These formulations "represent two points on a sliding scale in which the required degree of irreparable harm increases as the probability of success decreases." United States v. Odessa Union Warehouse Co-Op, 833 F.2d 172, 174 (9th Cir.1987). The Ninth Circuit earlier said that this really describes one test: "a continuum in which the required showing of harm varies inversely with the required showing of meritoriousness." San Diego Comm. v. Governing Bd., 790 F.2d 1471, 1473 n. 3 (9th Cir.1986).
DISCUSSION
Because I find that serious questions are raised regarding whether the Free Speech Policy offends the First Amendment to the United States Constitution, and that there exists a distinct possibility of plaintiff suffering irreparable injury, I need only address plaintiff's First Amendment claim in ruling on the instant motion.
*772 1. Injunctive Relief
A. The Merits
Plaintiff claims that the Free Speech Policy infringes upon his First Amendment right to free speech. The First Amendment provides, in part, that "Congress shall make no law ... abridging the freedom of speech." U.S. Const. amend. I. Under the due process clause of the Fourteenth Amendment, the same prohibition applies to the states. Cantwell v. Connecticut, 310 U.S. 296, 303, 60 S. Ct. 900, 903, 84 L. Ed. 1213 (1940).
Several matters relevant to the court's analysis of the Free Speech Policy under the First Amendment are either not in dispute or are beyond question, and therefore, necessitate little discussion. First, it is clear that plaintiff's preaching of the Gospel is expressive conduct protected by the First Amendment. Capitol Square Review and Advisory Bd. v. Pinette, ___ U.S. ___, ___, 115 S. Ct. 2440, 2446, 132 L. Ed. 2d 650 (1995) (Scalia, J., writing for the Court); Kreisner v. City of San Diego, 988 F.2d 883, 898 (9th Cir.1993) (Kozinski, J., concurring) ("Religious speech is speech, entitled to exactly the same protection from government restriction as any other kind of speech no more and no less."). Second, the parties, as well as the court, agree that the Square is a public forum, and thus, the City bears an extraordinarily heavy burden to regulate expressive conduct there. N.A.A.C.P., Western Region v. City of Richmond, 743 F.2d 1346, 1355 (9th Cir.1984); accord United States v. Doe, 968 F.2d 86, 87-88 (D.C.Cir. 1992) (government's ability to permissibly restrict expressive conduct in a public forum is very limited); see also Gerritsen v. City of Los Angeles, 994 F.2d 570, 576 (9th Cir.) ("public parks ... represent the quintessential public forum"), cert. denied, ___ U.S. ___, 114 S. Ct. 306, 126 L. Ed. 2d 253 (1993).[11] Lastly, there is no meaningful disagreement that the Free Speech Policy is not an attempt by the City to restrict the content of speech;[12] rather, the Free Speech Policy is simply a restriction on the time, place, and manner of expressive conduct within the Square.
The Supreme Court has articulated a three-prong test which a government regulation must meet to restrict constitutionally protected speech in a public forum:
[E]ven in a public forum the government may impose reasonable restrictions on the time, place, or manner of protected speech, provided the restrictions "are justified without reference to the content of the regulated speech, that they are narrowly tailored to serve a significant governmental interest, and that they leave open ample alternative channels for communication of the information."
Ward v. Rock Against Racism, 491 U.S. 781, 791, 109 S. Ct. 2746, 2753, 105 L. Ed. 2d 661 (1989) (quoting Clark v. Community for Creative Non-Violence, 468 U.S. 288, 293, 104 S. Ct. 3065, 3069, 82 L. Ed. 2d 221 (1984)); accord Gerritsen, 994 F.2d at 577. "The failure to satisfy any single prong of this test invalidates the [regulation]." Grossman v. City of Portland, 33 F.3d 1200, 1205 (9th Cir.1994).
*773 The gravamen of the First Amendment challenge here is whether the Free Speech Policy is sufficiently tailored to further any significant interests. In order to answer this question, the court must initially examine the scope of the City's legitimate interest. Doe, 968 F.2d at 88. Several interrelated governmental interests have been identified in the record, namely (1) preserving the attractiveness, intact condition, and overall tranquility of the Square; (2) regulating excessive noise; (3) maintaining the Square as a multiple use, not a dominant use, facility; and (4) avoiding having religious exercise so dominate the Square that the City would violate the First Amendment's prohibition against the establishment of religion. See Defendants' Memorandum in Opposition to Plaintiff's Motion for Preliminary Injunction, at 6-7.[13]
The City has stated a legitimate interest which, at least facially, bears a reasonable relationship to the Free Speech Policy. It is well established that "the government may act to protect even such traditional public forums as city streets and parks from excessive noise." Ward, 491 U.S. at 796, 109 S.Ct. at 2756. While certain of the other stated interests may be adequate to support a government regulation in other cases,[14]see e.g. Clark, 468 U.S. at 296, 104 S.Ct. at 3070 (recognizing the government's "substantial interest in maintaining the parks ... in an attractive and intact condition"), they simply are not sufficiently related to the Free Speech Policy to pass constitutional muster.[15] In fact, at oral argument, defense counsel conceded that the Free Speech Policy is essentially a noise abatement ordinance. The dispositive question here has, thus, been reduced to whether the Free Speech Policy is "narrowly tailored" to serve the interest of preventing excessive noise in the Square.
I am mindful that to be narrowly tailored, the Free Speech Policy "need not be *774 the least restrictive or least intrusive means" of curtailing excessive noise. Ward, 491 U.S. at 798, 109 S.Ct. at 2757. Rather, the requirement of narrow tailoring is satisfied provided that the Free Speech Policy promotes noise reduction without burdening substantially more speech than is necessary to further that interest. Id. at 799, 109 S.Ct. at 2758. Because this is a First Amendment challenge, the City bears the burden of showing that the Free Speech Policy is warranted under this standard. Doe, 968 F.2d at 90. In the instant case, I find that, at a minimum, there are serious questions concerning the City's ability to satisfy its burden.
The City has selected a means of combating excessive noise in the Square which appears to be substantially broader than necessary to achieve the desired result. First, as noted above, the City has in place a specific noise ordinance which is applicable to the Square, and which is in no way suspended or superseded by the Free Speech Policy. The City has not adequately explained why the Free Speech Policy is not, therefore, a superfluous limitation on constitutionally protected expressive conduct. Second, there is simply no empirical evidence in the record to support the City's choice of ten-feet as the limit intentional, communicative sound may travel before triggering the communicator's relegation to the Public Speech Area, with its attendant procedural constraints. The City fails to produce any evidence indicating the degree of disturbance created by or the excessiveness of a noise traveling ten feet. See Doe, 968 F.2d at 90. By contrast, plaintiff cites examples of arguably innocuous noises which travel distances in excess of ten feet, and which routinely occur in the Square. Finally, in analyzing whether the Free Speech Policy is sufficiently tailored to combat excessive noise, the court is obliged to take a pragmatic approach, considering the nature and traditional uses of the Square. Id. Doing so, it seems that given the Square's status as the City's "premier public gathering spot," as well as the high level of ambient noise generally found in the Square, the Free Speech Policy may set a noise limit which is unreasonably restrictive.
Because the presence of adequate alternative channels for communication will not save a restriction which is not narrowly tailored, see Id. at 88, I need not, at this juncture, consider whether the Free Speech Policy leaves open ample alternative channels of expression (the third prong of the test enunciated by the Court in Ward). See Grossman, 33 F.3d at 1205 n. 10.
Although not specifically raised by plaintiff, the court finds that the Free Speech Policy, as written, may be unconstitutionally vague and/or under-inclusive. In these regards, the potential shortcoming of the Free Speech Policy is that, by necessity, the policy defines offensive conduct as intending to communicate with another user of the Square who is over ten feet away. The policy may be under-inclusive in that a "speaker" would not be in violation for creating excessive noise intended to reach a user who was only ten feet, or less, away. While this particular problem may be alleviated to the extent that "intent" for purposes of the Free Speech Policy includes a speaker's substantial certainty that his voice will carry over ten feet (a matter not clear on the face of the policy), it begs two pertinent questions. First, how is a speaker to know, with any degree of certainty, whether his voice will reach beyond ten feet? Second, how is a law enforcement official to determine whether a speaker is intending to communicate? These queries lie at the heart of the court's vagueness concerns.
A government regulation is unconstitutionally vague if it "(1) does not define the conduct it prohibits with sufficient definitiveness and (2) does not establish minimal guidelines to govern law enforcement." United States v. Davis, 36 F.3d 1424, 1434 (9th Cir.1994), cert. denied, ___ U.S. ___, 115 S. Ct. 1147, 130 L. Ed. 2d 1106 (1995). Here, a speaker of ordinary intelligence may not understand that his conduct is prohibited by the Free Speech Policy. Moreover, the Free Speech Policy may not afford law enforcement officials with the minimal guidance needed to effectively and even-handedly enforce it.
As noted above, because I find that serious questions are raised as to plaintiff's First *775 Amendment claim, I need not reach his claims arising under the Fourteenth Amendment nor his claims arising under the Oregon Constitution.
B. Irreparable Injury or Balance of Hardships
Plaintiff alleges that he has suffered severe and irreparable injury as a result of the Free Speech Policy, and that he will continue to suffer such consequences if the policy is not enjoined during the pendency of this action. More specifically, plaintiff alleges that the Free Speech Policy has undermined his ability to effectively preach his message. Plaintiff further alleges that his failure to reach people with the Gospel is in defiance of God's command, and thus, could have both temporal and eternal consequences.
I find that plaintiff suffers from a real possibility of irreparable harm should the Free Speech Policy remain in effect. In addition to the harms noted above, the continued operation of the Free Speech Policy may serve to prolong a deprivation of plaintiff's First Amendment freedoms. Such a deprivation, for any degree of time, constitutes irreparable injury. Elrod v. Burns, 427 U.S. 347, 373, 96 S. Ct. 2673, 2689, 49 L. Ed. 2d 547 (1976).
In contrast to the genuine probability of irreparable injury faced by plaintiff, defendants face no serious hardships should the court enjoin the Free Speech Policy throughout the remainder of this action. The continued availability of the City's noise disturbance ordinance provides the City with a mechanism to regulate any overtly excessive noise in the Square.
In light of the above, I find that plaintiff is entitled to injunctive relief.
2. Security
Typically, when a court grants preliminary injunctive relief, the applicant is required to furnish security, "in such sum as the court deems proper, for the payment of such costs and damages as may be incurred or suffered by any party who is found to have been wrongfully enjoined...." Fed.R.Civ.P. 65(c). In the case at bar, however, defendants have consented to the waiver of the security requirement. Accordingly, the court waives this requirement.
CONCLUSION AND ORDER OF THE COURT
For the reasons provided above, plaintiff's motion (doc. # 13-1) for a preliminary injunction is GRANTED, and plaintiff's request (doc. # 13-2) for a waiver of the security requirement is GRANTED.
IT IS ORDERED that the Pioneer Square Free Speech Policy is enjoined during the pendency of this action. IT IS FURTHER ORDERED that plaintiff shall not be required to post any security under Fed. R.Civ.P. 65(c).
IT IS SO ORDERED.
NOTES
[1] The public's use of the Square includes activities such as eating lunch, engaging in conversation, collecting signatures for petitions, and playing hacky-sack.
[2] These establishments include a coffee shop, a book store, a few food-cart vendors, and an office of Tri-County Metropolitan Transportation District of Oregon ("Tri-Met").
[3] A policy relating to public speaking in the Square had been in place prior to the Free Speech Policy, but that policy was rendered defunct with the adoption and ratification of the Free Speech Policy.
[4] For purposes of the Free Speech Policy, persons within the Square encompass those person who are on the Square's immediately surrounding sidewalks. See Preamble to the Pioneer Courthouse Square Free Speech Policy ("The free speech policy is in effect for the entire Square, from curb to curb.").
[5] Nothing in the record conclusively establishes the precise size or location of the Public Speech Area. However, according to plaintiff, the area encompasses one hundred square feet, it is in a part of the Square where people do not normally congregate, and it is a good distance removed from the sidewalks surrounding the Square. Affidavit of Ron Rohman, at 13.
[6] The Free Speech Policy states that "[t]he right to use the Public Speech Area will be allocated on a first come, first serve basis unless the Square determines that competition among Speakers requires a sign-up sheet, in which case the Square will administer a sign-up sheet." Pioneer Square Free Speech Policy § 3.4.4. The record before the court does not reveal whether a first come, first serve policy or a sign-up sheet is currently in effect.
[7] The preamble to the Free Speech Policy provides that "[a]ny event on the Square requires a permit." The preamble goes on to define an event as "any activity involving a group of four or more persons who appear to be acting together and who are soliciting the public's attention."
Examples of "events" which have taken place on the Square are musical concerts and political rallies.
[8] Section 3.5 of the Free Speech Policy states, in part, that "[a]ny person violating [the City's noise] ordinance may be asked to reduce his or her volume, and may be subject to exclusion from the Square." Moreover, Portland City Code 20.12.265 provides that any person found to be violating any rule or regulation issued by the City Council, including the Free Speech Policy, may be excluded from any City park, including the Square, for a period of not more than thirty days.
[9] More specifically, plaintiff describes the substance of his preaching in the following terms:
The content of my preaching usually focuses on the salvation message (the Gospel) of the Lord Jesus Christ, which is that individuals are born sinful, that Christ came to earth to die for our sins, and that salvation (eternal life with God) is available to all those (and only those) who will accept the gift of salvation by trusting in Christ's finished work on the cross and receive the gift of salvation.
Affidavit of Ron Rohman, at 7-8.
[10] The most recent exclusion received by plaintiff also excluded him from O'Bryant Square, which is located several blocks from the Square.
[11] The Ninth Circuit has recently discussed the sanctity of parks as places to exercise First Amendment rights and the importance of preserving parks as arenas for the open exchange of ideas:
Parks, in particular, "have immemorially been held in trust for the use of the public and, time out of mind, have been used for purposes of assembly, communicating thoughts between citizens, and discussing public questions." This venerable tradition of the park as public forum has as suggested by the attendant image of the speaker on a soapbox a very practical side to it as well: parks provide a free forum for those who cannot afford newspaper advertisements, television infomercials, or bill-boards.
Grossman v. City of Portland, 33 F.3d 1200, 1204-05 (9th Cir.1994) (quoting Hague v. CIO, 307 U.S. 496, 515, 59 S. Ct. 954, 964, 83 L. Ed. 1423 (1939)).
[12] In deciding whether a government regulation is content neutral, the purpose of the regulation controls. "A regulation that serves purposes unrelated to the content of expression is deemed neutral, even if it has an incidental effect on some speakers or messages but not others." Ward v. Rock Against Racism, 491 U.S. 781, 791, 109 S. Ct. 2746, 2753, 105 L. Ed. 2d 661 (1989). As discussed infra, the principal justification for the Free Speech Policy is the City's desire to curtail excessive noise, which, in and of itself, is unrelated to content.
[13] The Free Speech Policy contains the following vague, sweeping statement of policy:
The policy of Pioneer Courthouse square is to regulate speech and other forms of expression at the minimum level necessary to respect the interests of other users and neighbors of the Square.
Pioneer Courthouse Square Free Speech Policy § 3.1.
[14] Any attempt by the City to justify the Free Speech Policy on the basis of preserving the tranquil atmosphere of the Square is misplaced. In United States v. Doe, 968 F.2d 86, the District of Columbia Circuit considered this justification in relation to Lafayette Park, which is located across the street from the White House. The Doe court found that the essential nature of the location involved is determinative, and in the case before it found that a regulation on expressive conduct in Lafayette Park could not tenably be supported by an interest in preserving tranquility. Id. at 89. The court explained:
[Lafayette Park] is exposed to every form of urban commotion passing traffic, bustling tourists, blaring radios, performing street musicians, visiting schoolchildren. By no reasonable measure does Lafayette Park display the characteristics of a setting in which the government may lay claim to a legitimate interest in maintaining tranquility. This is evidenced by the government's own policy of issuing rally and demonstration permits for use in the park.
Id.
By analogy, the Free Speech Policy is not susceptible to a justification of maintaining the tranquility of the Square.
[15] I find the City's asserted interest in not violating the Establishment Clause to be particularly specious. As a preliminary matter, a restriction on "private religious speech [in] an otherwise open forum on the ground that some observer might wrongly suspect official sponsorship ... would constitute content discrimination," and thus, would be ripe for constitutional challenge. American Jewish Congress v. City of Beverly Hills, 65 F.3d 1539, 1551 (9th Cir.1995) (Hall, J., concurring in part and concurring in the judgement). Moreover, nothing in the record suggests that allowing plaintiff to be heard, at any decibel level, would lead the "reasonable observer" to infer that the City endorsed plaintiff's preaching, see Id. at 1545, much less that the Square had become "a tax-supported church for the establishment of plaintiff's own brand of religion." Defendants' Memorandum in Opposition, at 3.
It is indeed ironic that the City would proffer a potential Establishment Clause violation as justification for the Free Speech Policy at a time when a sizable Christmas tree has been erected in the Square. The Ninth Circuit has stated:
[W]hile a reasonable passerby would never infer city endorsement of a soapbox speaker in the park, he or she would be much more likely to infer such endorsement from a large, unattended ... object....
Id. at 1545 n. 7 (citing Capitol Square, ___ U.S. at ___, 115 S.Ct. at 2458 (Souter, J., concurring) for the proposition that "an unattended display (and any message it conveys) can naturally be viewed as belonging to the owner of the land on which it stands").
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909 F. Supp. 759 (1995)
ELKO COUNTY BOARD OF SUPERVISORS; Duval Ranching Company; S & D Company; Kirk and Ramona Dahl; Sandra L. Sharp; and Sandra L. Sharp and Randall Sharp as trustees of the Leslie B. Sharp Testamentary Trust, Plaintiffs,
v.
Daniel R. GLICKMAN, Secretary of Agriculture; Jack Ward Thomas, Chief, United States Forest Service; R.M. "Jim" Nelson, Acting Forest Supervisor, Humboldt National Forest; D. Waive Stager, Acting District Ranger, Ruby Mountains Ranger District, Humboldt National Forest; United States Forest Service; and United States, Defendants.
No. CV-N-95-38-ECR.
United States District Court, D. Nevada.
November 17, 1995.
*760 John E. Marvel, Special Counsel to the Board of Commissioners of Elko County, Nevada, Elko, NV, Susan E. Buxton, Moore & McFadden, Boise, ID, for Plaintiffs.
Shirley Smith, Asst. U.S. Atty., Reno, NV, Stephen G. Bartell, Environmental Defense Section, Environment & Natural Resources Division, United States Department of Justice, Washington, DC, for Defendants.
ORDER
EDWARD C. REED, Jr., Senior District Judge.
This is a dispute about water, and the irrigation ditches which carry it out of a national forest and onto private land. The plaintiffs are ranchers in the Ruby Valley, in Elko County in northeastern Nevada. Their land lies, roughly speaking, immediately west of, and downhill from, the Humboldt National Forest. The defendants are the United States, its Forest Service, and the federal officials responsible, in varying degrees, for supervising use of that Forest.[1]
*761 The prime sources of water in the area are natural springs located in the Humboldt Forest. The water from those springs has been diverted toward the ranchers' land, where it is used primarily for irrigation and stockwatering purposes, by means of ditches which run across Forest Service land. The ranchers explain that, because their predecessors in interest built the ditches and diverted the water over a century ago, long before the federal land at issue was withdrawn from the public domain and made part of a national forest, they have the right to enter onto Forest Service land to maintain and improve the ditches, and vested rights to the water conveyed by them.
Hence this dispute. The ranchers claim that the Forest Service has interfered with their rights by placing fill on, and breaching, an irrigation ditch; by demanding, for the first time, that they prove the existence and extent of their rights before they enter onto Forest Service land to clean and maintain the ditches; and by prosecuting them, or threatening to, for cleaning and maintaining their irrigation ditches in a manner which they claim is minor and routine, and therefore within the scope of their rights. They ask for a preliminary injunction against the Forest Service, barring such "interference" with their rights.
The Forest Service opposes the motion. None of its employees, it states, has ever filled in, or breached, an irrigation ditch. It acts properly, it claims, when it requires the ranchers to prove that they do have rights under the relevant federal statute, before they enter onto Forest Service land to do various things in exercise of those rights. And, the Forest Service argues, even if the ranchers do have vested rights, certainly it may prosecute them if their activities on Forest Service land fall outside the scope of those rights and are not otherwise permitted by the relevant federal regulations. The briefing is complete. See Docs. # 12, 21 & 27.[2]
I. The facts
The general area at issue is referred to by the ranchers as the Woolverton Basin, Doc. # 1 ¶ 25, and consists of four separate drainages: Woolverton, Rockslide, Ray, and an unnamed drainage. Id.[3] Four springs Kelly, Woolverton, House and Ray originate in the Humboldt National Forest in this area, in what the ranchers term "close proximity" to their own land. Id. ¶ 24.
A. Kelly Spring
The upper portion of the Rockslide drainage is managed by the Forest Service, while the lower portion is owned by the Duvals. Id. ¶ 36. Both House Spring and Kelly Spring originate in the Rockslide drainage. Id. ¶ 35. A defined drainage begins at Kelly Spring. Id. ¶ 38. About a half mile below the spring is an impoundment structure, and about 100 yards below that structure is an irrigation ditch which delivers water to the Duval Ranch. Id.
In the summer of 1992, Don Duval installed a collection box, pipeline, trough and overflow at Kelly Spring. Id. ¶ 39. The precise details are unclear, but Duval himself states that he installed a "buried water line," Doc. # 1 Exh. E ¶ 9, running across national forest land, Doc. # 21 at 10, "from Kelly Spring approximately 100 yards due west to a livestock water trough on Duval Ranching Company's *762 private ground." Doc. # 1 Exh. E ¶ 9.
Duval was charged with two misdemeanors, for damaging a natural feature of the United States, 36 C.F.R. § 261.9(a), and for placing a structure on national forest land without approval from the Forest Service. 36 C.F.R. § 261.10(a). He pled guilty before a federal magistrate in January 1994, and was fined, id., and ordered to restore the site to its original condition. Doc. # 21 Exh. 7. Duval began the restoration work, but never completed it: in early October 1994, according to the Forest Service, a group of unidentified citizens installed a new water collection box, which is currently in place, at Kelly Spring. Doc. # 21 at 12-13.
B. Woolverton Spring
The upper portion of the Woolverton drainage is public land, managed by the Forest Service. The lower portion is owned by the Duval Ranching Company and the S & D Company. Doc. # 1 ¶ 27. Woolverton Spring originates in this drainage. According to the ranchers, its waters flow for about three-quarters of a mile in their original channel, and are then diverted across national forest land to Kirk Dahl's ranch, by means of an irrigation ditch about 1.75 miles long. Id. ¶¶ 28, 29. The ditch runs on Forest Service land for about a quarter of a mile before crossing onto Dahl's land.[4]Id. Exh. D ¶ 11.
Dahl and his wife have owned their ranch for over forty years and claim a water right dating back to 1875. Id. ¶¶ 2, 6. About five years ago, according to the ranchers and Dahl, see Doc. # 1 ¶ 30 & Exh. D ¶ 8, the Forest Service fenced off about 5.5 acres around Woolverton Spring in order to create or protect a riparian area. At the same time, the ranchers allege, "the Forest Service brought in heavy equipment and proceeded to cover" with fill material an area about 100 by 150 feet around the spring. Doc. # 1 ¶ 30. Finally, Dahl alleges, the quarter mile stretch of the irrigation ditch which runs on Forest Service land "has periodically been damaged by third parties," Doc. # 1 Exh. D ¶ 11, whom Dahl believes to be "Forest Service personnel or agents." Id. Specifically, Dahl explains that "[t]he ditch bank has been cut out allowing the water to flow back to the natural channel," and "tree branches and other debris" have been placed in the ditch, causing the water in the ditch to flow over the bank. Id.
C. Ray Spring
The bulk of the Ray drainage is public land; the lower quarter of the drainage is privately owned. Doc. # 1 ¶ 41. Sandra Sharp, both individually and as a trustee, owns the Sharp Angus Ranch, id. Exh. G ¶ 2, and she claims that the Ranch owns vested water rights, to Ray Spring, id. ¶ 3, dating back to 1889. Id. ¶ 7. A natural channel runs through the drainage, intermittently above the spring and perennially below it. Doc. # 1 ¶ 42. Towards the lower, western end of the drainage is a diversion dam. From the dam, an irrigation ditch runs about a half mile until it reaches a road. Id. ¶ 44.[5]
Ray Spring was, according to the ranchers, dug out in the past with a drag line or similar device, id. ¶ 46, and they theorize that the clay base was fractured. In any event, the spring no longer produces water. But whatever caused the problem, the ranchers explain, water can still be obtained from the spring so long as it is routinely cleaned and maintained. Id. Don Duval cleared the spring in May 1992, but, he claims, Doc. # 1 Exh. E ¶ 21, was told by Forest Service personnel that the next time he did so he *763 would face criminal charges. Similarly, Sandra Sharp claims that, in October 1992, she proposed installation of a pipeline and trough, id. Exh. G ¶ 11, which would have run across public land for about 200 feet, id. ¶ 12, but could not go forward with the project because the Forest Service refused to allow it.
II. The law
The ranchers base their claim on Section 9 of the Act of July 26 1866. It provided that when
rights to the use of water for mining, agricultural, manufacturing, or other purposes, have vested and accrued, and the same are recognized and acknowledged by the local customs, laws, and the decisions of the courts, the possessors and owners of such vested rights shall be maintained and protected in the same; and the right of way for the construction of ditches and canals for the purposes herein specified is acknowledged and confirmed....
Act of July 26, 1866, ch. 262, § 9, 14 Stat. 251, 253 (codified at R.S. § 2339, recodified at 43 U.S.C. § 661). More than a century ago, the ranchers explain, when the land which is now part of the Humboldt National Forest was merely land in the public domain, their predecessors diverted water from public land onto their own land. That appropriation, they explain, was sufficient to give them vested rights to the water under Nevada law. Section 9 of the 1866 Act, they continue, recognized both those vested rights and an accompanying right-of-way for a ditch or canal to convey the water across the public domain. Their right-of-way, they conclude, amounts to an easement across the forest land, and such an easement right, which is defined by reference to Nevada common law, includes the right to clean, maintain, and improve the right-of-way.
Section 661 was one of a "tangled array of laws granting rights-of-way across federal lands," United States v. Jenks, 22 F.3d 1513, 1515 (10th Cir.1994), repealed in 1976 with the enactment of the Federal Land Policy and Management Act ("FLPMA"). 43 U.S.C. §§ 1701-84. No new rights to water, and to accompanying rights-of-way, can arise under § 661. But, as the ranchers point out, rights under § 661 which existed on October 21, 1976, the effective date of FLPMA, were not affected by that statute. FLPMA itself provides that it shall not "have the effect of terminating any right-of-way or right-of-use heretofore issued, granted, or permitted." 43 U.S.C. § 1769(a).
III. The Forest Service's regulatory authority and the ranchers' administrative remedies
We will assume without deciding that the ranchers do, in fact, have vested rights to water, and to ditch rights-of-way, under the 1866 Act. Clearly the ranchers are correct when they argue that the scope of any easement right under the 1866 statute is determined by reference to state law. See Jennison v. Kirk, 98 U.S. 453, 25 L. Ed. 240 (1878). And we note, again, that all the ranchers want to do, they insist, is normal cleaning, maintenance and development on their rights-of-way activities which are within their rights under the 1866 statute and which therefore do not require a special use permit. Further, they argue, both federal and state law, and the Forest Service manual, require that the Forest Service follow its own internal rules and allow them to maintain their water sources and ditches.
The ranchers' argument, we think, contains two elements. The first, implicit in their briefing and made expressly at oral argument, is that they are simply not subject to regulation by the Forest Service, because everything they want to do is within the scope of their 1866 easements across national forest lands. Doc. # 27 at 4, 26. The second, made in a much more summary fashion, is that, even if they are subject to some sort of supervision by the Forest Service, that agency is acting illegally, and they are therefore entitled to judicial relief.
A. The Forest Service's regulatory authority
The ranchers may have (and, again, for present purposes we assume they have) vested rights to water and to rights-of-way across land within the Humboldt National Forest. As noted above, the scope of any *764 such easement would, indeed, be determined by reference to the relevant state law, as it existed on October 21, 1976, when FLPMA became effective. And the ranchers are correct when they point out that FLPMA expressly preserved, by a "grandfather" clause, rights which existed as of its effective date under § 661. See 43 U.S.C. § 1769(a).[6]
What the ranchers ignore, however, is the fact that their rights-of-way run across national forest lands. We assume that FLPMA, for the reasons stated above, does not limit in any way the ranchers' 1866 ditch rights. Entirely apart from FLPMA, however, Congress has delegated to the Secretary of Agriculture the authority make "rules and regulations" (violation of which is a criminal offense) regarding the occupancy and use of the national forests. 16 U.S.C. § 551. That authority is considerable, and includes the right to reasonably regulate the exercise of vested water rights and accompanying rights-of-way obtained under 43 U.S.C. § 661, where such rights and rights-of-way lie within a national forest.[7]Adams v. United States, 3 F.3d 1254, 1260 (9th Cir.1993); Hyrup v. Kleppe, 406 F. Supp. 214, 216-17 (D.Colo.1976); see also Nevada Land Action Ass'n v. United States Forest Service, 8 F.3d 713, 719 & n. 9 (9th Cir.1993) (§ 661 "merely establishes" that ranchers with permits to graze livestock in the national forests "may have protectable rights to the use of water," and the Forest Service, with statutory authority to "manage conflicting uses of forest resources," need not consider vested water rights in adopting a management plan for the forests); Grindstone Butte Project v. Kleppe, 638 F.2d 100, 103 (9th Cir.1981) (rights under the Act of March 3 1891, like rights under the 1866 Act, are subject to reasonable regulation). The Forest Service has promulgated extensive regulations governing activities on national forest lands. See 36 C.F.R. Pts. 251, 261. Those regulations apply to the ranchers just as they do to everyone else.
This answers the ranchers' argument that, so long as they act within the scope of their vested 1866 ditch rights, their actions are not subject to Forest Service regulation, even if they take place on Forest Service land. On the contrary: though we assume that the ranchers have vested rights-of-way under § 661, and that vested rights are protected property interests, a vested right-of-way which runs across Forest Service lands is nevertheless subject to reasonable Forest Service regulation, where "reasonable" regulation is defined as regulation which neither prohibits the ranchers from exercising their vested rights nor limits their exercise of those rights so severely as to amount to a prohibition. See United States v. Doremus, 888 F.2d 630, 632 (9th Cir.1989) (citing Weiss, 642 F.2d at 299).[8]
*765 B. Administrative remedies
With exceptions not relevant here, "[a]ll uses of National Forest System land, improvements, and resources ... are designated `special uses' and must be approved" by an authorized Forest Service officer. 36 C.F.R. § 251.50(a). "Damaging any natural feature or other property of the United States," or "[c]onstructing, placing, or maintaining any kind of ... structure ... or other improvement on National Forest system land" without a permit, is a criminal offense. 36 C.F.R. §§ 261.1b, 261.9(a), 261.10(a). This means that the ranchers, if they wish to enter onto Forest Service land to perform cleaning and maintenance on the ditches, must get the Forest Service's permission to do so.
It also means that the ranchers, if they are denied permission, must first appeal as far as possible within the Forest Service's administrative structure. The Forest Service's regulations contain an entire subpart, see 36 C.F.R. subpart 251, providing for appeals within the Service when an applicant is denied a permit and believes that the decision is incorrect. Moreover, the regulations expressly state, see 36 C.F.R. § 251.101, that "it is the position of the Forest Service that, for decisions appealable under the regulations, exhaustion should be required before an aggrieved party may seek federal court review." Clouser v. Espy, 42 F.3d 1522, 1532 (9th Cir.1994). Because an "agency rule requires appeal before review," the doctrine of exhaustion of administrative remedies requires that the ranchers first proceed as far as possible within the Forest Service's own administrative structure. Id. at 1532 n. 12; see also Darby v. Cisneros, 509 U.S. 137, ___, 113 S. Ct. 2539, 2548, 125 L. Ed. 2d 113 (1993).
IV. The relief sought
The ranchers want an injunction, barring criminal enforcement, as in Don Duval's case, of the federal regulations found at 36 C.F.R. Part 261 (they believe that civil enforcement mechanisms are the proper route) and stopping what the ranchers term the Forest Service's "interference" with their maintenance, development, and general "use of water rights and accompanying rights-of-way" located on Forest Service land. Doc. # 12 at 1, 6. The "interference" they want enjoined, to reiterate, is said to consist of several discrete acts: placing fill dirt on and around Woolverton Spring, dirt which Kirk Dahl would clear out if he were not afraid of being prosecuted for doing so, id. at 8; prosecuting Don Duval for his development of Kelly Spring, and threatening to prosecute him for doing similar work at Ray Spring; and "categorically and arbitrarily," id. at 10, refusing to allow Sandra Sharp to develop Ray Spring. See id. at 2. It also includes the assertion by the United States, in an ongoing adjudication of all water rights in the Ruby Valley, of water rights inconsistent with those claimed by the ranchers, and the *766 Forest Service's insistence that the ranchers prove the existence and extent of their water rights and ditch rights-of-way before entering Forest Service land to maintain the ditches. Id. at 2, 13; see also Doc. # 27 at 4.
There are two serious flaws in the ranchers' request for relief. The first is, simply, that they have not exhausted their administrative remedies. There is no indication that any of the ranchers have even applied for permits to perform the maintenance they believe necessary (unless we construe liberally Sandra Sharp's conversation with a Forest Service employee), let alone that they have been denied those permits and appealed the decision within the Forest Service.
The second flaw goes to the very nature of the injunction the ranchers seek: they want us to bar the federal government from bringing criminal prosecutions for violations of the Forest Service's regulations. As noted above, they seek that form of relief expressly, but most of the remainder of their request is to the same effect: Kirk Dahl wants to clear Woolverton Spring, and Don Duval wants to clear Ray Spring, and Sandra Sharp wants to make improvements to Ray Spring, and all want to do so without the threat of criminal prosecution hanging over them. It is clear, then, that what the ranchers seek, though they vaguely term it an injunction against "interference" with their vested rights, is really an injunction against the institution of criminal proceedings against them for violation of Forest Service regulations. They want to enter Forest Service land and do the cleaning and maintenance they believe necessary on their ditches, knowing that they won't be prosecuted for doing so. The inherent problem with that sort of request is that, even if the ranchers had an otherwise meritorious case, we deal here with clearly "valid and constitutional federal criminal statutes designed to police compliance with valid and applicable Forest Service rules and regulations," and therefore recognize the "very heavy presumption against enjoining pending or threatened criminal prosecutions." Downstate Stone Co. v. United States, 651 F.2d 1234, 1238 (7th Cir.1981).
V. Conclusion
The standard for issuance of a preliminary injunction in this circuit is familiar. The party seeking the injunction must meet one of two tests. Under the first, he must show that:
(1) he will suffer irreparable injury if the injunction is not granted;
(2) he will probably prevail on the merits;
(3) the State will not be harmed by the injunction more than he is helped by it; and,
(4) granting the injunction is in the public interest.
Under the second, the party must show either a combination of probable success on the merits and the possibility of irreparable injury or that serious questions are raised and the balance of hardships tips sharply in its favor (though no matter how far the hardships tipped, that party would have to show at least a fair chance of success on the merits). See Stanley v. University of Southern California, 13 F.3d 1313, 1319 (9th Cir.1994) (citing Martin v. International Olympic Committee, 740 F.2d 670, 674-75 (9th Cir. 1984)).
The ranchers in this case have made no such showing. Even assuming that they have valid 1866 ditch rights and rights-of-way, which constitute vested property rights, those rights-of-way are subject to reasonable regulation by the Forest Service so long as they run across Forest Service land. Among those regulations are the regulations which designate most uses of Forest Service land as "special uses," subject to a permit requirement. The ranchers have not even applied for permits, let alone been denied them and then exhausted their administrative remedies. Moreover, the "interference" with their rights which they seek to enjoin is in substance the threat of prosecution if they enter onto Forest Service land to do the cleaning and maintenance they believe is appropriate, and injunctions against criminal prosecutions are rarely granted.
IT IS THEREFORE HEREBY ORDERED that the ranchers' motion (Doc. *767 # 10) for a preliminary injunction is DENIED.
IT IS FURTHER ORDERED that the clerk shall amend the caption of this case to delete Michael Espy and substitute in his place Daniel R. Glickman.
NOTES
[1] Daniel R. Glickman is now the Secretary of Agriculture and is automatically substituted in place of his predecessor in office, Michael Espy. See Fed.R.Civ.P. 25(d)(1). All the federal officers are sued in their official capacities, Doc. # 1 ¶¶ 18-21, and for simplicity we refer to all defendants collectively as the "Forest Service."
[2] We held oral argument, at which we questioned whether the Elko County Board of Supervisors had standing to participate in this lawsuit. At the plaintiffs' request, we allowed supplemental briefing on that question, which is now complete. See Docs. # 36, 37, 38 & 39. The briefing is lengthy and the issue of the County's standing complex; we will address it in a separate order to be issued in the near future.
[3] A rough map of the area is attached as Exhibit B to the ranchers' complaint. It should be emphasized that the factual description of the area is taken from the complaint. Doc. # 1. The Forest Service does not concede the accuracy of that description, see Doc. # 5, and we make no finding with respect to it. As a general matter, we refer throughout this order to the allegations in the complaint, rather than to the narrative in the ranchers' motion for an injunction, because the former is more detailed. The affidavits and exhibits submitted with each document are largely the same.
[4] As noted above, the ranchers allege that the Duvals own the lower portion of the Woolverton drainage. The relative locations of the Duval and Dahl properties is unclear. Also, the ranchers allege that "[t]he right-of-way from the spring to [the Dahls'] private property is approximately .8 miles long." Doc. # 21 at 8. Perhaps that distance includes both the distance the Woolverton Spring waters initially flow in their natural channel (about three-quarters of a mile) and the approximately one-quarter mile segment of the irrigation ditch which lies on Forest Service land. In any event, we pass over these ambiguities for the moment.
[5] Sharp, however, states that the distance from the spring itself to her property line is only about 150 yards. Doc. # 1 Exh. G ¶ 11. Whether this is contradicts the allegation in the complaint need not concern us at this point.
[6] FLPMA does provide that
[t]he Secretary of Agriculture shall have the authority to administer all rights-of-way granted or issued under authority of previous Acts with respect to lands under the jurisdiction of the Secretary of Agriculture, including rights-of-way granted or issued pursuant to authority given to the Secretary of the Interior by such previous Acts[,]
43 U.S.C. § 1761(b)(3), and the Department of the Interior has promulgated extensive regulations pursuant to FLPMA relating to rights-of-way across public lands. See 43 C.F.R. Pt. 2800. Those regulations, however, expressly provide that
[a] right-of-way grant issued on or before October 21, 1976, pursuant to then existing statutory authority is covered by the provisions of this part unless administration under this part diminishes or reduces any rights conferred by the grant or the statute under which it was issued, in which event the provisions of the grant or the then existing statute shall apply.
43 C.F.R. § 2801.4.
[7] We are keenly aware of the "important and competing interests" involved in this case. Irrigation and stockwatering under the 1866 Act, like mining, "has been accorded a special place in our laws relating to public lands," United States v. Weiss, 642 F.2d 296, 299 (9th Cir.1981), and, like mining rights acquired under the 1872 Mining Law, the rights to water, and accompanying rights-of-way recognized by the 1866 Act are vested rights not lightly disturbed. On the other hand, "our national forests have also been a fundamental part of the use of our public lands," id., and the Secretary of Agriculture "has been given the responsibility and the power to maintain and protect our national forests and the lands therein." Id.
[8] Doremus merits further discussion. In that case, two miners had claims in a National Forest, under the 1872 Mining Law. They were cited for, among other things, engaging in a prohibited activity in violation of 36 C.F.R. § 261.9(a). Initially, they argued that, as holders of 1872 mining rights, they were not even subject to that regulation, because 36 C.F.R. § 261.1, which sets out the scope of prohibited activities on national forest lands, specifically exempts from its general prohibition those activities "authorized" by the 1872 Act. 36 C.F.R. § 261.1(b). (The miners might also have cited 36 C.F.R. § 251.50(a), which designates as "special uses" all uses of national forest land except, among others, uses provided for in the regulations, 36 C.F.R. Pt. 228, governing operations under the 1872 Mining Law conducted on National Forest System lands.)
The court of appeals disagreed, citing other regulations which referred to mining operating plans as involving prohibited activities, and 16 U.S.C. § 478, which "authorizes entry into national forests for `all proper and lawful purposes ...'," subject to the condition that "`[s]uch persons must comply with the rules and regulations covering such national forests.'" Id. at 632. The court agreed that the miners had a right to conduct activities "reasonably incident" to their mining rights, but held that "they may not exercise that right without first obtaining approval of their operation in the manner specified" in the part of the federal regulations relating to minerals. Id. at 633. In context, the court held, § 261.1(b) meant only that the miners' operations "`may not be prohibited nor so unreasonably circumscribed as to amount to a prohibition.'" Id. at 632 (citing Weiss, 642 F.2d at 299).
As in Doremus, so too here. Indeed, all the more so in this case, given the fact that uses of Forest Service land relating to 1866 ditch rights unlike uses relating to 1872 mining rights are neither exempted by 36 C.F.R. § 251.50(a) from the regulations defining "special uses" which require permits, nor excluded from 36 C.F.R. § 261.1(a)'s description of the scope of prohibited activities.
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909 F. Supp. 490 (1995)
NATIONAL RIFLE ASSOCIATION OF AMERICA, Michigan United Conservation Clubs, Olympic Arms, Calico Light Weapons Systems, Navegar, Inc., D.C. Engineering, Inc., Ammo Dump, Glenn Duncan, Charles Duncan, James E. Flynn, James J. Fotis, Thomas L. Heritier, and Craig D. Sandler, Plaintiffs,
v.
John W. MAGAW and United States of America, Defendants.
No. 95-CV-10045-BC.
United States District Court, E.D. Michigan, Northern Division.
November 22, 1995.
*491 M. Carol Bambery, Mich. United Conservation Clubs, Lansing, MI, James H. Warner, Michael K. McCabe, National Rifle Association, Fairfax, VA, Gerald W. Pergande, Bay City, MI, for plaintiffs.
Andrea Newmark, Dept. of Justice-Civil Division, Washington, D.C., Michael J. Hluchaniuk, Assistant U.S. Attorney, Bay City, Michigan, for defendants.
AMENDED OPINION ON DEFENDANTS' MOTION TO DISMISS OR FOR SUMMARY JUDGMENT ON THE QUESTION OF JURISDICTION
CLELAND, District Judge.
I. Introduction
Plaintiffs' complaint challenges the constitutionality of the Violent Crime Control and Law Enforcement Act of 1994, which amends the criminal provisions of the Gun Control Act of 1968, 18 U.S.C. §§ 921-930. The 1994 Amendments, which went into effect on September 13, 1994, criminalize for a ten-year period most future manufacture, transfer, and possession of semiautomatic assault weapons and large capacity ammunition feeding devices. The complaint alleges that the definition of "semiautomatic assault weapon," as contained in 18 U.S.C. § 921(a)(30), is unconstitutionally vague; that Congress exceeded the scope of its constitutional power by enacting the Amendments; that the designation of prohibited firearms is arbitrary and capricious and not rationally related to any legitimate governmental purpose; and that the interpretation of the term "firearm" for purposes of the grandfather provision of the statute by the Bureau of Alcohol, Tobacco, and Firearms is arbitrary and capricious.
Defendants have moved to dismiss the complaint, alleging that this court lacks subject matter jurisdiction because the complaint does not present a justiciable "case" or "controversy" within the meaning of Article III of the United States Constitution. Specifically, the defendants allege that the plaintiffs do not have standing because they have not alleged an actual or imminent injury, and that the matter is not ripe for adjudication because there is no pending or impending criminal prosecution of any of the plaintiffs based on the criminal provisions being challenged.
On August 9, 1995, the court heard oral argument on the Motion to Dismiss or for Summary Judgment on the Question of Jurisdiction. After review of the parties' written submissions and consideration of the arguments presented at the hearing, the court concludes that it lacks subject matter jurisdiction and, accordingly, dismisses the case.
*492 II. Background
The plaintiffs are two nonprofit gun rights corporations, two federally licensed firearms dealers, three retired police officers, two firearms manufacturers, an ammunition feeding device manufacturer, and two individuals. The defendants are John Magaw, the director of the Bureau of Alcohol, Tobacco, and Firearms ("BATF"), and the United States of America.
There is no allegation in the complaint that any plaintiff has been or is currently being prosecuted under the statute. Rather, Plaintiffs aver that they "desire" and "wish" to engage in certain possibly prohibited activities but are "restrained" and "inhibited" from doing so. Plaintiffs allege that they "are unable and unwilling, in light of the serious penalties threatened for violation of the statute, to obtain and possess the firearms and large capacity ammunition feeding devices prohibited by the statute." (para. 46). However, Plaintiffs also allege that they "will purchase, firearms, including those on the enumerated list of proscribed firearms." (para. 55). The complaint further avers, "If they are prudent, and are unwilling to risk felony penalties, they must refrain from the manufacture, transfer or possession of firearms which, in fact, may be lawful." (para. 58). Plaintiffs Olympic Arms and Calico Light Weapons Systems allege that they "involuntarily changed the names of their firearms" and "involuntarily ceased manufacturing firearms whose configuration might fit the generic criteria definition." (para. 48).
The plaintiffs have submitted affidavits supporting the allegations in the complaint. Two members of the National Rifle Association, James G. Giragosian and Stefan B. Tahmassebi submitted declarations stating that they wish to engage in certain conduct but are inhibited from doing so by a fear of prosecution and a possible felony conviction. Kevin M. Cunningham, another member of the National Rifle Association, submitted a declaration stating that he telephoned a Mr. Ed Owen of the BATF and posed to Owen a hypothetical question whether a folding stock could be installed to a Ruger Mini-14 rifle, a semiautomatic rifle which accepts a detachable magazine. According to the Cunningham declaration, Owen told Cunningham that if an individual were to install the folding stock, he "could be prosecuted for a federal felony." Phillip C. Martel, the president of Plaintiff D.C. Engineering, Inc., submitted a declaration stating, "If this ban is unconstitutional as applied to intrastate sales, we would be ready, willing and able to transfer such magazines [ammunition feeding devices] in intrastate commerce to fellow residents of Michigan. Our magazines are stamped with our name and location and could be stamped with date of manufacture so that it would be simple to determine if anyone did in fact transfer them out of state." Plaintiff Glenn Duncan has submitted a declaration stating that he is "unable to ascertain the meaning of the various restrictions," that if the ban is invalid, he stands ready to begin at once to fulfill his customers' requests to assemble firearms from components presented by the customers, and that the statute "has already restricted our doing business, limits us in the actions we can take today, and will restrict our actions within the immediate future."
The plaintiffs have also submitted a transcript of proceedings in a federal criminal prosecution, United States of America v. Corcoran, No. 88-11 (W.D.Pa. proceedings conducted April 5, 1988). It appears from a review of the portion of the trial transcript submitted by Plaintiffs that Corcoran was being prosecuted for unlawfully transferring a machine gun. The court dismissed several of the counts against the defendant, finding that the BATF was prosecuting Corcoran for transferring a weapon without an auto sear, which BATF argued was a machine gun within the meaning of statutes regulating the transfer of machine guns because it could fire more than one bullet with a single pull of the trigger, though BATF had previously ruled that a weapon without an auto sear is not a machine gun. The plaintiffs have submitted other documents relating to the Corcoran case, as well as transcripts on hearings before the Senate Judiciary Committee and a Report of the Subcommittee on the Constitution of the Senate Judiciary Committee. Though the evidentiary value of some of Plaintiffs' submissions to the questions of *493 standing and ripeness is limited, the court has nevertheless reviewed them.
III. Standard
Defendants bring their motion pursuant to Fed.R.Civ.P. 12(b)(1), lack of jurisdiction over the subject matter; Rule 12(b)(6), failure to state a claim upon which relief can be granted; and Rule 56, for summary judgment.
Fed.R.Civ.P. 12(b)(1) authorizes a defendant to move for dismissal based on lack of subject matter jurisdiction. A motion under Rule 12(b)(1) may be used to attack two different types of defects. The first is the pleader's failure to allege facts in the complaint sufficient to show subject matter jurisdiction. The second is the court's actual lack of jurisdiction over the subject matter, a defect that may exist despite the formal sufficiency of the allegations in the complaint. Wright & Miller, Federal Practice and Procedure: Civil 2d § 1350. This motion falls into the second category. Defendants allege that there is no justiciable case or controversy within the meaning of Article III of the United States Constitution. The burden of proof is on the plaintiff, the non-moving party in this case. "Where subject matter jurisdiction is challenged pursuant to Rule 12(b)(1), the plaintiff has the burden of proving jurisdiction in order to survive the motion." Moir v. Greater Cleveland Regional Transit Auth., 895 F.2d 266, 269 (6th Cir. 1990) (citing Rogers v. Stratton Indus., Inc., 798 F.2d 913, 915 (6th Cir.1986)). When deciding a motion to dismiss for lack of subject matter jurisdiction, no presumptive truthfulness attaches to the allegations in the complaint. Rather, "the court is empowered to resolve factual disputes when subject matter jurisdiction is challenged." Id. The Sixth Circuit has also ruled that where defendants move for dismissal based on both Rules 12(b)(1) and 12(b)(6), the court is bound to consider the 12(b)(1) motion first, since the Rule 12(b)(6) challenge becomes moot if the court lacks subject matter jurisdiction. Id. (citing Bell v. Hood, 327 U.S. 678, 682, 66 S. Ct. 773, 776, 90 L. Ed. 939 (1946). The same rationale would, of course, apply to Defendants' Rule 56 motion. Accordingly, the court analyzes Defendants' motion under Fed.R.Civ.P. 12(b)(1).
IV. Discussion
Defendants' motion raises two issues: standing and ripeness. Standing is concerned with who is a proper party to litigate a particular matter, while ripeness determines when that litigation may occur. Chemerinsky, Federal Jurisdiction, § 2.4 (1989). There is considerable overlap between the two doctrines where, as here, the argument that the plaintiffs lack standing rests on an allegation that noor insufficient injury has occurred. In such a situation, the court could characterize the problem as lack of sufficient injury to these plaintiffs (standing) or lack of sufficient injury at this time (ripeness). "If no injury has occurred, the plaintiff might be denied standing or the case might be dismissed as not ripe." Id. "[S]tanding focuses on whether the type of injury alleged is qualitatively sufficient to fulfill the requirements of Article III and whether the plaintiff has personally suffered that harm, whereas ripeness centers on whether that injury has occurred yet." Id.
In Lujan v. Defenders of Wildlife, 504 U.S. 555, 112 S. Ct. 2130, 119 L. Ed. 2d 351 (1992), the United States Supreme Court explained that the "irreducible constitutional minimum of standing" contains three elements: First, the plaintiff must have suffered an `injury in fact'an invasion of a legally-protected interest which is (a) concrete and particularized and (b) actual or imminent, not conjectural or hypothetical. Second, there must be a causal connection between the injury and the conduct complained ofthe injury has to be fairly traceable to the challenged action of the defendant and not the result of the independent action of some third party not before the court. Third, it must be likely, as opposed to merely speculative, that the injury will be redressed by a favorable decision. Id. at 560-61, 112 S.Ct. at 2136. "The party invoking federal jurisdiction bears the burden of establishing these elements." Id. (citing FW/PBS, Inc. v. Dallas, 493 U.S. 215, 231, 110 S. Ct. 596, 607-08, 107 L. Ed. 2d 603 (1990)). The appropriate focus in the case at bar is on the first element"injury in fact."
*494 The United States Supreme Court has stated that in deciding whether a case is ripe, it looks primarily to two considerations: "the hardship to the parties of withholding court consideration" and "the fitness of the issues for judicial decision." Abbott Lab. v. Gardner, 387 U.S. 136, 149, 87 S. Ct. 1507, 1515, 18 L. Ed. 2d 681 (1967). In Abbott, the seminal case on the ripeness doctrine, the Court explained that the "basic rationale" of the ripeness requirement is "to prevent the courts, through avoidance of premature adjudication, from entangling themselves in abstract disagreements." Id. at 148, 87 S.Ct. at 1515.
In deciding whether this court can and should exercise subject matter jurisdiction over Plaintiffs' pre-enforcement challenge to the constitutionality of a federal statute, the court is called upon to weigh two competing concerns. On one hand, if the court will not rule on a pre-enforcement challenge, the plaintiffs must either forego activity which they believe to be constitutionally protected or else subject themselves to criminal prosecution and take their chances that their position will be accepted by the court before which they are brought. The United States Supreme Court described this dilemma in Steffel v. Thompson, 415 U.S. 452, 94 S. Ct. 1209, 39 L. Ed. 2d 505 (1974), as the Court considered whether to hear a First Amendment-based pre-enforcement challenge to a state criminal statute:
[A] refusal on the part of the federal courts to intervene when no state proceeding is pending may place the hapless plaintiff between the Scylla of intentionally flouting state law and the Charybdis of forgoing what he believes to be constitutionally protected activity in order to avoid becoming enmeshed in a criminal proceeding.
Id. at 462, 94 S.Ct. at 1217. The same difficulty obtains where, as here, the plaintiff challenges a federal statute. However, if one accepts the premise that Congress and the federal courts are more likely than their State counterparts to follow the dictates of the United States Constitutionthe premise which underlies the Supremacy Clause and the post-Civil War trend toward federalization this difficulty may be somewhat less pronounced where the allegedly unconstitutional statute is a federal one. And, of course, the chilling effect on the plaintiff's conduct could be expected to decrease in proportion to the clarity of the alleged constitutional violation, i.e., when the fog between Scylla and Charybdis lifts, the course between them is more easily navigated. If Congress were to enact a law which was patently unconstitutional, one would expect that many would be willing to risk prosecution for breaking it, confident that the courts would strike the measure down.
To be weighed against these navigational concerns are the firmly-established policies which underlie the "case" or "controversy" requirement of Article III of the Constitution. The United States Supreme Court has repeatedly stressed the importance of judicial self-restraint in preserving the balance of power among the three branches of government and promoting judicial efficiency, and the Court has held that there are prudential considerations beyond the case or controversy requirement which militate against the giving of advisory opinions. Chief Justice Warren explained that the "words [cases and controversies] define the role assigned to the judiciary in a tripartite allocation of power to assure that the federal courts will not intrude into areas committed to the other branches of government." Flast v. Cohen, 392 U.S. 83, 95, 88 S. Ct. 1942, 1950, 20 L. Ed. 2d 947 (1968). The doctrines of standing and ripeness also conserve judicial resources, allowing the federal courts to focus their attention on the matters most deserving of review. Refusal by the court to decide cases involving conjectural or hypothetical injury improves judicial decision-making by sharpening the focus of the court's inquiry, and it promotes fairness to individuals who are not litigants before the court by limiting the scope of decisions to factual situations which have been presented to the court. As Justice Frankfurter noted, "The best teaching of this Court's experience admonishes us not to entertain constitutional questions in advance of the strictest necessity." Poe v. Ullman, 367 U.S. 497, 503, 81 S. Ct. 1752, 1756, 6 L. Ed. 2d 989 (1961) and Parker v. County of Los Angeles, 338 U.S. 327, 333, 70 S. Ct. 161, 163-64, 94 L. Ed. 144 (1949). Justice Black commented *495 in Younger v. Harris, 401 U.S. 37, 52, 91 S. Ct. 746, 754, 27 L. Ed. 2d 669 (1971), "The power and duty of the judiciary to declare laws unconstitutional ..., broad as it is, does not amount to an unlimited power to survey the statute books and pass judgment on laws before the courts are called upon to enforce them."
The Supreme Court has balanced these two considerations, setting forth guiding principles to determine the justiciability of a pre-enforcement challenge to a criminal statute. "A plaintiff who challenges a statute must demonstrate a realistic danger of sustaining a direct injury as a result of the statute's operation or enforcement." Babbitt v. Farm Workers, 442 U.S. 289, 298, 99 S. Ct. 2301, 2308, 60 L. Ed. 2d 895 (1979) (citing O'Shea v. Littleton, 414 U.S. 488, 494, 94 S. Ct. 669, 675, 38 L. Ed. 2d 674 (1974)). If prosecution is "certainly impending" or if "there exists a credible threat of prosecution" under the challenged statute, a plaintiff has standing, Babbitt, 442 U.S. at 298, 99 S.Ct. at 2308-09, but "`persons having no fears of state prosecution except those that are imaginary or speculative are not to be accepted as appropriate plaintiffs.'" Id. (citing Younger v. Harris, 401 U.S. 37, 42, 91 S. Ct. 746, 749, 27 L. Ed. 2d 669 (1971); Golden v. Zwickler, 394 U.S. 103, 89 S. Ct. 956, 22 L. Ed. 2d 113 (1969)). "`The party who invokes the power [to annul legislation on grounds of its unconstitutionality] must be able to show not only that the statute is invalid, but that he has sustained or is immediately in danger of sustaining some direct injury as the result of its enforcement.'" Poe v. Ullman, 367 U.S. 497, 505, 81 S. Ct. 1752, 1757, 6 L. Ed. 2d 989 (1961) (quoting Massachusetts v. Mellon, 262 U.S. 447, 488, 43 S. Ct. 597, 601, 67 L. Ed. 1078 (1923)). The United States Court of Appeals for the Sixth Circuit, too, has noted these principles. "Ordinarily, if criminal prosecution is threatened there exists the requisite controversy. However, if the possibility of prosecution is abstract or distant, then no controversy exists." Parker v. Turner, 626 F.2d 1, 5 n. 11 (6th Cir.1980) (internal citations omitted).
In Steffel v. Thompson, 415 U.S. 452, 94 S. Ct. 1209, 39 L. Ed. 2d 505 (1974), Justice Stewart, with whom Chief Justice Burger joined, concurring, stressed the importance of a "genuine threat of enforcement."
Our decision today must not be understood as authorizing the invocation of federal declaratory judgment jurisdiction by a person who thinks a state criminal law is unconstitutional, even if he genuinely feels `chilled' in his freedom of action by the law's existence, and even if he honestly entertains the subjectively belief that he may now or in the future be prosecuted under it.
Id. at 476, 94 S.Ct. at 1224. Justice Stewart also predicted, "Cases where such a `genuine threat' can be demonstrated will, I think, be exceedingly rare." Id. at 476, 94 S.Ct. at 1224. This prediction has proved accurate, especially in pre-enforcement challenges not invoking the First Amendment. In the more than twenty years since Justice Stewart made his forecast, only one plaintiff bringing such a challenge has been found to have standing.[1]
This court holds that the case at bar is not one of the exceedingly rare instances outside of the First Amendment context *496 in which the plaintiffs have met their burden of showing the requisite degree of injury to support a finding of standing for a pre-enforcement challenge to a criminal statute. Several plaintiffs have submitted no evidence whatsoever, beyond the bare allegations in the complaint, that they have or will suffer injury. The plaintiffs bear the burden of proving jurisdiction in order to survive a motion challenging subject matter jurisdiction, Moir v. Greater Cleveland Regional Transit Auth., 895 F.2d 266, 269 (6th Cir. 1990) (citing Rogers v. Stratton Indus., Inc., 798 F.2d 913, 915 (6th Cir.1986)), and, unlike under Fed.R.Civ.P. 12(b)(6), no presumptive truthfulness attaches to the allegations in the complaint. Only Plaintiff D.C. Engineering, Inc., through its president Phillip C. Martel; Plaintiff Glenn Duncan; and Plaintiff National Rifle Association of America, through its members James G. Giragosian, Stefan B. Tahmassebi, and Kevin M. Cunningham, have submitted declarations attesting to the injuries they have suffered.
Martel's declaration states that D.C. Engineering, Inc. is prohibited from manufacturing certain ammunition feeding devices and that, if the ban were found unconstitutional as applied to intrastate sales, D.C. Engineering "would be ready, willing and able to transfer such magazines in intrastate commerce to fellow residents in Michigan." These assertions do not describe a realistic danger of sustaining a direct injury as a result of the statute's operation or enforcement; instead, they merely allege that D.C. Engineering would change its practices if the statute were found unconstitutional. This is not enough. Duncan's declaration states that the ban "has directly and immediately affected our business"; that the law is confusing and arbitrary; that, if the ban is invalid, he stands ready to begin at once to assemble prohibited firearms; and that the statute has restricted his business activities. Giragosian alleges that he feels inhibited from engaging in certain conduct and that, in his opinion, the statute is vague. Tahmassebi alleges that he is inhibited from engaging in certain activities because he fears prosecution. Cunningham, an attorney, relates hearsay statements allegedly made by Mr. Ed Owen at the BATF, who allegedly informed Cunningham that a person could be prosecuted if he installed a folding stock on a Mini-14, something that Cunningham's client, Tahmassebi, alleged that he would like to do. The court finds that none of the declarants has alleged sufficient threat of direct injury to invoke the jurisdiction of this court.
The Supreme Court has stated that an association has standing to bring suit on behalf of its members when: "(a) its members would otherwise have standing to sue in their own right; (b) the interests it seeks to protect are germane to the organization's purpose; and (c) neither the claim asserted nor the relief requested requires the participation of individual members in the lawsuit." Hunt v. Washington State Apple Advertising Comm'n, 432 U.S. 333, 344, 97 S. Ct. 2434, 2442, 53 L. Ed. 2d 383 (1977). Because none of the declarations submitted by NRA members allege injury sufficient to confer standing on that individual member in his own right, the declarations are insufficient to confer standing on the National Rifle Association of America. Thus, the court finds that Plaintiffs Michigan United Conservation Clubs, Olympic Arms, Calico Light Weapons Systems, Navegar, Inc., Ammo Dump, Charles Duncan, James E. Flynn, James J. Fotis, Thomas L. Heritier, and Craig D. Sandler have no standing because they have not come forward with any evidence showing that they have suffered an actual or imminent, concrete and particularized injury in fact. Though Plaintiffs D.C. Engineering, Inc., Glenn Duncan, and the National Rifle Association of America have come forward with declarations, those declarations are insufficient to establish standing because they do not show a credible threat of prosecution or other direct, cognizable injury.
Even if the allegations in the complaint were taken as true, as under the standard for a motion to dismiss under Fed.R.Civ.P. 12(b)(6), the plaintiffs have not established the requisite actual or imminent, concrete and particularized injury in fact. Though they have pleaded that they wish to engage in proscribed conduct and that their actions have been chilled by the statute, they have not alleged that they face an immediate threat of prosecution. Rather, the threat of *497 prosecution, if any, is speculative, abstract, and distant. Indeed, Plaintiffs allege that they "are unable and unwilling ... to obtain and possess the firearms and large capacity ammunition feeding devices prohibited by the statute." (para. 46). Since the plaintiffs have affirmatively disavowed any intent to engage in the proscribed conduct, the court is constrained to find that they will not face prosecution, and, thus, they suffer no legally cognizable injury. The "chilling effect," which the plaintiffs may have experienced, does not constitute a legally cognizable injury. "[A]llegations of a subjective `chill' are not an adequate substitute for a claim of specific present objective harm or a threat of specific future harm." Laird v. Tatum, 408 U.S. 1, 13-14, 92 S. Ct. 2318, 2325-26, 33 L. Ed. 2d 154 (1972). This is because "[e]very criminal law, by its very existence, may have some chilling effect on personal behavior. That was the reason for its passage." Doe v. Duling, 782 F.2d 1202, 1206 (4th Cir.1986). See also Younger v. Harris, 401 U.S. 37, 42, 91 S. Ct. 746, 749-50, 27 L. Ed. 2d 669 (1971) (dismissing plaintiffs who had not been indicted, arrested or even threatened by the prosecutor, despite those plaintiffs' feeling of inhibition in their conduct caused by the existence of the criminal prohibition they contended was unconstitutionally vague.) Similarly, the allegations of Plaintiffs Olympic Arms and Calico Light Weapons Systems that they "involuntarily changed the names of their firearms" and "involuntarily ceased manufacturing firearms whose configuration might fit the generic criteria definition," (para. 48), show only a subjective "chilling effect," not a legally cognizable injury in fact.
In another part of their complaint, Plaintiffs allege that they "will purchase, firearms, including those on the enumerated list of proscribed firearms." (para. 55). Unsupported by evidence and directly contradicted by other portions of the complaint, (see para. 46), this allegation, too, even if taken as true, is insufficient to confer standing. "Such `some day' intentionswithout any description of concrete plans, or indeed any specification of when the some day will bedo not support a finding of `actual or imminent' injury that our cases require." Lujan v. Defenders of Wildlife, 504 U.S. 555, 564, 112 S. Ct. 2130, 2138, 119 L. Ed. 2d 351 (1992).
The court also finds that the case at bar is not ripe for adjudication. Because the Crime Control Act does not implicate First Amendment rights, it may be challenged for vagueness only as applied. "It is well established that vagueness challenges to statutes which do not involve First Amendment freedoms must be examined in the light of the facts of the case at hand." United States v. Mazurie, 419 U.S. 544, 550, 95 S. Ct. 710, 714, 42 L. Ed. 2d 706 (1975) (citing United States v. Nat'l Dairy Products Corp., 372 U.S. 29, 83 S. Ct. 594, 9 L. Ed. 2d 561 (1963)).[2] Because the 1994 Amendments have not yet been applied to the plaintiffs, a determination of their vagueness would be premature.
Two other United States District Courts, facing similar challenges to the statute at issue here, have come to the same conclusion as this court reaches today. See San Diego County Gun Rights Comm. v. Reno, No. 95-27 H (S.D.Cal. May 18, 1995) (appeal pending) and Oefinger v. Baker, No. 86-1396 (D.D.C. October 29, 1986) (finding no subject matter jurisdiction for a challenge to a different amendment to the Gun Control Act, 18 U.S.C. § 921 et seq., which prohibited the transfer or possession of machine guns). A United States Magistrate Judge came to the same conclusion in Kropelnicki v. United States of America, No. 1:94-CV-186 (W.D.N.C. June 8, 1995) (review by District Judge pending).
*498 The court is unpersuaded by the cases cited by the plaintiffs in support of their position that their claims are justiciable. Frank v. United States, 860 F. Supp. 1030 (D.Vt.1994) and Printz v. United States, 854 F. Supp. 1503 (D.Mont.1994)both suits brought by sheriffs to challenge the constitutionality of provisions of the Brady Act requiring them to conduct a background check in connection with firearms transactionsare inapposite because neither case found standing to challenge the criminal portions of the act. The sheriffs were able to show injury resulting from the background check requirement: each was required to divert resources away from his state-mandated duties and expend those resources in a manner inconsistent with state statutory duties. Indeed, the Frank court expressly found that Sheriff Frank did not have standing to challenge, on Fifth Amendment grounds, the criminal components of the act. Frank, 860 F.Supp. at 1036.
Pennell v. City of San Jose, 485 U.S. 1, 108 S. Ct. 849, 99 L. Ed. 2d 1 (1988) and National Organization for Women, Inc. v. Scheidler, ___ U.S. ___, 114 S. Ct. 798, 127 L. Ed. 2d 99 (1994) are also inapposite because both were decided under Fed.R.Civ.P. 12(b)(6)under which all facts must be taken as truerather than under Rule 12(b)(1), and neither Pennell nor NOW involved a pre-enforcement challenge to a criminal statute. Pennell was a suit by landlords and a landlords' association challenging a rent control ordinance, while NOW was an action under RICO for alleged conspiracy to shut down abortion clinics.
Plaintiffs' reliance on Pierce v. Society of Sisters, 268 U.S. 510, 45 S. Ct. 571, 69 L. Ed. 1070 (1924) and Roe v. Wade, 410 U.S. 113, 93 S. Ct. 705, 35 L. Ed. 2d 147 (1973) is misplaced because these cases deal with exceptions to the usual rule that one must allege a threat of imminent prosecution in order to have standing. Pierce involved a challenge by a Catholic school to the constitutionality of a statute which required children to attend public school and which subjected the parents to criminal penalties if the parents did not send their children to public school. The school, unlike the plaintiffs in this case, could not have challenged the constitutionality of the statute in their defense of a criminal prosecution, since the school was not subject to prosecution. Furthermore, the Court focused on the economic interest of the school and found "without doubt enforcement of the statute would seriously impair, perhaps destroy, the profitable features of appellees' business and greatly diminish the value of their property." Id. at 531, 45 S.Ct. at 572. The plaintiffs in the case at bar have not alleged economic injury stemming from the statutes they challenge. In Roe, standing was found because the alleged injury was said to be "capable of repetition yet evading review," a circumstance which cannot be said to be present in the case at bar.
In their brief, exhibits, and oral argument, the plaintiffs emphasized their view that the 1994 Amendments to the Gun Control Act of 1968 are poorly conceived and unartfully drafted. The court does notindeed, may not, under the Constitutionrule on these contentions. In ruling that the plaintiffs have failed to establish that their claims are justiciable, the court makes no comment on the merits of their claims.
V. Conclusion
The court finds that Plaintiffs' claims are not justiciable. Accordingly, Defendants' Motion to Dismiss or for Summary Judgment on the Question of Jurisdiction will be granted.
NOTES
[1] That case, Mack v. United States, 856 F. Supp. 1372, 1377 (D.Ariz.1994), is currently on appeal. The Mack court held that a sheriff had standing to challenge the criminal penalties in the Brady Act, even though he was not facing an imminent threat of prosecution, saying simply, "Mack is under threat of criminal penalties and thus possesses an injury that can be redressed. The agency's interpretation to the contrary is entitled to no deference." Id. Every other court facing the issue addressed in Mack, viz., whether a sheriff has standing to challenge the criminal penalties in the Brady Act, came to the opposite conclusion, finding that the case was not justiciable. See Frank v. United States, 860 F. Supp. 1030 (D.Vt.1994); Printz v. United States, 854 F. Supp. 1503 (D.Mont.1994); McGee v. United States, 863 F. Supp. 321, 324 (S.D.Miss.1994); Koog v. United States, 852 F. Supp. 1376, 1388 (W.D.Tex.1994); and Romero v. United States, 883 F. Supp. 1076, 1079 (W.D.La.1994).
Springfield Armory, Inc. v. City of Columbus, 29 F.3d 250 (6th Cir.1994) may be another example. Springfield Armory was a challenge by two manufacturers, a dealer, and two potential purchasers of weapons to the constitutionality of a Columbus city ordinance that bans assault weapons. The court did not consider the question of standing on appeal.
[2] One paragraph of Plaintiffs' does make reference to the First Amendment. Paragraph 28 alleges, "If the language creating the prohibition on firearms `known as' these designations, is taken to mean that a manufacturer is forbidden to write that name on a firearm, and means nothing more than this, then this prohibition violates the First Amendment to the Constitution of the United States." However, Plaintiffs' complaint cannot be fairly read to state a claim under the First Amendment. Paragraph 28 makes no reference to non-manufacturer plaintiffs, and the manufacturer plaintiffs do not allege and the court does not suspectthat their concerns would be alleviated if only they could write certain names on firearms which do not otherwise violate the statute. Rather, it appears that the plaintiffs' difficulty with the statute is its prohibition on manufacture, transfer, and possession of semiautomatic firearms, not on any asserted prohibition on speech.
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25 B.R. 317 (1982)
In re John W. BRIGGS, Soc. Sec. No. XXX-XX-XXXX and Diane S. Briggs, Soc. Sec. No. XXX-XX-XXXX, Debtors.
METROPOLITAN FEDERAL SAVINGS AND LOAN ASSOCIATION, Creditor-Appellant,
v.
John W. BRIGGS and Diane S. Briggs, Debtors-Appellees.
Bankruptcy No. 81-05419, Civ. A. No. A3-82-1.
United States District Court, D. North Dakota, Southeastern Division.
November 29, 1982.
David L. Johnson, DeMars & Turman, Fargo, N.D., for creditor-appellant.
Robert L. Stroup II, Patricia R. Ellingson, Nilles, Hansen, Selbo, Magill & Davies, Ltd., Fargo, N.D., for debtors-appellees.
MEMORANDUM OF DECISION AND ORDER
BENSON, Chief Judge.
Creditor Metropolitan Federal Savings and Loan Association (Metropolitan) appeals a bankruptcy court decision which permitted Chapter 13 debtors John and Diane Briggs to deaccelerate a home mortgage debt, allowed for payment of defaulted payments under the reorganization plan, and reinstated the original terms of the mortgage with payments to be made outside of the plan.
Background
The facts are not in dispute. Metropolitan holds a mortgage, dated June 29, 1977, on the debtors' residence. The mortgage contains the following clause:
If any deficiency in the payment of any installment under this note is not made good prior to the due date of the next such installment, the entire principal sum and accrued interest shall at once become due and payable without notice, at the option of the holder of this note. Failure to exercise this option shall not constitute a waiver of the right to exercise the same in the event of any subsequent default.
It appears that as early as December 1978, the Briggs fell behind in making monthly installment payments. The last payment received by Metropolitan was in April 1981 for the payment due in February 1981. On May 21, 1981, Metropolitan served the Briggs with a Notice Before Foreclosure indicating their intent to foreclose on the property. After failing in an attempt to reach an agreement with the Briggs to cure the deficiency, Metropolitan, in July 1981, declared the entire debt immediately due under the acceleration clause and filed a *318 foreclosure action in state district court. A hearing on Metropolitan's motion for a default judgment was set for September 15, 1981. On September 14, 1981, the Briggs, as joint debtors, filed a Chapter 13 petition with the bankruptcy court thereby staying the foreclosure proceedings.
The debtors' original Chapter 13 plan proposed to allow deacceleration of the debt, to require that the amount in default as of the time of the filing of the Chapter 13 petition be paid under the plan over a three year period, with interest on the deficiency balance to be assessed at the contract rate of 8½ percent, and to reinstate the mortgage on its original terms with payments to be made outside of the plan. The bankruptcy court denied confirmation of the plan but held that the mortgage could be reinstated on its original terms provided the debtors are required to pay the market rate of interest on the deficiency balance.[1] An amended plan providing interest at 16.5 percent on the defaulted payments was filed and an immediate appeal by Metropolitan followed. This court remanded the case to allow the bankruptcy court to act on the amended plan. The bankruptcy court confirmed the amended plan, but failed to certify the amended plan as part of the record on appeal. The amended plan was thereafter certified as part of the record on October 28, 1982.
The bankruptcy court's confirmation order provided that "the Debtors pursuant to 1322(b)(5) may cure the default and reinstate the mortgage on its original terms despite acceleration of the indebtedness." With reference to the indebtedness, the modified plan provides:
During the course of this Plan, the Debtors shall maintain current out of the funds of the Debtors not committed to this Plan, contract payments to the Class 3 claimant. With respect to any contract payments that are in default, the allowed amount of such claim shall be cured by the Debtors in equal monthly installments with interest on the unpaid balance at the rate of 16.5% per annum over a period of three years.
At oral argument on the appeal, it was brought out that at the time of the filing of the Chapter 13 petition the debtors were delinquent on seven monthly payments. Since the filing, fourteen additional monthly payments have become delinquent. In response to an inquiry from the court, debtor's counsel indicated it was the intention of the debtors that if the plan was confirmed, the pre-petition delinquency would be cured as provided in the plan but the post-petition delinquency would be cured by a lump sum payment with accrued interest. However, the plan does not specifically so provide.
The basic issue is whether, in a situation where a secured creditor following debtor's default has accelerated the debt on a real estate mortgage covering the debtor's principal residence and commenced foreclosure proceedings, a bankruptcy court on a Chapter 13 petition can de-accelerate the debt and allow the debtor to cure the default and thereby reinstate the mortgage indebtedness on its original terms.
11 U.S.C. Section 1322 is controlling and provides in pertinent part:
(b) Subject to subsections (a) and (c) of this section, the plan may
(2) modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor's principal residence, or of holders of unsecured claims;
(3) provide for the curing or waiving of any default;
. . . . .
(5) notwithstanding paragraph (2) of this subsection, provide for the curing of any default within a reasonable time and maintenance of payments while the case is pending on any unsecured claim or secured claim on which the last payment is due after the date on *319 which the final payment under the plan is due. . . .
Courts applying these provisions have reached conflicting holdings, see, e.g., In re Hardin, 16 B.R. 810 (Bkrtcy.N.D.Tex.1982); In re Davis, 16 B.R. 473, 8 B.C.D. 635 (D.C. D.Kan.1981); In re Williams, 11 B.R. 504 (Bkrtcy.D.Tex.1981); In re Pearson, 10 B.R. 189, 7 B.C.D. 567 (Bkrtcy.E.D.N.Y.1981). The bankruptcy court in confirming the plan relied principally on the reasoning and holding in In re Taddeo, 9 B.R. 299, 7 B.C.D. 422 (Bkrtcy.E.D.N.Y.1980). Since the bankruptcy court filed its decision, the Taddeo decision has been affirmed by the New York district court and the Second Circuit, see In re Taddeo, 9 B.R. 299, 7 B.C.D. 422 (Bkrtcy.E.D.N.Y.1980), aff'd, 15 B.R. 273, 8 B.C.D. 679 (E.D.N.Y.1981), aff'd, 685 F.2d 24 (2nd Cir.1982).
The Taddeo case does not appear to be distinguishable from the case now before this court. In Taddeo, the debtors defaulted on a home mortgage and the mortgagee, pursuant to a clause in the mortgage agreement, accelerated the debt and initiated foreclosure proceedings. The debtors filed a Chapter 13 petition thereby staying the foreclosure action. The bankruptcy court confirmed the debtors' plan which provided that the debtors could cure the default and reinstate their mortgage. The Second Circuit affirmed the plan and held that it was the intent of Congress to allow such treatment of home mortgage debts. This court, after attempting without much success to glean legislative intent from the Congressional reports, concludes that applying the Taddeo precedent to the instant case will achieve a just result if the plan is further modified so as to require the debtors to pay the post-petition delinquency in full, together with accrued interest at the rate of 16.5 percent, out of funds not committed to the plan.
The case is remanded to the bankruptcy court with directions to give the debtors an opportunity to modify the plan as suggested herein. If so modified, the order of the bankruptcy court is affirmed in all other respects. If not so modified, the stay will be lifted and the secured creditor allowed to proceed with the foreclosure.
IT IS SO ORDERED.
NOTES
[1] The bankruptcy court also rejected the plan's proposal of a one percent payout to unsecured creditors as not being made in good faith.
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25 B.R. 747 (1982)
In re CASCO BAY LINES, INC., Debtor.
Appeal of Richard E. POULOS.
Bankruptcy No. 82-9017.
United States Bankruptcy Appellate Panel for the First Circuit.
December 23, 1982.
*748 P. Benjamin Zuckerman, Portland, Maine, with whom David C. Hillman and Robert J. Keach, Portland, Maine, were on brief, for appellant.
Before LAWLESS, C.J., and GLENNON and VOTOLATO,[*] JJ.
LAWLESS, Chief Judge.
Before the Panel is the appeal of Richard E. Poulos (Poulos), counsel for the debtor in possession and debtor Casco Bay Lines, Inc. (CBL), from the final fee allowance made by the bankruptcy judge.[1] Poulos, contending the fee was inadequate, argues that the bankruptcy judge abused his discretion in *749 four separate respects. First, Poulos contends that the bankruptcy judge's denial of the motion for recusal at the fee hearing was an abuse of discretion. Additionally, Poulos argues that the bankruptcy judge abused his discretion in determining the fee in that he: (1) failed to apply the proper legal standard; (2) applied the proper legal standard in an improper manner; and (3) based the award on clearly erroneous findings of fact. See Matter of First Colonial Corp. of America, 544 F.2d 1291, 1298 (5th Cir.1977) cert. denied, 431 U.S. 904, 97 S. Ct. 1696, 52 L. Ed. 2d 388 (1977).
We hold that the bankruptcy judge did not abuse his discretion by denying the motion for recusal because appellant merely renewed a motion that had been denied earlier in the case and affirmed by this Panel in 17 B.R. 946 (Bkrtcy. 1st Cir.1982) and 28 U.S.C. § 455 applies only to conduct which runs against a party and not the lawyer. We hold that the bankruptcy judge did abuse his discretion by failing to apply the proper legal standard in the appropriate manner as set forth in Furtado v. Bishop, 635 F.2d 915 (1st Cir.1980). Since an appellate court is itself an expert on fees and has the authority to make appropriate fee allowances, in view of the peculiar circumstances of the case (as will appear) and in the interests of judicial economy we have done so.
FACTS
This Panel is not a stranger to the reorganization efforts of CBL and the related individual Chapter 11 proceedings of its shareholders, Peter and Valerie Kontaratos, as we have had occasion to review many aspects of these cases since they were initiated in June, 1980.[2] Rather than engaging in an extended analysis of all the trial and appellate proceedings to date, a brief summary of some of the significant Chapter 11 events provides a useful back-drop to an understanding of the matter at hand.
On June 12, 1980, CBL, by its attorney, Poulos, filed its original petition for relief under Chapter 11 of the Bankruptcy Code. CBL is a steamship line which, among other things, provides commuter service between the City of Portland, Maine and various islands in that city's harbor. In some instances, it is the sole form of ready transit between certain islands and the mainland. As such, CBL is regulated by public authority and is of interest to the local citizenry which it serves. CBL, however, is a privately owned corporation; its principal stockholders, directors and officers being Valerie and Peter Kontaratos. CBL's Chapter 11 filing was, in part, connected with the financial problems of its principals, who had appropriated and wrongfully used corporate assets for their individual benefit. They, in turn, filed individual Chapter 11 petitions on June 13, 1980, through their attorney Poulos.[3]
*750 On or about June 12 or 13, 1980, CBL filed an application for authority to employ Poulos as its attorney during the Chapter 11 case; Poulos filed an affidavit of his representation of adverse interests and disclosed his representation of the Kontaratoses; the Bankruptcy Court [Cyr, J.] authorized CBL's retention of Poulos as debtor's counsel. Upon similar application and disclosure, the Bankruptcy Court authorized the Kontaratoses' retention of Poulos as their attorney during their Chapter 11 case.
Although the misappropriation of corporate assets by the Kontaratoses was fully disclosed to CBL's creditor body and to the bankruptcy court and the Kontaratoses orally agreed to waive their discharge with respect to their obligation to repay said monies to CBL, in face of mounting opposition, Poulos withdrew from his representation of the Kontaratoses with court approval on October 23, 1980.[4] On that date, the bankruptcy court (Cyr, J.) barred the Kontaratoses from any participation in or control of the management of the then debtor-in-possession CBL. He further ordered that one Peter McLoughlin be hired as operating officer of the debtor, with both he and Poulos, as counsel for CBL, having joint check-signing authority. Approximately one month after being hired, McLoughlin died leaving the control and operation of the debtor's business ostensibly in the hands of Poulos.[5]
Despite Poulos' withdrawal as counsel in the Kontaratoses Chapter 11 cases, counsel for the Maine Public Utilities Commission (PUC), Roger Hale and Depositers Trust Company, two creditors with asserted security interests in the Kontaratoses' CBL stock, continued to press for disqualification of Poulos as CBL's counsel. After a hearing on December 15, 1980, Judge Cyr denied all motions to disqualify Poulos as CBL's counsel.[6] While various subsequent attempts were made to disqualify Poulos, none included any new grounds for disqualification and none were successful.
From December 1980 until to the appointment of the bankruptcy judge in September 1981,[7] the CBL reorganization case became *751 increasingly bitter and embroiled into what could be described, depending upon the point of view, as a defense of the public interest (Portland, PUC and CBITD's viewpoint) or as a `take over campaign' (CBL's viewpoint). CBL's attempts to win rate relief or deregulation were met by stiff opposition from the public agencies and the islanders' group, who in turn proposed a plan for acquiring the vessels. While substantial progress towards the confirmation of a plan of reorganization was made in some areas, suffice it to say that the confirmation of CBL's second plan in late August, 1981 was denied because of the objections of these parties.
Faced with an unbelievably voluminous record built up during the tenure of the prior two bankruptcy judges, the ever increasing acrimony between the parties and an unauthorized reorganization form, the bankruptcy judge authorized the appointment of a Chapter 11 trustee in September, 1981. While the debtor vigorously opposed such appointment, the insertion of a disinterested party into the battle had the desired effect in that a comprehensive settlement agreement of both the CBL and Kontaratoses' Chapter 11 cases was reached and approved by the bankruptcy court on February 1, 1982. In brief, the settlement agreement provided, inter alia, that:
(1) CBL would sell three of its vessels and charter a fourth to CBITD for $535,000.00.
(2) CBL would retain two of its vessels.
(3) All secured creditors would be paid in full in cash upon closing.
(4) After various voluntary reductions by the claimants, all administrative expenses would be paid in full.
(5) All pre-petition unsecured creditors would be paid in full.
(6) Upon closing, all pending appeals, except for appeals relating to the allowance of claims, such as this, would be dismissed.
We take judicial notice,[8] that all the creditors and contingencies contained in the settlement agreement have been satisfied and that the CBL Chapter 11 proceeding was dismissed October 4, 1982.
THE BANKRUPTCY COURT'S FEE DETERMINATION
After denying Poulos' motion to recuse the third bankruptcy judge at the hearing on fees on February 3, 1982, the bankruptcy judge issued a substantial opinion wherein he allowed debtor's counsel $83,008.00 in fees and $10,000.00 in expenses from Poulos' reduced request[9] for $170,000.00 in fees and $10,000.00 in expenses.
The bankruptcy judge began his analysis by questioning whether CBL's Chapter 11 proceeding, as separate and distinct from the Kontaratoses, should have ever been filed and concluded that CBL's financial difficulties were largely caused by its stockholders. However, recognizing that the CBL's Chapter 11 had been filed and services were rendered by Poulos, the bankruptcy court applied the dozen criteria[10] identified *752 in King v. Greenblatt, 560 F.2d 1024 (1st Cir.1977) with a view towards determining the reasonableness of Poulos' fee request in the CBL case.
The court considered the first four factors of King together from the perspective of the conditions existing as of the date of filing and determined that the problems presented required very little time and labor, the subject matter was not difficult and required no great skill and nothing concerned with the case should have occupied sufficient time to have precluded other employment. Turning to the customary fee in the community (factor 5), the bankruptcy court emphasized the well-established principle that estates cannot be charged expert rates for routine tasks and cited several non-bankruptcy cases[11] where the maximum allowed hourly rate was $75.00 per hour. As to the 6th factor, whether the fee was fixed or contingent, the bankruptcy court concluded that counsel was at all times assured of payment of the reasonable value of service. Analyzing time limitations imposed by the client or other circumstances (Factor 7), the bankruptcy court criticized the length of the Chapter 11 proceedings and the results debtor's counsel achieved as reflected in the settlement agreement. Considering the amounts involved and the results obtained (Factor 8) the court noted that it had already considered these factors in 3 and 7 and commented that it was somewhat ironic given the results obtained, that the Kontaratoses supported the full fee allowance to Poulos because the difference between the fee request and the court's final allowance would revert entirely to CBL and this would only serve to enhance the Kontaratoses' equity position in CBL.
With respect to the experience, reputation and ability of debtor's counsel (Factor 9), the court noted that Poulos, a Bankruptcy Referee and Judge of the District of Maine from 1956 to 1975, is a pre-eminent member of the Bankruptcy Bar. As such, however, the bankruptcy court held that Poulos should have realized the problems that would arise from filing both the individual and corporate Chapter 11 petitions. Turning to consideration of the undesirability of the case (Factor 10), the court recognized the acrimonious nature of the case and the severe damage done to the personal and professional relationships of the attorneys involved, but observed that this resulted from the tactics employed and was not inevitable. Since Poulos was hired shortly before the Chapter 11 filing, the court did not draw any conclusions from Factor 11.
The 12th Factor awards in similar cases was considered at length by the court. The court stressed the particular facts of the CBL case, and noted that although Poulos felt that he had complied with Maine Bar Rule 3.4(d), supra, note 3, by representing the Kontaratoses and CBL with their full knowledge and consent and after full disclosure and approval by the bankruptcy court (Cyr, J.), that Poulos could only be compensated to the extent that his services benefited the CBL estate.[12]*753 The court next noted the amount of time expended on the drafting and execution of the settlement (whereby the Kontaratoses acknowledged their obligation to repay the monies withdrawn from CBL) was disproportionate to the fact that this had long been verbally agreed to by the parties. The bankruptcy court went on to criticize the quasi-trustee status imposed on Poulos by the operating Order of October 23, 1980 (Cyr, J.) but concluded that the judicial authorization for the performance of these services entitled Poulos to compensation to the extent his services benefited the estate.[13]
On the basis of his analysis of the twelve Greenblatt criteria, the bankruptcy judge reduced the hourly rate of debtor's counsel from a request of $125.00 per hour for 2,266.75 hours of Poulos' time and $40.00 per hour for 457.25 hours of associates' time (a weighted average hourly rate of approximately $119.00 per hour) to a combined average hourly rate of $70.00 per hour. The court established the hourly rate of the paralegal time at the requested $20.00 per hour rate.
The bankruptcy court next undertook to determine what hours were reasonably expended by Poulos as counsel to the debtor-in-possession and debtor. Poulos' fee application delineated twenty-one separate tasks performed by his firm as counsel to the debtor-in-possession from June 1980 to the appointment of a Chapter 11 trustee in September, 1981. Poulos expended 1,733.25 hours, his associate 465.75 hours and his paralegal 578.55 hours. Subsequent to the appointment of a trustee in September, 1981, until the execution of the settlement agreement, Poulos in his fee application identifies eleven separate tasks performed by his firm as counsel to the debtor, CBL. (Poulos 493.75 hours, associates 38.75 hours, paralegal 110.75 hours). The total time requested, both pre-and post-trustee, was: Poulos, 2,266.75 hours; Associates, 457 hours and; Paralegal, 689 hours.
The bankruptcy court examined each of the 32 claimed tasks from the viewpoint that it had expressed earlier in the opinion when it discussed the twelve Greenblatt criteria. The court's analysis resulted in the reduction of the hours claimed in 24 of the 32 categories, ranging from a 100% disallowance of hours (6 categories) to the disallowance of 50% or more of the hours claimed (18 categories). The net effect of these reductions resulted in a final allowance of 1,107.25 hours of attorney time and 275 hours of paralegal time, from an original request of 2,723.75 hours of attorney time and 689 hours of paralegal time. The bankruptcy court then multiplied the $70.00 hourly rate by the allowed hours to arrive at the allowed fee of $83,008.00 plus $10,000.00 in expenses.
LEGAL FEES IN BANKRUPTCY PROCEEDINGS
Bankruptcy courts are accorded broad discretion in determining reasonable fee allowances, Dickinson Industrial Site v. Cowan, 309 U.S. 382, 60 S. Ct. 595, 84 L. Ed. 819 1940), and their decision should be disturbed only upon a showing of an abuse of that discretion. See, e.g., Matter of U.S. Golf Corp., 639 F.2d 1197, 1201 (5th Cir. 1981); In re First Colonial Corp. of America, 544 F.2d 1291, 1298 (5th Cir.1977) cert. denied, 431 U.S. 904, 97 S. Ct. 1696, 52 L. Ed. 2d 388 (1977); In re Boteiho, 8 B.R. 305, 306 (Bkrtcy.App. 1st Cir.1981).
The analysis of attorneys' fees in bankruptcy proceedings begins with Section 330 of the Bankruptcy Code (Code), 11 U.S.C. § 330 (1980), which provides that the bankruptcy court, after notice and hearing, may award:
(1) reasonable compensation for actual, necessary services rendered by such trustee, examiner, professional person, or attorney, as the case may be, and by any paraprofessional persons employed by such trustee professional person, or attorney, as the case may be, based on the *754 time, the nature, the extent, and the value of such services, and the cost of comparable services other than in a case under this title; and
(2) reimbursement for actual, necessary expenses.
The policy of section 330 is to compensate attorneys serving in bankruptcy cases at rates comparable to those earned by attorneys performing similar services outside of Title 11 and thus expressly overrule the notions of conservation of the estate and economy of administration which were applicable under the Bankruptcy Act, (Act), as enunciated in the Act case of In re Beverly Crest Convalescent Hospital, Inc., 548 F.2d 817 (9th Cir.1976). H.R.Rep. No. 595, 95th Cong., 1st Sess. 330 (1977), reprinted in 1978 U.S.Code Cong. & Admin.News, 5787, 6286. The rationale behind the change from the strict economy policy of Beverly Crest to a `market place' standard is due to the finding of Congress that:
If that case were allowed to stand attorneys that could earn much higher incomes in other fields would leave the bankruptcy arena. Bankruptcy specialists, who enable the system to operate smoothly, efficiently, and expeditiously, would be driven elsewhere, and the bankruptcy field would be occupied by those who could not find other work and those who practice bankruptcy law only occasionally almost as a public service. Id.
Aside from the abandonment of the principle of economy and the express allowance of interim compensation,[14] the basic criteria for determining reasonable compensation developed under the Act is applicable in construing section 330 of the Code. See, e.g., Matter of Hamilton Hardware Co., Inc., 11 B.R. 326 (Bkrtcy.E.D.Mich.1981); In re Garland Corp., 8 B.R. 826 (Bkrtcy.D. Mass.1981); 2 Collier on Bankruptcy ¶ 330.05[2] (15th Ed. 1980).
Under the Act, many courts looked for guidance in their fee determinations in bankruptcy cases to the twelve criteria originally espoused in Johnson v. Georgia Highway Express 488 F.2d 714, a Civil Rights Act case, and adopted by this Circuit in King v. Greenblatt, supra. The Johnson standards were first adopted in a bankruptcy case in First Colonial Corp. of America, 544 F.2d 1291, 1298-99 (5th Cir.1977) cert. denied 431 U.S. 904, 97 S. Ct. 1696, 52 L. Ed. 2d 388 (1977) with the addition of two other factors: first, the spirit of economy (no longer applicable to Code cases) and second, the avoidance of duplication of effort by the various professionals. The Johnson factors have since been cited as a point of reference in numerous other bankruptcy cases. See, e.g., Matter of U.S. Golf Corp, supra; Rose Pass Mines, Inc. v. Howard, 615 F.2d 1088 (5th Cir.1980); In re Lloyd Carr & Co., 2 B.R. 714 (D.Mass.1979).
In the practical sense, however, the delineation of twelve rubrics does little to assist in the trial court's determination of a reasonable fee allowance.[15] The court in Copeland v. Marshall, 641 F.2d 880 (D.C.Cir.1980) made the telling comment that:
The fundamental problem with an approach that does no more than assure that the lower courts will consider a plethora of conflicting and at least partially redundant factors is that it provides no analytical framework for their application. It offers no guidance on the relative importance of each factor, whether they are to be applied differently in different contexts, or, indeed, how they are to be applied at all. Id. at 890 (cites omitted).
The overlapping and redundant nature of the Johnson/Greenblatt criteria has been recognized by a number of courts and commentators as often producing an inequitable result.[16]
*755 In recognition of the deficiencies inherent in the Johnson approach but not in abrogation thereof, the "lodestar"[17] theory for fee setting developed. Originally adopted by the Third Circuit in Lindy Bros. Builders, Inc. v. American Radiator & Sanitary Corp., 487 F.2d 161 (1973) and in this Circuit in Furtado v. Bishop, 635 F.2d 915 (1980), the lodestar is an attempt to provide an analytical framework for the trial court's application of the Johnson/King criteria. The lodestar fee-setting inquiry begins with the calculation of the lodestar: the number of hours reasonably expended on the case multiplied by a reasonable hourly rate. The figure derived from this computation is crucial as it is recognized as "the only reasonably objective starting point for awarding a fee". Copeland v. Marsland, supra, at 891.
In order to make the lodestar the guiding star of a trial court's fee award and to avoid a number derived from a mechanical computation, however, the trial court must apply certain of the subjective Johnson factors to arrive at a `reasonable' hourly rate and the number of hours `reasonably' expended. The determination of a reasonable hourly fee in a bankruptcy case requires consideration of some, if not all of the following Johnson criteria: the customary hourly fee (5), the level of skill necessary to perform the services (3), whether the fee is fixed or contingent (6), time limitations (7), the amount to be obtained (8), the reputation of the attorneys (9) and the undesirability of the case (10). Similarly, the hours actually expended by an attorney do not necessarily constitute the hours reasonably expended. The court "should review the work done to see whether counsel substantially exceeded the bounds of reasonable effort." Pilkington v. Bevilacqua, 632 F.2d 922, 925 (1st Cir.1980). In delineating those boundaries the court should take into account: the time and labor required (1) from the perspective of the novelty and difficulty of the questions presented (2), the opposition encountered,[18] the amount involved (8),[19] the disallowance of duplicative hours and, in non-bankruptcy cases, the disallowance of compensation for time spent litigating issues and claims upon which the party seeking the fee did not ultimately prevail.[20] The "success" test is somewhat similar in a bankruptcy proceeding to an inquiry into what "benefit the estate" derived from counsel's services. However, the straight line equation of "success" with "benefit" for the purpose of shaving hours from a bankruptcy lodestar can often produce *756 a skewed analysis. Not only is it often difficult to fractionalize every adversary proceeding, cause of action and dispute in a typical reorganization proceeding (see the discussion of an analgous problem in Lamphere v. Brown University, 610 F.2d 46, 47 (1st Cir.1977), a Civil Rights case) but even more importantly, time spent upon an issue which an attorney ultimately loses may be beneficial in connection with the aims of the estate in general.[21]See, e.g. Matter of Aldersgate Foundation, 10 B.R. 910, 917-18 (Bkrtcy.N.D.Fla.1981). In short, while a battle may be lost in a reorganization proceeding, it is the result of the war that is paramount.
Rather than attempting to grade in the net benefit or results of the reorganization proceeding by making corresponding fine adjustments in the number of hours spent on each and every task undertaken by counsel, we suggest the bankruptcy judge should reserve such an adjustment until the lodestar is determined.[22]See Copeland, supra, at 903. In this way the objectivity of the lodestar can at least in some way, be preserved. Of course, hours spent on matters beyond that consistent with a standard of reasonable efficiency and productivity should be stricken from the lodestar calculation, see Furtado v. Bishop, supra, at 920, but such an approach ideally should be tempered with a view towards the need for the services at the time they were rendered. See generally 12 Collier on Bankruptcy ¶ 219.06 (14th ed. 1975).
Multiplying the reasonable hourly rate by the hours reasonably expended produces the lodestar. Then, the "lodestar is adjusted up or down to reflect factors, such as the contingent nature of success in the lawsuit or the quality of legal representation, which have not already been taken into account in computing the `lodestar' and which are shown to warrant the adjustment by the party proposing it." Miles v. Sampson, 675 F.2d 5, 8 (1st Cir.1982) (emphasis supplied). Such factors may include, if they were not already taken into account when computing the lodestar, the contingent nature of success and the delay in receipt of payment. See Copeland v. Marshall, supra, 892-92. Further the lodestar can be further adjusted to reflect the "quality of representation." This adjustment is appropriate "only when the representation is unusually good or bad, taking into account the level of skill normally expected of an attorney commanding the hourly rate used to compute the "lodestar." Id. (emphasis supplied).
It is under the heading "quality of representation" that a bankruptcy court should particularly consider the results of the attorney's participation in the bankruptcy proceeding, and the benefit to the estate to see if circumstances warrant adjustment of the lodestar figure. Where an attorney's services have produced particularly exceptional benefits for the estate, an upward adjustment of the lodestar may be warranted to compensate for an hourly rate that turned out to be overly conservative. Similarly, if a high-priced attorney performs in a competent but undistinguished manner a decrease in the hourly rate would be warranted. See Copeland, supra, at 894.
APPLICATION OF THE LEGAL FRAMEWORK TO THE BANKRUPTCY JUDGE'S DECISION
The bankruptcy court's denial of appellant's renewed motion for the bankruptcy judge's recusal at the fee hearing must be considered. Such a review is limited to determining whether the trial court's evaluation of the evidence amounted to an abuse of discretion. Blizard v. Frenchette, 601 F.2d 1217 (1st Cir.1979).
*757 From what little that can be gleaned from the record, presumably appellant believed the bankruptcy judge was personally biased against him. Since 28 U.S.C. § 144 is not applicable to bankruptcy judges, Dubnoff v. Goldstein, 385 F.2d 717, 720 (2nd Cir.1967), and 28 U.S.C. § 144 only applies to conduct which runs against the party and not the lawyer, Davis v. Board of School Commissioners of Mobile County, 517 F.2d 1044, 1052 (5th Cir.1975), cert. denied 425 U.S. 944, 96 S. Ct. 1685, 48 L. Ed. 2d 188 (1976), the denial of this motion was clearly proper. Additionally, the bankruptcy judge did not have to reconsider his earlier order denying the recusal motion because appellant did not introduce any new evidence or issues at the fee hearing. See Matter of REA Holding Corp., 2 B.R. 733 (D.C.S.D.N.Y.1980).
We hold, however, that the bankruptcy judge abused his discretion by failing to recognize and properly apply the appropriate legal standard as enunciated in Furtado and its progeny. The bankruptcy court's application of the Greenblatt criteria resulted in an inequitable magnification of the deficiencies present in appellant's representation of CBL. Further, the court's "benefit" analysis, whereby it reduced the hours spent, was inappropriately narrow in the circumstances of this case. Essentially, we see the bankruptcy court's decision as a classic example of the confusion inherent in the Johnson/Greenblatt criteria.
The bankruptcy court made two initial factual findings[23] when it applied the Johnson criteria, with which we agree: First, that at the outset of the CBL proceedings, the reorganization proceeding did not appear particularly difficult or necessary due to large equity to debt ratio. Second, that appellant should not have filed both the individual and corporate Chapter 11 petitions. We do disagree however, as to the extent to which these two factors influenced the entire fee setting determination of the bankruptcy judge.
As to the first, assuming that no specific finding of a "bad faith" filing is made, but the court feels the filing was inadvisable, the court should have made a discount in one or two of the Greenblatt criteria, or, more appropriately we think, a qualitative downward adjustment of the lodestar. In the instant case, the advisability of filing the reorganization case was a substantial factor in the drawing of a negative conclusion with respect to the first seven of the Greenblatt criteria. The magnification of this one factor by virtue of the Greenblatt approach created a situation whereby the bankruptcy court (although recognizing that once the Chapter 11 was filed the services should be compensated to the extent they were necessary and aided in the reorganization of CBL) was locked into the viewpoint that little in the way of services were required to extricate CBL from the Chapter 11. This conceptual framework hindered the bankruptcy judge's appreciation of the actual facts as they unfolded during the reorganization proceeding.
Additionally, the bankruptcy judge's evaluation of all twelve of the Johnson criteria for the purpose of determining a reasonable hourly rate is illsuited as many of these factors were properly related to the determination of what number of hours were reasonably expended under the circumstances. Applying these factors (principally one and two) on one side of the lodestar equation (the hourly rate) when they necessarily have to be considered on the other side (the number of hours) results in a "double deduction." Just as a lodestar should not be adjusted upward or downward by factors that were already taken into account when computing the lodestar, Miles v. Sampson, supra, at 9, the lodestar itself should not be the product of multiplying the same factor twice. While we recognize that the line of demarcation is often difficult to draw (i.e. the skill required (3) *758 may influence both the hourly rate and the number of hours required) the trial court should strive to avoid this duplication. Here, that was not done.
The second fact that permeates the bankruptcy court's analysis (and concomitantly assumes drastic proportions by virtue of the incorrect application of the Johnson criteria) is the appellant's initial representation of both CBL and the Kontaratoses. Poulos was remiss in believing that he could adequately represent both the equity holders and the corporation in a bankruptcy proceeding, especially where there was the admitted liability of the former to the latter. Poulos' full disclosure to the court and to his clients of the conflict and the misappropriations and the subsequent judicial imprimatur upon that representation did not cure that defect. It is only when Poulos withdrew from his representation of the Kontaratoses (and they retained other counsel) and he agreed to waive any fee with respect to that representation that his position became at all tenable. Judge Cyr's December 15, 1980 order specifically finding that no further grounds existed to disqualify Poulos as CBL's counsel, established the law of the case as to his legitimacy because no new grounds were ever asserted after the entry of that order and no finding of a conflict was ever made by the judges below. See generally Peterson v. Federated Development Co., 416 F. Supp. 466, 473-74 (S.D.N.Y.1976) (a district judge's departure from a ruling made by his predecessor judge requires a clear conviction of error).
The bankruptcy court's disapproval of Poulos's initial representation of both of the debtors is present in its application of Greenblatt in factors 9, 10, and particularly 12 (awards in similar cases). The bankruptcy court's application of factor 12 (awards in similar cases) bears no relation to the fixing of a reasonable hourly rate. What the bankruptcy court found to be an excessive amount of time spent on executing the Kontaratoses' acknowledgement of liability to CBL might well be appropriate in considering what hours should be allowed (as it was when the court deducted fourteen hours from the twenty-eight requested) but should not be interjected into the lodestar, particularly when such facts are neither supported by the record or by specific findings. Similarly, the criticism of Poulos's quasi-trustee status, ordered by the bankruptcy court, is irrelevant to Poulos' hourly rate.
The absence of an analytical framework for the bankruptcy court's application of the Greenblatt criteria results in many of the same factors being "spilled" over into the calculation of "the hours reasonably" spent. The bankruptcy court engages in a litmuslike "benefit" test that causes an unwarranted reduction of the hours spent by appellant. For example, in the most significant reduction (over 300 hours), the bankruptcy judge totally disallowed all time spent by debtor's counsel reviewing pleadings, researching, drafting answers, affirmative defenses and counterclaims and attending the proceedings initiated by Depositors, Hale, the City of Portland and the CBIDA for the appointment of a trustee and for the disqualification of Poulos as attorney for CBL. The court's rationale for this disallowance ("none of this time yielded any benefit to the estate, was largely made necessary by the need for self-justification, and cannot be allowed") departs from the calculation of what hours should be reasonably be rendered by counsel to the debtor-in-possession. It also ignores the prior finding and Order made by Judge Cyr. The debtor-in-possession is the norm in a Chapter 11 proceeding and the debtor-in-possession should not be removed without a finding of "cause" See 11 U.S.C. 1107 and 11 U.S.C. § 1108. The Code envisions that the finding of "cause" takes place in the context of an adversary proceeding and, as such, the debtor-in-possession is entitled to counsel. The bankruptcy court's denial of compensation under the guise of a benefit analysis (because he later found that circumstances warranted the appointment of a trustee) is in effect a nullification of a right afforded by statute. See generally Philadelphia & Reading Coal & Iron Co., 61 F. Supp. 120 (E.D.Pa.1945) (a Chapter X proceeding).
*759 Similarly, the disallowance of all time spent opposing the motions for disqualification of Poulos as CBL's counsel, was also inappropriate in light of Judge Cyr's finding that these attempts were made to nullify the effective representation of the debtor's interests in these proceedings. The reorganization process is at best the reconciliation of conflicting views and rights as reflected in a financial readjustment. Those conflicting views are entitled to able and partisan representation. The benefit analysis employed by the bankruptcy court cannot be so strongly construed as to stifle the voices of those participating in the reorganization proceeding. Of course, it is the bankruptcy court's prerogative to strike those services which exceeded the bounds of reasonable efficiency and productivity. The total dissallowance of these hours, however, constitutes an abuse of discretion.
In a similar mode, the bankruptcy court disallowed all time (30 hours) spent subsequent to the appointment of the Chapter 11 trustee regarding the debtor's opposition to CBITD's takeover plan on the basis that "[n]one of the above hours yielded any benefit to the estate and they [the hours] are all disallowed." This restrictive interpretation of "benefit to the estate" is contrary to the well-established rule that services rendered in successfully opposing a plan of reorganization are beneficial to the estate. See e.g., In re Porto Rican American Tobacco, 117 F.2d 599 (2nd Cir.1941); Matter of Aldersgate Foundation Inc., 10 B.R. 910 (Bkrtcy.N.D.Fla.1981).
Further illustrative of the extent to which the bankruptcy judge's initial views of the case were magnified by the unguided application of the Greenblatt criteria is his disallowance of nearly 50% of the time spent for preparation and attendance at all the meetings of the creditors. The bankruptcy judge did so on the basis that "[s]ince creditors were always going to be paid in full, extensive meetings should not have been necessary." The inadvisability of filing the Chapter 11 petition was presumably a factor in the bankruptcy court's reduction of the allowed hourly rate. Once enmeshed in the Chapter 11 proceeding, the necessity for the services should have been determined at the time when they were rendered. Consultation with a creditors' committee and attendance at the administrative meetings conducted by the United States Trustee in Chapter 11 proceedings, is a duty of a debtor-in-possession and such time should be compensated for, absent a showing that the hours are inflated. Such services are clearly necessary and beneficial to the estate's general goals.
The bankruptcy judge's allowance of 50 out of 210 hours of attorney time devoted to negotiations and litigation involving Hale, Depositors, the PUC and others regarding financing for a plan of reorganization serves as a final illustration of the restrictiveness of the bankruptcy court's approach. The court found that "[a]ll of this time should not have been necessary just to set up the settlement and financing agreement which never did go through, and in any event, was primarily for the stock holders benefit." To the extent that the disallowance was based upon a finding by the court that the time exceeded the bounds of reasonable effort, we defer to that decision. However, the fact that parties settlement agreement was not executed as originally designed did not abrogate any progress that the parties made through these discussions. Debtor's counsel is generally the primary force behind any reorganization effort and his good faith attempt to negotiate the funding of a plan of reorganization should not be hindered by a success test. See, e.g. In re International Horizons, Inc., 10 B.R. 895, 900 (Bkrtcy.N.D.Ga.1981). Furthermore, the fact that the Kontaratoses, as equity holders, would benefit from the confirmation of a plan of reorganization is irrelevant to the reasonableness and necessity for the hours rendered as all parties would benefit from the confirmation of a Plan.
Although we discern various other errors comparable to those delineated above in the bankruptcy court's disallowance of *760 hours,[23A] we do not feel it necessary to further examine each of the other 20 categories in which deductions were made. We hold that the bankruptcy court abused its discretion in fixing appellant's fees by applying improper legal standards in its determination. See Matter of First Colonial Corp., supra, at 1298. Since the amount of the award of attorneys' fees is to be determined by the trial court and the role of an appellate court is to review for errors of law or abuse of discretion ordinarily we would remand to the trial court for a determination in light of our holding.
We do not believe, however, that under the circumstance it would be productive to remand this case for new computations. Two and one half years have elapsed since this case was filed. This Panel and three bankruptcy judges have spent an inordinate amount of time on these proceedings. The comprehensive settlement agreement has resulted in the dismissal of the CBL case and we do not see the need for prolonging this matter.[24] Additionally, one of the reasons for having the trial judge fix the fees is that he had the opportunity to observe the applicant's performance on a day-to-day basis and therefore has a far better basis for determining reasonable fees. See Trustees v. Greenough, 105 U.S. 527, 537, 26 L. Ed. 1137 (1882). In the instant case, most of appellant's services were rendered prior to the designation of the bankruptcy judge and therefore we are just as well advised as the bankruptcy judge with regard to the value of these services. Fuller v. Memphis Street Ry. & Co., 110 F.2d 577 (6th Cir.1940) (where the services in a Chapter X proceeding were rendered during the incumbency of a previous judge, the appellate court would determine the fees). As we are ourselves experts in assessing the reasonableness of an attorney's fee award,[25] we shall do so. See, e.g., In re Copeland, supra, at 902, In re TMT Trailer Ferry, Inc., 577 F.2d 1296, 1304 (5th Cir.1978); B-M-G-Inv. Co. v. Continental/Moss Gordin, Inc., 437 F.2d 892, 893 (5th Cir.1971), cert. denied, 402 U.S. 989, 91 S. Ct. 1668, 29 L. Ed. 2d 154 (1971).
This matter should not be left without the Panel being recorded as saying that the now bankruptcy judge's designation as the third judge in charge of this case was perhaps the only happy event in the whole proceedings. It was a remarkably venomous contest, peopled on both sides by bitter and relentless adversaries, as the appeals record will indicate. It was a very difficult case to handle, particularly by a judge by inheritance who had to wade into the thicket of prior proceedings; it was done with great skill and brought to a conclusion. Had it not been for his designation, the parties would no doubt still be given the chance to exhibit their hostility.
APPELLANT'S FEE AWARD
The bankruptcy court's incorrect application of redundant Johnson criteria has produced a skewed determination with respect to both the allowed hourly rate and the number of allowed hours. We do not intend to impose rigid guidelines or structure upon the format that a fee opinion must take as we feel individual styles and the circumstances of each particular case (the *761 number of fee applicants, the length of the proceeding, the magnitude of the award and the like) might warrant some departure from the analysis we have suggested is appropriate. It is essential, however, that the bankruptcy court avoid allowing certain factors or assumptions from dominating its analysis. The lodestar approach is the best method for avoiding an inequitable result.
We are prepared to allow Appellant's fee request to the full amount negotiated pursuant to the settlement agreement. We are more than satisfied that, even given the hourly rate established by the bankruptcy court (which in itself we found to be erroneous), sufficient hours were rendered that benefited the estate to justify such an allowance. This is particularly so because over 300 hours were rendered in good faith by appellant as quasi-trustee when CBL was a debtor-in-possession. While this was later found to be a situation requiring the appointment of a trustee, the services rendered by Poulos were necessary and beneficial to the estate. A trustee would have been entitled to compensation for services during this period. The subsequent finding by the bankruptcy court that these services should have been performed by a trustee, does not abrogate the equitable right to compensation for such services. Cf. 11 U.S.C. § 363(m) and 11 U.S.C. § 364(e).
In the circumstances of this case, it is important to recognize that the equity holders support and are able to pay the $170,000.00 fee to Poulos. Only the equity security holders of the post-dismissal debtor, CBL, will benefit from a reduced allowance to debtor's counsel. While the ability to pay in itself cannot be made the basis for increased allowance [In re Philadelphia & Reading Coal & Iron Co., 61 F. Supp. 120 (D.Pa.1945)], where the reorganized debtor is amply able to pay, drastic and unwarranted reduction of allowances to those who contributed to the reorganization will not be permitted. Matter of Mountain State's Power Co., 118 F.2d 405 (3rd Cir.1941). Although the reorganization in this case assumed the form of a conditional dismissal whereby all creditors were paid in full, the distinction is one without a difference.
Accordingly, the order of the bankruptcy court is AFFIRMED IN PART; REVERSED IN PART and appellant's allowance is: $170,000.00 fee and $10,000.00 expenses.
NOTES
[*] Judge Votolato did not participate in this decision.
[1] The third bankruptcy judge involved in these proceedings (hereinafter referred to as the "bankruptcy judge") following Judge Cyr's departure and Judge Johnson's recusal.
[2] For further background on these proceedings, see, inter alia 8 B.R. 784 (Bkrtcy.App. 1st Cir. 1981) [Appeal of Maine Public Utilities Commission (PUC) from Order (Cyr, J.) denying its motion to dismiss a complaint filed against it by CBL]; 14 B.R. 18 (Bkrtcy.App. 1st Cir.1981) [Appeal of City of Portland from Order (Cyr, J.) imposing certain limitations upon the Intervenor status of Portland]; 14 B.R. 846 (Bkrtcy. App. 1st Cir.1981) [Appeal of City of Portland from Order (Cyr, J.) denying Portland's motion to disqualify Poulos as CBL's counsel]; No. 81, slip op. (Bankr. 1st Cir. November 6, 1981) [Emergency appeal of CBL and Poulos from Order establishing hearing date on Casco Bay Island Transit District's (CBITD) Motion to strike appearance and disallow all compensation to Poulos]; No. 81, slip op. (Bankr. 1st Cir. December 22, 1981) [Appeal of CBL from Order granting CBITD party-in-interest status]; 15 B.R. 298 (Bkrtcy.App. 1st Cir.1981) [Appeal of United States Trustee from Order (Cyr, J.) requiring the U.S.T. to investigate the qualifications of the Kontaratoes' Creditors' Committee]; 17 B.R. 946 (Bkrtcy.App. 1st Cir.1982) [Appeal of CBL from Order authorizing the appointment of a Chapter 11 trustee and denying CBL's motion for recusal of the bankruptcy judge.]
[3] Poulos did so in reliance upon Maine Bar Rule 3.4, which provides:
(d) Multiple Employment Permitted. A lawyer may represent multiple clients if it is obvious that he can adequately represent the interests of each and if each consents to the representation after full disclosure of the possible effect of such representation on the exercise of the lawyer's independent professional judgment on behalf of each.
[4] At the time of his withdrawal, Poulos's firm had expended 513.25 hours representing the Kontaratoses (Poulos 329.50 hours; associate 64.50 hours, paralegal 119.25 hours). Poulos waived all claims to the fee when he withdrew from representing the Kontaratoses.
[5] This unauthorized reorganization form (neither a debtor nor debtor-in-possession) constituted the basis for the now bankruptcy judge's September 16, 1981 Order authorizing the appointment of a Chapter 11 Trustee, subsequently affirmed on appeal by us in 17 B.R. 946 (Bkrtcy.App. 1st Cir.1982). Poulos, in reliance on the October 23, 1980 Order, claims to have rendered 332 hours as consultant/manager to CBL. His fee application, however, does not include any of these hours.
[6] At the hearing on the disqualification motions on December 15, 1980, Judge Cyr stated:
I wish to state on the record and I regret the need to have to do so that these proceedings are contentious. They are important to many people. I have not the slightest evidence before me nor have Mr. Burns [Hale's counsel] or Mr. Furber [the PUC's counsel] brought any today that Mr. Poulos has in any way either failed in his ethical duty or in complying with orders of this Court or with his duties to his client under the statute . . . It strikes the Court as inappropriate that counsel should spend so much time endeavoring to nullify the effectiveness of each other as representatives of their clients rather than address themselves to the merits of the case. The Court is going to enter an appropriate order as it indicated but would simply implore counsel to stop this utter, complete waste of time in unprofessionalism in pursuing a matter which seems to this Court to be motivated by their desire to nullify the effective representation of the Debtor and I hope that will be all the Court has to say on the matter."
(Tr. 12/15/80) (emphasis supplied). Judge Cyr then went on to find in the Order that:
"a principal purpose of the instant Motion and of the earlier Application for the disqualification of Richard E. Poulos, Esquire as counsel for CBL has been to hinder and delay the effective representation of CBL by its present experienced and knowledgeable counsel. . . . "
(December 15, 1980 Order of Cyr, J.)
[7] Bankruptcy Judge Cyr presided over CBL and Kontaratoses' Chapter 11 proceedings until his appointment to the United States District Court in June, 1981 when the case was transferred to Bankruptcy Judge Frederick A. Johnson for the District of Maine. On August 29, 1981, however, Judge Johnson found it necessary to disqualify himself sua sponte under 28 U.S.C. § 455(a). Chief Circuit Judge Frank M. Coffin then designated the bankruptcy judge to preside over both Chapter 11 cases.
[8] See In re Cummins, 20 B.R. 652 (Bkrtcy.App. 9th Cir.1982).
[9] In order to assure that CBL's modified plan was feasible and that all of CBL's creditors were paid a 100% cash dividend, Poulos had reduced his fee request from $312,301.40 to $235,000.00 plus expenses of $10,000.00. Pursuant to the comprehensive settlement agreement, Poulos further reduced his maximum request to $170,000.00 plus expenses of $10,000.00.
[10] King listed twelve factors to be considered in determining fees to be awarded pursuant to the Civil Rights Attorney's Fees Award Act of 1976, 42 U.S.C. § 1988. (1) the time and labor required; (2) the novelty and difficulty of the question presented; (3) the skill required to perform the legal services; (4) the preclusion of other employment by the attorney due to acceptance of the case; (5) the customary fee in the community; (6) whether the fee is fixed or contingent; (7) time limitations imposed by client or circumstances; (8) the amount involved and the results obtained; (9) the experience, reputation and ability of the attorney; (10) the undesirability of the case; (11) the nature and length of the professional relationship with the client; (12) awards in similar cases.
[11] Souza v. Southworth, 564 F.2d 609 (1st Cir. 1977); Lund v. Affleck, 587 F.2d 75 (1st Cir. 1978); Lamphere v. Brown University, 610 F.2d 46 (1st Cir.1979); Pilkington v. Bevilacqua, 632 F.2d 922 (1st Cir.1980).
[12] Additionally, the court cited cases for the proposition that courts have authority to deny all compensation to counsel representing adverse interests. See Woods v. City National Bank, 312 U.S. 262, 61 S. Ct. 493, 85 L. Ed. 820 (1941); Silbiger v. Prudence Bonds Corp., 180 F.2d 917 (2nd Cir.1950) cert. denied 340 U.S. 831, 71 S. Ct. 37, 95 L. Ed. 610 (1950). While this is the general rule it should be noted that in Silbiger, supra, at 921, the court said that it is not reasonable to impose an entire fee forfeiture, where the allowed fee comes in no part from any group that could have been prejudiced by the attorney's divided allegiance. In the instant case, all creditors have been paid in full and the only possible group that could have been prejudiced by Poulos divided allegiance, the stockholders of CBL, strongly support his entire fee request. Furthermore, Poulos withdrew from his representation of the Kontaratoses on October 23, 1980 and he was absolved from any conflict of interest by Judge Cyr in December, 1980, long before the bankruptcy judge's designation in September, 1981.
[13] Apparently, the court was unaware that Poulos' fee application did not include the 332 hours devoted to managerial/consulting services. See note 4. In any case, no compensation was allowed for such time.
[14] 11 U.S.C. § 331.
[15] Commenting upon one of the standard litanies containing eight factors that should determine fees, the court in City of Detroit v. Grinnel Corp., 495 F.2d 448, 470 (2nd Cir.1974) noted, "this conceptual amalgam is so extensive and ponderous that it is probably not employed in any precise way by those courts espousing adherence to it."
[16] For example, a high-powered attorney has his fee increased threefold as factors (3) (skill), (5) (customary charge), and (9) (experience) are considered. Conversely, a young attorney will experience an unfair reduction in his fees: although he might be skillful (3), he is inexperienced (9), cannot prove high customary charges (5), is not precluded from other assignments (4), and will not be hurt by arguing an unpopular cause because his notoriety would help him attract similar cases (10). Note, Promoting the Vindication of Civil Rights Through the Attorney's Fees Awards Act, 80 Column L.Rev. 346, 373 N. 163 (1980).
In addition to magnifying a deficiency or strength out of proportion, the Johnson criteria are so interdependent that a separate analysis and conclusion for each criteria, is impossible. For example, the customary hourly fee (5), is likely to be influenced by the level of skill necessary to perform the services (3), the novelty and difficulty of the questions (2), time limitations (7), the reputation of the attorneys (9) and the undesirability of the case (10). Copeland v. Marshall, 641 F.2d 880, supra, at 840.
[17] Webster's Third International Dictionary defines "lodestar" as 1: a star that leads or guides; 2: someone or something that serves as a guiding star or as a focus of hope or attention.
[18] See, e.g., Wolf v. Frank, 555 F.2d 1213, 1217 (5th Cir.1977) "Obviously, the more stubborn the opposition the more time would be required"); Perkins v. New Orleans Athletic Club, 429 F. Supp. 661, 667 (E.D.La.1976) ("Those who elect a militant defense . . . [are responsible for] the time and effort they exact from their opponents.").
[19] Although this factor might also be taken into account in determining the reasonableness of the hourly rate. See Copeland v. Marshall, supra, at 892.
[20] The consideration of what issues a fee applicant ultimately prevailed upon is necessitated in finding a "lodestar" in antitrust actions under Section 4 of the Clayton Act, 15 U.S.C. § 15, and in action under the Civil Rights Act of 1866, 42 U.S.C. § 1988, because only issues upon which a party ultimately prevailed upon are entitled to be compensated for, in effect, an "all or nothing approach."
[21] For example, if debtor's attorney is successful in staving off a secured creditor's complaint to foreclose upon an item of property essential to a debtor's business and thereby the debtor is able to generate substantial profits during the interim, such time should be compensable even if the property is ultimately reclaimed by the creditor.
[22] Similarly, the grading in of a "quality" factor in determining an hourly rate on a task by task basis can also degenerate into a highly subjective process. See Miles v. Sampson, 675 F.2d 5, 9 (1st Cir.1982).
[23] Contrary to appellant's assertions, we do not find that the bankruptcy judge's fee determination was limited to what was introduced at the fee hearing or to what the judge was requested to take judicial notice of. This assertion is inimicable to the entire fee-setting process.
[23A] For example, the bankruptcy court totally disallowed over 200 hours spent by appellant's firm for research and analysis relative to the Public Utilities Commission's (PUC) jurisdiction, intervention, contempt and audit powers. The court's rationale ("[n]one of this time benefited this Debtor's estate and in part involved a defense of the Kontaratos' [sic] . . . [and] basic research should be performed by associates . . .) ignores the prior Finding by Judge Cyr preliminarily enjoining the contempt proceedings initiated by the PUC because he found that the PUC's action would severely dispute CBL's operations and impair its reorganization efforts. (July 10, 1980 Order of Cyr, J.) Clearly, the prevention of such disruption is beneficial to the estate. Further, if such research should be done by associates, there is no basis for the bankruptcy judge's disallowance of the entire eighty hours spent by Poulos' associate on this matter.
[24] "[We] will not remand a case for more specific findings if doing so will consume precious time and judicial resources without serving any purpose." Lasalle Extension Univ. v. FTC, 627 F.2d 481, 483 (D.C.Cir.1980).
[25] See Copeland v. Marshall, supra, at 902 n. 43 and cases cited therein.
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IN THE COURT OF APPEALS, THIRD DISTRICT OF TEXAS,
AT AUSTIN
NO. 3-91-226-CR
ADRIAN BUDD,
APPELLANT
vs.
THE STATE OF TEXAS,
APPELLEE
FROM THE DISTRICT COURT OF TRAVIS COUNTY, 167TH JUDICIAL DISTRICT
NO. 0911577, HONORABLE BOB JONES, JUDGE PRESIDING
After finding the appellant guilty of theft of property of the value of at least seven
hundred fifty dollars but less than twenty thousand dollars, Tex. Penal Code Ann.
§ 31.03(e)(4)(A) (West 1992), the jury assessed punishment, enhanced by two prior theft
convictions, at thirty-one years confinement. We will affirm the conviction.
In his first point of error, appellant contends the evidence is insufficient to establish
that the appellant had previously been convicted of theft on the two prior occasions alleged for
enhancement of punishment.
Certified copies of the judgments and charging instruments in the two prior causes
contain the same name, offenses, date of offenses and date of birth as those shown on certified
copies of appellant's arrest records. Fingerprints taken of appellant during trial of the instant
cause match fingerprints on the arrest records. Patricia Cooper, identification technician for the
Austin Police Department, testified that a booking number is given to every person arrested. This
number is assigned to only one person and will appear on any subsequent arrest records of that
person. Stan Anderson, criminal investigator for the Travis County Attorney's office, identified
criminal history records taken from computer printouts in the county attorney's office showing
a person with the same name and date of birth was convicted of theft offenses that occurred on
the same dates and in the same numbered causes as those contained in the judgments of the prior
convictions. The name, sex, race, date of birth and booking number on the printouts correspond
with information appearing in the arrest records of the instant cause as well as those in the prior
convictions.
The standard for determining the sufficiency of the evidence set forth in Jackson
v. Virginia, 443 U.S. 307, 319 (1979), is applicable to situations where the State has alleged prior
convictions to enhance punishment. Human v. State, 749 S.W.2d 832, 834 (Tex. Crim. App.
1988). Thus, viewing the evidence in the light most favorable to the jury's verdict, we must
determine whether any rational trier of fact could have found the essential facts of the alleged
prior convictions beyond a reasonable doubt. Appellant does not complain that the allegations of
prior convictions were insufficient to give him notice of what the State intended to prove. In
Human, the court stated that the purpose of requiring that the proof correspond to the allegations
of prior convictions in the indictment is to put defendant on notice as to the charges against him
and, in order that he may, if necessary, plead the same in an event of a further attempt to place
him again in jeopardy for the same alleged act. Human v. State, 749 S.W.2d at 836.
We conclude that the identity of the names, offenses, dates of offenses, races, dates
of birth, booking numbers, cause numbers, and dates of disposition in the arrest records and
computer printout are sufficient to support the conclusion that these records correspond with the
judgments of conviction alleged for enhancement to establish that the appellant was the person
convicted. See Spang v. State, 718 S.W.2d 713, 715 (Tex. App.Austin 1989, no pet.).
In his second point of error, appellant asserts that one of the exhibits identified by
Anderson is a printout of information compiled by the Travis County District Attorney's office,
and Anderson, as an employee of the County Attorney's office, is not qualified to establish the
foundation for the introduction of the exhibit as a business record. Appellant contends that the
fact that Anderson may be able to access information contained in the district attorney's computer
does not qualify him as a custodian of the records or furnish him with the basis for knowing how
the information was compiled.
In Denby v. State, 654 S.W.2d 457, 460 (Tex. Crim. App. 1983), cited by
appellant, it was held that a custodian of the records in an Angleton Bank was unable to testify
as to the truthfulness of the records of the defendant's account in a Mississippi bank since he had
no knowledge of the business of that bank, nor was it shown that he was the custodian of that
bank's records.
Anderson testified that in the county attorney's computer "there is also a screen for
cases that are pending and disposed of at the district attorney's office here in Travis County."
While he did not keep the records, Anderson stated that he used them on a regular basis. He
related that the computer entries are made at or near the time the events occur, that the records
are made from information transmitted by a person with knowledge of the events, that they are
kept in a regular course of business activity, and that it is "the regular practice of the county
attorney's office to make and keep such records."
Unlike the Angleton bank employee in Denby, who had no personal knowledge of
the manner in which the business records of the Mississippi bank were made, Anderson's
testimony established the predicate required by Tex. R. Crim. Evid. 803(6) to bring the records
in questions within the business-records exception to the hearsay rule. The fact that Anderson did
not have personal knowledge of the information contained in the records does not affect the
admissibility of the records. See McGowan v. State, 664 S.W.2d 355, 359 (Tex. Crim. App.
1984). Appellant's second point of error is overruled.
In his third point of error, appellant asserts the court erred when it permitted
Officer Yolando Richey to testify over objection regarding extraneous offenses because such
testimony is inadmissible under Tex. R. Crim. Evid. 404(b). Appellant urges the language the
appellant used on the police officer and his actions toward the officer were unrelated to any issue
in the case. Appellant's further contention that the relevancy of the extraneous offense testimony
is outweighed by its prejudicial effect and is inadmissable under Tex. R. Crim. Evid. 403 forms
the basis of appellant's fourth point of error. Because these points of error concern the court's
admission of the same evidence, we will consider them together.
Officer Richey of the Austin Police Department testified that she responded to a
call regarding a shoplifting offense at Montgomery Wards on the occasion in question. Upon
arrival at the store, a security officer pointed toward the shoplifter who was later identified as the
appellant. Richey stated that following her arrest of the appellant, she asked for his name and he
replied, "F you, Bitch." Richey advised appellant that if he would not disclose his name, she
would have to file on him for failure to identify. Appellant answered, "F you. File on me.
It's only a class C." When Richey attempted to search appellant, "[H]e pulled away from me .
. . and he lunged at me." She had to await help from a backup officer; "It took three of us to
hold him down . . . he attempted to spit in my face." When they took appellant to the patrol car,
he yelled, "Help me. They're killing me."
Rule 404(c) provides that evidence of other crimes, wrongs or acts is not admissible
except in certain enumerated instances. Rule 403 states that relevant evidence may be excluded
if "its probative value is substantially outweighed by the danger of unfair prejudice, confusion of
the issues, or misleading the jury, or by considerations of undue delay, or needless presentation
of cumulative evidence."
In Archer v. State, 607 S.W.2d 539 (Tex. Crim. App. 1980), the court rejected
appellant's contention that evidence of one hundred fifty pills and capsules found in his pocket was
inadmissible in a cause where he was charged with the offense of unlawful possession of a firearm
by a felon. In Archer, the court stated:
Where an offense is one continuous transaction, or another offense is part of the
case on trial or blended or closely interwoven, proof of all such facts is proper.
Such an extraneous offense is admissible to show the context in which the criminal
act occurred; this has been termed the "res gestae," under the reasoning that events
do not occur in a vacuum and that the jury has a right to hear what occurred
immediately prior to and subsequent to the commission of that act so that they may
realistically evaluate the evidence.
In Milligan v. State, 554 S.W.2d 192, Tex. Cr. App., the defendant maintained
that the trial court erred in admitting evidence concerning a knife he was carrying
at the time he was arrested for unlawful possession of a firearm by a felon. The
Court found that such evidence was properly admitted as res gestae of the arrest
and the offense.
Archer v. State, 607 S.W.2d at 542 (emphasis added) (citations omitted).
We are not persuaded by appellant's argument that his action did not come within
the context of the act or the arrest since the officer arrived after the offense and his detention by
store personnel. We hold that the complained-of evidence is admissible as res gestae of the arrest
and the offense. Moreover, appellant's conduct in resisting arrest evidences an intent to escape
from custody. Evidence of escape from custody or flight to avoid arrest is generally held
admissible on the issue of guilt. Rumbaugh v. State, 629 S.W.2d 747, 752 (Tex. Crim. App.
1982). In order to have such evidence excluded, the burden shifts to the defendant to show that
the conduct is not connected with the offense on trial. Rumbaugh v. State, 629 S.W.2d at 752.
Appellant failed to discharge this burden. Nor has appellant shown that the relevancy of the
evidence is outweighed by its prejudicial effect. Evidence that came within the context of the
offense will rarely be found inadmissible "so long as it truly sets the stage for the jury's
comprehension of the whole criminal transaction." Maynard v. State, 685 S.W.2d 60, 67 (Tex.
Crim. App. 1985). Appellant's third and fourth points of error are overruled.
The trial court's judgment is affirmed.
Tom G. Davis, Justice
[Before Justices Aboussie, B. A. Smith and Davis*]
Affirmed
Filed: September 16, 1992
[Do Not Publish]
* Before Tom G. Davis, Judge (retired), Court of Criminal Appeals, sitting by assignment.
See Tex. Gov't Code Ann. § 74.003(b) (West 1988).
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484 A.2d 916 (1984)
Norman H. GREENBERG
v.
George E. and Marie M. HADWEN.
No. 82-089.
Supreme Court of Vermont.
September 7, 1984.
Reargument Denied November 5, 1984.
R. Clarke Smith, Leonard F. Wing, Jr., and Allan R. Keyes of Ryan Smith & Carbine, Ltd., Rutland, for plaintiff-appellant.
Clark, Lillie & Holden, Bennington, for defendants-appellees.
Before BILLINGS, C.J., HILL, UNDERWOOD and PECK, JJ., and LARROW, J. (Ret.), Specially Assigned.
HILL, Justice.
The plaintiff appeals the denial of his request for an injunction to prevent the defendants from interfering with a prescriptive easement that the plaintiff claims exists over a strip of the defendants' land. We affirm.
The undisputed facts are as follows. The plaintiff's land is contiguous to and *917 west of the defendants' land. An area of open land at the boundary between the parties' lands is "land in common" and is used for the passage of people and vehicles, parking, loading and unloading of vehicles, and accumulation of rubbish. Between the land in common and a public street to the south known as Franklin Lane is another strip of open land owned by the defendants; this strip of land is the disputed area in this case. Finally, adjacent to and west of the common boundary line, and extending north from Franklin Lane to one of the plaintiff's buildings, is a ten-foot strip of land originally used as a right of way for the passage of people and vehicles.
Over the past several years both the plaintiff and the defendants have increased their business activities on their respective properties. This increased activity has resulted in an increased use of the land in common and the disputed area, which has caused some friction between the parties. When the defendants decided to place some tree planters in the disputed area, the plaintiff sued for an injunction, claiming that the planters would exclude the plaintiff from the disputed area and seriously interfere with his business activities. The plaintiff claimed that he has a right by prescriptive easement to use the disputed area. The trial court rejected the plaintiff's claim.
I.
The plaintiff argues that the trial court committed reversible error in failing to find that the plaintiff and his predecessor in title had used the disputed area for the passage of vehicles to and from the land in common for a sufficient period of time to establish an easement by prescription. However, we do not address the plaintiff's objections to the findings relating to the time period necessary to establish a prescriptive easement. Instead, we hold that two other findings made by the court and not objected to by the plaintiff are sufficient to uphold the trial court's conclusion that no prescriptive easement exists.
A prescriptive easement may be created if the claimant's use of the land is open, notorious, continuous for fifteen years, and hostile or under claim of right. Patch v. Baird, 140 Vt. 60, 63-64, 435 A.2d 690, 691 (1981). The trial court in this case concluded that the plaintiff did not satisfy the requirement that the use be hostile because the defendants had given the plaintiff implied permission to use the disputed area for ingress to and egress from the land in common. This conclusion is supported by findings No. 28 and 29 to which the plaintiff does not object on appeal. Finding No. 28 states that to the extent the disputed area was available to the plaintiff to gain access to the land in common, the area was also used by customers and employees of the defendants for the same purposes. Finding No. 29 states that until recently the defendants had no objection to the plaintiff's use of the disputed area for access to the land in common. Although travel upon the claimed right of way by the land's owner does not necessarily negate the "hostile" nature of the claimant's use, Patch v. Baird, supra, 140 Vt. at 65, 435 A.2d at 692, the owner's permission to use the land does negate the element of hostility. Id.; Russell v. Pare, 132 Vt. 397, 404, 321 A.2d 77, 82 (1974). As this Court stated in Plimpton v. Converse, 44 Vt. 158 (1871),
wherever the owner of land throws it open to the public to pass and repass on in connection with the use to which he appropriates it, the mere use of the land by an adjoining proprietor for a way to his own premises, though that use is uninterrupted, open and notorious, will be presumed to be with the permission of the proprietor, and will not be presumed to be adverse to the owner....
Id. at 164. The Court further stated that in order to show a right of way by prescriptive easement, the claimant "must show some act appropriating the way peculiarly to himself, more pronounced and more clearly indicative of a claim of right, than the open and notorious use of the way by himself." Id.
*918 The trial court's findings in this case indicate that the plaintiff failed to show that his use of the disputed area was without the defendants' permission. The plaintiff did not object to findings 28 and 29, and a review of the record supports these findings. Since the plaintiff failed to establish the element of hostility, the trial court was correct in finding that no prescriptive easement exists. Other findings to which the plaintiff did object were not necessary to the trial court's conclusion. Unessential findings, even if incorrect, are not grounds for reversal. Latchis v. State Highway Board, 120 Vt. 120, 126, 134 A.2d 191, 195 (1957).
II.
The plaintiff also argues that the trial court committed reversible error by deciding that the contract entered into between the plaintiff and his predecessor in title, whereby the predecessor suspended use of the land in common and the disputed area for 28 days, constituted an interruption of the continuous use that the plaintiff had the burden of establishing to prove the existence of a prescriptive easement. Since we have found that the plaintiff failed to establish the element of hostility, the trial court's finding on the element of continuous use is unnecessary. Thus, even if the finding is incorrect, it is not grounds for reversal since it is unessential. Latchis v. State Highway Board, supra.
III.
The plaintiff's final argument is that the trial court erroneously enjoined the plaintiff from using the land in common to have trucks there temporarily for the delivery and removal of merchandise. The plaintiff points out that the land may be used for all reasonable purposes, 25 Am.Jur.2d Easements and Licenses § 77, because the deeds creating the land in common did not proscribe any usages to which the land may be put. The plaintiff contends that the land in common has been used as a place for loading and unloading trucks for over 30 years, and that this constitutes a reasonable use of the land.
The plaintiff's argument contradicts the court's finding No. 20, to which the plaintiff did not object. Finding No. 20 states that, prior to the plaintiff's purchase of his land, the land in common had been used primarily for parking purposes, and not for the loading and unloading of trucks. Thus, the court found that the reasonable use of the land in common is for parking for employees and customers of the plaintiff and the defendants. The plaintiff's use of the land in common to load and unload trucks constitutes an undue interference with the parties' reciprocal rights, as defined by the parties' long usage. Cf. 25 Am.Jur.2d Easements and Licenses, supra ("no use may be made of [a] right of way, different from that established at the time of its creation, so as to burden the servient estate to a greater extent than was contemplated at the time of the grant"). We hold that the trial court correctly concluded that the plaintiff wrongfully interfered with the defendants' use of the land in common by allowing large trucks to obstruct the area for purposes of loading and unloading.
Affirmed.
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301 Md. 642 (1984)
484 A.2d 612
AUTOMOBILE TRADE ASSOCIATION OF MARYLAND ET AL.
v.
HAROLD FOLK ENTERPRISES, INC. T/A UNITED BUYING SERVICES.
No. 97, September Term, 1983.
Court of Appeals of Maryland.
December 7, 1984.
Motion for Reconsideration Denied January 7, 1985.
Stephen C. Winter, Towson (Eugene W. Cunningham, Jr. and White, Mindel, Clarke & Hill, on brief, Towson), for appellants, Automobile Trade Ass'n of Maryland, Inc., Gladding Chevrolet, Inc. and Tate Chrysler Plymouth Inc.
Avery Aisenstark, Asst. Atty. Gen., Stephen H. Sachs, Atty. Gen., Kathleen Howard Meredith, Asst. Atty. Gen., and Lynette M. Phillips, State Atty., for appellant, State of Maryland.
Ronald H. Jarashow, Annapolis (Franch, Earnest & Cowdrey, P.A., Annapolis, on brief), for appellee.
Argued before MURPHY, C.J., COLE, DAVIDSON[*], RODOWSKY and COUCH, JJ., and CHARLES E. ORTH, Jr., Associate Judge of the Court of Appeals (retired), specially assigned and JAMES C. MORTON, Jr., Associate Judge of the Court of Special Appeals (retired) specially assigned.
COLE, Judge.
The central issue we must decide in this case is whether referral agents of United Buying Service (UBS), an automobile referral sales business, must satisfy the licensure requirements for vehicle salesmen under Md.Code (1984 Repl. Vol.) §§ 15-401 to -412 of the Transportation Article.
We recount those facts necessary to place this issue in proper perspective. UBS is an automobile referral sales business with operations in Virginia, New York, Colorado, the District of Columbia, and, since 1967, Maryland. UBS arranges sales of new vehicles to individuals belonging to member-groups, such as companies, labor organizations, and other similar entities. These individuals contact a UBS referral agent after locating a desired vehicle in the UBS price book, which lists various makes and models of new vehicles at a price that is discounted from the dealer's normal list price. The individual provides the UBS referral agent with information concerning the desired automobile, such as the make, model, and options. In return, the UBS referral agent sends the customer a "purchase certificate" for that vehicle. The referral agent instructs the customer to take the certificate to a dealer who has agreed to accept UBS referrals under a verbal agreement between UBS and the dealership. Under this agreement, the dealer must sell that vehicle to the customer at the UBS price. As consideration for UBS referrals, the dealer pays UBS $30.00 per sale.
Approximately ninety percent of UBS's business is derived from automobile referrals, with the remaining ten percent derived from furniture referrals. The Chevy Chase based organization employs about twenty five individuals, most of whom are UBS referral agents. UBS referral agents are responsible for dealing with prospective customers, often over the telephone, concerning vehicles listed in the UBS price book. UBS hires and trains these referral agents, and pays their salaries, workmen's compensation insurance, medical benefits, and other expenses. All UBS referral agents transact business from the Chevy Chase office.
On the basis of a 1982 opinion by the Attorney General, the Motor Vehicle Administration (MVA) informed UBS that it would not renew the licenses of its referral agents, which were due to expire on April 30, 1983. In response, UBS filed a declaratory judgment action in the Circuit Court for Anne Arundel County seeking injunctive and mandamus relief against the MVA. The Automobile Trade Association of Maryland (ATA), an association of new automobile dealers, intervened in this suit. The trial court found that UBS referral agents were required to be licensed because they were "vehicle salesmen," and that these referral agents met the licensure requirements because they were "employed by" licensed dealers. Accordingly, on April 28, 1983, the trial court ordered that the MVA renew the licenses of the UBS referral agents. The MVA appealed to the Court of Special Appeals but we granted certiorari before judgment was entered by that Court.
I
Before we can reach the merits of this case it is necessary for us first to analyze a procedural issue raised by the appellants. In its opinion and order, the trial court made several findings to which the appellee did not file a cross-appeal. Appellants argue that the appellee's failure to file a cross-appeal bars appellate review of the trial court's finding that UBS referral agents are "vehicle salesmen" within the meaning of § 15-101(e) of the Transportation Article and are thus required to be licensed under Maryland law.
The Maryland Rules do not contain extensive requirements for cross-appeals. For review by this Court, Maryland Rule 812 b provides in general that any other party may file a petition for writ of certiorari within ten days of the filing of the first timely petition for writ of certiorari or within the time specified in Maryland Rule 812 a. Similarly, for appeals to the Court of Special Appeals, Maryland Rule 1012 f generally requires any other party to file an order for appeal within ten days from the date on which the first order for appeal was filed. Despite the lack of detailed guidance in the rules, we have discussed on numerous occasions when a cross-appeal properly lies. E.g., Joseph H. Munson Co. v. Secretary of State, 294 Md. 160, 448 A.2d 935 (1982), aff'd, ___ U.S. ___, 104 S. Ct. 2839, 81 L. Ed. 2d 786 (1984); Offutt v. Montgomery County Bd. of Educ., 285 Md. 557, 404 A.2d 281 (1979).
As a general matter, a party to a trial court proceeding must file a valid, timely order of appeal to seek direct appellate review and reversal of the trial court's judgment. See Joseph H. Munson Co. v. Secretary of State, supra, 294 Md. at 168, 448 A.2d at 939-40. In Munson, we held that an appellee could not assert on appeal that the appellant lacked standing to challenge the constitutionality of a statute because the appellee failed to file a cross-appeal from a declaratory judgment that upheld the validity of that statute. Id. at 168, 448 A.2d at 940. In writing for the Munson Court, Judge Eldridge reasoned that the lack of standing could not be raised for the first time by the appellee on appeal because lack of standing would not serve as an alternate ground for affirming the trial court's decision on the merits. Conversely, where a party has an issue resolved adversely in the trial court, but receives a wholly favorable judgment on another ground, that party may, as an appellee and without taking a cross-appeal, argue as a ground for affirmance the matter that was resolved against it at trial. Offutt v. Montgomery County Bd. of Educ., supra, 285 Md. at 564 n. 4, 404 A.2d at 285 n. 4; State Comm'n on Human Relations v. Amecom Div., 278 Md. 120, 123 n. 2, 360 A.2d 1, 3 n. 2 (1976). In Offutt, the appellee school board received a judgment wholly in its favor, although the trial court ruled that it had bargained in bad faith. The school board filed a cross-appeal. Under these circumstances, we determined that the cross-appeal was inappropriate because a finding of good faith would have been an alternate ground to support the trial court's ruling. In Amecom Div., we noted that the appellee was not required to file a cross appeal to assign any error of the trial court in support of the final decree when the appellee seeks only affirmance of that final decree.
In light of these principles, it is apparent to us that the appellee in the case sub judice was not required to file a cross-appeal to argue in this Court that its referral agents are not "vehicle salesmen" under § 15-101(e) of the Transportation Article. The appellee received a judgment wholly in its favor at trial insofar as that court denied the relief sought by appellants. Without taking a cross-appeal, appellee may argue as a ground for affirmance the matter that was resolved against it at trial. Thus, appellee can argue that we should affirm the trial court's final order on an alternate ground, i.e., that the UBS referral agents do not come within the definition of vehicle salesmen and therefore do not have to be licensed. Although this issue was resolved against appellee at trial, it nevertheless provides an alternate ground for affirmance. We therefore hold that the appellant's contention that appellee is barred from raising the contested issues because no cross-appeal was taken is without merit.
II
UBS and Maryland's vehicle salesmen licensing laws have often been at odds since UBS initiated its Maryland operation in 1967. Barely one year after UBS's foray into Maryland, the MVA issued a bulletin to all automobile dealers on May 21, 1968, indicating that they should not enter into selling arrangements with any person not licensed or bonded in accordance with Maryland law. At the MVA's request, the Attorney General of Maryland issued an opinion on the matter. The Attorney General opined that consumer buying services were "salesmen" under former Md.Code 1957, 1967 Repl.Vol.), Art. 66 1/2, § 2(49a) (current version at Md.Code (1984 Repl.Vol.), § 15-101(e) of the Transportation Article) and that dealers could not participate in an automobile sales transaction with an unlicensed buying service without violating the applicable licensing laws. 53 Op. Att'y Gen. 402 (1968). On November 20, 1968, MVA directed UBS to cease and desist its operations. After discussions between UBS and the MVA, UBS modified its purchase certificate by having it state that UBS was the agent of the purchaser, not the dealer. Based on this modification, the MVA approved the UBS operation on January 2, 1969.
In 1970, the General Assembly undertook an extensive revision of Maryland's motor vehicle laws. This revision expanded the definition of "vehicle salesmen" to include an individual who "induces or attempts to induce any person to buy or exchange" a vehicle and who "receives or expects to receive" any "value from either the seller or purchaser" of a vehicle. Chapter 534 of the 1970 Laws of Maryland (codified at Md.Code (1957, 1970 Repl.Vol.), Art. 66 1/2, § 1-210) (definition of "vehicle salesman"). Based on this new definition, the MVA again issued a bulletin that advised automobile dealers not to operate in conjunction with buying services that induce or attempt to induce the sale of vehicles, unless the representative of the buying service holds a valid salesman's license covering employment by a particular registered dealer. Bulletin from Chief, Dealer Licensing Services, Maryland Dept. of Motor Vehicles (June 16, 1971).
Shortly after the issuance of this bulletin UBS filed suit in the Circuit Court for Montgomery County seeking an injunction prohibiting the MVA from advising dealers not to transact business with UBS and a declaration that the licensing laws were inapplicable to UBS and, moreover, were unconstitutional. Settlement negotiations resulted in what the parties characterize as an "accommodation letter" between UBS and MVA. Under the terms of this May 5, 1972 letter from the Deputy Administrator of the MVA to UBS's counsel, the MVA explained that UBS would be in compliance with the licensing laws if the UBS representatives became licensed vehicle salesmen. To accomplish this UBS representatives had to be licensed through, and bonded by, a licensed dealer. UBS followed this procedure for the next decade, at which time the Attorney General issued an opinion adverse to UBS. This opinion, requested by the Secretary of Transportation, dealt with whether UBS referral agents had to comply with the appropriate licensure requirements. 67 Op.Att'y Gen. 393 (1982). The Attorney General noted that Maryland's licensing and regulatory requirements fail to accommodate adequately the operation of automobile buying referral services such as UBS, and that these businesses are unauthorized to the extent that they receive or expect to receive compensation for their referrals. More specifically, the Attorney General stated that UBS referral agents are "vehicle salesmen," but that they are ineligible for licenses because they are not "employed" by licensed dealers as required under § 15-404. The opinion concluded:
In summary, it is our opinion that the statutory licensing scheme does not permit the operation of car buying/referral services in the manner described above. The licensing scheme makes it lawful only for licensed dealers and their licensed salesmen to participate in vehicle sales in Maryland. Furthermore, the General Assembly has long required that, as a condition on which a salesman's license may be granted, the salesman must be an employee of the dealer, not some other entity. The mere alignment of buying/referral service staff members as vehicle salesmen with a dealer does not satisfy this employment requirement.
This opinion in turn precipitated the appellee's declaratory judgment action and this subsequent appeal.
A
Central to our analysis is whether UBS referral agents are vehicle salesmen within the meaning of § 15-101(e) of the Transportation Code. The statute provides:
(e) Vehicle Salesman. (1) "Vehicle salesman" means, except as provided in paragraph (2) of this subsection, any individual who:
(i) For a commission or other compensation, under any form of agreement or arrangement with a dealer, buys, sells, or exchanges or negotiates or attempts to negotiate a sale or exchange of an interest in a vehicle of a type required to be registered under Title 13 of this article; or
(ii) Induces or attempts to induce any other person to buy or exchange an interest in a vehicle of a type required to be registered under Title 13 of this article and receives or expects to receive a commission or other compensation from either the seller or the buyer of the vehicle.
(2) "Vehicle salesman" does not include:
(i) A person described in subsection (b)(2) of this section; or
(ii) An individual acting as a representative of a person described in subsection (b)(2) of this section.
Based on this definition, the trial court determined that UBS's referral agents fall within the definitional purview of § 15-101(e)(ii) because these agents induce or attempt to induce automobile sales. The parties correctly note that the meaning of "induce" and "attempts to induce" as used within that statute is of critical importance in ascertaining whether the referral agents are vehicle salesmen. Because the Transportation Article does not define these terms, we must resort to well-settled canons of statutory construction to determine their meaning.
As we have often stated:
[I]t is the duty of the courts to declare the law as the General Assembly has made it, that is, to ascertain and give effect to the intention of the legislature. This we have said on many occasions is the cardinal rule of statutory construction. In ascertaining the legislative intent we look to the language used, and when such language is clear and unambiguous, it must be held to mean what it expresses. However, where the language is ambiguous and of doubtful import, the duty of the courts is to ascertain and give effect to the true legislative intent. In short, the judicial function of statutory construction lies wholly within the domain of ambiguity and uncertainty. When exercising this function the courts may resort to extrinsic aids such as examining the history of the passage of the law, the reports of committees and commissions, the introduction of amendments and testimony given before legislative committees. As we said in Berry v. State, [287 Md. 491, 496, 413 A.2d 557 (1980)], "where the statutory language is of doubtful meaning, the Court must venture beyond the words of the statute and consider the subject matter of the statute, the purpose underlying its enactment, and the object sought to be accomplished[.]"
Bledsoe v. Bledsoe, 294 Md. 183, 188-89, 448 A.2d 353, 356 (1982) (citations omitted); see Board of Examiners in Optometry v. Spitz, 300 Md. 466, 474, 479 A.2d 363, 367 (1984); City of Baltimore v. Hackley, 300 Md. 277, 283, 477 A.2d 1174, 1177 (1984). In light of these well-settled rules, we must determine the meaning of "induce" and "attempts to induce" as those terms are used in § 15-101(e)(ii) of the Transportation Article.[1]
Dictionary meanings are a useful source in determining the "natural and ordinary signification" of the terms involved. Webster's Third New International Dictionary 1154 (1976) defines "induce" in the following manner:
1a: to move and lead (as by persuasion or influence .. .: prevail upon: INFLUENCE, PERSUADE ... b: to inspire, call forth, or bring about by influence or stimulation ... 3a: to bring on or bring about: EFFECT, CAUSE
* * * * * *
syn PERSUADE, PREVAIL: INDUCE may indicate overcoming indifference, hesitation, or opposition, usu. by offering for consideration persuasive advantages or gains that bring about a desired decision ... PERSUADE may suggest a winning over by an appeal, entreaty, or expostulation addressed as much to feelings as to reason ... PREVAIL may be used in situations in which strong opposition or reluctance is overcome by sustained argument and entreaty[.]
Although induce, persuade, and prevail are considered synonyms, "induce suggests a subtler leading of a person to a course of action so that the decision seems finally to come from him[.]" Webster's New World Dictionary 1062 (2d ed. 1982). A leading law dictionary further defines induce as "[t]o bring on or about, to affect, cause, to influence to an act or course of conduct, lead by persuasion or reasoning, incite by motives, prevail on." Black's Law Dictionary 697 (5th ed. 1979).
These definitions of induce suggest that that term is susceptible to either a restrictive or expansive interpretation. Under a restrictive interpretation, the action taken must actually accomplish the goal, which in this case is the sale of a new vehicle. A less restrictive interpretation would be that the action taken lead or influence one toward the desired goal. Irrespective of the appellee's argument that "induce" be given a restrictive meaning, it is clear to us that the General Assembly intended a significantly broader meaning by its use of the language "attempts to induce." Appellee seeks to avoid the effect of this language by urging that we give "attempt" its criminal law meaning of a specific intent to do a criminal act. This argument is pure sophistry because it disregards the natural and ordinary signification of the term "attempt." The fallacy in appellee's contention is best illustrated by the definition of "attempt": "In statutes and in cases other than criminal prosecutions an `attempt' ordinarily means an intent combined with an act falling short of the thing intended. It may be described as an endeavor to do an act, carried beyond mere preparation, but short of execution." Id. at 116 (emphasis supplied.) Another dictionary defines "attempt" as follows: "to make an effort to do, accomplish, solve, or effect ... often used in venturous or experimental situations sometimes with implications of failure[.]" Webster's Third New International Dictionary, supra, at 140.
These definitions, together with our obligation to ascertain and carry out the real legislative intent, compels us to conclude that UBS referral agents induce or attempt to induce vehicle sales within the meaning of § 15-101(e)(ii) of the Transportation Article. The act of referring a customer to a specific vehicle dealer or dealers serves "to influence," "to bring on or about", "to affect," and "to aid" the sale of a vehicle by that dealer to that particular customer. The customer expects to receive a lower purchase price and a faster transaction as the result of the referral made by the UBS agent. The expectation of these special services and benefits are presumably not readily available at other dealers. Indeed, one dealer testified that UBS referred customers enjoy savings between $800 $2,000 over non-UBS customers. Of course, a sale does not always have to result by virtue of the referral because the statute uses the language "attempts to induce." See 67 Op.Att'y Gen., supra, at 401-02.
Appellee discounts this reasoning by maintaining that its operation simply facilitates or carries out a purchase already decided upon by the buyer. This argument proves too little. As an initial matter, assuming arguendo that the customer may have already decided to purchase a specific automobile before contacting a UBS referral agent, the customer has obviously not decided from which dealer to purchase the vehicle. By referring the customer to a specific dealer, the UBS referral agent induces or attempts to induce the sale of a vehicle between that dealer and that customer. The argument also proves too much because it rests on the unsupported proposition that every customer who contacts a UBS referral agent has already firmly decided upon the desired vehicle's make, model, options, and accessories. Although there was testimony to the effect that UBS referral agents never discuss the price or options with potential customers, other testimony indicated that referral agents would apprise potential customers of recent price increases not reflected in the UBS price book. In addition, the UBS price book, which was offered into evidence, clearly encourages customers to contact UBS referral agents to discuss its contents. Taken collectively, the actions on the part of the UBS referral agents have the effect of advancing the sales process. We therefore hold that the trial court did not err in concluding that UBS referral agents induce or attempt to induce vehicle sales under § 15-101(e)(ii) of the Transportation Article and therefore met the first statutory criterion of vehicle salesmen.
The second criterion under § 15-101(e)(ii) provides that an individual is a vehicle salesman if he "receives or expects to receive a commission or other compensation from either the seller or the buyer of the vehicle." The trial court found that the UBS referral agents receive compensation from the seller because the salaries of the referral agents are paid out of the proceeds received by UBS from dealers. Appellee does not contest this finding, and we cannot conclude that the trial court's finding is erroneous. We therefore hold that UBS referral agents are "vehicle salesmen" under § 15-101(e)(ii) and must therefore comply with the licensure requirements under §§ 15-401 to -412.
B
Maryland law imposes various conditions upon the licensure of vehicle salesmen. These conditions provide, inter alia, that a person may not act as a vehicle salesman unless he is licensed by the MVA (§ 15-402), only individuals may apply for and be issued licenses (§ 15-403), and a person must be employed by a licensed dealer (§ 15-404). The last condition is the focus of our attention. Section 15-404 provides in pertinent part:
§ 15-404 Employment by licensed dealer required.
(a) In general. A person may not be licensed under this subtitle [Subtitle 4. Vehicle Salesmen] unless the person:
(1) Is a licensed dealer; or
(2) Is employed as a vehicle salesman by a licensed dealer.
UBS argues that its referral agents are "employed" by licensed dealers within the meaning of this statute because they act on behalf of the licensed dealer in making the referral on the basis of an agreement between UBS and the dealer. In an alternative argument, UBS posits that its referral agents are employees of the dealer because they satisfy the criteria for an employer-employee relationship. Although UBS notes that dual employment would exist under its alternative argument, it nonetheless contends that this form of employment does not contravene the Maryland vehicle salesmen licensing statute.
Appellants counter these arguments by advancing the contrary proposition that UBS referral agents are not "employed" by licensed dealers as required by § 15-404 and are therefore ineligible for licensure as vehicle salesmen. In support of this proposition, appellants maintain that UBS failed to present evidence sufficient to support a finding that the referral agents are employees of the dealers. With respect to appellee's dual employment argument, appellants explain that the licensure scheme contemplates that licensed dealers exercise exclusive supervision and control over their licensed vehicle salesmen. Furthermore, appellants insist that the General Assembly's recent rejection of legislation purporting to encompass automobile referral sales supports their view that the term "employed" contemplates the traditional employer-employee relationship.
The trial court considered these arguments and agreed with UBS's contention that its referral agents were "employed" by both UBS and the licensed dealer. The threshold issue we must determine, therefore, is whether the UBS referral agents are employed by licensed dealers within the meaning of § 15-404. We must thus turn our attention to that statute and adhere to the rules of statutory construction noted above.
Nowhere does § 15-404 or the Transportation Article itself define "employed." That statute, however, as well as §§ 15-405 and 15-409, uses the term in the context of the vehicle salesman licensed dealer relationship. Appellee would have us give "employed" a meaning so broad so as to encompass any relationship between a vehicle salesman and a licensed dealer. We decline to do so because the General Assembly was careful in referring to this relationship in Subtitle 4 in terms associated with the traditional employer-employee relationship. Cf. United Buying Serv., Inc. v. State Dep't of Revenue, 37 Colo. App. 465, 548 P.2d 1286 (1976) (court declined to restrict term "employed" to technical employer-employee relationship, and thus found that UBS itself is employed by dealers; case is distinguishable from instant case because only individuals in Maryland, not corporations, are eligible for licensure as vehicle salesmen).
In Mackall v. Zayre Corp., 293 Md. 221, 443 A.2d 98 (1982), we set forth the following five criteria to determine the existence of an employer-employee relationship:
These [criteria] include (1) the power to select and hire the employee, (2) the payment of wages, (3) the power to discharge, (4) the power to control the employee's conduct, and (5) whether the work is part of the regular business of the employer. The decisive test in determining whether the relation of employer and employee exists is whether the employer has the right to control and direct the employee in the performance of the work and in the manner in which the work is to be done.
Id. at 230, 443 A.2d at 103. The trial court referred to these criteria and concluded that the UBS referral agents were employees of UBS. We agree. UBS selected, hired, and fired the referral agents, paid their wages, social security taxes, and workmen's compensation insurance, and supervised them on a day-to-day basis. Moreover, the work of the referral agents in referring potential customers to licensed dealers was a major part of UBS's regular business; the referral agents worked from UBS's sole Maryland office and used UBS clerical staff, office supplies, telephones, and stationery. In addition, UBS maintained the personnel files on the referral agents. These factors clearly indicate the existence of an employer-employee relationship between UBS and its referral agents.
The trial court further held that UBS referral agents were also the employees of the licensed dealers to whom they made referrals. This holding raises the issue of whether the referral agents are employed simultaneously by UBS and the licensed dealers and, if so, whether the licensure provisions permit this form of dual employment.
As an initial matter, we recognize "that, under certain circumstances, a person performing a given function simultaneously may be the employee of two employers." Id. at 229, 443 A.2d at 102; see Comptroller v. Atlantic Supply Co., 294 Md. 213, 448 A.2d 955 (1982); Keitz v. National Paving Co., 214 Md. 479, 134 A.2d 296 (1957). The test for determining whether dual employment exists is whether "there is evidence to support an inference that more than one individual or company controls or directs a person in the performance of a given function." Mackall v. Zayre Corp., supra, 293 Md. at 230, 443 A.2d at 103 (emphasis supplied). Based upon this standard, we must determine whether the trial court's factual determination that the UBS referral agents are employees of both UBS and the licensed dealers is clearly erroneous in light of our review of the law and the evidence. Md.Rule 886.
The decisive test in determining the existence of an employer-employee relationship is the right of the employer to control and direct the employee in the performance of the work and in the manner in which the work is to be done. Id. at 230, 443 A.2d at 103. Evidence adduced at trial indicated that the licensed dealers had the right to terminate their relationship with their particular UBS agent and had the right to reprimand a referral agent. The evidence also indicated that the agents were paid from the fees collected from the dealers through referrals, that the dealers assumed various responsibilities inherent in bonding their respective referral agents, and that the dealers and agents visited the other's premises. These facts were the only ones that gave rise to an inference of an employer-employee relationship between the dealers and the referral agents. We cannot agree with the trial court that these facts, considered individually or collectively, constitute an employer-employee relationship.
The control allegedly vested in the dealers is, in our view, nonexistent. The actual right to control and direct these referral agents is vested in UBS. UBS's reliance on Mackall is misplaced. Mackall did not create a per se rule that dual employment exists in every case where two entities affect the actions of a single employee. Instead, Mackall was careful to limit the dual employment rule to "certain circumstances." A careful reading of Mackall indicates the important differences between that case and the case sub judice, and dispels the proposition that the UBS referral agents are employees of the licensed dealers.
Factually, the two employers in Mackall, Zayre Corporation (Zayre) and Alden Millinery (Alden), exercised substantial control over the employee (Mackall). Alden operated a concession in one of Zayre's department stores. Mackall sustained injuries when she slipped and fell while at work. In a tort action brought by Mackall against Zayre, the jury determined that Mackall was the employee of both Alden and Zayre. As such, her exclusive remedy was under the Workmen's Compensation law. We affirmed the judgment in favor of Zayre, holding that Mackall was a dual employee of Alden and Zayre. In writing for the Court, Judge Davidson noted that both entities participated in the selection, hiring, and paying of the employee. Both had the power to discharge her and, most important, both employers exercised control over Mackall in the performance of her duties. For instance the Zayre manager exercised control over the staffing of the Alden concession and could transfer Mackall to the Zayre jewelry department during lunchtime when that department was unattended. Moreover, Mackall was subject to all the rules and regulations applicable to Zayre employees, and the Zayre manager was authorized to transfer a Zayre employee into the Alden concession when the concession was not adequately staffed.
The degree of control allegedly exercised by the dealers in the case sub judice pales in comparison to that in Mackall. Indeed, there was no evidence that the referral agents were subject to all the rules and regulations of the dealership to which they were assigned. Simply stated, no evidence was presented that the dealers engaged in the same degree of control as that exercised by the Zayre managers in Mackall. We therefore conclude that Mackall is clearly distinguishable from the instant case, and that the referral agents were not "employed" by the licensed dealers under § 15-404.
Our conclusion that the referral agents are not "employed" by the licensed dealers is buttressed by a recent Attorney General's opinion to the same effect. Although the opinion of the Attorney General interpreting legislation is not binding on this Court, it is nevertheless entitled to careful consideration. Board of Examiners in Optometry v. Spitz, supra 300 Md. at 476, 479 A.2d at 368. The Attorney General concluded that "[t]he mere alignment of buying/referral service staff members as vehicle salesmen with a dealer does not satisfy [the § 15-407] employment requirement." 67 Op.Att'y Gen., supra, at 408. Because the Attorney General recognized that his conclusion would affect the operation of a type of business that may benefit consumers, he suggested that the General Assembly adopt remedial legislation to authorize referral services to conduct business.
In response to the Attorney General's opinion of June 8, 1982, Senate Bill 729 was introduced on February 18, 1983. This bill proposed to add a "Buying Referral Services" subtitle to Title 15 of the Transportation Article. The rejection of this legislation by the Senate on April 7, 1983, intimates that the legislature acquiesced in the Attorney General's Opinion. See Board of Examiners in Optometry v. Spitz, supra.
Even assuming that the trial court did not err in concluding that the referral agents were "employed" by the licensed dealers, the trial court's determination that § 15-404 permits dual employment is erroneous. Our view of the Maryland licensure scheme convinces us that the legislature intended to proscribe dual employment. The General Assembly intended for a one-salesman-one-dealer exclusivity principle to govern the licensing of vehicle salesmen. This principle is illustrated by the requirement under § 15-409(b) that a licensed vehicle salesman may not solicit sales for the benefit of any seller other than the licensed dealer named in his license. In addition, § 15-408 provides that a license authorizes a licensee "to be a vehicle salesman for a licensed dealer during the license year for which it is issued," while § 15-405 states that a license application must include the "name and business address of the licensed dealer by whom the applicant is or will be employed." This language clearly indicates that a vehicle salesman may be employed by only one licensed dealer.
The rationale for this type of licensing scheme is to foster dealer accountability in the context of consumer transactions. We discussed briefly the purpose of this scheme in Aero Motors v. Administrator, Motor Vehicle Admin., 274 Md. 567, 337 A.2d 685 (1975). In the course of upholding the constitutionality of the Maryland licensure system, we observed that the statutorily-regulated franchise-dealer system was designed to encourage accountability and thus enhance consumer protection. We further noted that the legislature intended to use some of the prevalent industry practices as a means of enforcing the licensing laws. Id. at 579-81, 337 A.2d at 694-96. Shortly after this decision, the United States District Court for the District of Maryland elaborated upon the Aero Motors rationale in a case involving a constitutional challenge brought by a brokerage referral service. Detroit Automotive Purchasing Servs. v. Lee, 463 F. Supp. 954 (D.Md. 1978). The Detroit Automotive court emphasized the accountability and exclusivity principles that pervade the vehicle salesmen licensure provisions, and remarked:
In operation, this system of licensing often takes advantage of established industry practices to aid in policing the wholesale and retail market in Maryland.
In this regard, automobile dealers play an important role in policing the conduct of motor vehicle salesmen. As a condition for obtaining a license as a vehicle salesman, an individual must either be a licensed dealer himself or employed by one. § 15-404(a). Moreover, an applicant for a salesman's license must submit a written statement by a licensed dealer certifying that the salesman has in fact been accepted as the dealer's employee, § 14-404(b), and the application must include the name and full address of the dealer, § 15-405(1). Finally, the issued license itself bears the name of the dealer by whom the salesman is employed, § 15-409(a), and the licensed salesman may not solicit sales for the benefit of any seller other than the licensed dealer named in his license, § 15-409(b).
This licensed dealer, clearly identified as a result of the licensing requirements for vehicle salesmen, is himself lawfully and professionally responsible for the conduct of the employee-salesman. Under § 15-109, the licensed dealer can, in some circumstances, lose his own license because of the misconduct of his employee. Thus, the dealer's interest in preserving the investment in a business dependent upon retaining a dealer's license serves as an incentive to monitor the practice of the employee-salesman. In this way, dealer supervision of salesmen augments the regulation of vehicle salesmen through formal MVA adjudication of customer complaints and the imposition of sanctions directly upon the salesman, either by revoking or suspending the salesman's license.
Id. at 957-58 (footnotes omitted). The Detroit Automotive Court further recognized:
The pertinent restriction which requires a licensed broker to be "employed" by a licensed dealer and act as a vehicle salesman for only him, § 15-409(b), can be rationally justified as facilitating the informal supervision of vehicle brokers by licensed dealers. .. . [T]he one-dealer-one salesman rule conceivably functions to avoid confusion among dealers concerning who will have legal responsibility for supervising the conduct of a salesman on a given transaction.
Id. at 969 n. 9 (emphasis supplied).
These cases demonstrate that the hierarchial structure found in today's automobile industry from manufacturer to dealer to salesman is an integral part of Maryland's statutory enforcement mechanism. This mechanism places a premium on the control exercised by one party over another in the process. In our view, § 15-404's "employed by" requirement should be read in light of this concept. Obviously, dual employment affords a licensed dealer less control over a vehicle salesman than exclusive employment. A qualitative difference exists between the degree of control exercised by the dealer and the degree of control it exercises over UBS referral agents. This qualitative difference reinforces our view that § 15-404 prohibits dual employment. Cf. United Buying Service v. Dept. of Revenue, supra (licensure provisions indicate a legislative intent that multiple licensing be permitted).
For these reasons, we hold that the UBS referral agents are not "employed" by licensed dealers to whom they are assigned within the meaning of § 15-404.
III
UBS contends that the 1972 accommodation constituted an accord and satisfaction that binds the State to grant vehicle salesmen licenses to UBS referral agents under the terms of the May 5, 1972, accommodation letter from MVA to UBS. We disagree.
Although the equitable doctrine of accord and satisfaction ordinarily concerns monetary settlements of debts or liabilities, other settlements not involving an exchange of funds can be as equally binding as an accord and satisfaction. See Adams v. Wilson, 264 Md. 1, 12, 284 A.2d 434, 440 (1971) (recognizing that partnership dispute could be resolved by accord and satisfaction). In Air Power v. Omega Equip. Corp., 54 Md. App. 534, 459 A.2d 1120 (1983), the court defined accord and satisfaction as follows:
Accord and satisfaction is a method of discharging a contract or cause of action, whereby the parties agree to give and accept something in settlement of the claim or demand of the one against the other, and perform such agreement, the "accord" being the agreement, and the "satisfaction" its execution or performance.
Id. at 538, 459 A.2d at 1123 (quoting 1 C.J.S. Accord and Satisfaction § 1) (emphasis supplied); see Porter v. Berwyn Fuel & Feed Co., 244 Md. 629, 224 A.2d 662 (1966). An accord and satisfaction is essentially contractual, consideration for which can take monetary or non-monetary forms. Because the State agreed to issue vehicle salesmen licenses in exchange for UBS's promises to dismiss the law suit and license its referral agents through a licensed dealer, an accord and satisfaction arguably arose. We need not decide, however, whether the accommodation is an accord and satisfaction. Irrespective of whether a state agency was a party to that accommodation or that UBS derived substantial economic benefit therefrom, this Court will not lend its aid to enforce an agreement that directly contravenes state law. See Patton v. Graves, 244 Md. 528, 532, 224 A.2d 411 (1966). We therefore expressly hold that the State is not required to grant vehicle salesmen licenses to UBS referral agents under the purported accommodation of May 5, 1972.
JUDGMENT OF THE CIRCUIT COURT FOR ANNE ARUNDEL COUNTY REVERSED AND REMANDED TO THAT COURT FOR AN ENTRY OF A JUDGMENT CONSISTENT WITH THIS OPINION.
COSTS TO BE APPORTIONED EQUALLY BETWEEN THE PARTIES.
NOTES
[*] Davidson, J., participated in the hearing of the case and in the conference in regard to its decision, but died prior to the adoption of the opinion by the Court.
[1] Very few states have statutes that mirror the "induce" or "attempts to induce" language used in the Maryland vehicle salesman licensure statute. E.g., Cal.Vehicle Code § 675 (West Supp. 1984) (no judicial interpretation of these terms to date).
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106 B.R. 696 (1989)
MANLEY TRUCK LINE, INC., Plaintiff,
v.
MERCANTILE BANK OF KANSAS CITY, Defendant.
Civ. A. No. 89-2069-S.
United States District Court, D. Kansas.
October 3, 1989.
Stephen D. McGiffert, McDowell, Rice & Smith, Chartered, Kansas City, Kan., Leonard A. Rose and Jay W. Endress, Rose, Jackson, Brouillette & Shapiro, Kansas City, Mo., for plaintiff.
Jay Selanders, Husch, Eppenberger, Donohue, Cornfeld and Jenkins, Overland Park, Kan., David A. Vorbeck, and Daniel D. Phillips, Husch, Eppenberger, Donohue, Cornfeld and Jenkins, Kansas City, Mo., for defendant.
MEMORANDUM AND ORDER
SAFFELS, District Judge.
This matter is before the court on defendant's motion to refer the above-captioned proceeding to the bankruptcy court for this district. In the present case, plaintiff (hereafter "Manley") asserts a three-count complaint against defendant (hereafter "Mercantile") alleging breach of contract, wrongful dishonor and negligence. Manley has demanded a jury trial of its complaint.[1]
In support of its motion to refer this proceeding to bankruptcy court, Mercantile notes that Manley is currently a debtor in a Chapter 11 proceeding in a bankruptcy court for this district, i.e., In re: Manley Truck Lines, Inc., No. 87-40330-11. Further, *697 Mercantile contends that Manley's present action relates to the debtor-creditor relationship between these parties, and that in the interest of judicial economy the present action should be consolidated with an adversary proceeding between the parties presently before the bankruptcy court to determine the priority of, and to enforce, Mercantile's security interest and lien against Manley's assets, i.e., Mercantile Bank of Kansas City v. Manley Truck Lines, No. 88-0165.
The general rule in this district is that all proceedings under, and related to, Title 11 of the United States Code are referred to district bankruptcy judges. D.Kan. Rule 705. This general rule, adopted pursuant to 28 U.S.C. § 157(a), is subject to 28 U.S.C. § 157(d) which sets forth cases in which a district court's reference to a bankruptcy judge either may or must be withdrawn. Since in this case the mandatory withdrawal of reference provision does not apply, this court may, under the permissive withdrawal section, withdraw a case "for cause shown." 28 U.S.C. § 157(d). Although "cause" is not defined in the statute, courts have considered a number of factors in deciding whether reference to a bankruptcy court is appropriate, including whether a jury trial has been requested. See Holland America Ins. Co. v. Succession of Roy, 777 F.2d 992, 999 (5th Cir.1985); In re Leedy Mortgage Co., Inc., 62 B.R. 303, 306 (E.D.Pa.1986). Although no direct prohibition exists on jury trial to a bankruptcy court, statutory provision for district court review de novo of bankruptcy court decisions in non-core proceedings[2], 28 U.S.C. § 157(c)(1), renders a jury trial before a bankruptcy court impractical. See In re Smith-Douglass, Inc., 43 B.R. 616, 618 (Bankr.E.D.N.C.1984).
Given that Manley has requested a jury trial, the court finds that reference of the above-captioned matter would not be in the interests of judicial economy since any jury trial before a bankruptcy court would be rendered essentially "advisory" by this court's duty to review the bankruptcy court's findings. Id.; see 28 U.S.C. § 157(c)(1). Further, although the present action is certainly related to Manley's Chapter 11 proceeding and, to some extent, to Mercantile's action to enforce its lien, the state law claims asserted in this action are not so intimately connected with the bankruptcy proceeding as to require reference to the bankruptcy court. See, e.g., In re Leedy Mortgage Co., Inc., 62 B.R. at 306. The court will thus deny defendant's motion to refer this proceeding to the bankruptcy court of this district.
IT IS BY THE COURT THEREFORE ORDERED that defendant's motion to refer this proceeding to the bankruptcy court for this district is hereby denied.
IT IS FURTHER ORDERED that plaintiff's motion for a stay of proceedings until new counsel for plaintiff entered an appearance is now moot, and thus deemed denied.
NOTES
[1] The court notes that in connection with Mercantile's motion to refer this case to bankruptcy court, Manley submitted a motion to stay consideration of this motion pending an entry of appearance by Manley's new counsel. Since Manley's new counsel has entered an appearance and submitted suggestions with respect to Mercantile's referral motion, the court will consider the motion for a stay of decision on Mercantile's motion effectively moot.
[2] Although the distinction between "core" and "non-core" proceedings may be somewhat difficult to draw, the court finds that Manley's present action, asserting state law claims for negligence, breach of contract and wrongful dishonor, is in the nature of a non-core proceeding. A core proceeding is essentially equitable and would not exist absent the Bankruptcy Code, In re American Energy, Inc., 50 B.R. 175, 178 (Bankr.N.D.1985). A non-core proceeding includes those proceedings "at law" which in the absence of bankruptcy could have been brought in a federal district or state court. In re Colorado Energy Supply, Inc., 728 F.2d 1283, 1286 (10th Cir.1984). Further, in a non-core proceeding, the Seventh Amendment right to jury trial is preserved. In re American Energy, 50 B.R. at 180.
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106 B.R. 62 (1989)
In re Douglas G. BRANTZ, Aleta Brantz, Debtors.
Bankruptcy No. 89-11791S.
United States Bankruptcy Court, E.D. Pennsylvania.
October 2, 1989.
*63 Jonathan H. Ganz, Philadelphia, Pa., for debtors.
Edward Sparkman, Philadelphia, Pa., Standing Chapter 13 Trustee.
David E. Stern, Leona Mogavero, Blue Bell, Pa., for Meritor Financial Services, Inc.
James J. O'Connell, Philadelphia, Pa., U.S. Trustee.
OPINION
DAVID A. SCHOLL, Bankruptcy Judge.
On June 16, 1989, the joint Debtors in this Chapter 13 bankruptcy case, DOUGLAS G. BRANTZ and ALETA BRANTZ (hereinafter "the Debtors"), commenced on May 25, 1989, filed a motion pursuant to 11 U.S.C. § 522(f)(1) seeking to avoid a judicial lien[1] in the amount of $28,441.17 obtained against their residential real estate at 2103 Friendship Street, Philadelphia, Pennsylvania 19149, held by Meritor Financial Services, Inc. (hereinafter "Meritor"). Meritor opposed the motion, principally by filing a motion seeking permission to institute an adversary proceeding to attack an apparently prior Mortgage in favor of Philip and Sondra Schley, the parents of the Wife-Debtor (hereinafter "the Schleys").
After two continuances of the Debtors' motion, we scheduled it for a hearing on a must-be-tried basis on September 14, 1989, per an Order of August 14, 1989. A Stipulation between Meritor and the Debtors to continue the hearing on the Debtors' motion until after Meritor's motion had been decided, brought to our attention after our Order of August 14, 1989, was entered, resulted in our also scheduling the hearing on Meritor's motion on September 14, 1989. The parties thoughtfully simplified the potential procedural logjam created by these motions and orders by appearing on September 14, 1989, and agreeing substantially as follows: (1) Meritor had standing and therefore could proceed to attack the Schleys' Mortgage. Accord, In re Morrison, 69 B.R. 586, 589-90 (Bankr.E.D.Pa. 1987); (2) Meritor's ability to defend the Debtors' motion depended entirely on its ability to avoid the Schleys' Mortgage; and (3) The parties were prepared to try the issue of whether Meritor could avoid the Schleys' Mortgage, pursuant to 11 U.S.C. §§ 547 or 548, on that date. Meritor then called Philip Schley and both Debtors as its witnesses as of cross-examination and adduced brief additional testimony from its work-out specialist assigned to the account, Michael Karp, in support of its position.
The Meritor judgment was based upon the Debtors' default in payments of a *64 Promissory Note of February 3, 1983, in the amount of $40,000, the proceeds of which were utilized in a business of the Husband-Debtor the failure of which had led to the Debtors' bankruptcy filing. In July, 1988, Mr. Karp met with the Husband-Debtor and Mr. Schley at the business to attempt to work out a resolution for curing the defaults in payment of the then-delinquent loan. On August 9, 1988, no resolution having been reached, Meritor's counsel wrote a letter to the business, copied to the Debtors and Mr. Karp, accelerating the indebtedness and indicating that a collection suit would be filed forthwith. On August 11, 1988, apparently having filed suit in the interim and having had a telephone conversation with the Husband-Debtor which Meritor's counsel believed had resulted in an agreement, counsel forwarded a draft of a Stipulation promising forbearance as long as the Debtor paid according to the terms set forth therein.
The Stipulation was never executed by the Debtors, and payments thereto were not made. Instead, on August 16, 1988, a Mortgage on the Debtors' home in favor of the Schleys in the amount of $40,000 was recorded. Meritor subsequently obtained a judgment against the Debtors, but this bankruptcy ensued before it could collect on same. However, the Schleys' Mortgage was prior to Meritor's subsequent judicial lien against the Debtor's home. The parties stipulated that the Debtors' home was worth $65,000 and was subject to other unavoidable mortgages in the total amount of $38,000. Whether the Debtors had any equity in the premises in excess of the $15,800 claimed exemptions in the premises, which have not been challenged,[2] was agreed to be dependent upon whether the Schleys' Mortgage could be avoided. See In re Magosin, 75 B.R. 545, 547 (Bankr.E. D.Pa.1987).
Mr. Schley testified that he was very close to all of his five (5) children, including the Wife-Debtor[3] and very generous in assisting them financially. He stated that, since 1978, he had "made loans" to the Husband-Debtor's business, in a total amount of about $140,000. Repayments of $50 weekly were made on an irregular basis.
All of these "loans" were undocumented except by bank records showing withdrawals and deposits from the Schleys' bank accounts for about ten (10) years. However, Mr. Schley testified that he had openheart surgery for the third time in January, 1988, at which time he was informed that a further heart attack would be fatal. Having no retirement benefits to protect his wife, he stated that he decided to ask the Debtors to sign the Mortgage to protect his wife's future financial security. The parties agreed on the $40,000 figure as their best estimate of the balance of the Debtors' present indebtedness to the Schleys, and a Mortgage was prepared and dated February 1, 1988. However, it was not recorded at that time because, according to Mr. Schley, he suffered another heart attack in March, 1988;[4] was hospitalized until May, 1988; was so sick thereafter that he had to have a cousin take it to City Hall to record it;[5] and this was not done until August, 1988. He claimed, despite his closeness to the Debtors, that he was unaware of the letters of August 9, 1988, and August 11, 1988, from Meritor's counsel which immediately preceded the filing of the Mortgage.
Mr. Schley also stated that he had loaned an additional $18,000 to the Debtors subsequent to August, 1988. While originally stating that he had loaned them $9,000 in *65 the past few weeks, he attempted to retract that statement when the court expressed concern that the Debtors had received an undisclosed post-petition loan from him. Mr. Schley also contended that the Debtors have continued to date to repay him $50 weekly on the $40,000 indebtedness reflected by the Mortgage. He attempted to retract this statement in part by claiming that his wife made part of the $50 payments for the Debtors when the court expressed a concern that potentially-avoidable post-petition payments were being made to him. These attempted retractions weighed against his credibility, as did his overstatements.
The Husband-Debtor's testimony was marked by his "inability to recall" the dates of any significant events, including those of his post-petition loans from and payments to his parents-in-law or that of his signing of the Schleys' Mortgage. He did recall the letters from Meritor's counsel. However, apparently perceiving the need to place the signing of the Mortgage before receipt of the letters to legitimize his actions, he stated that the signing occurred in "spring, 1988." He also conceded that his liabilities exceeded his assets by $60,000 to $70,000 as of August, 1988. The Wife-Debtor, agreeing with her husband's statement of the couple's asset-picture, but disagreeing with her husband regarding the date of the signing of the Mortgage, placed the signing in August, 1988, just before the recordation of the Mortgage.
At the close of the testimony, we engaged in an extended colloquy with counsel. Meritor first asserted that the transfer could be avoided pursuant to 11 U.S.C. § 547. We opined that the elements of §§ 547(b)(1), (b)(2), (b)(3), and (b)(4)(B) were clearly present.[6] Meritor was permitted to reopen the record to admit a copy of the Debtors' proposed Chapter 13 Plan, contemplating a ten (10%) percent dividend to unsecured creditors, thereby clearly satisfying the element of § 547(b)(5). In response, the Debtors asserted a § 547(c)(4) affirmative defense in the amount of $18,000, arising from Mr. Schley's alleged advances to the Debtors after the execution of the Mortgage.
Meritor also relied on both 11 U.S.C. § 548(a)(1) (transfer characterized by actual fraudulent intent) and 11 U.S.C. §§ 548(a)(2)(A) and (a)(2)(B)(i) (transfer which is a constructive fraud) as bases for avoidance of the Schleys' Mortgage.[7] The *66 Debtors argued that the Schleys had received consideration for the transfers in the form of the extensive prior loans and that there were insufficient "badges of fraud" present in the transaction, see In re Pinto Trucking Service, Inc., 93 B.R. 379, 386 (Bankr.E.D.Pa.1988), to offset their denials of fraudulent intent.
Meritor's counsel also argued that a mortgage, like the Schleys' Mortgage, which lies unaccompanied by another writing evidencing the underlying debt secured by it was invalid. At its request, we allowed it (and the Debtors as well) until September 20, 1989, to submit any writings to us in the form of post-hearing argument, particularly on this latter point, which was unfamiliar to us. The sum total of the responses was a one-page letter of September 19, 1989, from Meritor's counsel, arguing that the Schleys' lack of compliance with Act 6 of 1974, 41 P.S. § 101, et seq. (hereinafter "Act 6"), and the federal Truth in Lending Act, 15 U.S.C. § 1601, et seq. (hereinafter "TILA"), justified striking the Mortgage. This is a curious and totally spurious argument.[8]
Our decision flows directly from our conclusion that the recording of the Schleys' Mortgage was a calculated, direct, and immediate response to one predominant external factor: Meritor's threat to sue the Debtors on its Note. We refuse to find it purely coincidental that a Mortgage, in the same amount as Meritor's Note, would be recorded by the Schleys a few days after Meritor's demands.
Mr. Schley, given his obvious overstatements, see page 64, nn. 3, 4, 5 supra, was not generally a credible witness. His testimony had the distinct air of a parent quite willing to bend the truth to "help" his daughter and her husband. His meeting with Karp to discuss the status of the Meritor loan in July, 1988, belies his contention that he was so ill between January, 1988, and August, 1988, that his intention to record the Mortgage, allegedly formulated in February, 1988, was put off and that the Debtors did not inform him of their troubled circumstances due to his illness during this period. If his explanation for desiring a mortgage from the Debtors to protect his wife in light of his own failing health had in fact been a dominant motive for recording the Mortgage, his subsequent hospitalization in March, 1988, would have caused him to have the Mortgage recorded immediately, not later.
The variance in the testimony of Mr. Schley and each of the Debtors as to when the Mortgage was executed is indicative of the attempt by particularly Mr. Schley and the Husband-Debtor to introduce fabrications to conceal the true motivations of the Debtors and the Schleys for the entry of the Mortgage at the time when it was effected. The Wife-Debtor, we believe honestly, testified that the Mortgage was executed in August, 1988, probably just before it was recorded. The February date appears to have been added to the Mortgage, possibly cleverly typed onto the document in August, as an attempt to conceal the true motivations of the parties. Mr. Schley, never stating when the document was executed, claimed unlikely ignorance of Meritor's August demands. The Husband-Debtor, unable to deny knowledge of the August letters, attempted to feign ignorance of the date of signing and then improbably place it in spring, long before his wife definitely stated that the Debtors had signed the Mortgage.
*67 We believe that, first and foremost, the Schleys' Mortgage may be avoided pursuant to 11 U.S.C. § 548(a)(1). We disbelieve the testimony of Mr. Schley and the Husband-Debtor and find that the predominant and perhaps the sole motivation of the Debtors and the Schleys which resulted in the preparation and recording of the Mortgage was the actual intent of these parties to hinder, delay, and defraud Meritor by attempting to pre-empt the maximum amount of the Debtor's obligation to it with the Schleys' Mortgage.
In Pinto Trucking, supra, 93 B.R. at 386, we acknowledged
the well-developed list [of "badges of fraud"] set forth in § 4(b) of the proposed Uniform Fraudulent Transfers Act (hereinafter "UFTA"), which reads as follows:
"(b) In determining actual intent . . ., consideration may be given, among other factors, to whether:
(1) the transfer or obligation was to an insider;
(2) the debtor retained possession or control of the property transferred after the transfer;
(3) the transfer or obligation was disclosed or concealed;
(4) before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit;
(5) the transfer was of substantially all the debtor's assets;
(6) the debtor absconded;
(7) the debtor removed or concealed assets;
(8) the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;
(9) the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;
(10) the transfer occurred shortly before or shortly after a substantial debt was incurred; and
(11) the debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor."
7A UNIFORM LAWS ANNOTATED 653 (1965). See also, e.g., In re Crompton, 70 B.R. 60, 62 (Bankr.W.D.Pa.1987).
"Badges of fraud" (1), (2), (4), (5), (9), and (10) from the list above clearly are present here. We also believe that "badge" (8), lack of reasonably-equivalent consideration for the transfer, was present. While we believe that the Schleys did advance sums to the Debtors prior to August, 1988, which may have exceeded a net balance of $40,000, there is no indication that granting a Mortgage on their home in favor of the Schleys was a condition for these transfers at the time that they were made nor was there an indication of any substantial additional advance in 1988 which justified execution of the Mortgage. Previous loans could hardly be consideration for subsequently granting a lender security.
Other "badges," not included in the list above, are present here. One is the amount of the Mortgage, which is the exact equivalent of Meritor's Note. Another is the timing of the recording of the Mortgage, just after Meritor's threats and demands. The final "badge" is the rather apparent web of falsehoods spun by the Debtors and Mr. Schley at the hearing to attempt to defend this transaction. Compare In re Fleet, 89 B.R. 420, 427 (E.D.Pa. 1988) (general lack of credibility of transferor supports avoidance of a transfer on the basis of fraudulent intent).
This conclusion makes consideration of whether the Mortgage could be avoided under 11 U.S.C. §§ 548(a)(2)(A) and (a)(2)(B)(i) and 11 U.S.C. § 547 superfluous. However, we observe that proving (1) lack of receipt of equivalent value; and (2) insolvency, both of which we found present in considering the presence of certain "badges" of fraud in the foregoing discussion is in itself sufficient to allow Meritor to avoid the Mortgage as a constructive fraud.
With respect to the Debtors' only viable defense to the § 547 claim under § 547(c)(4), i.e., that the Schleys gave new *68 value of $18,000 after the Mortgage, thereby preventing avoidance of $18,000 of the Mortgage, we question whether such a defense is viable when it is apparent that the giving of new value had no connection with the transfer. We find that, in advancing the $18,000, the Schleys were acting precisely as they had for the previous eleven (11) years, and that the presence of the Mortgage was not a factor in their continued beneficence towards the Debtors. However, such analysis of the motives for the giving of new value may be inappropriate. See In re New York City Shoes, Inc., 880 F.2d 679, 680-81, 684-85 (3d Cir.1989) (§ 547(c)(4) has only three (3) requirements: (1) an otherwise voidable transfer; (2) an advance of new unsecured creditor after the transfer; and (3) the creditor must not have been fully compensated for the new value. None of these requirements implicate the creditor's subjective state in providing the new value. Hence, the motivations of the creditor in giving the new value may be irrelevant).
We therefore conclude that the Schleys' Mortgage may be and hereby is avoided. However, this conclusion does not, as Meritor apparently assumed, result in total denial of the Debtors' motions. Rather, it merely results in exclusion of the Schleys' Mortgage in applying the formula for § 522(f)(1) lien avoidance set forth as follows in Magosin, supra, 75 B.R. at 547:
1. Determine the value of the property on which a judicial lien is sought to be avoided.
2. Deduct the amount of all liens not to be avoided from (1).
3. Deduct the Debtors' allowable exemptions from (2).
4. Avoidance of all judicial liens results unless (3) is a positive figure.
5. If (3) does result in a positive figure, do not allow avoidance of liens, in order of priority, to that extent only (emphasis added).
The parties stipulated that the value of the Debtors' home was $65,000. They also agreed that the mortgages other than that of the Schleys, totalling $38,000, could not be avoided. The claimed exemptions of the Debtors in their home totalling $15,800 have not been challenged.[9] Therefore, it appears that the Debtors are precluded from avoiding only $12,200 of the Meritor lien on the basis of the following calculations pursuant to the Magosin formula:
Value of Property: $65,000
Unavoidable liens: (38,000)
Exemptions: (15,800)
________
Amount which cannot
be avoided $12,200
Since Meritor's lien is $28,441.17, more than $16,200 of Meritor's lien is avoidable.
Finally, we must observe that this hearing has yielded information of which the Trustee should take note. The Debtors have admitted making certain post-petition loans without permission from this court, which may be subject to investigation. See 11 U.S.C. § 364 (only Trustee may obtain credit post-petition). The proceeds from these loans may also constitute undisclosed income. Also, they have admitted making certain post-petition loan repayments to the Schleys, which are apparently subject to avoidance. See 11 U.S.C. § 549(a). The *69 first meeting of creditors pursuant to 11 U.S.C. § 341 has already apparently taken place on August 23, 1989. The Standing Chapter 13 Trustee or the United States Trustee should consider convening a special meeting of creditors, see 2 COLLIER ON BANKRUPTCY, ¶ 341.03, at 341-13 (15th ed. 1989), or an examination of the Debtors pursuant to B.Rule 2004 for the purpose of effecting further investigation of these matters.
An Order consistent with the conclusions expressed in this Opinion will be entered.
ORDER
AND NOW, this 2nd day of October, 1989, after a hearing of September 14, 1989, on the Debtors' Motion to avoid the judicial lien of Meritor Financial Services, Inc. (hereinafter "Meritor") against the Debtors' premises at 2103 Friendship Street, Philadelphia, Pennsylvania 19149 (hereinafter "the Premises"), at which the parties agreed that Meritor could challenge the prior mortgage of Philip and Sondra Schley (hereinafter "the Schleys"), it is hereby ORDERED as follows:
1. Meritor's motion to avoid the mortgage of the Schleys of August 16, 1988, against the Premises pursuant to 11 U.S.C. §§ 548(a)(1), 548(a)(2)(A), and 548(a)(2)(B)(i) is GRANTED and the aforesaid mortgage is declared null and void. The Schleys are directed to take all steps necessary to satisfy this mortgage on or before October 16, 1989.
2. The Debtors' Motion to avoid Meritor's judicial lien obtained in an action in the Philadelphia County Court of Common Pleas, August Term, 1988, No. 1615, in the amount of $28,441.17, is GRANTED in part, the said lien is reduced to the amount of $12,200. Meritor is directed to take all steps necessary to reflect this Order on or before October 16, 1989.
3. The Standing Chapter 13 Trustee or the United States Trustee is directed to carefully review this Opinion and to consider scheduling a special meeting of creditors or an examination of the Debtors forthwith.
NOTES
[1] This Code section provides as follows:
(f) Notwithstanding any waiver of exemptions, the debtor may avoid the fixing of a lien on an interest of the debtor in a property to the extent that such lien impairs an exemption to which the debtor would have been entitled under subsection (b) of this section, if such lien is
(1) A judicial lien; . . .
[2] See page 68 & n. 9 infra.
[3] However, his statement that they each call him three (3) times daily, which would result in at least fifteen (15) telephone calls from his children each day, appears to be one of several overstatements on his part.
[4] Obviously, this was not fatal, as Mr. Schley stated that he had been informed in January, 1988, would be the case if he suffered another heart attack. This statement of his condition therefore appears to be another of his overstatements.
[5] This appears to be another overstatement, as he had attended a meeting with Mr. Karp and the Husband-Debtor in July, 1988, in which the loan was discussed.
[6] The pertinent Code Sections, 11 U.S.C. §§ 547(b) and 547(c)(4) provide as follows:
(b) Except as provided in subsection (c) of this section, the trustee may avoid any transfer of an interest of the debtor in property
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;
(3) made while the debtor was insolvent;
(4) made
(A) on or within 90 days before the date of the filing of the petition; or
(B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and
(5) that enables such creditor to receive more than such creditor would receive if
(A) the case were a case under Chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by the provisions of this title.
(c) The trustee may not avoid under this section a transfer
. . . . .
(4) to or for the benefit of a creditor, to the extent that, after such transfer, such creditor gave new value to or for the benefit of the debtor
(A) not secured by an otherwise unavoidable security interest; and
(B) on account of which new value the debtor did not make an otherwise unavoidable transfer to or for the benefit of such creditor;
[7] These Code Sections provide as follows:
(a) the trustee may avoid any transfer of an interest of the debtor in property, or any obligation incurred by the debtor, that was made or incurred on or within one year before the date of the filing of the petition, if the debtor voluntarily or involuntarily
(1) made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made or such obligation was incurred, indebted; or
(2)(A) received less than a reasonably equivalent value in exchange for such transfer or obligation; and
(B)(i) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation; . . .
[8] No authority is cited for this proposition, although, in the letter, counsel states as follows: "It is my understanding that this court has held that a mortgage may be stricken for failure to comply with the requirements of Act 6." We know of no such case. Act 6 does incorporate the TILA disclosure requirements. 41 P.S. § 401. However, disclosures under TILA are required to be made only by "creditors," 15 U.S.C. § 1638(a), and there is no evidence that the Schleys "regularly" extend credit and hence meet this definition. See 15 U.S.C. § 1602(f). Perhaps Meritor's counsel is referencing our quite distinct holding in In re Mosley, 85 B.R. 942, 951-55 & n. 7 (Bankr.E.D.Pa.1988), that a significant violation of Act 6 may invalidate a foreclosure judgment and claims for fees and costs incurred in obtaining such a judgment. However, these principles have no applicability here, as the Schleys are not asserting any rights based upon a judgment.
[9] We believe that a creditor opposing a § 522(f)(1) motion may dispute the validity of exemptions claimed by the debtor despite having failed to raise a timely objection to the exemptions themselves pursuant to Bankruptcy Rule 4003(b). See In re Montgomery, 80 B.R. 385, 387-93 (Bankr.W.D.Tex.1987); In re Mitchell, 80 B.R. 372, 374-80 (Bankr.W.D.Tex.1987); and In re Brockington, Bankr. No. 87-02559S (Bankr.E.D.Pa. Jan. 12, 1988). But see Magosin, supra, 75 B.R. at 548-49. Cf. In re Frazier, 104 B.R. 255 (Bankr.N.D.Cal.1989); and In re Roehrig, 36 B.R. 505, 507-08 (Bankr.W.D.Ky.1983) (failure to object to claim of exemptions does not affect creditor's ability to defend a motion under 11 U.S.C. § 522(f)(2)). But cf. In re Van Pelt, 83 B.R. 617, 618-19 (Bankr.S.D. Iowa 1987); In re Hahn, 60 B.R. 69, 75-76 (Bankr.D. Minn.1985); and In re Grethen, 14 B.R. 221, 225-26 (Bankr.N.D. Iowa 1981). We also observe that the Debtors have apparently claimed more exemptions than those to which they were entitled pursuant to 11 U.S.C. § 522(d)(5) (each debtor may use only the extra $400 exemption since the homestead exemption was used; however, the $400 sum is claimed in the home and also for tax refunds and deposits). However, Meritor has not raised any such contentions, even in its defense of this motion at the hearing and we will therefore not consider these matters.
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909 F. Supp. 279 (1995)
Lawrence ZINMAN, Plaintiff,
v.
PRUDENTIAL INSURANCE COMPANY OF AMERICA, et al., Defendants.
Civ.A. No. 94-7287.
United States District Court, E.D. Pennsylvania.
December 12, 1995.
*280 Stephen W. Edwards, Dolchin, Slotkin & Todd, P.C., Philadelphia, PA, for Plaintiff.
Thomas P. Wagner, Joshua Bachrach, Rawle & Henderson, Philadelphia, PA, Rita Durant, Philadelphia, PA, for Defendants.
MEMORANDUM AND ORDER
ANITA B. BRODY, District Judge.
Plaintiff brings this action pursuant to § 502(a)(1)(B) of the Employee Retirement Income Security Act ("ERISA") to enforce his rights under his disability insurance policy and to recover disability benefits allegedly *281 owed to him. Before me is a motion to strike plaintiff's jury demand.
Defendant Prudential Insurance Company of America challenges plaintiff's right to a jury in this case, arguing that in the Third Circuit this action is equitable and therefore that plaintiff has no constitutional entitlement to a jury. Plaintiff argues in response: (1) that defendant is collaterally estopped from bringing this challenge because another court ruled against defendant on the identical issue; (2) that the Third Circuit has never ruled definitively on this issue; (3) that this is essentially a breach of contract action, which is an action at law for which he is entitled to a jury; and (4) that pursuant to the terms of his insurance contract, this court is bound to follow decisions of the Second Circuit which have upheld the jury demands of other ERISA claimants. I reject all four arguments and will grant defendant's motion to strike the jury demand.
I. DISCUSSION
Plaintiff Lawrence Zinman is a former employee of Prudential Securities, Inc. ("PSI"). During the course of his employment with PSI, Zinman was insured by the Prudential Insurance Company of America ("PICOA") pursuant to a Group Insurance Contract between PSI and PICOA.
In 1992, Zinman allegedly became disabled and as a result left his employment with PSI. PICOA initially paid Zinman disability benefits in accordance with his insurance policy, but then discontinued the payments on the ground that Zinman was not "totally disabled." Plaintiff Zinman is now suing both PSI and PICOA under § 502(a)(1)(B)[1] of ERISA to enforce his rights under his insurance policy and to recover the disability benefits allegedly owed to him. (Pl.'s 2d Am. Compl.)
Plaintiff has demanded a jury trial. The Seventh Amendment to the United States Constitution protects the right to a jury trial in "[s]uits at common law." U.S. Const. amend. VII. In other words, there is a constitutional right to a jury only with claims to enforce legal rights, and not with claims to enforce equitable rights. Chauffeurs, Teamsters and Helpers, Local No. 391 v. Terry, 494 U.S. 558, 564, 110 S. Ct. 1339, 1344, 108 L. Ed. 2d 519 (1990).
The Third Circuit has held that claims pursuant to § 502(a)(1)(B) of ERISA are equitable. Pane v. RCA Corp., 868 F.2d 631, 636 (3d Cir.1989); Turner v. CF & I Steel Corp., 770 F.2d 43, 47 (3d Cir.1985), cert. denied, 474 U.S. 1058, 106 S. Ct. 800, 88 L. Ed. 2d 776 (1986). Therefore, under the law as interpreted by the Third Circuit, plaintiff has no constitutionally protected right to a jury trial.
1. Collateral Estoppel
Plaintiff claims that defendant is collaterally estopped from bringing this challenge because a district court in the Western District of Arkansas rejected an identical challenge by PICOA in a different case. (Pl.'s Mem. Opp'n Def.'s Mot. to Strike at 5.) See Brasher v. Prudential Ins. Co. of Am., 771 F. Supp. 280 (W.D.Ark.1991).
Under the doctrine of collateral estoppel, once an issue of fact or law is resolved by the final judgment of a court, then it is conclusively resolved in subsequent actions between the parties. See Burlington N. R.R. Co. v. Hyundai Merchant Marine Co., Ltd., 63 F.3d 1227, 1231 (3d Cir.1995). Plaintiff argues that the issue of his right to a jury was conclusively determined by the Brasher court and therefore may not be relitigated in this jurisdiction.[2]
*282 The prerequisites for the application of collateral estoppel in federal court are: (1) the issue sought to be precluded must be the same as the issue in the prior action; (2) the issue must have actually been litigated in the prior action; (3) it must have been determined by a final and valid judgment; and (4) the determination must have been essential to the prior judgment. Burlington, 63 F.3d at 1231-32 (quoting In re Graham, 973 F.2d 1089, 1097 (3d Cir.1992)). This case fails to satisfy the fourth prerequisite, because plaintiff's right to a jury in Brasher was not a determination essential to the court's judgment.
While denying a defense motion for summary judgment, the court in Brasher also held that plaintiff was entitled to a jury trial. Brasher, 771 F.Supp. at 282. The decision that plaintiff was entitled to a jury trial was incidental to any judgment of the court. It does not go to the merits of the case and therefore cannot be said to meet the requirement that it be "essential to the prior judgment."
Even if all the prerequisites were satisfied in this case, collateral estoppel is still inapplicable because under the "unmixed question of law" exception an issue is not estopped from relitigation when (a) it is an issue of law, and (b) the two actions involve claims that are substantially unrelated or "a new determination is warranted in order to take account of an intervening change in the applicable legal context or otherwise to avoid inequitable administration of the laws." Burlington, 63 F.3d at 1233 (quoting Restatement (Second) of Judgments § 28(2) (1982)). The exception applies in this case because there has been a "change in the applicable legal context." The change of circuits from the Eighth to the Third was more than a mere change in jurisdiction it was actually a change in the applicable law: in the Third Circuit § 502(a)(1)(B) actions are considered equitable, Pane v. RCA Corp., 868 F.2d 631, 636 (3d Cir.1989), while in the Eighth Circuit they are considered actions at law, Brasher, 771 F.Supp. at 282. The "unmixed question of law" exception to collateral estoppel therefore applies to this case, and collateral estoppel would not be appropriate even if the four prerequisites were satisfied.[3]
2. Third Circuit Case Law
Plaintiff then tries to attack the applicability of existing Third Circuit case precedent. Specifically, plaintiff argues that his case is factually distinct from all of the previous cases decided in the Third Circuit, because they involved claims against pension plan trustees, while plaintiff's claim is against his employer and insurance company. (Pl.'s Mem. Opp'n Def.'s Mot. to Strike at 7.)
However, contrary to plaintiff's allegations, the Third Circuit has held that § 502(a)(1)(B) actions against employers are actions in equity. Pane v. RCA Corp., 868 F.2d 631, 636 (3d Cir.1989). And, while the Third Circuit has never ruled explicitly regarding § 502(a)(1)(B) claims against insurance companies, the rationale used by the Third Circuit applies as persuasively to such claims. See, e.g., Turner v. CF & I Steel Corp., 770 F.2d 43, 46 (3d Cir.1985) ("[T]he nature of most controversies under subsection (a)(1)(B) ... does not lend itself comfortably to the traditional jury trial."), cert. denied, 474 U.S. 1058, 106 S. Ct. 800, 88 L. Ed. 2d 776 (1986). Therefore, the factual differences between previous Third Circuit cases and the instant case are not material, and I will make no distinction based upon them.
3. ERISA Preempts State Contract Law
Plaintiff also argues that his case is essentially a breach of contract case, which is an action at law for which he is entitled to a *283 jury. (Pl.'s Mem. Opp'n Def.'s Mot. to Strike at 6.) However, ERISA preempts state contract law. 29 U.S.C. § 1144(a) (1995) ("[T]he provisions of this subchapter ... shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan...."); see also Kearney v. U.S. Healthcare, Inc., 859 F. Supp. 182, 184-85 (E.D.Pa.1994) ("However characterized, ... claims which arise from the manner in which defendant administered benefits or which are premised on the type or extent of benefits defendant promised or provided are preempted."). This is an ERISA case, which in the Third Circuit is considered an action in equity.
4. Choice of Law
Plaintiff argues that it is improper for me to look to Third Circuit precedent when deciding this dispute because under the Group Insurance Contract I am bound to follow decisions of the Second Circuit which have upheld the jury demands of ERISA claimants. (Pl.'s Mem. Opp'n Def.'s Mot. to Strike at 4.) This argument fails.
First of all, the words of the Group Insurance Contract do not point to my use of Second Circuit case law.[4] The relevant provision of the Group Insurance Contract reads, "Governing Jurisdiction: State of New York." (Pl.'s Resp. to Def.'s Mot. to Strike Pl.'s Jury Trial Demand Ex. 1.) The plain meaning of the provision is that New York courts have jurisdiction over contractual disputes. That is quite different from the notion that, if an action were brought in a court outside of New York, Second Circuit precedent must be applied.
Plaintiff implies, however, that the parties intended the provision to serve as a choice of law provision. (Pl.'s Mem. Opp'n Def.'s Mot. to Strike at 4.) A contract is interpreted in accordance with the intent of the parties. Windsor Sec., Inc. v. Hartford Life Ins. Co., 986 F.2d 655, 667 (3d Cir.1993). If plaintiff's contention is correct, the clause at most provides that this court must look to New York state substantive law to resolve contract disputes. It says nothing about applying Second Circuit case law to determine the nature of a federal cause of action under ERISA. Second Circuit case law is wholly independent from New York state substantive law. See, e.g., Byrd v. Blue Ridge Rural Elec. Coop., Inc., 356 U.S. 525, 537, 78 S. Ct. 893, 900, 2 L. Ed. 2d 953 (1958).
II. CONCLUSION
For the foregoing reasons, plaintiff does not have a constitutional right to a jury trial. Accordingly, this 12th day of December, 1995, IT IS ORDERED that defendant PICOA's "Motion to Strike Plaintiff's Jury Trial Demand" is GRANTED.
NOTES
[1] Section 502(a)(1)(B) of ERISA provides as follows:
A civil action may be brought ... by a participant or beneficiary ... to recover benefits due to him under the terms of his plan, to enforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan.
29 U.S.C. § 1132(a)(1)(B) (1995).
[2] This is "offensive non-mutual collateral estoppel." It is "offensive" because it uses collateral estoppel to prevent the party against whom the claim was brought from defending on the estopped issue. It is "non-mutual" because the parties in this case are not identical to the parties in the prior action. Burlington, 63 F.3d at 1232. Offensive non-mutual collateral estoppel has been recognized as proper under the federal common law principles of collateral estoppel. Id. at 1231-32 (federal common law principles of collateral estoppel apply when the court is examining the preclusive effect of a prior federal court action).
[3] Collateral estoppel would lead to an especially troublesome result in this case were it applied, because it would allow plaintiff to avoid the entire body of unfavorable Third Circuit case law which preexisted Brasher. Justice White questioned the rationale behind allowing collateral estoppel in such circumstances, United States v. Stauffer Chem. Co., 464 U.S. 165, 178, 104 S. Ct. 575, 582-83, 78 L. Ed. 2d 388 (1984) (J. White, concurring), as did Justice Becker of the Third Circuit, Burlington, 63 F.3d at 1239 n. 16.
[4] There is nothing in the record to support plaintiff's contention that the Group Insurance Contract between PSI and PICOA applies to his dispute with defendants. However, viewing this in a light most favorable to plaintiff, I am assuming, without deciding, that plaintiff's assertion is correct.
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240 B.R. 281 (1997)
In re Teresa Y. GIVENS.
Bankruptcy No. 97 B 20480.
United States Bankruptcy Court, N.D. Illinois, Eastern Division.
December 9, 1997.
Lorraine Greenberg, Chicago, IL, for Movant or Plaintiff.
Louis Levit, Chicago, IL, trustee.
RULING ON MOTION TO AVOID PREFERENTIAL TRANSFER OF PROPERTY
JOAN H. LEFKOW, Bankruptcy Judge.
Debtor, Teresa Givens, seeks to avoid a preferential transfer of wages which her employer withheld from her salary pursuant to wage garnishment proceedings instituted by a judgment creditor. On July 3, 1997, Givens filed her petition for relief under chapter 7 of the United States Bankruptcy Code and claimed the withheld wages as exempt pursuant to 735 ILCS 5/12-1001(b). Approximately one week later, Givens' employer transferred the withheld wages to the judgment creditor.
Although authorized to do so, see 11 U.S.C. § 547, the Chapter 7 trustee has taken no action to avoid the transfer. Under § 522(h) of the Bankruptcy Code, Givens also has authority to avoid the transfer but only to the extent that she could have claimed the property as exempt under § 522(b) if the trustee had avoided the transfer. The real issue then is whether the withheld wages are exemptible under § 522(b).
Illinois law requires a resident-debtor to use state authorized exemptions for § 522(b) purposes. Effective December 31, 1996, however, Illinois exemption law was amended to prohibit the application of any Illinois personal property exemption to "any wages due or to become due to the debtor that are required to be withheld in a wage deduction proceeding under [the Illinois wage deduction law]." 735 ILCS 5/12-1001. Thus, under § 522(b) itself, the *282 withheld wages are not exemptible property.
Nevertheless, the inquiry cannot end there. As the Supreme Court has recognized, when no one lodges a timely objection to a substantively improper claim of exemption, the property claimed as exempt is exempt by default as § 522(l) provides. Taylor v. Freeland & Kronz, 503 U.S. 638, 112 S. Ct. 1644, 118 L. Ed. 2d 280 (1992). Because it appears that no one has objected to Givens' claim that her withheld wages are exempt, the court must consider the effect of Taylor on the outcome here.
Some judges of this court have decided, in the slightly different context of lien avoidance under § 522(f)(1), that the incontestability of an exemption obtained pursuant to § 522(l) extends to lien avoidance proceedings, thereby entitling a debtor to avoid liens on property which has become exempt solely due to the operation of § 522(l). This court, however, is persuaded by the able analyses of In re Franklin, Brown and Ramirez, 210 B.R. 560 (Bkrtcy.N.D.Ill.1997), and In re Morgan, 149 B.R. 147 (9th Cir. BAP 1993), which reach a contrary result. As explained in those decisions, exemption by default under § 522(l) is not the equivalent of a substantive entitlement to an exemption under § 522(b). Because the lien avoidance provisions require proof of an exemption to which the debtor "would have been entitled under [§ 522](b)," proof of exemption under § 522(l) is not enough. Similarly, here, § 522(h) requires proof that Givens "could have exempted the property" under § 522(b). For the reasons explained in detail in Franklin and Morgan, this court concludes that she is unable to make the necessary showing.
For these reasons, debtor's motion to avoid preferential transfer of property is denied.
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883 S.W.2d 711 (1994)
R____ S____ and J____ S____, Appellants,
v.
B____ J____ J____ and B____ C____ J____, Appellees.
No. 05-93-00848-CV.
Court of Appeals of Texas, Dallas.
August 17, 1994.
*713 Richard D. William, Greenville, for appellants.
Russell P. Brooks, H. Craig Black, Atty. ad litem, Greenville, for appellees.
Before LAGARDE, BARBER and WHITTINGTON, JJ.
OPINION
LAGARDE, Justice.
R__ and J__ S__ ("Mr. S__" and "Mrs. S__" or collectively "the parents") appeal an order naming appellees B__ and C__ J__ ("Mr. J__" and "Mrs. J__" or collectively "the nonparents") managing conservators of two of the parents' three children.[1] In two points of error, the parents (i) challenge the sufficiency of the evidence and (ii) argue that separating their children is against public policy. We affirm.
The parents have three children: R__ R__ S__ ("B__"), L__ M__ S__ ("L__"), and J__ D__ S__ ("P__").[2] L__ and P__ (collectively *714 "the children") are the subject of this litigation. The testimony at trial was confusing and, at times, hotly disputed. Briefly, however, the basic undisputed facts are as follows.
In 1987, Mrs. J__ was a good friend of the parents.[3] In August 1987, Mrs. S__ voluntarily relinquished P__, then only fifteen and one-half months old, into the care of Mrs. J__. This arrangement was originally intended to be temporary. Except for a couple of overnight outings with the parents before 1989, however, P__ lived continuously with Mrs. J__ until September 1990. In January 1989, Mrs. S__ voluntarily placed L__, then six years old, into the care of Mrs. J__. From this date until September 1990, the parents had no contact whatsoever with either child. The parents never provided Mrs. J__ with any child support for the costs incurred in raising their children.
In September 1990, the nonparents filed this action seeking managing conservatorship of the children. Following a hearing, the nonparents were named temporary managing conservators and the parents were named temporary possessory conservators with standard visitation rights. Despite living more than one hundred miles away, the parents frequently exercised their visitation rights after September 1990.
The parents counterclaimed, seeking managing conservatorship and alleging intentional and negligent infliction of emotional distress through the nonparents' acts of "secluding" and "abducting" the children. The nonparents amended their pleadings to request termination of parental rights and adoption or, in the alternative, managing conservatorship. Following a trial to the court, the judge declined to terminate the parents' parental rights; however, the court's judgment named the nonparents as managing conservators and the parents as possessory conservators. The court also denied recovery on the parents' counterclaims.
SUFFICIENCY OF THE EVIDENCE
In their first point of error, the parents assert that the trial court erred in awarding custody of the children to the nonparents "because the evidence was not sufficient for this ruling." This point of error is ambiguous because it can be interpreted as challenging either the legal or factual insufficiency of the evidence. Garza v. Alviar, 395 S.W.2d 821, 823 (Tex.1965). The general rule is that unless the context shows that the words were used in a different sense, references to the insufficiency of the evidence are usually construed to mean factual insufficiency. Id.
The parents' own statement best summarizes their argument on appeal: "Appellees have not met their burden of proof and [sic] introducing into evidence specific acts of the natural parents which would disqualify them as being managing conservators over the children." The thrust of the parents' argument is that no evidence was presented to overcome the legislative presumption that children belong in the custody of their natural parents. See Tex.Fam.Code Ann. § 14.01(b) (Vernon Supp.1994). Further, the parents' brief did not suggest a standard of review to be applied.[4] The parents conclude their brief by "pray[ing] that this Court reverse the decision of the [t]rial [c]ourt and render a judgment in favor of [a]ppellants." Legal insufficiency points call for the reversal and rendering of a judgment in favor of appellant, while factual insufficiency points call for the reversal and remanding for a new trial. Alstan Corp. v. Board of Admin., 713 S.W.2d 130, 132 (Tex.App.-Austin 1986, writ ref'd n.r.e.) (citing Robert W. Calvert, "No Evidence" and "Insufficient Evidence" Points of Error, 38 Tex.L.Rev. 361, 362 & 365 (1960)).
We conclude from the parents' arguments and prayer that this point of error challenges *715 only the legal sufficiency of the evidence. See Alstan Corp., 713 S.W.2d at 132 (prayer for rendition of judgment a factor in determining point of error was "no evidence" point). Assuming, arguendo, that our construction of the parents' point of error is incorrect, the parents' point of error is a factual insufficiency point. See Garza, 395 S.W.2d at 823 (general rule). In the interest of judicial economy and with the welfare of the real parties-in-interest in this case, the children, in mind, we will also consider the factual sufficiency of the evidence.
Standards of Review
A. Legal Sufficiency
Legal insufficiency or no-evidence points are questions of law. Tomlinson v. Jones, 677 S.W.2d 490, 492 (Tex.1984). In reviewing a no-evidence point, we consider only the evidence and reasonable inferences drawn therefrom which, when viewed in their most favorable light, support the trial court's findings. Lewelling v. Lewelling, 796 S.W.2d 164, 166 (Tex.1990). We disregard all evidence and inferences to the contrary. Id. The findings must be upheld if there is more than a scintilla of evidence to support them. Stedman v. Georgetown Sav. & Loan Ass'n, 595 S.W.2d 486, 488 (Tex.1979). Evidence is no more than a scintilla when it is "so weak as to do no more than create a mere surmise or suspicion of [the fact's] existence." Seideneck v. Cal Bayreuther Assocs., 451 S.W.2d 752, 755 (Tex.1970) (quoting Robert W. Calvert, "No Evidence" and "Insufficient Evidence" Points of Error, 38 Tex.L.Rev. at 363). If the evidence supplies some reasonable basis for differing conclusions by reasonable minds about the existence of a vital fact, however, then there is some evidence, or, in other words, more than a scintilla of evidence. Kindred v. Con/Chem, Inc., 650 S.W.2d 61, 63 (Tex.1983).
B. Factual Sufficiency
In reviewing a factual sufficiency point, we consider all the evidence, including any evidence contrary to the judgment. PlasTex, Inc. v. U.S. Steel Corp., 772 S.W.2d 442, 445 (Tex.1989). This Court must consider, weigh, and compare all the evidence in the record pertinent to the issue under consideration. Sosa v. City of Balch Springs, 772 S.W.2d 71, 72 (Tex.1989) (per curiam); Pool v. Ford Motor Co., 715 S.W.2d 629, 635 (Tex.1986). We set aside a finding only if it is so contrary to the overwhelming weight of the evidence as to be clearly wrong and unjust. Cain v. Bain, 709 S.W.2d 175, 176 (Tex.1986) (per curiam).
In reviewing factual insufficiency points, we note that this Court is not a fact finder, and we cannot substitute our judgment for that of the trial court, as fact finder, even if a different finding could be reached on the evidence. Brigham v. Brigham, 863 S.W.2d 761, 763 (Tex.App.-Dallas 1993, writ denied); Clancy v. Zale Corp., 705 S.W.2d 820, 826 (Tex.App.-Dallas 1986, writ ref'd n.r.e.). It is within the province of the trier-of-fact to weigh the credibility of the witnesses. The trial court, as fact finder, was the judge of the facts proved and of the reasonable inferences to be drawn therefrom. Brigham, 863 S.W.2d at 763; see Lockley v. Page, 142 Tex. 594, 598, 180 S.W.2d 616, 618 (1944).
Applicable Law
A. Presumed Findings
In reviewing a judgment from a bench trial, we ordinarily look to the formal findings of fact and conclusions of law. Although the parents requested formal findings and conclusions, none appear in the record.[5] The record does not reflect that appellant filed a "Notice of Past Due Findings of Fact or Conclusions of Law" in accordance with our rules of procedure. See Tex.R.Civ.P. 297. Where findings of facts and conclusions of law are not properly requested and none are filed, the judgment of the trial court must be affirmed if it can be upheld on any legal theory that finds support in the evidence. *716 In the Interest of W.E.R., 669 S.W.2d 716, 717 (Tex.1984) (per curiam) (citing Lassiter v. Bliss, 559 S.W.2d 353, 356 (Tex. 1977)). This is so regardless of whether the trial court articulates the correct legal reason for the judgment. J.M.R. v. A.M., 683 S.W.2d 552, 555 (Tex.App.-Fort Worth 1985, writ ref'd n.r.e.) (citing Gulf Land Co. v. Atlantic Refining Co., 134 Tex. 59, 131 S.W.2d 73, 84 (1939)).
B. Family Code
The appointment of managing conservators is governed by section 14.01 of the family code, which states, in part, as follows:
(b) A parent shall be appointed sole managing conservator or both parents shall be appointed as joint managing conservators of the child unless:
(1) the court finds that appointment of the parent or parents would not be in the best interest of the child because the appointment would significantly impair the child's physical health or emotional development; or
(2) a person who is not a parent seeks appointment as managing conservator of the child by intervening in or commencing a suit affecting the parent-child relationship... and the court finds that:
(A) the child's ... parents have voluntarily relinquished possession and control of the child to the person ... for a period of one year or more a portion of which was within 90 days preceding the date of intervention or commencement of the suit or proceeding; and
(B) the appointment of the person as managing conservator of the child is in the best interest of the child.
TEX.FAM.CODE ANN. § 14.01(b) (Vernon Supp. 1994) (emphasis added). The nonparents' second-amended petition, their live pleading at trial, alleged sufficient facts to give the parents notice that the nonparents were seeking relief under sections 14.01(b)(1) and 14.01(b)(2). Therefore, the trial court's judgment will be upheld if the record supports the naming of managing conservators under either theory. See In the Interest of W.E.R., 669 S.W.2d at 717.
In order to prevail under section 14.01(b)(2), the nonparents had to prove that (i) they sought appointment as managing conservators; (ii) the parents voluntarily relinquished possession and control of each child to them for at least one year, a portion of which was within the ninety-day period preceding the suit; and (iii) appointment of the nonparents as managing conservators is in the best interest of the children.[6] Tex.Fam.Code Ann. § 14.01(b)(2) (Vernon Supp.1994). Although there are numerous cases[7] interpreting section 14.01(b)(1), neither party has cited a case construing section 14.01(b)(2). Because we, too, have been unable to find such a case, this appears to be a case of first impression.
Although only recently codified, for one hundred years Texas has used the "best interest of the child" test in determining whether a parent may reacquire custody of a child after voluntarily relinquishing that child into the custody of another for a substantial period of time. See Legate v. Legate, 87 Tex. 248, 252, 28 S.W. 281, 282 (1894); see also Herrera v. Herrera, 409 S.W.2d 395, 396 (Tex.1966); Mumma v. Aguirre, 364 S.W.2d 220, 221 (Tex.1963). Because there is a presumption that a minor child's interests are best served by custody with the natural parents, the burden of proof on the issue of the *717 best interest of the child is on the one seeking to deprive the natural parents of custody. See TEX.FAM.CODE ANN. § 14.01(b) (Vernon Supp.1994); Herrera, 409 S.W.2d at 396. However, the trial court's determination of the child's best interest should only be reversed when it appears from the record as a whole that the court abused its discretion. Herrera, 409 S.W.2d at 363.
Facts
A. Voluntary Relinquishment
At trial, the testimony was undisputed that Mrs. S__ voluntarily gave custody of P__ to Mrs. J__ around the first of August 1987. It was also undisputed that until at least November 1988, both parents knew where P__ was, yet neither parent asked for his return.
On at least two occasions during 1987, Mr. S__ visited P__. One visit occurred at Mrs. J__'s house and another at Mr. S__'s brother's house. At the conclusion of each visit, Mr. S__ left P__ in Mrs. J__'s custody. During 1988, Mrs. S__ had some contact with P__, but always returned him to Mrs. J__. The frequency of contact was disputed. Mr. S__ testified initially that he did not see P__ from December 1987 until this suit was filed in September 1990. He later admitted, however, seeing P__ probably twice after December 1987.
In October 1988, Mr. S__ moved temporarily to Las Vegas, Nevada for business. In November, Mrs. J__ and P__ moved to Oklahoma. Mrs. J__ testified that she informed Mrs. S__ of her new address. After arriving in Oklahoma, Mrs. J__ telephoned Mrs. S__ and they discussed L__ and B__ coming to live with Mrs. J__ because the parents did not have any utilities. Mrs. J__ told Mrs. S__ that she did not think she could handle any more children because, at the time, she was unemployed. Mrs. S__ did not dispute this testimony.
In December 1988, Mrs. J__ wrote Mrs. S__ a letter telling her that she would try to care for one more child. While in Texas for the holidays, Mrs. J__ made several attempts to contact Mrs. S__ by telephone, but was unable to do so until the morning of January 3, 1989, the day Mrs. J__ was to return to Oklahoma. She and P__ went over to the parents' house and from there accompanied Mrs. S__ to check out L__ from school. Mrs. S__ packed up all L__'s belongings and L__ returned to Oklahoma with Mrs. J__ and P__. L__ was six years old.
Mrs. J__ testified that there was no discussion of when the children would be returned, except that Mrs. S__ agreed not to move them back and forth during the school year. It is undisputed that Mrs. S__ knew Mrs. J__'s address in Oklahoma. Mrs. J__, in fact, testified that she sent Mrs. S__ several letters and that they called each other on the telephone during this time period.[8]
Mr. S__ returned from Las Vegas a few days after Mrs. S__ gave custody of L__ to Mrs. J__. Mr. S__ was upset by the arrangement. Mr. S__ testified that he never knew the whereabouts of his children after Mrs. J__ moved from Fort Worth in 1988. He stated that his wife told him that she did not know where the children were living. He attempted to locate them by asking relatives and acquaintances that might know Mrs. J__'s whereabouts, but no one would tell him. He admitted, however, that he never called the police, any welfare agencies, or any other authorities to assist in returning his children to him. He did admit that he trusted Mrs. J__ to take good care of his children.
Mr. S__ could not provide an explanation for why his wife refused to tell him the location of his children. The court-appointed psychiatrist who examined the parties, however, pointed out that because of Mrs. S__'s dependence on her husband, Mr. S__ probably would have been able to obtain Mrs. J__'s address from Mrs. S__, if he had really tried, unless she was refusing to disclose it for some reason.
In June 1989, Mrs. J__ moved from Oklahoma back to Texas. In August 1989, she married Mr. J__. Mrs. J__ testified that she wrote and talked to Mrs. S__ after moving *718 back to Texas. She stated that she told Mrs. S__ of her new address and also informed the parents' telephone intermediary neighbors, people and officials in Oklahoma, and various people in Texas of her new Texas address. Mrs. J__ testified that she was not attempting to hide from the parents.
Mrs. S__, however, adamantly disagreed. She testified that the last address she had for Mrs. J__ and her children was in Oklahoma. In fact, in July 1990, she mailed a letter to Mrs. J__ at the Oklahoma address, but it was returned "forwarding address expired." Mrs. J__, however, introduced into evidence a picture of B__, undisputedly taken in the fall of 1989, that she had received from Mrs. S__ in Texas. Mrs. J__ also testified that the letter accompanying the picture was addressed to her in Texas.
B. Best Interest of the Children
The court appointed Dr. Steven Edward Ball to prepare psychological reports on the parties in this case. Ball interviewed and tested the parents, the nonparents, P__ and L__. All reports were admitted into evidence. In addition, Ball testified in person.
The doctor's report on Mr. S__ indicated that his I.Q. is in the low-normal to borderline range. He is a man of action rather than talk. The evaluation revealed a "possibility of significant alcohol or drug abuse." The report stated that
[Mr. S__] is also apt to be somewhat gregarious and outgoing, capable of making a good first impression. He may prove, however to be manipulative and deceptive. Under the outward show, [Mr. S__] may be very dissatisfied and can experience episodic depression.
Nevertheless, Ball concluded that, in many respects, Mr. S__ would not present any difficulties if appointed managing conservator. His major concern was the propensity of an addictive personality.
Both of the parents admitted that Mr. S__ had an alcohol problem in the past, but both adamantly testified that he had quit drinking "cold turkey." They were unable, however, to enunciate a clear date of his quitting, giving sometime in 1989, 1990, and 1991 as the date of his last drink.
Ball's evaluation of Mrs. S__ revealed an I.Q. in the mildly retarded range. Although one test suggested intense feelings of insecurity and possible strong self-destructive thoughts, other tests qualified this "bleak picture," describing her as having good esteem, not depressed, and quite capable of bonding with others. The report concluded that Mrs. S__ "seems to offer little problem should she be named managing conservator," although she could benefit from a parenting skills class.
Ball's report of Mrs. J__ indicated an I.Q. in the normal to low-normal range, socially introverted, shy, lacking confidence, easily having difficulty making decisions. Moderate depression, attributable to the current legal battle, was evident; she did not appear to be carrying much hostility or the likelihood of aggressive behavior; and was "apt to be fairly self-reliant." The report concluded that although she could benefit from parenting skills training, Ball could see little reason why she should not be able to function effectively in a parenting role.
Finally, the evaluation of Mr. J__ revealed a normal to low-normal I.Q. range. In the past, Mr. J__ had suffered a severe trauma in an automobile-train collision. He is, however, surprisingly free from neuropsychological fall-out from it. Mr. J__ may be suspicious of others and their motives. Relationships are important to him and he maintains them appropriately. He is an emotional man and has good coping skills. He gets along well with others. The report concluded that a parenting skills course could prove helpful, but there is no significant barrier to his serving as managing conservator.
Ball testified that neither the parents nor the nonparents would pose a threat to the physical or emotional well-being of the children. In fact, both of the parents stated that they had no complaints about how their children were being raised by the nonparents. They knew they were being treated well.
Mrs. J__, however, testified that the best interest of the children would not be served by naming the parents as managing conservators. *719 In her estimation, the parents had ignored their children by not visiting with, speaking to, or writing to them for about eighteen months. During the entire period that she cared for them before the filing of the lawsuit, they never once sent a birthday or Christmas present or even a card. Neither did she receive any support to raise them, except for a few diapers and about $60 soon after she was given P__. None of the relatives of the parents sent birthday or Christmas cards either; however, Mrs. J__'s relatives didtreating the children like a member of their own family.
There was testimony that both the parents and the nonparents live below the poverty line. The parents had not given any thought to counseling for the children or themselves. The nonparents, however, were trying to get the children back into counseling.
Ball also evaluated the children. His 1992 report reveals that L__ is educationally impaired and severely disturbed. She has improved, however, since 1990 based on comparative tests performed soon after she enrolled in a Texas school. L__ has reactive attachment disorder, a rare disorder in which she does not "bond well to others, to the significant people in [her] life." The cause occurred well before the custody fight began.
Ball's report on P__ showed that he is also experiencing some problems, but not as severe as L__. P__ is in need of a very structured environment at home. Ball stated that P__ had bonded to the nonparents and Mr. J__'s two sons. Removing P__ from that environment would be "emotionally disruptive." Ball also thought it probable that L__ had bonded to Mr. J__'s two sons.
Application of Law to Facts
It is undisputed that the nonparents initiated this suit. The parents' counterclaim, however, makes it clear that they disputed both the voluntariness of the relinquishment and the appointment of the nonparents as being in the best interest of their children. Using the appropriate standards of review, we will review the evidence adduced at trial on each issue to determine whether some evidence and sufficient evidence was presented to support the trial court's judgment.
A. Voluntary Relinquishment
It is undisputed that the initial placement of the children with Mrs. J__ was voluntary. The only issue is whether they remained in her custody involuntarily because Mrs. J__ purposely avoided informing the parents of her and the children's whereabouts. Mrs. J__'s statements that she kept Mrs. S__ informed of her addresses is some evidence that Mrs. S__ knew the children's whereabouts at all times. It is also some evidence that Mr. S__ knew the children's whereabouts because a reasonable inference can be drawn that a wife would tell her husband where their children are. We overrule appellant's no-evidence point regarding the voluntariness issue.
Looking at all the evidence, Mrs. S__ testified that she was never aware of a second Texas address. Mrs. J__, however, testified that she told and wrote Mrs. S__ herself. To bolster her lack of knowledge assertion, Mrs. S__ introduced a letter that was returned as undeliverable. Mrs. J__ received a picture from Mrs. S__, however, that could only have been taken after Mrs. J__ moved back to Texas.
Mr. S__ testified that he tried, unsuccessfully, to locate his children. He did not enlist the aid of any authorities. He stated that he asked his wife several times where the children were, but she would not tell him. Finally, he inquired of several others, but said they also did not tell him. On the other hand, Mrs. J__ stated that she told some of these same persons where she had moved. Ball stated that in his opinion if Mr. S__ really had tried to get this information from his wife, he would have been successful. Finally, Ball's evaluation of Mr. S__ suggested that he might be manipulative and deceptive.
The trial court is the sole judge of the credibility of the witnesses and can accept or reject any witness's testimony. As the fact finder, the trial court acted within its prerogative to settle these factual disputes. We conclude that the evidence is sufficient to support the implied findings that both parents voluntarily relinquished custody of their children to Mrs. J__ for the statutorily required *720 period. We overrule the parents' factual sufficiency challenge regarding the voluntariness issue.
B. Best Interest of the Children
The evidence recounted above is both legally and factually sufficient to support implied findings that the best interests of the children are served by naming the nonparents as managing conservators. Ball's report was some evidence that the nonparents were qualified to serve as managing conservators. He testified that P__ would experience emotional disruption if removed from the nonparents' custody. Despite bonding problems, L__ appeared to be attached to the nonparents' family unit. Even the parents had no complaints about the manner in which their children had been raised by the nonparents.
On these facts, we cannot say that the trial court abused its discretion in finding that the best interests of the children would be served by remaining in the custody of those with whom their parents had voluntarily placed them. We overrule the parents' first point of error.
PUBLIC POLICY
Relying on Pizzitola v. Pizzitola, 748 S.W.2d 568, 569 (Tex.App.-Houston [1st Dist.] 1988, no writ), the parents assert in their second point of error that "[i]t is against public policy to separate siblings from each other." Other than this statement from one case, however, the parents make no other argument to support their proposition. We are unpersuaded.
First, the parents overstate the general rule in this state. It is well settled in Texas that the custody of two or more children of the same marriage should not be divided, except for clear and compelling reasons. Pizzitola, 748 S.W.2d at 569; Zuniga v. Zuniga, 664 S.W.2d 810, 812 (Tex.App.-Corpus Christi 1984, no writ). Our public policy does not bar separating children of the same marriage under all circumstances, but, in fact, allows it in appropriate instances. See, e.g., Zuniga, 664 S.W.2d at 814. Second, to the extent that the parents argue that it should be against public policy to separate siblings, they have failed to cite any authority for that proposition. Appellant's cited authority allows the separation of siblings under appropriate circumstances.
Finally, it is the public policy of this state, as expressed by the legislature, that the overriding consideration in child custody cases is the "best interest of the child." See TEX.FAM.CODE ANN. § 14.07(a) (Vernon 1986). As discussed above, we do not believe that the trial court abused its discretion in separating P__ and L__ from B__ when the record reflects that the parents (1) voluntarily separated these two children from their brother for four years and two years, respectively; (2) permitted them to form familial relationships with the nonparents and Mr. J__'s two children during these periods; and (3) neither visited, wrote, nor supported them for most of these periods. See Herrera, 409 S.W.2d at 399. We conclude that public policy is not offended by the separation of the siblings on these facts.
The parents' second point of error is overruled and the trial court's order affecting parent-child relationship is affirmed.
NOTES
[1] On our own motion, we refer to each party or party-in-interest by initials only. TEX.FAM.CODE ANN. § 11.19(d) (Vernon 1986).
[2] The testimony was uncontroverted that Mrs. S__ was the biological mother of all three children. The evidence was also uncontradicted that Mr. S__ was the biological father of B__ and L__. Although P__ was born to the parents during their marriage, there was some question raised as to the identity of P__'s biological father.
[3] At this time, Mrs. J__ was apparently the common-law wife of the father of Mr. S__'s sister's husband and went by the name C__ G__. Mrs. J__ did not marry Mr. J__ until August 1989. Nevertheless, for simplicity, this opinion shall refer to appellee C__ J__ as "Mrs. J__" regardless of the time period under discussion.
[4] We note that the nonparents did not cite us to a standard of review for this point of error either. Neither did the nonparents challenge the ambiguity of the point of error in their brief.
[5] The parents appear to challenge "findings" contained in the body of the judgment. Such findings are inappropriate and may not be considered on appeal. TEX.R.CIV.P. 299a; Sutherland v. Cobern, 843 S.W.2d 127, 131 n. 7 (Tex. App.-Texarkana 1992, writ denied); Boland v. Natural Gas Pipeline Co., 816 S.W.2d 843, 844 (Tex.App.-Fort Worth 1991, no writ).
[6] Unlike subsection (b)(1), subsection (b)(2) does not require that the appointment of the parents would not be in the best interest of the children. See Tex.Fam.Code Ann. § 14.01(b) (Vernon Supp. 1994); see Lewelling, 796 S.W.2d at 167 (section 14.01(b)(1) requires nonparents to offer evidence of specific actions or omissions by the parents that demonstrate an award of custody to the parents would result in physical or emotional harm to the children). Apparently, subsection (b)(2) was added by the legislature in 1989 to qualify, in certain instances, the very strong parental presumption that had been enacted in 1987 through subsection (b)(1). See John J. Sampson, Texas Family Code Symposium, 21 Tex.Tech.L.Rev. 1326, 1327-28 (1990).
[7] See, i.e., Lewelling, 796 S.W.2d at 167; Brigham, 863 S.W.2d at 762; Thomas v. Thomas, 852 S.W.2d 31, 34 (Tex.App.-Waco 1993, no writ); May v. May, 829 S.W.2d 373, 376 (Tex.App.-Corpus Christi 1992, writ denied); In re W.G.W., 812 S.W.2d 409, 412 (Tex.App.-Houston [1st Dist.] 1991, no writ).
[8] The record reflects that the parents were without a telephone during portions of 1989, 1990, and 1991. Nevertheless, Mrs. S__ and Mrs. J__ telephoned each other through a neighbor of Mrs. S__.
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118 Pa. Commw. 516 (1988)
545 A.2d 981
Jay Gallagher, Appellant
v.
Commonwealth of Pennsylvania, Bureau of Correction et al., Appellees.
No. 60 T.D. 1987.
Commonwealth Court of Pennsylvania.
Argued April 20, 1988.
August 12, 1988.
*517 Argued April 20, 1988, before President Judge CRUMLISH, JR., and Judges CRAIG, MacPHAIL, DOYLE, BARRY, McGINLEY and SMITH.
Jeffrey W. Stover, Novak, Stover & McCarty, for appellant.
Gregory R. Neuhauser, Senior Deputy Attorney General, with him, Andrew S. Gordon, Chief Deputy Attorney General, and LeRoy S. Zimmerman, Attorney General, for appellees.
OPINION BY JUDGE BARRY, August 12, 1988:
Jay Gallagher appeals from an order of the Court of Common Pleas of Centre County which granted a motion for summary judgment filed by the Commonwealth's Bureau of Correction and the State Correctional Institution at Rockview (SCIR) and dismissed appellant's complaint.
Appellant is incarcerated at the SCIR. At the time in question, he shared a cell with another inmate. The cell had bunk beds, appellant occupying the upper *518 bunk. Because no ladder is in the cell, appellant could reach the upper bunk only by using the cell bars to climb to the upper bunk. Appellant was using the cell bars to get out of his bunk when his cellmate closed the cell door, severing appellant's left ring finger.
Appellant filed a complaint alleging negligence on the part of the defendants. The defendants filed a motion for summary judgment, alleging immunity under 42 Pa. C. S. §8522(b). The trial court granted the motion and dismissed the complaint. This appeal followed.
Appellant makes three allegations of error. He first argues that this case falls within the real property exception contained in 42 Pa. C. S. §8522(b)(4). He also argues that the case falls within the personal property exception of 42 Pa. C. S. §8522(b)(3). Finally, he argues that the trial court erred in granting summary judgment because it was the cellmate who put the door in motion. We affirm.
We shall consider the first and third argument together. 42 Pa. C. S. §8522(b)(4) waives sovereign immunity for a claim of damages caused by "[a] dangerous condition of Commonwealth agency real estate.... including Commonwealth owned real property...." A number of recent cases establish that this section is inapplicable to this case.
The exceptions to the rules of immunity must be strictly construed and narrowly interpreted. Mascaro v. Youth Study Center, 514 Pa. 351, 523 A.2d 1118 (1987), reversing, 89 Pa. Commw. 388, 492 A.2d 786 (1985). In that case, the plaintiffs were severely injured by the criminal acts of a third party who had escaped from the defendant's detention facility. The plaintiffs alleged that the real property exception applied because defective locks at the detention facility had allowed the third party to escape. The trial court granted judgment on the pleadings in favor of the defendant; we reversed and remanded for trial. In reversing our decision, the *519 Supreme Court stated, "[T]he real estate exception can be applied only to those cases where it is alleged that the artificial condition or defect of the land itself causes the injury, not merely when it facilitates the injury by the acts of others, whose acts are outside the statute's scope of liability." 514 Pa. at 363, 523 A.2d at 1124 (emphasis in original). Since the alleged defect in the real property involved in Mascaro, the locks at the detention facility, did not cause the injury complained of, the Supreme Court reversed.
Appellant argues that this case is controlled by Mistecka v. Commonwealth, 46 Pa. Commw. 267, 408 A.2d 159 (1979), and not by Mascaro. In Mistecka, we held that the Commonwealth could be liable for injuries caused when unknown individuals threw rocks from an overpass onto cars travelling upon a Commonwealth owned highway. Because such rock throwing incidents had occurred in the past, we held that a jury could find that since there was no protection from rock throwers, this was a "dangerous condition" of the Commonwealth highway. However, because of Mascaro and cases that followed it, we have expressed real doubts about the validity of Mistecka. Rippy v. Fogel, 108 Pa. Commw. 296, 529 A.2d 608 (1987).
In Johnson v. Southeastern Pennsylvania Transportation Authority, 516 Pa. 312, 532 A.2d 409 (1987), the court held that the real property exception did not apply where the plaintiff was beaten inside a SEPTA facility which was a known haven for criminal activity. In Chevalier v. City of Philadelphia, 516 Pa. 316, 532 A.2d 411 (1987), the court held that the exception did not apply where the plaintiff was mugged in a municipal parking lot which was poorly lighted. The court stated:
In Mascaro, we held that the Tort Claims Act... clearly precludes the imposition of liability on the Commonwealth or its local agencies for the acts of third parties, and the Legislature has *520 not seen fit to waive immunity for such actors or their acts in any of the eight exceptions.
Since [plaintiff's] injuries were caused by the criminal acts of a third party, the City is insulated from all liability for the harm caused by such a party.
516 Pa. at 319, 532 A.2d at 413 (emphasis in original). Because the rock throwing in Mistecka is akin to criminal conduct mentioned in Mascaro and its progeny, we doubt the case would be decided the same way today.
Appellant argues, however, that none of these cases are applicable because each of them involves an exception to local government immunity as set forth in 42 Pa. C. S. §8542 rather than sovereign immunity. While the Commonwealth can be liable for a dangerous condition of real estate, Section 8542(b)(3) waives immunity for local governmental units with regard to the "care, custody and control of real property...." Id. In Gratkie v. Air Wisconsin, 107 Pa. Commw. 461, 528 A.2d 1032 (1987), we noted the differences between the two waivers of immunity and stated:
It seems to us that the concept of a dangerous condition of real estate may more easily be said to include the acts of third parties than can the concept of damage caused by the care, custody or control of the real property. The latter seems to focus more on the actual defects of the real estate itself, not any `dangerous condition' which may be caused by third parties.
Id. at 468, 528 A.2d at 1035. However, in a decision which followed Gratkie involving Commonwealth defendants, we stated without equivocation in a case involving injuries caused by criminal conduct of a third party, "Although [Mascaro, Chevalier and Johnson] addressed the governmental immunity of local agencies, the reasoning of these decisions mandates the same conclusion with respect to the Commonwealth under [42 *521 Pa. C. S. §8522]." Moore v. Commonwealth, 114 Pa. Commw. 56, 60, 538 A.2d 111, 113 (1988).
Appellant aptly notes that all of the aforementioned cases involve criminal conduct and no criminal conduct is involved in the present case. While that is true, we believe that McCloskey v. Abington School District, 115 Pa. Commw. 289, 539 A.2d 946 (1988), on remand from, 517 Pa. 347, 537 A.2d 329 (1988), reversing, 101 Pa. Commw. 110, 515 A.2d 642 (1986) is instructive. There, a student was injured when he fell from a set of gymnastic rings. The minor filed suit and the trial court granted the school district's motion for summary judgment on the basis of immunity. We reversed and remanded to the trial court for a determination of whether the rings were fixtures and therefore part of the real property. The Supreme Court vacated our order and remanded for reconsideration in light of Mascaro. Upon reconsideration following the Supreme Court's remand order, we quoted extensively from Mascaro and then stated, "Because . . . the injury to Mr. McCloskey was the result of his own action, we are therefore constrained to vacate our prior order and affirm the summary judgment order entered by the trial court." 115 Pa. Commonwealth Ct. at 293, 539 A.2d at 948. McCloskey thus shows that criminal actions of a third party are not necessary to bring Mascaro into play.
We must admit that appellant's argument has a certain appeal. In all of the aforecited cases, the injuries were not caused by any inherent defects in the real property but were only facilitated thereby. Appellant urges us to view the cell bars with the hinged door as the only means of access to the top bunk. Those cell bars are clearly fixtures and hence part of the real property. Appellant asks that we also view those bars as a defective "ladder". Since a defect in the "ladder", i.e., the hinged door where individuals will put their hands *522 when using the bars as a ladder, actually severed appellant's fingers, appellant posits that his case is unique from any of the other cited cases. Nonetheless, considering the Supreme Court's mandate to strictly construe and narrowly interpret the waivers of immunity, we are constrained to conclude that this case does not fall within the real property exception.
As to appellant's argument that the Commonwealth is not entitled to summary judgment because the cell mate put the door into motion, we again must disagree. All of the cases cited above stand for the proposition that actions of third parties have no bearing on the liability of the governmental defendants. The question of the governmental defendants' immunity is decided solely on whether any waivers of immunity are applicable. As we have decided that the real property exception is not applicable here, appellant's argument is meritless.
Appellant's final argument concerning the personal property exception of Section 8522(b)(3) must finally be answered. That Section waives immunity for damages caused by "[t]he care, custody or control of personal property in the possession or control of Commonwealth parties, including Commonwealth personal property." Appellant argues that he was in the custody and control of the Commonwealth by virtue of his status as a prisoner, thereby making himself the personal property of the Commonwealth. This argument makes no sense to us and we reject it out of hand.
ORDER
NOW, August 12, 1988, the order of the Court of Common Pleas of Centre County at Civil Action No. 85-100, dated May 26, 1987, is affirmed.
*523 DISSENTING OPINION BY JUDGE DOYLE:
I respectfully dissent. The majority concedes, and I would certainly agree, that the cell door is real property. Therefore, the question we must decide is whether the door constituted a dangerous condition within the intendment of Section 8522(b)(4) of the Judicial Code, 42 Pa. C. S. §8522(b)(4). While the door, in and of itself, may not have been defective, its placement next to the bunk in light of the custom to utilize the door to gain access to the top bunk and in light of the total absence of any other means of access to that bunk indicates to me a design defect in the real property which a jury could reasonably view as a dangerous condition.
While Mascaro v. Youth Study Center, 514 Pa. 351, 523 A.2d 1118 (1987), and its progeny construed the real property exception narrowly, they did not eradicate the principle entirely. Moreover, those cases involved intervening criminal action by a third party which could logically be viewed as the proximate cause of the injury. Here, in contrast, the cell door was being used for the very purpose for which it was intended and the action of Mr. Gallagher's cell mate in closing the door was certainly not criminal. Thus, on the peculiar facts before us, I believe that Mr. Gallagher has pled sufficient facts to resist dismissal of his case by way of a motion for summary judgment. Accordingly, I would reverse the trial court's order and direct that the case continue.
Judge McGINLEY joins.
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883 S.W.2d 695 (1994)
E-Z MART STORES, INC., Appellant,
v.
Linda HALE, Appellee.
No. 06-93-00079-CV.
Court of Appeals of Texas, Texarkana.
Submitted March 29, 1994.
Decided July 21, 1994.
Rehearing Denied September 13, 1994.
*697 John R. Mercy, Atchley, Russell, Waldrop, Hlavinka, Texarkana, for appellant.
Tom Needham, Needham, Johnson, Lovelace, Johnson, Dallas, for appellee.
Before CORNELIUS, C.J., and BLEIL and GRANT, JJ.
OPINION
GRANT, Justice.
E-Z Mart Stores, Inc. appeals from a judgment favoring Linda Hale in her lawsuit alleging a breach of contract and a breach of the duty of good faith and fair dealing. E-Z Mart contends that as a matter of law there was no contract between itself and Hale, that the evidence is legally or factually insufficient to support the existence of a contract, that no issue was submitted to the jury on the existence of a contract, and that, absent a finding on the existence of a contract, Hale could not collect on her allegation of a breach of the duty of good faith and fair dealing.
Linda Hale testified that on August 6, 1987, while she was working as an E-Z Mart store manager, she injured her back carrying a wooden ladder used to change gasoline prices displayed on an outside sign post. E-Z Mart had previously posted a notice to its employees that, effective May 22, 1987, E-Z Mart was switching to a self-insurance program for workers' compensation benefits. After her injury, Hale reported her injury to the E-Z Mart employee in charge of such claims, and E-Z Mart paid Hale monetary benefits and began paying for her medical expenses. On May 31, 1988, Hale was informed that E-Z Mart had stopped paying the expenses. E-Z Mart contends that an investigator hired by it had determined that Hale's injury did not occur in the manner that she had alleged and that he recommended that her claim should be denied.
Hale sued E-Z Mart claiming negligence, a violation of the Texas Insurance Code, breach of contract, misrepresentation, fraud, and a violation of the duty of good faith and fair dealing. After four days of trial, the jury charge submitted theories of negligence, violation of the Texas Insurance Code, breach of the duty of good faith and fair dealing, and, perhaps, breach of contract. The jury found that E-Z Mart had breached the contract and its duty of good faith and fair dealing and that it violated the Texas Insurance Code. Hale moved for judgment only on the theories of breach of contract and breach of the duty of good faith and fair dealing. The trial court entered judgment awarding the plaintiff $254,686.27, fifty weeks of compensation benefits at the rate of $143.33 a week, and pre- and post-judgment interest.
I. BREACH OF CONTRACT
The parties initially argue whether a contract existed between them, whether this issue should have been presented to the jury, and what effect the failure to submit the issue should have had on the resulting judgment. E-Z Mart is a nonsubscriber under the Workers' Compensation Act and, therefore, Hale must prove either that E-Z Mart was negligent or that E-Z Mart and Hale had a contract providing the same benefits as would be received under workers' compensation coverage. The jury refused to find, in response to question 9, that E-Z Mart's negligence, if any, was not a proximate cause of any of Hale's total incapacity. Hale does not challenge this finding and is, therefore, relegated to her contract theory of recovery. Under Texas law, a contract is enforceable when an employer obligates itself to provide the benefits that would be provided under workers' compensation. Tigrett v. Heritage Bldg. Co., 533 S.W.2d 65, 70 (Tex.Civ.App.-Texarkana 1976, writ ref'd n.r.e.); see also Hazelwood v. Mandrell Industries Co., 596 S.W.2d 204, 205 (Tex.Civ.App.-Houston [1st Dist.] 1980, writ ref'd n.r.e.).
*698 Hale asserts that the existence of contractual duties was established as a matter of law by the evidence as presented by E-Z Mart's attorney. In pretrial motions and briefs, E-Z Mart relied on the existence of the self-insurance program in arguing that Hale's claims were barred by federal preemption under ERISA. During the voir dire phase of the trial, E-Z Mart's attorney told venire members that E-Z Mart had set up its own program to handle on-the-job employee injuries, that the program was governed by the same rules as a workers' compensation program, and that the evidence would show that E-Z Mart sent a bulletin to all of its employees informing them that claims under the new system would be handled the same as claims under the workers' compensation system. In his opening statement, E-Z Mart's attorney stated that E-Z Mart sent the bulletin to explain to its employees that claims would be handled in the same fashion, and, in closing argument, E-Z Mart's attorney again explained to the jury that E-Z Mart had set up a program to handle claims from on-the-job injuries. Thus, E-Z Mart did not place in issue whether a contract of insurance existed. An issue that is not in controversy need not be presented to a jury.
Both parties contend that the other side waived its argument on the existence of the contract by failing to object to a jury charge submitted without an issue regarding the contract's existence. If an entire theory is omitted from the charge, it is waived, and the defendant has no duty to object. Ramos v. Frito-Lay, Inc. 784 S.W.2d 667, 668 (Tex. 1990). Where an issue is omitted which constitutes only a part of a complete and independent ground and other issues necessarily referable to that ground are submitted and answered, the omitted elements are deemed found in support of the judgment if no objection is made and they are supported by sufficient evidence. Id; see also Tex. R.Civ.P. 279; Southwestern Bell Tel. Co. v. DeLanney, 809 S.W.2d 493, 495 (Tex.1991) (breach of contract case following Ramos).
Jury questions 13 and 14 set out parts of the breach of contract claim. Question 13 asks: "Did Linda Hale receive an injury on or about August 6, 1987, in the course of her employment that was a producing cause of any total incapacity?" Question 14 inquires about the duration of such incapacity. The jury questions clearly assume the existence of an insurance contract between E-Z Mart and its employees. The evidence presented conclusively proves that E-Z Mart made the decision to replace workers' compensation insurance with a self-insurance program. Since Hale was an employee, the contract applied to her as well as the other eligible employees of E-Z Mart. Based upon these facts, the manner in which the case was presented to the jury, and the character of the questions submitted to the jury, we deem a finding of the existence of a contract to provide workers' compensation benefits to its employees by E-Z Mart. This finding is made in support of the judgment. See Cielo Dorado Dev. v. Certainteed Corp., 744 S.W.2d 10, 11 (Tex.1988). This point of error is overruled.
Hale additionally argues that any error committed by the trial court in submitting question 13 unconditioned on any other question was invited by E-Z Mart because its attorney encouraged the court to submit the question unconditionally. Although E-Z Mart's attorney did request question 13 to be the first question in the charge, he also suggested changes in it which would have made it a general question regarding whether the injury occurred in the course and scope of employment, and he also objected to question 14 as setting up a statutory cause of action which had not been pleaded, apparently indicating a workers' compensation suit. E-Z Mart did not invite the error.
E-Z Mart next contends that if the court determines that a finding on the existence of a contract might be deemed, the evidence was legally and factually insufficient to support such a finding. In reviewing a legal sufficiency point of error, the court should examine only the evidence and inferences that support the jury's finding, and it should disregard all evidence and inferences to the contrary. Larson v. Cook Consultants, Inc., 690 S.W.2d 567 (Tex.1985). If there is any evidence of probative value which supports the finding, then the point of *699 error fails. Holley v. Watts, 629 S.W.2d 694 (Tex.1982). When reviewing a factual sufficiency point of error, the court should examine all of the evidence and set aside the finding only if it goes against the overwhelming weight of the evidence so as to be clearly wrong and manifestly unjust. In re King's Estate, 150 Tex. 662, 244 S.W.2d 660 (1951).
Hale pleaded both an express and an implied contract. E-Z Mart contends that there is no evidence to support the existence of an express contract, and Hale does not dispute this. The evidence shows that E-Z Mart posted a notice in the store where Hale worked which stated that:
Effective 5-22-87 all E-Z Mart employees are covered by Workmen's Compensation Ins. through E-Z Mart, Inc. Self Insurance Program. The Company has assumed the role of your Workmen's Comp. Insurance Company.
Because this is not a formal contract of offer and acceptance, it is best categorized as an implied contract, based on the relationship of the parties and their actions.
A contract implied in fact arises from the acts and conduct of the parties, it being implied from the facts and circumstances that there was a mutual intention to contract. Haws & Garrett G. Con., Inc. v. Gorbett Bros. Weld. Co., 480 S.W.2d 607, 609 (Tex.1972). The real difference between express contracts and those implied in fact is in the character and manner of proof required to establish them. Id. It may be said broadly that any conduct of one party, from which the other may reasonably draw the inference of a promise, is effective in law as such. Id.
A vice-president of E-Z Mart testified that the corporation created and funded its own program to provide benefits parallel to those provided under the Workers' Compensation Act. E-Z Mart posted the notice and, after her injury, Hale reported her injury to Paula O'Rourke Jeans, the E-Z Mart employee in charge of receiving injury claims under the program. Hale testified that Jeans said that "everything would be taken care of, the medical bills, whatever I needed would be taken care of." E-Z Mart then paid Hale monetary benefits, which she accepted, and it paid certain medical expenses involved in treating her back, including surgery and rehabilitation services. Hale contends that the facts detailed above support a finding that an implied-in-fact contract existed between the parties in regard to benefits for on-the-job injuries.
The evidence demonstrates that the parties had a mutual intention to contract as is required when a contract is implied in fact. See id. E-Z Mart points to Hale's testimony that, when she began working for E-Z Mart, she did not care whether the company had workers' compensation coverage, and she did not ask if it did have coverage. However, Hale further testified that she expected to be compensated if she was hurt on the job.
Hale continued to work for E-Z Mart after the posting of the notice. The benefit of her services to E-Z Mart constitutes consideration. The benefit program is just another form of compensation for her services. The evidence is sufficient to support a deemed finding on this theory.
II. BREACH OF THE DUTY OF GOOD FAITH AND FAIR DEALING
E-Z Mart next contends that the duty of good faith and fair dealing that is imposed upon insurers does not apply in this case. The jury found that E-Z Mart breached the duty of good faith and fair dealing that it owed to Hale. A duty of good faith and fair dealing arises where a contract between the parties expressly provides the duty or when a special relationship exists between the parties. Arnold v. National County Mutual Fire Ins. Co., 725 S.W.2d 165, 167 (Tex.1987). Although the duty does not exist in the at-will employment context, Day & Zimmermann v. Hatridge, 831 S.W.2d 65, 70-71 (Tex.App.-Texarkana 1992, writ. denied), Texas does recognize such a duty rising as a matter of law from the insured-insurer relationship. Arnold, 725 S.W.2d at 167; see also Aranda v. Insurance Co. of North America, 748 S.W.2d 210, 212 (Tex.1988) (workers' compensation carriers).
*700 This duty is imposed upon insurers because a special relationship exists between insurers and insured. The relationship
arises out of the parties' unequal bargaining power and the nature of insurance contracts which would allow unscrupulous insurers to take advantage of their insureds' misfortunes in bargaining for settlement or resolution of claims. In addition, without such a cause of action insurers can arbitrarily deny coverage and delay payment of a claim with no more penalty than interest on the amount owed. An insurance company has exclusive control over the evaluation, processing and denial of claims.
Arnold, 725 S.W.2d at 167.
The question presented is whether E-Z Mart, by its decision to self-insure its employees, placed itself under the same duty of good faith and fair dealing as that imposed upon a formal insurance company. The El Paso Court of Appeals held that such a duty does not exist in Texas Health Enterprises, Inc. v. Gentry, 787 S.W.2d 604 (Tex.App.-El Paso 1990, no writ). The court held that a nursing home that provided employees with benefits similar to workers' compensation benefits could not have violated the Insurance Code because it was not in the business of insurance and because the benefit program did not take the form of a formal insurance policy.
Gentry is distinguishable because it involved allegations of technical violations of the Insurance Code rather than a violation of its duty to act fairly with its insureds, and because the nursing home did not set itself out as the insurer of its employees. Thus, in Gentry, the purpose behind the imposition of the duty upon insurers is not implicated with the degree of clarity apparent in the present case.
In the present case, when E-Z Mart informed its employees that it had disposed of its insurance coverage for its employees, E-Z Mart expressly stated that "[t]he Company has assumed the role of your Workmen's Comp. Insurance Company." E-Z Mart made the unqualified decision to place itself in the position of an insurer. We will hold it to its decision. These points of error are overruled.
III. STATUTE OF LIMITATIONS
E-Z Mart lastly contends that Hale's bad faith claim is barred by the two-year statute of limitations found in Tex.Civ. PRAC. & REM.CODE ANN. § 16.003(a) (Vernon 1986). A cause of action alleging a breach of the duty of good faith and fair dealing must be filed within two years of the accrual of the cause of action, i.e. when coverage is denied. Murray v. San Jacinto Agency, Inc., 800 S.W.2d 826 (Tex.1990).
E-Z Mart stopped paying benefits on Hale's claim in December 1987, and Hale apparently became aware of the denial of her claim in May 1988 when she was told by someone treating her condition that her treatments were no longer being paid for by E-Z Mart. E-Z Mart, therefore, contends that Hale's cause of action should have been filed by December 1989 or, at the latest, May 1990 and, because she did not allege a breach of the duty of good faith and fair dealing until February 15, 1993, in her third amended petition, her cause of action is barred by limitations.
Hale relies on Tex.Civ.Prac. & Rem.Code Ann. § 16.068 (Vernon 1986) which provides:
If a filed pleading relates to a cause of action ... that is not subject to a plea of limitation when the pleading is filed, a subsequent amendment or supplement to the pleading that changes the facts or grounds of liability ... is not subject to a plea of limitation unless the amendment or supplement is wholly based on a new, distinct, or different transaction or occurrence.
See also Ex parte Goad, 690 S.W.2d 894 (Tex.1985); Pineda v. PMI Mortgage Ins. Co., 843 S.W.2d 660 (Tex.App.-Corpus Christi 1992), writ denied per curiam, 851 S.W.2d 191 (Tex.1993).
Hale filed her original pleading on March 10, 1989, well within the two-year period that ran from the time E-Z Mart stopped paying her benefits. This pleading alleges negligence *701 and a breach of contract. Since her cause of action for a breach of the duty of good faith and fair dealing stems from E-Z Mart's failure to pay her benefits under the program, as does her breach of contract claim, these claims appear to be based on the same transaction or occurrence. Thus, the breach of the duty of good faith and fair dealing claim is not barred by the statute of limitations.[1] This point of error is overruled.
IV. DAMAGES FOR DELAY
Hale requests that the court award her an amount equal to ten percent of the judgment as damages for delay because E-Z Mart's appeal is groundless. Specifically, she contends that E-Z Mart has completely reversed its position on the existence of the contract from its position at trial merely to create frivolous points of error on appeal. She complains that the delay caused by the appeal has amounted to nearly a year thus far and, in the meantime, she has been denied needed benefits and medical care.
We find that E-Z Mart brought some matters of legitimate controversy before this Courtthis application of the duty of good faith and fair dealing being one of first impression. The request for damages is denied.
The judgment of the trial court is affirmed.
NOTES
[1] See Guajardo v. Liberty Mutual Ins. Co., 831 S.W.2d 358 (Tex.App.-Corpus Christi 1992, writ denied) (court held that claims for workers' compensation benefits and breach of the duty of good faith and fair dealing were based on the same transaction or occurrence); Long v. State Farm Fire and Cas. Co., 828 S.W.2d 125 (Tex.App.-Houston [1st Dist.] 1992, writ denied) (court held that a breach of the duty of good faith and fair dealing was based on the same transaction or occurrence as were benefits under an insurance policy).
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883 S.W.2d 278 (1994)
Marion STOVER, Appellant,
v.
Jerold W. GORMLEY, D.D.S., Appellee.
No. 07-93-0144-CV.
Court of Appeals of Texas, Amarillo.
July 12, 1994.
Order Overruling Rehearing August 19, 1994.
*279 Leighton Cornett, Paris, for appellant.
Peterson, Farris, Doores & Jones, Barry D. Peterson, Amarillo, for appellee.
Before DODSON, BOYD and POFF, JJ.
BOYD, Justice.
In this appeal, appellant Marion Stover (Stover) challenges a take-nothing summary judgment in favor of appellee, Jerold W. Gormley, D.D.S. (Gormley). In one point of error, she contends that the trial court erred in entering the summary judgment for the reason that Gormley failed to establish his affirmative defense of limitations as a matter of law so as to entitle him to the judgment. For reasons hereinafter stated, we affirm the judgment in part and reverse it in part.
HISTORY OF THE CASE
On September 14, 1988, Stover contacted Gormley regarding a surgical procedure to *280 improve Stover's ability to wear dentures. Gormley initially intended to perform a bone graft to help provide the necessary support to retain Stover's dentures; however, he subsequently proposed to perform a skin graft to accomplish the same objective and Stover agreed to that procedure.
Gormley performed the operation on September 27, 1988 and Stover was released from the hospital on September 30, 1988. After the surgery, Stover informed Gormley that she was experiencing significant pain and numbness in her upper lip, nose, and surrounding areas of her face. Stover returned to see Gormley on several occasions for follow-up care and also to seek relief from the problems she experienced after the surgery. According to Gormley's records, he last treated Stover on January 30, 1990 and, on that date, he referred her to Dr. Paullus for a post-operative neurological evaluation. On March 8, 1990, after a telephone conversation with Paullus's neurological technician, Gormley referred Stover to "the district clinic" for funding of additional studies in Dallas. On March 15, 1990, according to his records, Gormley referred Stover to a specialist in Dallas for additional neurological diagnostic studies. However, according to Stover, when she last called Gormley in March of 1990, he told her that she was "on [her] own" and that if she wanted to have the nerve test done in Dallas, she would have to do it at her own expense.
Stover sent a written notice of claim to Gormley on November 8, 1990[1] and filed the instant suit on February 22, 1991. In her petition, Stover alleged that Gormley "improperly performed [the] surgery and improperly treated plaintiff after the surgery." Gormley did not file an exception to Stover's failure to allege more specifically the shortcomings of the post-surgical treatment. Stover also alleged that Gormley was negligent in choosing to perform a skin graft rather than a bone graft.
Read as a whole and in the light in which we must review them, Stover's allegations are sufficient to assert that Gormley committed medical malpractice in that he was negligent in his choice of the surgical method, in his performance of the surgery, and in his post-surgery treatment. Stover also sufficiently alleged that Gormley violated several provisions of the Texas Deceptive Trade Practices-Consumer Protection Act (DTPA) as a result of certain alleged false representations he made.[2]
Gormley successfully moved for summary judgment on the basis that the two-year limitation periods provided by the Texas Medical Liability and Insurance Improvement Act[3] and the DTPA[4] had run on both the negligence and DTPA claims.
LEGAL STANDARDS AND STANDARDS OF REVIEW
In order for a defendant to prevail on a motion for summary judgment, he or she must disprove, as a matter of law, at least one of the essential elements of each of the plaintiff's causes of action, Lear Siegler, Inc. v. Perez, 819 S.W.2d 470, 471 (Tex.1991), or establish one or more defenses as a matter of law, Bryant v. Gulf Oil Corp., 694 S.W.2d 443, 445 (Tex.App.-Amarillo 1985, writ ref'd n.r.e.). The standards for reviewing a motion for summary judgment, as set out by the Texas Supreme Court in Nixon v. Mr. Property Management Company, 690 S.W.2d 546 (Tex.1985), are well established. They are:
1. The movant for summary judgment has the burden of showing that there is no genuine issue of material fact and that it is entitled to judgment as a matter of law.
2. In deciding whether there is a disputed material fact issue precluding summary *281 judgment, evidence favorable to the non-movant will be taken as true.
3. Every reasonable inference must be indulged in favor of the non-movant and any doubts resolved in its favor.
Id. at 548-49.
DISCUSSION
The parties acknowledge that Stover's notice of claim and petition were filed more than two years after the surgery, but less than two years after the end of her treatment by Gormley. Bearing that in mind, we will first deal with the limitations provision of the Texas Medical Liability and Insurance Improvement Act (the Act).
Section 10.01 of the Act provides:
Notwithstanding any other law, no health care liability claim may be commenced unless the action is filed within two years from the occurrence of the breach or tort or from the date the medical or health care treatment that is the subject of the claim or the hospitalization for which the claim is made is completed....
Tex.Rev.Civ.Stat.Ann. art. 4590i, § 10.01 (Vernon Supp.1994). This section establishes three possible dates from which medical malpractice liability claims may run: (1) the date of the breach or tort; (2) the date the health care treatment that is the subject of the claim is completed; or (3) the date the hospitalization for which the claim is made is completed. Rowntree v. Hunsucker, 833 S.W.2d 103, 104 (Tex.1992); Kimball v. Brothers, 741 S.W.2d 370, 372 (Tex.1987). The date Stover was released from the hospital is not significant to this case, therefore, we need only determine which of the other two possible dates the limitation period on Stover's claim began to run.
Stover takes the position that the surgery and follow-up care were all part of a single course of treatment. Therefore, it is her position that her last day of treatment is the date from which the limitations provision of the Act must run. In his motion for summary judgment, Gormley argued that the only instance in which any negligence on his part may have occurred was during Stover's September 27, 1988 surgery and, therefore, the filing of the petition was outside the two-year limitation period. We review that contention, as we must, according to the standards set forth in Lear Siegler, Bryant, and Nixon.
To determine if Gormley has proven, as a matter of law, the affirmative defense of limitations with regard to his alleged medical malpractice, we must examine more closely the causes of action raised by Stover's petition. In the second paragraph of her petition, Stover alleged that Gormley was negligent in three respects: first, in deciding to perform a skin graft instead of a bone graft; second, in performing the procedure in a manner that was below the standard of care normally exercised by a doctor performing that procedure; and third, in providing substandard follow-up care. In support of her position that the last date of treatment is the only ascertainable date from which limitations can run, she argues that these three acts of negligence were part of a continuing course of treatment. We disagree.
The present case is very similar to Shook v. Herman, 759 S.W.2d 743 (Tex.App.-Dallas 1988, writ denied), and we find that court's decision helpful. In that case, the plaintiff had eye surgery on August 9, 1982. Id. at 744. The doctor who performed the surgery also provided follow-up care. The same doctor performed a second surgery on the same eye on November 30, 1983 and also provided the follow-up care for that surgery.
The plaintiff contended that these events constituted an ongoing chain of events that were not separable into specific breaches or torts, thereby preventing the statute of limitations from running until the course of treatment provided by the doctor was completed. Id. at 745. En route to rejecting that contention, the Dallas Court of Appeals cited the proposition espoused in Kimball, 741 S.W.2d at 372, that when the precise date of a breach or tort can be ascertained, that is the date from which limitations run. See also Marchal v. Webb, 859 S.W.2d 408, 413 (Tex.App.-Houston [1st Dist.] 1993, writ denied) (on rehearing); Dougherty v. Gifford, 826 S.W.2d 668, 673 (Tex.App.-Texarkana 1992, no writ). With this proposition in mind, the court treated the plaintiff's petition *282 as alleging four negligent events: the first surgery, its follow-up care, the second surgery, and its follow-up care. Shook, 759 S.W.2d at 746. Finding the first three events occurred more than two years before the plaintiff filed her notice of claim and petition, the court affirmed a summary judgment in favor of the defendant on the basis of limitations. Parenthetically, the summary judgment as to the fourth event was affirmed because the court found the defendant established the absence of negligence in that matter. Id. at 747.
We find the proposition stated and followed in Shook and the cases cited therein is applicable here. Therefore, we will apply the same proposition in analyzing Gormley's contention as to the applicability of the limitations bar in this case. Although Stover argues that all of the treatment provided by Gormley constituted a single course of treatment, her petition actually alleges two negligent events, the surgical procedure and the ensuing care. As the ending date of each of these events is readily ascertainable, the limitation period provided by section 10.01 of the Act must be calculated from those respective dates.
From this perspective, we find that the trial court did not err in granting Gormley summary judgment as to Stover's claim arising out of his choice of surgical method and his surgical performance. The summary judgment evidence was sufficient to sustain the holding that the claim was barred by the Act's statute of limitation. However, we do not agree that Gormley was entitled to a summary judgment regarding Stover's claim arising out of the follow-up care.
The premise of Gormley's motion and summary judgment evidence was that the limitation period began on September 27, 1988, the date of the surgery. That premise and evidence is not sufficient to establish, as a matter of law, that any claim Stover may have had for improper follow-up treatment after the surgery and through her last contact with Gormley was barred by limitations. As Gormley failed to establish that Stover's claim of improper post-surgical care was barred by limitations he was not entitled to summary judgment on that issue.[5] This is especially true because summary judgment may not be granted on a theory not presented in a movant's motion. McConnell v. Southside School Dist., 858 S.W.2d 337, 341 (Tex.1993); Tex.R.Civ.P. 166a(c).
Stover also seeks to invoke the doctrine of fraudulent concealment for the first time on appeal. She argues that Gormley falsely represented to her that the numbness and pain she was feeling would "go away" in 10 to 12 months and that such representations were sufficient to fall within the ambit of that species of equitable estoppel. In a proper case, invocation of fraudulent concealment estops a defendant from relying upon a statute of limitation as an affirmative defense to a cause of action. It applies where a defendant is under a duty to make disclosure but fraudulently conceals the existence of a cause of action from the party to whom it belongs. In such an instance, the defendant is estopped from relying on the defense of limitations until the party learns of the right of action or should have learned of that right through the exercise of reasonable diligence. Borderlon v. Peck, 661 S.W.2d 907, 908 (Tex. 1983). Because the physician-patient relationship is one of trust and confidence, Texas recognizes that a physician's failure to disclose a negligent act or fact that an injury has occurred constitutes fraudulent concealment. Id. See also Williams v. Khalaf, 802 S.W.2d 651, 657 (Tex.1990); Rhodes v. McCarron, 763 S.W.2d 518, 523 (Tex.App.-Amarillo 1988, writ denied).
It is the rule, however, that with the exception of an attack on the legal sufficiency of the grounds raised by the movant, a non-movant in a summary judgment proceeding *283 must expressly present to the trial court any reasons he relies upon in seeking to avoid the movant's entitlement to summary judgment. Such reasons include those set out in Rules 93 and 94 of the Texas Rules of Civil Procedure. City of Houston v. Clear Creek Basin Authority, 589 S.W.2d 671, 676-78 (Tex. 1979); see also McConnell, 858 S.W.2d at 341. Fraudulent concealment is a species of estoppel and, as such, it is one of those affirmative defenses enumerated in Rule 94. Inasmuch as Stover failed to present this defense to the trial court, she is precluded from claiming it now.
Stover also argues that her allegations that Gormley knowingly made material misrepresentations to her was sufficient to plead an independent cause of action for fraud. Her argument follows that this action for fraud invoked the general four-year statute of limitations and, therefore, her petition was timely filed.[6] We disagree.
In her first amended original petition, her active pleading, Stover did not allege an independent cause of action for fraud. It is well established that a plaintiff's pleading must provide fair notice of the cause of action and relief sought. Stoner v. Thompson, 578 S.W.2d 679, 683 (Tex.1979). In paragraphs four, five, and seven of her petition, Stover alleges several instances of misrepresentation and false representations by Gormley. In paragraph eight, she alleges:
Plaintiff alleges that as a result of the negligence of defendant, and as a result of the representations made knowingly to her, she has suffered damages in excess of FIVE HUNDRED THOUSAND DOLLARS (500,000.00), and sues defendant for same.
The knowing misrepresentations made by defendant as above alleged herein, constitutes (sic) violations of the Deceptive Trade Practices act (sic), Texas Business and Commercial (sic) Code Annoted (sic) Section 17.41-17.63 (1987 and supplement 1991) (DTPA) arising out of dental services provided by the defendant.
Taken together, paragraphs four, five, seven, and eight alleged a cause of action under the DTPA and for medical negligence; however, they did not give fair notice that Stover was seeking recovery under an independent fraud claim. Thus, the four-year limitation statute in question is not applicable to this case.
We must now consider Stover's claims under the Texas DTPA in which she avers that Gormley knowingly made the false representations that the skin graft procedure would work as well as a bone graft and that he would be able to perform the surgery without difficulty. In response, Gormley argues that any such cause of action is also included in the two-year limitation period provided by section 10.01 of the Act. He contends that this is so because the first sentence of that section specifically provides that the section governs all health care liability claims "[n]otwithstanding any other law." Therefore, he reasons that the limitation provision of the DTPA is inapplicable. We disagree.
Section 12.01(a) of the Act is the provision that governs the relationship between the Act and the DTPA. Chapman v. Paul R. Wilson, Jr., D.D.S., Inc., 826 S.W.2d 214, 219 (Tex.App.-Austin 1992, writ denied). Section 12.01(a) provides:
Notwithstanding any other law, no provision of Sections 17.41-17.63, Business & Commerce Code, shall apply to physicians or health care providers as defined in Section 1.03(3) of this Act, with respect to claims for damages for personal injury or death resulting, or alleged to have resulted, from negligence on the part of any physician or health care provider.
Tex.Rev.Civ.Stat.Ann. art. 4590i, § 12.01(a) (Vernon Supp.1994) (emphasis added). While the language of the section is sufficient to exempt health care providers from DTPA claims based upon negligence, it does not cover a cause of action based upon a "knowing" misrepresentation, inasmuch as a "knowing" action is not the equivalent of a negligent one. Sorokolit v. Rhodes, 1994 WL 138329, 37 Sup.Ct.J. 680, 682 (April 20, 1994). Because Stover's DTPA claims are based upon allegations of "knowing" misrepresentations *284 and not negligence, they are not governed by the limitations provided by section 10.01 of the Act. Id. See also Chapman, 826 S.W.2d at 219; Richard M. Alderman, The Business of MedicineHealth Care Providers, Physicians, and the Deceptive Trade Practices Act, 26 Hous.L.Rev. 109, 141 (1989).
Having made that decision, we must next decide if Stover's DTPA claims were barred by section 17.565, the relevant limitation provision of the DTPA. That section, which is similar to section 10.01 of the Act, provides a two-year limitation period within which to bring an action. However, unlike section 10.01, section 17.565 provides that the limitation period begins to run from the date the plaintiff "discovered or in the exercise of reasonable diligence should have discovered" the cause of action. Tex.Bus. & Com.Code Ann. § 17.565 (Vernon 1987).
In a summary judgment proceeding, section 17.565 places the burden on the defendant to establish, as a matter of law, that the plaintiff either discovered or should have discovered the acts giving rise to the cause of action. Burns v. Thomas, 786 S.W.2d 266, 267 (Tex.1990); Eshleman v. Shield, 764 S.W.2d 776, 777 (Tex.1989). Therefore, we must examine the summary judgment evidence with regard to Stover's DTPA claims to see if Gormley showed his entitlement to the summary judgment in regard to those claims.
Stover's DTPA claims are contained in paragraphs four, five, and seven of her first amended original petition.[7] Paragraph four addresses alleged misrepresentations Gormley made to Stover to induce her to have the surgery performed. In paragraph five, Stover alleges that about six or seven weeks after the surgery, Gormley made certain knowing misrepresentations to her concerning her recovery. In her seventh paragraph, Stover re-alleges her complaint that she was induced to consent to the surgery by Gormley's knowing misrepresentations and that these statements also induced her to permit subsequent treatment by Gormley.
In her summary judgment affidavit testimony, Stover averred that Gormley told her that he could do the surgery "with no problems." She further swore that he first told her he would graft some bone under the skin of her upper gums and build them up so that she would have no problem wearing her dentures. He then told her that he had decided to take skin from her upper leg for the graft, that this procedure would work just as well as the bone graft, and that "there would be no problem." She also swore that he told her that when he "got through" with the surgery, he would send her to another dentist to make the denture plates, that the plates would fit well, and that she "would have a hard time getting them out of her mouth."
A few days after the operation, Stover visited Gormley and told him that her upper lip and nose were still numb and very tender. He told her that she would regain feeling in those areas and that the pain would go away after a period of about six months. When Stover returned to Gormley's office to have the sutures removed approximately a week later, she was told that the pain would go away in about 10 or twelve months. Suffice it to say, from our review not only of Stover's summary judgment affidavit but of the summary judgment record as a whole, we cannot say that the evidence was sufficient to establish, as a matter of law, that Stover knew or should have known of the existence of a possible DTPA cause of action within the section 17.565 limitation period. Thus, the trial court erred in holding Stover's DTPA claims were barred by that statute.
For the reasons we have discussed above, we affirm the trial court's summary judgment as to appellant's claims of medical negligence arising out of or before the September 27, 1988 surgery. We reverse the summary judgment as to appellant's negligence claims arising out of the follow-up care provided by Gormley and as to Stover's DTPA action against Gormley. We remand those portions of the suit to the trial court.
*285 ON APPELLEE'S MOTION FOR REHEARING
Asserting four points of error, appellee Jerold W. Gormley, D.D.S., has filed a motion for rehearing of this cause. In his motion, Dr. Gormley contends that this court erred in: (1) applying the statute of limitations found in the Texas Deceptive Trade Practices-Consumer Protection Act[1] (DTPA) to appellant Marion Stover's claim that Dr. Gormley, a health care provider, knowingly and intentionally made false representations concerning Stover's surgery and recovery;[2] (2) applying the discovery rule so as to avoid Dr. Gormley's affirmative defense of limitations to Stover's DTPA claims; (3) reversing a portion of the trial court's summary judgment on a point not asserted by either party; and (4) reversing a portion of the trial court's summary judgment on an issue Stover did not expressly present to the trial court. We remain convinced that our disposition of the appeal was correct. Consequently, for the following reasons, Dr. Gormley's motion for rehearing must be overruled.
Regarding Dr. Gormley's first point, we remain convinced, for reasons given in our original opinion, that the statute of limitations provided in section 17.565 of the Texas Business and Commerce Code is applicable to Stover's DTPA claims. In his second point, Dr. Gormley argues that by failing to plead the discovery rule to avoid his defensive plea that the DTPA allegations were barred by the statute of limitations, "Stover waived that defense." We disagree.
We pointed out in our original opinion that section 17.565 provides that its two-year limitation period begins to run from the date the "consumer discovered or in the exercise of reasonable diligence should have discovered" the false, misleading or deceptive act or practice giving rise to the cause of action. In Burns v. Thomas, 786 S.W.2d 266 (Tex.1990), also cited in our original opinion, the Texas Supreme Court commented that "[t]he legislature essentially wrote the discovery rule into the DTPA" by including the above quoted language in the statute of limitations. Id. at 267. The court went on to say that in order to claim the benefit of the statute on summary judgment, the defendant must "bear[] the burden of establishing as a matter of law that the plaintiff either discovered or should have discovered the acts giving rise to the cause of action." Id. See also Eshleman v. Shield, 764 S.W.2d 776, 777 (Tex. 1989).
To be entitled to summary judgment, a defendant must establish, as a matter of law, one or more defenses to the plaintiff's cause of action. Bryant v. Gulf Oil Corp., 694 S.W.2d 443, 445 (Tex.App.-Amarillo 1985, writ ref'd n.r.e.). For the reasons we iterated in our opinion, Dr. Gormley failed to sustain his burden of establishing, as a matter of law, that Stover either discovered or should have discovered the alleged acts giving rise to her cause of action.
In the point of error asserted in her brief, Stover contended that the trial court erred in entering Dr. Gormley's summary judgment based upon the plea of limitations. This point is sufficient to permit her to challenge whether Dr. Gormley met his burden of showing his entitlement to the trial court judgment. City of Houston v. Clear Creek Basin Authority, 589 S.W.2d 671, 678 (Tex.1979); Malooly Brothers, Inc. v. Napier, 461 S.W.2d 119, 121 (Tex.1970).
As stated above, we continue to believe the disposition of the case made in our original opinion was correct. Accordingly, Dr. Gormley's motion for rehearing is overruled.
NOTES
[1] The Texas Medical Liability and Insurance Improvement Act requires that any person asserting a health care liability claim provide written notice to each defendant at least sixty (60) days before suit is filed. Tex.Rev.Civ.Stat.Ann. art. 4590i, § 4.01 (Vernon Supp.1994).
[2] Tex.Bus. & Com.Code Ann. §§ 17.41-.63 (Vernon 1987 & Supp.1994).
[3] Tex.Rev.Civ.Stat.Ann. art. 4590i, § 10.01 (Vernon Supp.1994).
[4] Tex.Bus. & Com.Code Ann. art. 17.565 (Vernon 1987).
[5] Gormley argues in his brief that there is no evidence of negligence in the post-surgical care; however, this argument was not made in his motion for summary judgment. The motion's only reference to the post-surgical claim is the statement that "[t]he health care of which plaintiff complains and which is the subject of her claim occurred on or before September 27, 1988." Again, a summary judgment cannot be affirmed based on a ground not presented to the trial court. Jones v. Legal Copy, Inc., 846 S.W.2d 922, 924 (Tex.App.-Houston [1st Dist.] 1993, no writ).
[6] See Tex.Civ.Prac. & Rem.Code Ann. § 16.051 (Vernon 1986).
[7] That petition does not contain a paragraph six.
[1] Tex.Bus. & Com.Code Ann. §§ 17.41-.63 (Vernon Supp.1994).
[2] Appellee argues that appellant's DTPA claims against a health provider should be controlled by the limitations statute of the Texas Medical Liability and Insurance Improvement Act. See Tex. Rev.Civ.Stat.Ann. art. 4590i, § 10.01 (Vernon Supp.1994).
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25 B.R. 790 (1982)
In the Matter of GEORGIA STEEL, INC., Debtor.
GEORGIA STEEL, INC., Plaintiff,
and
The Creditors' Committee, Intervenor-Plaintiff,
v.
The CITIZENS AND SOUTHERN NATIONAL BANK, Credit Alliance Corporation and Leasing Service Corporation, Defendants.
Bankruptcy No. 81-50966, Adv. No. 82-5045.
United States Bankruptcy Court, M.D. Georgia, Macon Division.
September 17, 1982.
*791 Jerome L. Kaplan and Ward Stone, Jr., Kaplan & Thomason, P.A., Macon, Ga., for debtor.
Claude J. Hicks, Jr., Macon, Ga., for Creditors' Committee.
Ed S. Sell, III, Sell & Melton, Macon, Ga., for Citizens & Southern National Bank.
MEMORANDUM OPINION ON COMPLAINT SEEKING A DECLARATORY JUDGMENT
ROBERT F. HERSHNER, Jr., Bankruptcy Judge.
STATEMENT OF THE CASE
On September 3, 1981, Plaintiff Georgia Steel, Inc. (Georgia Steel) filed with this Court its petition under Chapter 11 of Title 11 of the United States Code. On February 18, 1982, Georgia Steel filed with the Court a "Complaint Seeking a Declaratory Judgment." The complaint requests that the Court render a declaratory judgment as to whether various orders issued during the course of Georgia Steel's bankruptcy case require Georgia Steel to execute certain Georgia Motor Vehicle Certificate of Title application forms so as to show the three defendant creditors The Citizens and Southern National Bank (C & S), Credit Alliance Corporation (Credit Alliance), and Leasing Service Corporation (Leasing Service) as lienholders on the vehicles described in the certificates of title.[1]
After reviewing the evidence and the arguments of counsel, the Court is of the opinion that Georgia Steel should not be required to execute the motor vehicle certificate of title application forms.
FINDINGS OF FACT
After Georgia Steel filed its bankruptcy petition under Chapter 11, the reorganization chapter of the Bankruptcy Code, there was an immediate crisis over the issue of Georgia Steel's use of cash collateral.[2] The four orders now before the Court were entered as interim orders in this "cash collateral crisis." The four orders are as follows:
1. The September 14, 1981 "Interim Order on Debtor's Application to Use Cash Collateral." The debtor in possession applied to the Court for leave to use cash collateral, and a preliminary hearing on the matter was held on September 11, 1981. On September 14, 1981, the Court entered a consent order continuing the preliminary hearing to September 18, 1981 and allowing Georgia Steel to use cash collateral to meet payroll obligations, general overhead expenses and miscellaneous operating expenses. The order was to remain in effect until further order of the Court, and during the effective period of the order, the parties advised the Court that they would be attempting to reach an agreement regarding the use of cash collateral.
2. The September 25, 1981 "Consent Interim Order of Debtor-in-Possession's Application to Use Cash Collateral." On September 25, 1981, three weeks after Georgia Steel filed its bankruptcy petition, the parties entered into a "Consent Interim Order of Debtor-in-Possession's Application to Use Cash Collateral." (Consent Interim Order), which authorized Georgia Steel to use cash collateral subject to certain conditions. The fourth condition of the consent order was:
The debtor-in-possession is to cause the security interests held by the Citizens & Southern National Bank, Credit Alliance *792 Corporation and Leasing Service Corporation, in accordance with their present priority status to be perfected in any unencumbered motor vehicles owned by the debtor-in-possession regarding which such security interests are not properly noted on any Georgia Motor Vehicle Certificates of Title covering such motor vehicles.
3. The October 9, 1981 "Order." On September 18, 1981, prior to the entry of the September 25, 1981 Consent Interim Order, the three defendant creditors filed a "Joint Application for Post-Petition Security Interests in Receivables, Inventory, Unencumbered Equipment & Vehicles." Notice was sent to Georgia Steel's creditors and to Georgia Steel, stating that any objection to the joint application should be filed with the Court. No objection was filed, and on October 9, 1981, the Court entered an order granting to the three defendant creditors a postpetition security interest "in accordance with their present priority status in the Debtor's receivables, inventory, unencumbered equipment and vehicles acquired or accrued by the Debtor."
4. The November 11, 1981 "Order on Application for Authorization to Use Cash Collateral." On November 6, 1981, the three defendant creditors revoked their consent to the September 25, 1981 Consent Interim Order. Thereafter, on November 11, 1981, the Court entered an order granting Georgia Steel's application to use cash collateral and requiring Georgia Steel to pay $25,000 a month to whichever of the three defendant creditors had priority in the cash collateral. The order further required Georgia Steel to give the three defendant creditors a substitute lien on all receivables as they were created, in accordance with the respective priorities of the three defendant creditors.
Of the four orders, the one that is the focus of the Court's inquiry is the September 25, 1981 Consent Interim Order. At the time that order was signed, Georgia Steel was under the impression that there were only a few vehicles upon which C & S had not perfected its security interest. The Court also was led to believe that there were only "a few" vehicles upon which C & S needed to perfect its security interest.
After the Consent Interim Order was signed, C & S delivered to Georgia Steel sixty Georgia Motor Vehicle Certificate of Title application forms and requested that Georgia Steel execute all sixty in accordance with the provisions of the Consent Interim Order. Upon receiving C & S's request, Georgia Steel made inquiry of C & S as to the status of C & S's perfection in the sixty vehicles. Georgia Steel was told that forty-nine motor vehicle certificates of title had been delivered to C & S on February 4, 1981 and that three more had been delivered in June of 1981. C & S had taken no action to perfect its security interest in the motor vehicles covered by those fifty-two certificates of title. The remaining eight titles were delivered to C & S by Georgia Steel following the entry of the Consent Interim Order. Those eight certificates of title had been in the possession of Georgia Steel at the time the Consent Interim Order was entered.
C & S's request that Georgia Steel execute all sixty motor vehicle certificate of title application forms gave rise to Georgia Steel's request for declaratory judgment as to its legal duty under the four orders described above.
CONCLUSIONS OF LAW
The first order issued by the Court, the September 14, 1981 "Interim Order on Debtor's Application to Use Cash Collateral" entered on September 14, 1981, is not at issue in reaching a decision on Plaintiff's complaint for declaratory judgment. The order specifically stated that the debtor in possession, Georgia Steel, was authorized to use cash collateral "until further order of this Court." After that order, three other orders were entered pertaining to Georgia Steel's use of cash collateral. Those orders effectively superseded the September 14, 1981 order, which was only a temporary measure to enable Georgia Steel to continue *793 its operations, pending negotiations between the parties as to Georgia Steel's use of cash collateral. Therefore, the Court need not consider the September 14, 1981 order in making its decision in this adversary proceeding.
Neither does the Court need to consider the October 9, 1981 order granting the three defendant creditors a postpetition security interest "in the Debtor's receivables, inventory, and unencumbered equipment and vehicles acquired or accrued by the Debtor" (emphasis added). There was no Debtor until the Chapter 11 petition was filed,[3] and thus the October 9 order deals only with property acquired by Georgia Steel after September 3, 1981, the date the Chapter 11 petition was filed and Georgia Steel became a "Debtor." There has been no evidence presented to the Court that the Debtor acquired any of the sixty motor vehicles after September 3, 1981. Therefore, the October 9, 1981 order does not affect the Court's decision as to whether Georgia Steel must execute the sixty motor vehicle certificate of title application forms, since that order dealt only with vehicles acquired after September 3, 1981.[4]
The "Order on Application for Authorization to Use Cash Collateral" entered on November 11, 1981 allowed Georgia Steel to use cash collateral conditioned on: (1) the payment by Georgia Steel of $25,000 a month and (2) Georgia Steel's giving the three defendant creditors a substitute lien on all of its receivables as the receivables were created. Georgia Steel was not ordered to give the three defendant creditors a lien on all unencumbered motor vehicles under the terms of the November 11, 1981 order. Georgia Steel contends that the three defendant creditors' revocation of their consent to the September 25, 1981 Consent Interim Order, coupled with the November 11 order making no mention of a lien on motor vehicles, supersedes the September 25, 1981 Consent Interim Order and negates any security interest that might have been given to the three defendant creditors by the Consent Interim Order. The Court need not address that argument in reaching its decision.
The focus of the Court's inquiry in this adversary proceeding is the September 25, 1981 Consent Interim Order. That order, signed by the Court and consented to by all parties, provided that:
The debtor-in-possession is to cause the security interests held by the Citizens & Southern National Bank, Credit Alliance Corporation and Leasing Service Corporation, in accordance with their present priority status to be perfected in any unencumbered motor vehicles owned by the debtor-in-possession regarding which such security interests are not properly noted on any Georgia Motor Vehicle Certificates of Title covering such motor vehicles.
The evidence reveals that at the time the Consent Interim Order was entered into and during negotiations prior to the entry of the Consent Interim Order, C & S was aware of its unperfected status as to the fifty-two vehicles covered by the motor vehicle certificates of title in C & S's possession. During the negotiations, however, time was crucial and Georgia Steel did not inquire into the status of C & S's perfection, nor did C & S volunteer the information to Georgia Steel. Both the Court and Georgia *794 Steel were led to believe that the number of vehicles in which a security interest remained to be perfected was limited.
Rule 924 of the Rules of Bankruptcy Procedure, R.Bankr.P. 924, makes Rule 60 of the Federal Rules of Civil Procedure, Fed.R. Civ. 60, applicable in bankruptcy cases. Rule 60 of the Federal Rules of Civil Procedure provides in part that:
(b) . . . On Motion and upon such terms as are just, the court may relieve a party or his legal representative from a final judgment, order, or proceeding for the following reasons: (1) mistake, inadvertence, surprise, or excusable neglect; (2) newly discovered evidence which by due diligence could not have been discovered in time to move for a new trial under Rule 59(b); (3) fraud (whether heretofore denominated intrinsic or extrinsic), misrepresentation, or other misconduct of an adverse party; (4) the judgment is void; (5) the judgment has been satisfied, released, or discharged, or a prior judgment upon which it is based has been reversed or otherwise vacated, or it is no longer equitable that the judgment should have prospective application; or (6) any other reason justifying relief from the operation of the judgment. The motion shall be made within a reasonable time, and for reasons (1), (2), and (3) not more than one year after the judgment, order, or proceeding was entered or taken. A motion under this subdivision (b) does not affect the finality of a judgment or suspend its operation. This rule does not limit the power of a court to entertain an independent action to relieve a party from a judgment, order, or proceeding, or to grant relief to a defendant not actually personally notified as provided in Title 28, U.S.C., § 1655, or to set aside a judgment for fraud upon the court.
Fed.R.Civ.P. 60(b).
Although no motion under Rule 60(b) has been made by Georgia Steel, Georgia Steel has questioned the effect of the four interim orders in light of C & S's having withheld the information that C & S held certificates of title to fifty-two vehicles in which it had not perfected its security interest. Under Rule 60(b), such a withholding could justify a court's revoking or amending an order. Since Rule 60(b) allows a court to examine the continuing validity of its orders, the Court today follows the body of case law interpreting Rule 60(b) in determining the effect of the four orders.[5]
A motion for relief from a judgment under Rule 60(b) is addressed to the discretion of the Court. Tipton v. Tennesco, Inc. (In re Tipton), 18 B.R. 464 (Bkrtcy.E.D. Tenn.1982). The leading case on the application of Rule 60 to bankruptcy proceedings is Otte v. Manufacturers Hanover Commercial Corp. (In re Texlon Corp.), 596 F.2d 1092 (2d Cir.1979). In Texlon, the bankruptcy judge had erroneously granted an ex-parte order of cross-collateralization but considered himself unable to amend the order. The Second Circuit held that Bankruptcy Rule 924, making Federal Rule of Civil Procedure 60 applicable to the bankruptcy case, enabled the bankruptcy judge to amend his order. The Second Circuit stated that the test a court should use in deciding whether to vacate or amend an order is:
[W]hether, upon granting the motion to reconsider, the court will be able to reestablish the rights of the opposing party as they stood when the original judgment was rendered. . . . Almost by definition it cannot be necessary for reconsideration that the court should be able to place a losing party in the same position as if there had been none.
596 F.2d at 1101.
The Second Circuit went on the remark that bankruptcy cases are both continuous and long, and because of that unique nature the application of a rule permitting vacation or modification of an order has much *795 practical utility. The Court noted that often in bankruptcy cases, subsequent events presented during the administration of the case demonstrate the necessity of amending or vacating a previous order.
The Second Circuit continued the line of reasoning it took in Texlon in deciding Montco, Inc. v. Barr (In re Emergency Beacon Corp.), 666 F.2d 754 (2d Cir.1981). In Emergency Beacon, the Second Circuit held that a bankruptcy court may revoke or vacate an order subsequently deemed improper at any time so long as there are no vested intervening rights.
In light of the Second Circuit's decisions in Texlon and Emergency Beacon and the reasons discussed therein, this Court concludes that it has the power to vacate or amend the Consent Interim Order of September 25, 1981. Subsection (3) of Rule 60(b) allows a court to vacate or amend a final order for fraud, misrepresentation or other misconduct of an adverse party. The Court is of the opinion that C & S's failure to advise Georgia Steel and the Court as to how many motor vehicle certificates of title were actually at issue constitutes such misrepresentation or misconduct as to justify the Court's vacating the September 25, 1981 Consent Interim Order to the extent that it required Georgia Steel to execute the motor vehicle certificate of title application forms in favor of the three defendant creditors.
In Emergency Beacon, the Second Circuit stated that "[o]rdinarily clause (3) [of Rule 60(b)] is invoked where material information has been withheld or incorrect or perjured evidence has been intentionally supplied." 666 F.2d 759 (emphasis added). In this case, officers at C & S were aware that there had been no perfection as to at least fifty-two vehicles, but did not give this information to the Court or to Georgia Steel. Instead, C & S allowed the Court and Georgia Steel to labor under the impression that security interests in only "a few" vehicles were unperfected. The fact that C & S was unperfected as to fifty-two vehicles is material, and knowledge of that fact could have caused either Georgia Steel or the Court to withhold consent to the September 25, 1981 Consent Interim Order. C & S's failure to disclose the true status of its perfection constitutes a misrepresentation that calls for the Court's application of Rule 60(b) to partially vacate the order.
Further, there have been no vested intervening rights, and C & S will not be placed in a worse position than when the Consent Interim Order was entered. The Consent Interim Order provided that Georgia Steel would cause the security interests of C & S to be perfected in the vehicles. However, Georgia Steel in fact never executed the motor vehicle certificate of title application forms and thus no legally perfected interest ever vested in C & S as to the sixty motor vehicles. C & S has been adequately protected throughout the pendency of the bankruptcy case by the $25,000 monthly payments of Georgia Steel, and there has been no evidence presented to the Court that C & S lost anything during the period covered by the Consent Interim Order. C & S insists that because it allowed Georgia Steel to use the cash collateral, it put itself "at risk" and thus is entitled to the security interest in all sixty motor vehicles. The test, however, looks to actual loss and C & S has failed to demonstrate any such loss.[6]
In light of the Court's finding of misrepresentation on the part of C & S and in light of the fact that no rights ever vested in C & S as a result of the September 25, 1981 Consent Interim Order, paragraph four of the Consent Interim Order, which in effect required Georgia Steel to execute the motor vehicle certificate of title application forms for the vehicles as to which the three defendant creditors were not properly perfected, is vacated.[7] It is the opinion of the *796 Court that Georgia Steel is not required to execute any of the sixty motor vehicle certificate of title application forms in question so as to show the three defendant creditors as lienholders.[8]
NOTES
[1] Although the orders at issue address themselves to Georgia Steel and all three defendant creditors in this adversary proceeding, only C & S is actively participating in this declaratory judgment action. Both Credit Alliance and Leasing Service Corporation have been paid their secured debts in full.
[2] "Cash collateral" is defined at 11 U.S.C.A. § 363(a) as "cash, negotiable instruments, documents of title, securities, deposit accounts, or other cash equivalents in which the estate and an entity other than the estate have an interest." Id. Subsection (c)(2) of section 363 forbids the use, sale, or lease of cash collateral unless each entity having an interest in the cash collateral consents or the court, after notice and a hearing, authorizes the use, sale, or lease of the cash collateral.
[3] "Debtor" is a term of art used to designate the "person or municipality concerning which a [bankruptcy] case . . . has been commenced." 11 U.S.C.A. § 101(12) (West 1979). Thus, by definition, prior to filing the bankruptcy petition, there can be no debtor.
[4] Additionally, the Court takes judicial notice that the "Notice of Joint Application for Post-Petition Security Interests in Receivables, Inventory, Unencumbered Equipment and Vehicles," sent on September 21, 1981 by the Clerk of this Court to Georgia Steel and all creditors of Georgia Steel listed in Georgia Steel's schedules, stated that the security interests were to cover only that property "acquired or accrued" by "the above captioned debtor-in-possession." Thus, Georgia Steel's creditors had notice only that vehicles acquired by Georgia Steel after September 3, 1981 would be subject to the postpetition security interest, since the debtor in possession did not exist as such prior to the September 3 filing of Georgia Steel's bankruptcy petition. 11 U.S.C.A. §§ 1101, 101(12) (West 1979).
[5] Even if Georgia Steel had not instituted the declaratory judgment action, the Court could have raised the question of the continuing effect of the Consent Interim Order on its own motion, in accordance with its power of equity. 11 U.S.C.A. § 105 (West 1979); 28 U.S.C.A. § 1481 (West Supp.1982).
[6] The other requirements of Rule 60 are also satisfied in this adversary proceeding. The Consent Interim Order is a final judgment because no appeal was filed with the Court within ten days of the entry of the order. R.Bankr.P. 803. Also, Georgia Steel's request for declaratory judgment was brought within a year of the entry of the Consent Interim Order.
[7] 28 U.S.C.A. § 2202 (West 1982) allows a court to grant "[f]urther necessary or proper relief based on a declaratory judgment or decree . . ., after reasonable notice and a hearing, against any adverse party whose rights have been determined by such judgment." The parties, in the hearings on the declaratory judgment issue, have already litigated the matter of C & S's misrepresentation. Therefore, the Court incorporates into the declaratory judgment the order vacating paragraph four of the Consent Interim Order.
[8] Had C & S in actuality desired to perfect only as to the eight vehicles whose certificates of title were held by Georgia Steel during the negotiations over the September 25, 1981 Consent Interim Order, there would have been no misrepresentation and thus no grounds to vacate paragraph four of the September 25 Consent Interim Order. However, the fact remains that C & S was less than candid with the Court as to the presence of the other fifty-two certificates of title. This lack of candor leads to the vacation of paragraph four of the Consent Interim Order in its entirety, not just as to the fifty-two vehicles. Because of its misrepresentation, C & S is now unable to perfect its security interest in any of the sixty vehicles.
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25 B.R. 399 (1982)
In re EARTH SERVICES, INC., Debtor.
EARTH SERVICES, INC., Plaintiff,
v.
David P. deRHAM, Defendant.
Bankruptcy No. 81-00162, Adv. No. 82-0106.
United States Bankruptcy Court, D. Vermont.
October 29, 1982.
Alan R. Medor, and Alan P. Biederman, Rutland, Vt., for plaintiff.
Charles C. Chamberlain, Rochester, N.Y., for defendant.
MEMORANDUM
CHARLES J. MARRO, Bankruptcy Judge.
The Complaint of the Debtor to avoid a preferential transfer came on for hearing, after the issuance of a Summons and Notice of Trial and the filing of an Answer by the Defendant.
The Plaintiff as a debtor-in-possession filed a Petition for Relief under Chapter 11 of the Bankruptcy Code on August 6, 1981 and within 90 days prior thereto, to-wit, on June 22, 1981 the Defendant obtained a lien on the real estate of the Plaintiff by virtue of a Writ of Attachment and an Order of Approval by the Rutland Superior Court in a civil action entitled "David P. deRham v. Earth Services, Inc., et al," which Writ of Attachment was filed for record in the offices of the Town Clerks of the Towns of Pawlet and Manchester, Vermont. The action in which this Writ of Attachment was obtained was brought to recover on a promissory note dated July 12, 1978 executed and delivered by the Plaintiff to the Defendant. The Plaintiff seeks to avoid the lien obtained by attachment under § 547(b) of the Bankruptcy Code which provides that a trustee may avoid any transfer of property of the debtor
"(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;
*400 (3) made while the debtor was insolvent;
(4) made
(A) on or within 90 days before the date of the filing of the petition; or
(B) between 90 days and one year before the date of the filing of the petition, if such creditor, at the time of such transfer
(i) was an insider; and
(ii) had reasonable cause to believe the debtor was insolvent at the time of such transfer;"
At the hearing on the Plaintiff's Complaint the Defendant improved as a witness the Defendant, David deRham, who testified that from an unaudited statement of the Debtor dated September 2, 1980 it appeared that the Debtor had a very small net equity in its assets. None of his testimony bore directly on the issue of insolvency. As defined in § 101(26) of the Bankruptcy Code "insolvent" means financial condition such that the sum of an entity's debts is greater than all of such entity's property, at a fair valuation.
The Defendant conceded that the Plaintiff had established all of the elements of a preference with the exception of the one numbered "(3)" under § 547(b) which requires the transfer to be made while the debtor was insolvent if it is to be avoided.
As to insolvency, under § 547(f) the debtor is presumed to have been insolvent on and during the 90 days immediately preceding the date of the filing of the petition. The presumption merely requires the party against whom it is directed to come forward with some evidence to rebut the presumption, but the burden of proof remains on the party in whose favor the presumption exists. See Legislative History, House Report No. 95-595, Cong. 1st Session (1977) Page 179; Senate Report No. 95-589, 95th Cong.2d Sess. 89 (1978), U.S.Code Cong. & Admin.News 1978, p. 5787.
In the instant case the Defendant has failed to introduce any testimony bearing on insolvency as defined in the Bankruptcy Code which would require the Plaintiff to come forward with rebutting evidence. In addition, the Defendant requested the Court to take judicial notice of Exhibits D-1 and D-2 attached to the Answers of the Debtor to the Requests of the Defendant for Disclosure filed July 22, 1982. These Exhibits show that as of June 30, 1981 the total assets of the Debtor were valued at $258,470.00 and the total liabilities amounted to $384,982.00. Since the liabilities exceed the value of the assets by $126,512.00, it appears that the Debtor was in fact insolvent on June 30, 1981 and presumably the same situation existed on June 22, 1981, only eight days prior to the date of the statement showing the financial condition of the Debtor. Such being the case, the Debtor as Plaintiff, who was entitled to exercise the same rights as a trustee according to § 1107 of the Bankruptcy Code has established all of the elements of a preference obtained by the Defendant under the attachment lien against the real estate of the Plaintiff on June 22, 1981 and, therefore, is entitled to have the lien voided. Judgment is being entered in accordance with this Memorandum.
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909 F. Supp. 582 (1996)
Harry D. WEEKS, Plaintiff,
v.
SAMSUNG HEAVY INDUSTRIES CO., LTD., Samsung America, Inc., an Illinois corporation, Samsung Shipbuilding & Heavy Industries Co., Ltd., Samsung Construction Equipment Co., an Illinois corporation and Unknown Owner or Owners, Defendants.
No. 93 C 4899.
United States District Court, N.D. Illinois, Eastern Division.
January 3, 1996.
*583 Michael L. Flynn, Flynn Cosentino, Ltd., Lisle, IL, Torquil R. Olson, Torquil R. Olson, P.C., Hinsdale, IL, for Harry D. Weeks.
Peter J. Mone, Andrew John Boling, Nam H. Paik, William Lynch Schaller, Baker & McKenzie, Chicago, IL, for Samsung Heavy Industries Co., Ltd., Samsung Construction Equipment Co.
Andrew John Boling, Nam H. Paik, William Lynch Schaller, Baker & McKenzie, Chicago, IL, for Samsung America, Inc., Samsung Shipbuilding & Heavy Industries Co., Ltd.
MEMORANDUM OPINION AND ORDER
BUCKLO, District Judge.
Plaintiff, Harry D. Weeks, has brought this lawsuit against the defendants, Samsung Heavy Industries Co., Ltd., Samsung America, Inc., Samsung Shipbuilding & Heavy Industries Co., Ltd., and Samsung Construction Equipment Co. ("Defendants" or "Samsung"), under Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act of 1967, and Illinois common law based in part on Samsung allegedly demoting him in January, 1992 from the position of North American Sales Manager. Mr. Weeks has filed a motion to disqualify Mr. Nam Hung Paik, one of the defendants' attorneys, from this litigation.
Disqualification is a drastic measure that courts should impose only when absolutely necessary. Owen v. Wangerin, 985 F.2d 312, 317 (7th Cir.1993) (citations omitted). Mr. Weeks, as the movant, has the burden of showing facts requiring disqualification. Lanigan v. Resolution Trust Corporation, No. 91 C 7216, 1992 WL 350688, *1 (N.D.Ill. Nov. 23, 1992). Mr. Weeks' motion will be denied.
In his motion, Mr. Weeks claims that he recently was put on notice that the defendants deny that he was in fact demoted. Mr. Weeks asserts that while he was employed by the defendants, he worked closely with Mr. Paik and intends to call Mr. Paik as a witness at trial to testify "regarding his working relationship with the Plaintiff [which] will address the issue of whether the Plaintiff was demoted." Pl.'s Memo., p. 5. Mr. Weeks argues that, consequently, I should disqualify Mr. Paik.
Mr. Weeks relies on Illinois Rule of Professional Conduct 3.7, which is also Rule 3.7 of the Rules of Professional Conduct for the Northern District of Illinois. Paragraph (a) of Rule 3.7 states that
[a] lawyer shall not accept or continue employment in contemplated or pending litigation if the lawyer knows or reasonably should know that the lawyer may be called as a witness on behalf of the client [except in the following four enumerated circumstances].
Because paragraph (a) pertains to situations in which a lawyer may be called to testify on behalf of his client, and Mr. Weeks does not argue that he presently is Mr. Paik's client, paragraph (a) is not applicable. Paragraph (b) provides that
[i]f a lawyer knows or reasonably should know that the lawyer may be called as a witness other than on behalf of the client, the lawyer may accept or continue the representation until the lawyer knows or reasonably should know that the lawyer's testimony is or may be prejudicial to the client.
Under paragraph (b), Mr. Paik would not be obligated to disqualify himself until he "knows or reasonably should know" that his testimony would prejudice Samsung. Mr. Weeks' brief and exhibits do not show that in the event Mr. Paik testifies for Mr. Weeks, Mr. Paik's testimony would prejudice the defendants. Mr. Weeks' bald assertion in his brief that he "anticipates that [Mr. Paik's] testimony will be prejudicial to the Defendants," which is unsupported by either an affidavit or evidence, is insufficient to carry his burden to show facts necessitating disqualification of Mr. Paik. See Lanigan v. Resolution Trust Corporation, supra, 1992 WL 350688 at *4.
Mr. Weeks cites to cases applying Disciplinary Rules ("DR") 5-101(B) and 5-102 of the ABA Code of Professional Responsibility to situations in which lawyers testified for their own clients. See Rybicki v. State Board of Elections of the State of Illinois, *584 584 F. Supp. 849, 859-861 (N.D.Ill.1984); Shakman v. Democratic Organization of Cook County, 634 F. Supp. 895, 900-901 (N.D.Ill.1986). DR 5-101(B) bars a lawyer from accepting employment in litigation if he knows that he "ought to be called as a witness" except under the circumstances specified in DR 5-101(B)(1) through (4) (which are practically identical to those listed in Rule 3.7(A)(1)-(4)). DR 5-102(A) requires a lawyer who in the course of litigation learns that he "ought to be called as a witness on behalf of his client" to withdraw unless a situation listed in DR 5-101(B)(1) through (4) is present. However, DR 5-102(B) provides that a lawyer who during litigation realizes that he may be called as a witness other than for his client may continue the representation until it is obvious that his testimony will prejudice his client. Thus, it is apparent that at least in this case, the restrictions in Rule 3.7 on the one hand and DR 5-101(B) and DR 5-102 on the other hand regarding an attorney acting as a witness are the same. Accordingly, neither the Disciplinary Rules of the ABA Code of Professional Responsibility nor the cases to which Mr. Weeks cites alter my analysis under Rule 3.7.
Mr. Weeks seems to additionally argue that I should disqualify Mr. Paik because Mr. Weeks once had an attorney-client relationship with Mr. Paik. See Analytica, Inc. v. NPD Research, Inc., 708 F.2d 1263, 1266-67 (7th Cir.1983) ("[A] lawyer may not represent an adversary of his former client if the subject matter of the two representations is `substantially related.'") In response, the defendants contend that Mr. Weeks relies on an improper affidavit, and state that there never was an attorney-client relationship between Messrs. Weeks and Paik. It is unnecessary to resolve these issues because Mr. Weeks has waived his right to request that I disqualify Mr. Paik.
"A motion to disqualify should be made with reasonable promptness after a party discovers the facts which lead to the motion." Kafka v. Truck Insurance Exchange, 19 F.3d 383, 386 (7th Cir.1994) (citation omitted); Central Milk Producers Cooperative v. Sentry Food Stores, Inc., 573 F.2d 988, 992 (8th Cir.1978). Mr. Weeks has known of Mr. Paik's involvement in this lawsuit at least since September 13, 1993 when Mr. Paik filed his appearance for the defendants and Rule 39 affidavit. Pl.'s Ex. D. As of that date, Mr. Weeks and his attorney have dealt with Mr. Paik as opposing counsel in this litigation. Also, Mr. Weeks has been on notice for some time that Samsung conferred with Mr. Paik about Mr. Weeks: the defendants' privilege log, which was produced in June, 1994, at a minimum indicates that Mr. Paik provided information about Mr. Weeks to the defendants. Defs.' Ex. 13; Pl.'s Ex. B.
Moreover, the evidence presented does not support Mr. Weeks' argument that he only recently became aware that the defendants do not consider the changes to his job a demotion. In its April, 1992 position statement to the EEOC, Samsung denies that Mr. Weeks was demoted. Defs.' Ex. 2, p. 5. In addition, a March, 1992 memorandum from Samsung to Mr. Weeks declares:
Given [Samsung's] ambition to make substantial inroads in the North American market, the recognition that this objective could not be accomplished by you alone should not be viewed as a demotion or as a material reduction in your responsibilities.
Defs.' Ex. 29 (emphasis added).
Mr. Weeks objected to Mr. Paik's representation of the defendants for the first time on September 29, 1995, two years after Mr. Paik filed his appearance, when Mr. Flynn sent the defendants' attorneys (Messrs. Boling, Schaller, and Paik) a letter enclosing the motion to disqualify as part of a response to their letter to Mr. Flynn suggesting that he consider voluntarily dismissing this case under Rule 11. Defs.' App. Ex. 4, 6. Mr. Weeks filed his motion on October 4, 1995. It is noteworthy that Mr. Weeks was represented by counsel during the entire two-year delay and easily could have moved to disqualify Mr. Paik earlier. Mr. Weeks' procrastination in seeking disqualification years after knowing that Mr. Paik represents Samsung and that Samsung denies that he was demoted constitutes not "reasonable promptness" but rather undue delay. See Alexander v. Primerica Holdings, Inc., 822 F. Supp. 1099, 1115 (D.N.J.1993).
*585 Disqualifying Mr. Paik would deprive the defendants of a lawyer with substantial knowledge of and involvement in this case and require a substitute attorney to perform work that most likely would duplicate Mr. Paik's. If Mr. Paik is barred from representing Samsung, then Samsung will not receive its full value for the money spent in attorneys' fees for Mr. Paik's legal services and will be obligated to pay the substitute attorney for his or her repetitive work. Thus, an order disqualifying Mr. Paik from this lawsuit at this stage of the litigation would unfairly prejudice the defendants. See Chemical Waste Management, Inc. v. Sims, 875 F. Supp. 501, 505 (N.D.Ill.1995). Accordingly, by delaying twenty-four months before seeking to disqualify Mr. Paik, Mr. Weeks has impliedly waived any right to bar Mr. Paik from litigating this case on behalf of the defendants. See id.
Conclusion
For the reasons set forth above, Mr. Weeks' motion to disqualify attorney Nam H. Paik is denied.
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01-03-2023
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10-30-2013
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https://www.courtlistener.com/api/rest/v3/opinions/1525132/
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25 B.R. 484 (1982)
ALLIED TECHNOLOGY, INC., Unsecured Creditors' Committee on Behalf of Allied Technology, Inc., 1200 Talbott Tower, Dayton, Ohio 45402, Plaintiff,
v.
R.B. BRUNEMANN & SONS, INC., Successor in interest to Brunemann Realty Co., Inc., 11120 Kenwood Road, Cincinnati, Ohio 45242, Defendant.
In the Matter of ALLIED TECHNOLOGY, INC. an Ohio Corporation, Debtor.
Adv. No. 3-82-0522, Bankruptcy No. 3-80-00669.
United States Bankruptcy Court, S.D. Ohio, W.D.
December 7, 1982.
*485 *486 *487 Peter J. Donahue, Dayton, Ohio, for debtor.
Dennis J. Patterson, Dayton, Ohio, for Creditors' Committee.
William A. Rogers, Jr. and Daniel T. Harman, Dayton, Ohio, for P.O.B., Inc.
Katherine Butts Warwick, Dayton, Ohio, for Allied Technology, Inc.
C. Francis Barrett, Cincinnati, Ohio, Attorneys for R.B. Brunemann & Sons, Inc.
DECISION AND ORDER
CHARLES A. ANDERSON, Bankruptcy Judge.
PRELIMINARY PROCEDURE
This matter is before the Court for consolidated consideration of Debtor-Lessee's Application for Assumption of Lease, the Unsecured Creditors' Committee's Application to subordinate any assumed obligations to the claims of unsecured creditors, and Defendant-Lessor's Motion to Dismiss a Complaint filed by Debtor alleging that Lessor violated the automatic stay of 11 U.S.C. § 362.
Debtor's instant Application for Assumption of Lease was filed on 17 February 1982. The Court heard the Application on 1 March 1982, at which time the parties indicated that the then anticipated Application of the Unsecured Creditors' Committee (filed on 3 March 1982), could be decided based upon the record then before the Court without the necessity of a separate hearing. The parties have submitted a series of memoranda debating the legal issues raised within the Applications.
On 12 August 1982, Debtor filed a Complaint alleging violation of the automatic stay by an eviction action instituted on 22 July 1982, despite the pendency of this Court's decision on the aforementioned Applications. The eviction action, commenced in the Hamilton County (Ohio) Municipal Court, is presently pending and seeks to evict the assignee of the subject lease, and also requests money damages against both Debtor (as Lessee-Assignor) and the assignee, the party presently in possession. Defendant-Lessor filed the instant Motion to Dismiss on 2 September 1982, and all interested parties have submitted legal memoranda regarding the issues raised therein.
The Court held a pretrial conference on 20 September 1982. At the pretrial, the parties agreed that the Motion to Dismiss could be consolidated with the Applications to enable joint decision based upon consolidation of the records, reserving for later resolution only the allegation of fraudulent conduct alleged in the Complaint and, within the discretion of the Court, any other matters within the Complaint deemed not yet ripe for decision. The following decision is therefore based upon the respective records and memoranda of the parties, and the evidence adduced at the hearing.
FINDINGS OF FACT
This case basically concerns the assumption of a lease by a debtor-lessee-assignor. The controversy stems from the facts that the lease provides for monthly payments considerably below fair market value and that prior to the Petition filing Debtor assigned *488 the leasehold without specific reservation of any reversionary interest. The pertinent facts are not in dispute, and the case is essentially presented to the Court for resolution of legal issues.
Debtor-Lessee entered into the subject lease agreement with Brunemann Realty Co., Inc. on 18 July 1968. R.B. Brunemann & Sons, Inc. (hereinafter Lessor) is the successor in interest to Brunemann Realty Co., Inc. Relevant to the case at bar, the lease contains the following "express conditions":
. . . . .
2. Without prior written consent of the Landlord, which consent shall not be unreasonably withheld, the term hereby demised shall not be assigned or underlet, nor shall any right or interest thereto or therein be conferred on or vested in any one other than the Tenant.... Tenant reserves the right to occupy said premises and sublet to any of its subsidiaries.... Tenant shall remain liable for all obligations of Tenant hereunder notwithstanding any such assignment or subletting.
. . . . .
7. Tenant shall upon termination of this lease for any reason whatsoever surrender [the premises] ... to the Landlord .... The Tenant shall pay to the Landlord the cost to the Landlord of repairing any damage to the building caused by the Tenant....
. . . . .
17. The Tenant further agrees that his covenants and agreements herein contained shall be deemed conditions as well as covenants, and that if default be made in the payment of the rent herein reserved as the same shall come due, or if the Tenant shall fail to observe any of the other covenants and agreements herein contained on the Tenant's part to be performed, and the Tenant shall fail to cure such default or breach within 20 days after notice thereof is given by the Landlord to the Tenant, then it shall be lawful for the Landlord, at its option, either: (first) to enter and repossess said premises and to remove all persons and property therefrom; and for the purpose of such entry and repossession the Tenant hereby waives any notice required by law or otherwise to vacate the premises, and thereupon this lease and everything herein contained on the Landlord's behalf to be done and performed shall cease, determine and be void; or (second) as agent of the Tenant to enter and repossess said premises and to remove all persons and property therefrom and to re-rent said premises and apply all rentals received to the amounts due from the Tenant under this lease, and to expenses incurred in connection with such re-renting, the Tenant in such event to be liable for such expense when incurred, and the installments of rent and other charges as they become due, less the amount of any rents so collected by the Landlord. The Landlord shall be under no obligation in re-renting the premises to give priority to the rental of said space over other vacant space in the building.
The Tenant further agrees that for the more effectual securing to the Landlord of the rent herein reserved, the filing of any petition under the bankruptcy laws or insolvency laws, or in any reorganization proceedings, by or against the Tenant, the making of an assignment for the benefit of creditors, or the appointment of a receiver for the property of the Tenant, shall be deemed to constitute a breach of this lease, and thereupon, ipso facto, and without entry or other action by the Landlord, this lease shall at the option of Landlord terminate, and notwithstanding any other provisions of this lease, the Landlord shall forthwith, upon such termination, be entitled to recover damages for such breach in an amount equal to the amount of the rent reserved in this lease for the balance of the term hereof, less the fair rental value of the premises for the residue of said term.
The Landlord may also restrain any threatened breach of the covenant to observe the conditions of this lease, or of any covenant therein contained, but the mention herein of any particular remedy shall not preclude the Landlord from any *489 remedy it might have either at Law or in equity; nor shall consent to one act, which would otherwise be a violation, nor shall waiver of, or redress for, one violation, either of covenant or condition, prevent a subsequent act which would originally have constituted a violation from having all the force and effect of an original violation.
. . . . .
19a Tenant shall have the option to extend this lease under the same terms and conditions contained herein for an additional five (5) years, beginning at the expiration of the original term hereof, provided that the Tenant shall not then be in default herein and provided further that Tenant shall have given Landlord at least six (6) months' notice in writing prior to the expiration of the then existing term hereof of such exercise of its option. If the said first option to extend this lease is exercised then Tenant shall have a second option to extend this lease for an additional five (5) years under the same terms and conditions, except that there shall be no further option to extend beyond said second five (5) year term. 20. It is agreed that the provisions hereof shall bind and inure to the legal representatives, successors and assigns, of the parties hereto ....
As permitted in Condition # 2, the leasehold was subsequently occupied by the "P.O.B. Sealants Division" of Debtor.
In early 1980, Debtor contemplated selling its P.O.B. Sealants Division to P.O.B., Inc. (hereinafter Assignee). Assignee's offer to purchase Debtor's P.O.B. Sealant Division, however, was contingent upon successful assignment of the lease to Assignee, and the assignment itself constituted part of Debtor's consideration in the proposed sales contract.
On 25 February 1980, Debtor-Lessee-Assignor and Assignee entered into an Assignment of Lease as part of the arrangements consummating Debtor's simultaneous sale of its P.O.B. Sealant Division. The Lessor consented in writing on 22 February 1980 to the assignment of the lease to the Assignee, and the assignment is valid and enforceable in accordance with terms of the lease. Lessor's consent was specifically conditioned upon Lessee's continued liability under the lease, as required by Condition 2 of the Lease. It is further undisputed that the instant assignment is a true assignment (as distinguished from a sublease) without any reversionary interest or right of reentry retained by Debtor-Assignor. (See generally, 49 Am.Jur.2d Landlord and Tenant §§ 391 et seq.; and 33 O.Jur.2d Landlord and Tenant §§ 239 et seq.)
Relevant to the instant proceeding, the Assignment of Lease contains the following "covenants":
1. Seller-[Debtor-Assignor] does hereby assign, transfer and set over unto [Assignee] all of its rights, title and interest in and to said lease....
. . . . .
3. [Assignor] covenants and agrees that said lease is in full force and effect and that Seller exercised its option to renew said lease for a five (5) year term in 1978 and that there remains the right to further renew said lease for an additional term of five (5) years after the expiration of the initial term of five (5) years provided that the tenant is not in default thereunder all as set forth in Paragraph 19a [of the lease]; ... that the [Assignor] has performed all the covenants and conditions and obligations on its part to be performed pursuant to said lease up to the date of closing [25 February 1980] ...; and that [Assignor] is not in violation of any of the covenants or terms of said lease at the date of closing. In the event that any sums are due and payable arising out of the failure of the Seller to perform the covenants under said lease prior to the date of closing regardless of whether or not demand has been made therefor by [Lessor] to [Assignor], the [Assignor] shall promptly remit any said sums to the [Assignee] on demand therefor.
. . . . .
*490 5. Buyer by the execution of this assignment, hereby excuses and releases Seller from any further liability under the lease for obligations arising after the 25 day of February, 1980.
Assignor has been in possession of the leasehold since the date of the assignment; and it is undisputed that Assignor has, to date, fully performed.
Debtor filed its Chapter 11 Petition in this Court on 18 March 1980. Debtor scheduled Lessor as an unsecured creditor in the amount of $2,083.32, based upon an anticipated rent arrearage as discussed below. Lessor subsequently filed a Proof of Claim with the Court on 11 August 1981 listing Lessor's claim as an "unliquidated" claim based upon a "breach" of the subject lease.
Prior to the Petition filing, Debtor made rent payments by two checks which Lessor had not presented for payment as of the date of the Petition filing. The drawee-payor bank subsequently dishonored these checks because of the intervening Petition filing. Note 11 U.S.C. §§ 542(a) and 544(a). The Court notes that the date of presentment is not of record. In July 1980, however, Assignee (presumably promptly) reimbursed Lessor for the dishonored checks. Assignee was subsequently reimbursed for this payment by Debtor in Possession pursuant to this Court's approval of Assignee's Proof of Claim for reimbursement. The Court also notes that, to date, rent payments have never again been in arrears, though Lessor has refused Assignee's tender of rent payments (apparently, though the record is not clear) subsequent to the Notice to Leave Premises, discussed below. These payments have instead been escrowed "to preserve Lessor's eviction rights."
Debtor filed an Application to assume the lease on 27 August 1980. A ruling on this Application, however, was reserved by Court order dated 4 November 1980 to permit the Court to entertain the Application jointly with two adversarial proceedings involving common questions of fact.
The first of these adversarial proceedings, commenced on 7 October 1980 and numbered X-XX-XXXX, essentially concerned an attempt by the Unsecured Creditors' Committee to set aside the sale of Debtor's P.O.B. Sealant Division, inclusive of the instant assignment. The Court notes that this matter has subsequently been resolved within Debtor's Plan of Reorganization, as discussed below, and has accordingly been dismissed. See this Court's Order of 18 November 1982.
The other adversarial proceeding, commenced on 28 October 1980 and numbered X-XX-XXXX, involved a request by Debtor-Lessee-Assignor that the Court stay any action by Lessor to evict Assignee. This adversarial proceeding was filed in response to Lessor's dissatisfaction with the unfavorable terms of the lease, manifested throughout Lessor's involvement with Assignee. For example, when Debtor requested Lessor's consent to the Assignment, Lessor's initial response (later retracted by Lessor's written request as discussed above) was to withhold consent, as follows:
On behalf of our client, R.B. Brunemann & Sons, Inc., the successor in interest to Brunemann Realty Co., Inc., by merger, we are herewith responding to your letter dated February 1, 1980 which requested our client's consent to your company's assignment of the subject lease to Mr. Michael J. Dooley.
Our client respectfully declines to consent to this assignment.
The payments of the monthly installments of rent have typically been late. Your company has periodically been in default throughout the term and is presently in default. During the original ten year term of the lease, only 119 of these 120 monthly payments were made. The rent for June, 1979 has never been received. The September, 1979 rent was received one month late. The rent for November and December, 1979 and for January, 1980 was not received until February, 1980. The rent checks for August, 1979 and February, 1980 were just tendered last week, and our client is refusing to accept these checks and is returning these checks to your company. Furthermore, *491 the contract rent under this lease is substantially below the market rent. As stated above, even this below market rent has been paid late or not paid at all. Therefore, in view of the foregoing, our client is fully justified in refusing to consent to the assignment of this lease.
Lessor's point of view was made more explicit by a letter to Assignee dated 28 July 1980 (which prompted Adversary Proceeding No. 3-80-0626) intimating that Lessor anticipated an eviction action against Assignee, as follows:
This letter is to set forth the position of my client, R.B. Brunemann & Sons, Inc. [Lessor], with regard to the above-captioned matter.
R.B. Brunnemann & Sons, Inc. had entered into a written lease with Allied Technology, Inc. [Debtor] which provided for monthly installments of rent of $1,041.67, which is equivalent to $12,500.04 a year. Based upon the 13,103 square feet of space in the subject building at 1100 Kenwood Road, the rent per square foot is less than $1.00 per year. The current market rent for comparable space is $3.50 to $4.00 a square foot. From the foregoing, it is obvious that Brunemann has a very unfavorable lease and certainly did not like the idea of having to consent to the assignment to P.O.B., Inc. If Brunemann could have avoided consent to the assignment, it would have done so. However, the assignment was made subject to the continuing liabilities of Allied Technology, Inc. under the lease, and the only basis for P.O.B., Inc.'s occupancy of this real estate is by virtue of the lease agreement.
Since the lease has an unequivocal provision concerning automatic termination for a bankruptcy proceeding, it is our position that the lease has been terminated. If your client, P.O.B., Inc., wishes to maintain the position ... that only a default by P.O.B., Inc. can give rise to a basis for evicting P.O.B., Inc., then it would be our position that P.O.B., Inc. is a tenant on a month-to-month basis which can be evicted on 30 day's notice. (How can it be said that Allied Technology, Inc. has no further obligations to the lessor under the lease agreement without saying that P.O.B., Inc. is not claiming any interest in the subject real estate under the Allied Technology, Inc. lease?)
However, in accordance with [Assignee's] apparent desire to settle the matter, we would be willing to avoid litigation and reach a compromise agreement. Under such an agreement, Brunemann would be willing to accept a rental rate at the low end of the current market rental rate (that is, $3.50 per square foot per year), with a provision for increase based upon the consumer price index, would be willing to enter into a written lease with a 5 year term, would pay the insurance, and would expect the tenant to be responsible for the real estate taxes, utilities, and repairs.
If [Assignee] is willing to settle on these terms, please let me know.
The Court notes that the above-quoted letter indicates that Lessor was not dissatisfied with Assignee as a tenant nor with Assignee's performance as of the date of the letter, but instead was only dissatisfied with the unfavorable lease terms. This indication is further evidenced by Lessor's earlier "Notice to Leave the Premises," dated 11 June 1980, which requested "surrender" of the premises on the single ground of a "breach of Lease ... by Lessee's filing Bankruptcy Petition in violation of paragraph 17 [effecting a forfeiture of the leasehold upon the filing in Bankruptcy Court]...." The Court also notes that both Lessor's letter and Notice to Leave Premises do not allege any irregularities in rent payments as a basis for eviction, notice of which, along with an opportunity to cure, would have been required by Condition # 17 of the lease prior to an eviction on the basis of rent arrearage. The resulting adversarial proceeding requesting that the Court stay any attempts by Lessor to evict Assignee is no longer pending before the Court pursuant to the parties' arrangements within Debtor's Plan of Reorganization to dismiss the adversary "with prejudice," as discussed below. See also this *492 Court's order dated 3 March 1982 within Adversary X-XX-XXXX.
As alluded, all matters regarding the subject lease remained dormant pending the parties' negotiations leading to Debtor's Plan of Reorganization, confirmed by Order of the Court dated 17 August 1981.[1] Relevant to the instant proceeding, the Plan contains the following "Articles":
. . . . .
ARTICLE V
Rejection of Executory Contracts
All executory contracts, stock options, warranty obligations, and unexpired leases of Allied entered into prior to March 18, 1980 and not assumed in writing prior to confirmation of the Plan shall be deemed rejected upon confirmation of the Plan, except that Allied will renew its Motion to affirm its obligations, if any, under a lease previously assigned to P.O.B., Inc. Allied shall have the right to file motions for the rejection of such executory contracts, warranty obligations or unexpired leases at any time prior to confirmation of the Plan. Any person or entity claiming rights under a rejected executory contract, warranty obligations or unexpired lease shall have until August 10, 1981 to file a proof of claim in this case or such additional time as the court, before that date may allow.
ARTICLE VI
Provisions for the Retention, Enforcement, Settlement or Adjustment of Claims
Except as noted below, confirmation of the Plan shall constitute settlement of all litigation commenced in connection with this Chapter 11 action, which litigation shall be dismissed with prejudice by the Reorganization Court. The adversary proceeding concerning the lease which had been previously assigned by Allied to P.O.B., Inc. shall be heard after confirmation among Allied, the lessor and P.O.B., Inc. All rights other than those granted under this Plan shall be waived by acceptance and confirmation of the Plan. All claims, causes of action, demands and rights shall merge in Allied upon confirmation and any exercise of rights shall be Allied's decision and Allied will assume the defense of any claim by P.O.B., Inc. and idemnify and hold harmless the Unsecured Creditors' Committee with respect thereto.
Confirmation of the Plan shall constitute the release of any right of Allied or other interested parties to pursue preference actions under Section 547 of the Code.
ARTICLE VIII
Retention of Jurisdiction
The Reorganization Court shall retain jurisdiction to require the performance of any act that is necessary for the consummation of the Plan including, without limitation, the jurisdiction to hear and determine all claims against Allied and to enforce all causes of action which may exist in its favor and to modify the Plan pursuant to the provisions of Section 1127 of the Code.
The jurisdiction of the Reorganization Court shall continue until all of the approved and allowed claims under Class 2, Class 3 and Class 4 are satisfied pursuant to the Plan.
Conformably to Article VI of the Plan, Adversarial Proceedings No. 3-80-0578 and No. 3-80-0626 were both dismissed as aforementioned, by Orders of the Court dated 18 November 1982 and 3 March 1982, respectively. Relevant to the matter sub judice, Adversary No. 3-80-0626 (commenced by Complaint requesting that Lessor *493 "be stayed from any action to evict [Assignee], to re-enter or cause surrender of the premises...) was dismissed "with prejudice," as agreed by the parties pursuant to Lessor's Motion to Dismiss on the ground that the Adversary became moot "as the grounds for said Complaint ... no longer exist ... [in light of] the Plan confirmation."
Also as provided in the Plan, on 17 February 1982 Debtor "renewed" the instant Application to Assume the subject lease.
ISSUES RAISED
Debtor's threshold argument is that no forfeiture of the leasehold has occurred and that, "at worst," there may have been a technical breach which has been cured, or which Debtor has a right to cure as provided in 11 U.S.C. § 365(b). Debtor contends that Lessor is essentially attempting to circumvent this Court's jurisdiction in order to enforce in a nonbankruptcy forum a contractual ipso facto clause which is argued to be invalid under 11 U.S.C. § 365(e)(1)(B). Debtor alleges that Lessor's "grounds" for forfeiture are contrived and spurious, and, even if deemed to have merit, cannot be properly utilized by Debtor to effect a forfeiture, as alleged, because of waiver and estoppel. Debtor further contends that assumption of the lease would be in Debtor's best interests in order to avoid potential liability to Assignee for any resulting forfeiture of the leasehold if assumption would not be permitted.
Lessor responds that there is sufficient basis to warrant a determination of forfeiture of the leasehold vis-a-vis Assignee by either Debtor-Lessee's breach by the instant Petition filing or by Debtor's erratic rent payments prior to the lease assignment. Lessor argues that 11 U.S.C. § 365(e)(1)(B) is inapplicable to a third party assignee. Instead, Lessor contends, "The ipso facto clause is merely declared unenforceable during the pendency of the bankruptcy proceedings, once the proceedings are concluded, the ipso facto clause is applicable and may be enforced against an unrelated third party." In essence, Lessor posits that an ipso facto clause cannot be "cured" by a debtor-lessee, and may be enforced against any third party in a nonbankruptcy setting. Lessor further alleges that Assignee cannot assert liability against Debtor because of Covenant 5 of the Assignment of Lease, whereby Assignee "release[d] [Debtor] from any further liability under the lease for obligations arising after the 25th day of February 1980."
Assignee reiterates Debtor's arguments that the record does not support Lessor's allegation that the leasehold has been forfeited by Debtor-Lessee's conduct, and that, despite the release clause in Covenant 5 of the Assignment, Assignee may nevertheless seek damages for any breach of "certain warranties" within the Assignment of Lease resulting in the event of a forfeiture of the leasehold due to Debtor-Lessee's conduct.
Assignee and Debtor also contest Lessor's interpretation of 11 U.S.C. § 365(e)(1)(B). Both argue that such interpretation would render leases containing ipso facto clauses valueless, as "only a hapless Jack would trade a cow for such a contract." In essence, both argue that 11 U.S.C. § 365(e)(1)(B) (and (f)) would be meaningless if an ipso facto clause within an assumed lease would be enforceable, as such, upon completion the bankruptcy proceeding. (It should be noted, in this regard, that the case has not to date been closed as a matter of fact).
The Unsecured Creditors' Committee essentially argues that assumption of the subject lease could have unnecessary "grave consequences" upon Debtor's estate. The Unsecured Creditors' Committee also disputes the allegation of potential liability in the event Debtor does not assume, arguing that Assignee has failed to file a proof of claim for contingent liability, and that, since time for such filing has lapsed, no such claim could be asserted against Debtor's estate. The Unsecured Creditors' Committee therefore concludes that assumption would constitute little more than a Court-approved "preference" of Lessor and Assignee over the unsecured creditors, and *494 that "equity and fairness" require that any assumed liabilities be subordinated to the claims of unsecured creditors.
These matters were all presented for this Court's determination and were pending on 22 July 1982, the date Lessor filed a "Complaint for Restitution of Real Property and Money Damages" in state court. The Complaint alleges that Lessor, by virtue of this Court's Order dated 3 March 1982 dismissing Adversary Proceeding No. 3-80-0626 "with prejudice," is now entitled to maintain the state court action to evict Assignee on the basis of forfeiture of the lease by late payment for rent and/or Debtor's Petition filing. The Complaint also requests money judgment against both Debtor and Assignee for Lessor's damages, alleged to be the difference, calculated from the date of the assignment, between the fair market value of the leasehold and the rents actually collected. As aforementioned, this matter is presently pending in state court.
On 12 August 1982, Debtor filed the Complaint presently before this Court requesting that Lessor be stayed from pursuing its state court action. The Complaint also alleges that Lessor's institution of the state court action was in bad faith and fraudulent by omission therein of the details of the proceedings in this Court, alleged to justify an award of compensatory damages and additional punitive damages in the amount of $10,000.00. Debtor also requests that this Court find Lessor in contempt of Court for violation of the automatic stay. See 11 U.S.C. § 362.
Lessor responded with the instant Motion to Dismiss. In debating the Motion, the parties basically restated their views as earlier presented to the Court. In addition, Lessor emphasizes its beliefs that the automatic stay of 11 U.S.C. § 362 is inapplicable to Lessor because the lease is not "property of the estate," and that this Court's Order of 3 March 1982 in Adversary X-XX-XXXX is res judicata as to Debtor's request for a stay of Lessor's eviction action.
The parties also dispute this Court's jurisdiction over Debtor's Complaint. Debtor argues that the lease interest constitutes "property of the estate," as that term is defined in 11 U.S.C. § 541, and that this Court therefore possesses exclusive jurisdiction over disposition of the leasehold. Debtor points out that 11 U.S.C. § 365(f), providing for assignment of assumed leases by a debtor in possession, appears to support the view that a lease may constitute property of the estate even if the leasehold is assigned. Note 11 U.S.C. § 1107(a). Lessor argues that, since Debtor has no present right to possession of the leasehold, the leasehold is not "property of the estate" within the meaning of 11 U.S.C. § 541. On this basis, Lessor argues that this Court therefore does not possess subject matter jurisdiction since it essentially concerns only the rights of Lessor and Assignee. Lessor further argues that a forfeiture, as alleged, could not have even an attenuated effect on Debtor's estate because of Assignee's release of Debtor in Covenant 5 of the Assignment of Lease, and that this Court therefore should properly defer for determination of Assignee's interest in a nonbankruptcy forum.
DECISION AND ORDER
I
The initial question before the Court is whether a debtor's right to assume a lease under 11 U.S.C. § 365 is applicable to a lease in which the debtor, prior to the Petition filing, had assigned possessory interest in the leasehold.
It is the determination of the Court that a possessory interest (i.e. privity of estate with the lessor) is not a requisite to the exercise of a debtor's right to assume the lease under 11 U.S.C. § 365.
A lease of real property is a hybrid legal arrangement creating both privity of estate and privity of contract between the lessor and lessee. See generally, 33 O.Jur.2d Landlord and Tenant § 4, and 49 Am.Jur.2d Landlord and Tenant § 1. The "leasehold" is the interest in real property involved, typically the res minus the lessor's reversionary interest. 33 O.Jur.2d Landlord and Tenant § 4. An assignment of the *495 leasehold, without reservation of a right of reentry, may divest the lessee-assignor of the estate. See generally, 33A O.Jur.2d Landlord and Tenant §§ 242, and 258-265, 49 Am.Jur.2d Landlord and Tenant § 395; Note also, O.R.C. §§ 5321.01(B) and 5321.03, which limit eviction actions to lessors and sublessors. The lessee-assignor, however, remains in privity of contract, and continues to be liable, as a surety, for covenants designed for protection of the lessor's reversion. Gholson v. Savin, 137 Ohio St. 551, 19 O.Ops. 309, 31 N.E.2d 858 (1941); 33A O.Jur.2d Landlord and Tenant § 262. The lessee-assignor, nevertheless, ceases to have any direct interest in the leasehold and thus has no cause of action against an assignee on the basis of a successful eviction of the assignee. 49 Am.Jur.2d Landlord and Tenant § 436. Significant to the instant matter, the lessee-assignor does, of course, become liable to the assignee for any express covenants within the assignment itself. 33A O.Jur.2d Landlord and Tenant §§ 242, and 258-265; 49 Am.Jur.2d Landlord and Tenant § 434.
In the case at bar, the parties do not dispute that Debtor has validly assigned its interest in the subject lease without reservation of a right of reentry, and consequently has no possessory interest in the leasehold. 11 U.S.C. § 365, however, only requires that the lease be "of the debtor" in order to be assumable. 11 U.S.C. § 365(a). It is the opinion of the Court that a "lease of the debtor," as that term is used in 11 U.S.C. § 365, may be solely contractual in nature, and that there is no direct limitation upon a debtor's rights under 11 U.S.C. § 365 by the concept of "property of the estate" as elaborated in 11 U.S.C. § 541.
The decision of a debtor in possession to assume or reject an unexpired lease is within the "business judgment" of the debtor in possession, subject to court approval, and is in no way conditioned upon a possessory interest in the leasehold. 11 U.S.C. §§ 365, 1107 and 1108; Group of Institutional Investors v. Chicago, Milwaukee, St. Paul & Pacific Railroad Co., 318 U.S. 523, 550, 63 S. Ct. 727, 742, 87 L. Ed. 959 (1943). A debtor in possession, by definition, "operates the business." 11 U.S.C. §§ 1107(a) and 1108. Such operation implicitly requires the exercise of reasonable judgment in ordinary business matters, including assumption or rejection under 11 U.S.C. § 365. This business judgment is controlling throughout the reorganization of a debtor in possession, though often, as in the case of the assumption or rejection of unexpired leases, subject to Court approval. 11 U.S.C. §§ 365(a), 1107(a) and 1108.
Court approval of a debtor in possession's judgment that assumption of a lease is in the best interest of the debtor's business should not be withheld on the basis of a second-guessing of the debtor's judgment, unless the matter is presented in the context of 11 U.S.C. § 1104(a)(1) for determination of the larger question of the competency of debtor in possession's business judgment. It is not the function of the Court to operate the debtor, 11 U.S.C. §§ 364(a), 1104(a), 1107(a) and 1108. As long as assumption of a lease appears to enhance a debtor's estate, Court approval of a debtor in possession's decision to assume the lease should only be withheld if the debtor's judgment is clearly erroneous, too speculative, or contrary to the provisions of the Bankruptcy Code, and particularly of 11 U.S.C. § 365.
II
The threshold question under 11 U.S.C. § 365 is whether the subject lease existed at the time of the Petition filing. If the lease terminated by a prepetition forfeiture, 11 U.S.C. § 365 would be inapplicable, even if the leasehold were essential to reorganization, because a "lease of the debtor" would have ceased to exist. See Executive Square Office Building v. O'Connor and Associates Inc., 19 B.R. 143, 9 B.C.D. 35 (Bkrtcy.N.D.Fla.1981), and extensive citation therein.
Lessor contends that the subject lease ceased to exist because of (1) the assignment itself, (2) erratic rent payments, and (3) the lessee's filing in this Court, each *496 alleged to constitute independent material breaches of the lease.[2] In essence, Lessor argues that prepetition conduct of Debtor-Assignor and/or Debtor's act of filing a bankruptcy petition should effect a forfeiture of the leasehold of a performing assignee, and that the Debtor-Lessee-Assignor has no right to dispute the alleged forfeiture in a bankruptcy forum for purposes of either assumption or handling any handling any resulting liability within the bankruptcy proceeding.
Having determined, however, that Debtor has properly applied for assumption of the instant lease, the resolution of an allegation of a prepetition forfeiture of that lease is impliedly necessary for this Court's determination both of the lease's existence and the reasonableness of Debtor's business judgment to assume.
It is the determination of the Court that Debtor's conduct has not effected a forfeiture of the subject lease. As a general rule, "the law abhors a forfeiture." See this Court's opinion in, Acme Precision Building Limited v. Dayton Forging & Heat Treating, Inc., 23 B.R. 79 (Bkrtcy.1982), and citation therein; see also 2 Collier on Bankruptcy, 15th Ed., ¶ 365.04. In the case at bar, Lessor's allegations of forfeiture appear to be little more than a specious legal technicality asserted to rewrite or rescind the lease, rather than to rectify any bona fide damages. The subject assignment, though initially contested, was entered only subsequent to Lessor's valid written consent. The only rent payment "default" of record, (the dishonoring of two rent checks because of Debtor's intervening Petition filing), was promptly cured by Assignee.[3] The Court also notes that there is no evidence in record that Lessor ever offered notice of default as required in Condition 17 of the lease. To the contrary, Lessor's correspondence to Assignee in 1980 indicates that Debtor's alleged erratic rent payments were not the then perceived basis for a possible eviction action, which instead was argued to be exclusively based upon the ipso facto clause.
Since it is undisputed, however, that an ipso facto clause is unenforceable directly against a debtor assuming a lease containing such a clause, (see 11 U.S.C. § 365(b)(2)(B) and (e)(1)(B)), the Debtor's act of assumption of the lease acts to cure this "default," a curing which is preemptive of any relevant state law. U.S.Const., Art. 1, § 8. Any conclusion to the contrary would render a debtor's right to assign (or to preserve an assignment prior to assumption) meaningless, and would obviously be contrary to 11 U.S.C. § 365. In essence, to permit forfeiture of an assumed lease on the basis of enforcement of an ipso facto clause against a performing nondebtor assignee would render any assumed lease containing an ipso facto clause valueless for purposes of assignment, and would be wholly inconsistent with the concept implicit in 11 U.S.C. § 365 that assumption of a lease rectifies the lease, and otherwise places the parties in their prepetition postures. Thus, although it is perhaps unclear what result would occur under Ohio law if an ipso facto clause were directly asserted against a performing assignee on the basis of a rejecting debtor's petition filing, this question is not before the Court because of Debtor's assumption of the lease, thereby "curing" any arguable breach of the ipso facto clause. Note 33A O.Jur.2d Landlord and Tenant § 540.
In this regard, the Court also notes that any arguable forfeiture has been waived by Lessor's consent to the assignment and acceptance of rent payments from both Lessee and Assignee during and since the time period of the alleged forfeiture.
*497 III
Having determined that the lease existed at the time of the Petition filing, the basic question now before the Court is whether Debtor's business judgment that the lease should be assumed is reasonable. Debtor argues that it is in Debtor's best interests to assume the subject lease in order to avoid potential liabilities which may arguably occur if assumption is not approved. It is the determination of the Court that this business judgment should not be judicially reversed inasmuch as the facts do not discredit such a conclusion.
A basic requisite for assumption of a lease by a Chapter 11 debtor is the debtor's financial entanglement, i.e. the enhancement of the debtor's estate by the assumption of the liability.
It is the opinion of the Court, however, that assumption of liability to avoid arguably greater liability is a valid consideration in a debtor in possession's exercise of its business discretion.[4] In this case, the assumption of the subject lease does not appear to involve a substantial risk, (as discussed in Part IV below). On the other hand, the potential liabilities in the event of rejection appear to be significant. By Covenant 3 of the Assignment of Lease, Debtor-Assignor specifically covenanted that Assignee would have "... the right to further renew said lease for an additional term of five (5) years after the expiration of the initial term of five (5) years, provided [Assignee] is not [itself] in default [under the lease]." As intimated in Lessor's state court eviction action, in the event of a lease forfeiture, Debtor could arguably be liable to Assignee for considerable damages, including the amount of Assignee's increased rent expenses for the remainder of the lease term(s), and for other damages, such as associated moving costs. Furthermore, in a situation in which the assumption of an assigned lease appears to involve minimal liability, the desire to avoid anticipated litigation expenses which may result from rejection may itself constitute a valid ground for assumption, even if the alleged grounds for liability appear attenuated or unlikely to result in an actual finding of liability. In this regard, the Court particularly notes that Article VI of Debtor's Plan of Reorganization specifically provides that Debtor "will assume the defense of any claim by P.O.B., Inc. [the Assignee]."
The Court also finds that the record does not sustain allegations that liabilities to Assignee incurred by a hypothetical rejection/breach of the lease by Debtor could not be asserted by Assignee. Assignee's "release" of Debtor in Covenant 5 of the Assignment of Lease "from any further liability under the lease for obligations arising after the 25th day of February, 1980" appears to release Debtor-Assignor from liability to Assignee under the terms of the lease agreement. It does not release Debtor from liability to Assignee for a breach of a covenant within the Assignment itself, nor does it release Debtor from liability to Lessor for any breaches of the original lease agreement, as is specifically provided in both the lease and in Lessor's consent to assignment. This is further evidenced and emphasized by Lessor's state court action seeking damages against Debtor based upon the lease.
In addition, the argument that any claim Assignee may have against Debtor has "lapsed" because of Assignee's "failure" to file a proof of claim lacks merit. A claim based upon rejection of a lease arises at the moment of rejection, and is essentially a postpetition claim which is constructively handled as prepetition under the administration of the bankruptcy proceeding. 11 U.S.C. §§ 365(g) and 502(g); See also *498 this Court's opinion in Solon Automated Services, Inc. v. Georgetown of Kettering, Ltd., 22 B.R. 312, 9 B.C.D. 552, 6 C.B.C.2d 1484 (Bkrtcy.1982). There is no requirement that a "claim arising from the rejection" of a lease be asserted based upon the lease itself, and it is the opinion of the Court that Assignee's potential claim based upon the Assignment of Lease constitutes a "claim arising from the rejection" of the subject lease. Since Assignee's claim for damages would not arise until the act of rejection, the deadline for proofs of claims for prepetition debt (i.e. a claim as defined in 11 U.S.C. § 101(9)(A)) cannot bar Assignee's assertion of an alleged claim for postpetition debt (i.e. a claim as defined in 11 U.S.C. § 101(9)(B)), since such claim will be assertable only in the event of rejection which may or may not occur (if at all) by the time of the deadline for prepetition claims. 11 U.S.C. § 501(d). As indicated in the legislative history of the Code.
[11 U.S.C. § 501(d)] governs the filing of claims [based upon the rejection of a lease of the debtor]. The separation of this provision from the other claim filing provisions in this section is intended to indicate that claims of the kind specified, which do not become fixed or do not arise until after the commencement of the case, must be treated differently for filing purposes such as the bar date for filing claims. The Rules will provide for later filing of claims of these kinds. H.R.No. 95-595, 95th Cong., 1st Sess. 351 (1977); S.R.No. 95-989, 95th Cong., 2d Sess. 61 (1978), as quoted in Part 3 of the Collier Pamphlet Edition of the Bankruptcy Code, Legislative History of 11 U.S.C. § 501.
Instead, the deadline for the filing of proofs of claims arising under 11 U.S.C. § 502(g) is "within such time as the Court may direct," presumably not prior to the existence of the claim. B.R.P. 11-33(b)(2)(B); Solon Automated Services, Inc. v. Georgetown of Kettering, Ltd., supra; In re Hall, 8 B.R. 237, 239 (Bkrtcy.W.D.Okla.1982).
IV
11 U.S.C. § 365(b)(1) provides that, "if there has been a default," a debtor in possession may not assume a lease under 11 U.S.C. § 365 unless the debtor in possession:
(A) cures, or provides adequate assurance that the trustee will promptly cure, such default;
(B) compensates, or provides adequate assurance that the trustee will promptly compensate, a party other than the debtor to such contract or lease, for any actual pecuniary loss to such party resulting from such default; and
(C) provides adequate assurance of future performance under such contract or lease.
As aforementioned, 11 U.S.C. § 365(b)(2) excepts a "breach" of an ipso facto clause from the duty to "cure" under 11 U.S.C. § 365(b)(1)(A).
In this case, it is undisputed that, if assumption is approved, any "breach" of the subject lease which may arguably have occurred has been cured, and Assignee has been fully reimbursed for "losses" resulting from such "breach." If assumption is approved, 11 U.S.C. § 365(b)(1)(A) and (B) consequently are not at issue instanter. The question arises, therefore, whether Debtor has provided "adequate assurance of future performance," 11 U.S.C. § 365(b)(1)(C).
Although 11 U.S.C. § 365(b) is only triggered in the event of a default (and even a technical default is not definitively established by the record) it is, nevertheless, the specific finding of the Court that Debtor in Possession has provided adequate assurance of future performance. As earlier stated by this Court, "Adequate assurance does not require an absolute guarantee of repayment, and is largely a factual determination." Hennen v. Dayton Power and Light Co., 17 B.R. 720, 725, 8 B.C.D. 1102, B.L.D. ¶ 68,631 (Bkrtcy.1982), and citation therein. In this case it appears reasonably certain that Lessor will receive complete performance of the terms of the lease. Relevant to this finding are the facts that Assignee has *499 fully performed to date and appears capable of continued full performance, and also the apparent marginal risk of liability because of the marketability of the lease to subsequent assignees in the event Assignee were to prove incapable of performing due to unforeseen circumstances.
V
The Unsecured Creditors' Committee requests that the Court subordinate any claims resulting from the assumption of the subject lease to the claims of unsecured creditors pursuant to 11 U.S.C. § 510(c)(1), which provides that the Court may:
under principles of equitable subordination, subordinate for purposes of distribution all or part of an allowed claim to all or part of another allowed claim or all or part of an allowed interest to all or part of another allowed interest....
Subordination is argued as appropriate under the instant facts on the general grounds of "fairness" and "equity."
It is the determination of the Court that subordination, as requested is unwarranted in the case at bar. Subordination is essentially a discretionary exercise of the Court's equitable powers, and should only be used sparingly to rectify obvious inequities. See generally, 3 Collier on Bankruptcy, 15th Ed., ¶ 510.04. "[G]enerally, ... a claim may normally be subordinated only if its holder is guilty of misconduct." S.R. No. 989, 95th Cong., 2d Sess. 74 (1978), cited in Part 3 of the Collier Pamphlet Edition of the Bankruptcy Code, Legislative History of 11 U.S.C. § 510, and in 3 Collier on Bankruptcy, 15th Ed., ¶ 510.04. It is the opinion of the Court that subordination should not be used to frustrate legitimate business dealings of a debtor in possession undertaken for valid purposes within the reorganization. This is particularly true in the instant case since the subject lease appears to be in the best interests of Debtor's estate, and thus itself serves to benefit the unsecured creditors. Without specific facts of record demonstrating an inequitable result, this Court should not subordinate liabilities assumed in apparent good faith, though the question could later be presented to the Court (in more timely fashion) upon elaborated facts when and if such claims are actually asserted.
VI
The final matter before the Court is Debtor's request for sanctions against Lessor for institution of the questioned postconfirmation state court eviction action against Debtor and Assignee. The Court notes that Lessor's "eviction action" requests, inter alia, money "damages" against Debtor and Assignee, jointly and severally, for what is essentially an "unliquidated" scheduled debt for which Lessor has duly filed a Proof of Claim in this Court.
This Court's postconfirmation jurisdiction extends over "any necessary party ... to perform any ... act ... necessary for the consummation of the plan." 11 U.S.C. § 1142(b); Solon Automated Services, Inc. v. Georgetown of Kettering, Ltd., supra. The key document for determination of this Court's postconfirmation jurisdiction is thus the Plan itself, which is binding on all creditors, including Lessor. 11 U.S.C. § 1141(a).
In this case, Debtor's Plan of Reorganization unequivocally retains postconfirmation jurisdiction in this Court for resolution of any claim Lessor may have against Debtor based on either a prepetition breach or postpetition rejection (which is constructively a breach, 11 U.S.C. § 365(g)) of the subject lease. Specifically, Article VII of Debtor's Plan of Reorganization provides that the Court "shall retain jurisdiction ... to ... determine all claims against [Debtor] ...," and Articles V and VI explicitly provide that the Court will retain postconfirmation jurisdiction over the questions raised within Debtor's Application to assume the subject lease.
As a general rule, any claim based upon a lease involving a debtor and which arose prior to a debtor's decision to assume or reject, should be properly resolved within the bankruptcy administration, unless specific provision is made otherwise. *500 U.S.Const., Art. 1, § 8; 11 U.S.C. § 365; 28 U.S.C. § 1471. In this regard, the Court specifically notes that the right to cure a breach of an unexpired lease under 11 U.S.C. § 365(b) extends to "a default," a term which is not qualified and presumably includes any default which occurred prior to the time of assumption. 11 U.S.C. § 365(b).
A lessor of real property may assert any combination of three types of claims against a debtor's estate (1) a prepetition claim (as defined in 11 U.S.C. § 101(9)(A)) based upon a prepetition breach or forfeiture of the lease, (2) a postpetition claim for a breach of the lease prior to a debtor's assumption or rejection under 11 U.S.C. § 365, and/or (3) a post-petition claim (as defined in 11 U.S.C. § 101(9)(B)) based upon a breach of the lease which occurs, by statute, upon rejection of the lease within the bankruptcy proceeding, 11 U.S.C. §§ 365(g) and 502(g). Regardless of which type of claim is asserted, the Code contemplates that such claim(s) be resolved exclusively within the bankruptcy proceeding, to avoid needless postconfirmation litigation in a nonbankruptcy forum, such as the type in question instanter. For example, if a debtor failed to pay rent both before and after the petition filing and then rejected the lease under 11 U.S.C. § 365, the lessor would assert the resulting claims against the estate as follows:
(1) The prepetition claim would be asserted as such, subject to usual prepetition avoidance powers. Priority for such claim would be determined by 11 U.S.C. § 726 in Chapter 7, or pursuant to the terms of the plan under Chapters 11 or 13. 11 U.S.C. §§ 101(9)(A), 501, 502, and 506.
(2) The post-petition claim for breach prior to the act of rejection would be asserted as an administrative expense. 11 U.S.C. § 503(b)(1); Matter of Chase Commissary Corp., 11 F. Supp. 288 (S.D.N.Y.1935); and see generally, 2 Collier on Bankruptcy, 15th Ed., ¶ 365.03[2], and citation therein.
(3) The claim for damages "arising from the rejection" of the lease would be asserted as a prepetition claim by filing of a proof of claim after the rejection "within such time as the Court provides," again subject to usual prepetition avoidance powers. 11 U.S.C. §§ 365(g) and 502(g); B.R.P. 11-33(b)(2)(B). Priority of the claim would be determined as would be determined for prepetition claims.
On the other hand, if the debtor had assumed the lease under 11 U.S.C. § 365, both the prepetition claim and the postpetition claim for any breach prior to assumption would, of necessity, be promptly cured pursuant to 11 U.S.C. § 365(b)(1)(A), and the parties would otherwise return to their prepetition stance with no further lessor remedies for conduct prior to the date of assumption. This scheme in no manner either contemplates resolution of such questions or liquidation of any alleged damages by a nonbankruptcy forum. 11 U.S.C. §§ 362 and 365, and 28 U.S.C. § 1471.
In the case at bar, Lessor argues that this Court has no jurisdiction over Debtor's Complaint because the subject matter of Lessor's eviction action is the leasehold, which is not property of the estate, and therefore is not within this court's subject matter jurisdiction. It is the determination of the Court, however, that the vesting of the lease within the concepts of "property of the estate" is irrelevant to the question of jurisdiction in the matter sub judice. Lessor's action is, in essence, an attempt to liquidate and collect a scheduled debt in a nonbankruptcy forum during the pendency of Debtor's bankruptcy proceeding. Although Debtor has pleaded jurisdiction under 28 U.S.C. § 1471(e), it is self-evident that this Court's jurisdiction to resolve scheduled claims against an estate lies within the broad jurisdictional grant of 28 U.S.C. § 1471(a), (b), and (c), (and, if collection is attempted directly from estate assets, also (e)); and that this Court may act accordingly. See this Court's opinion in Matter of Century Entertainment Corp., 21 B.R. 160, 162 (Bkrtcy.1982).
*501 In this case, Lessor has asserted in state court what is essentially a prepetition claim for damages arising by an alleged forfeiture of the subject lease by Debtor's conduct.[5] This "claim" was duly scheduled. 11 U.S.C. § 362(a)(1) stays "commencement ... of a proceeding ... against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title...." In a Chapter 11 proceeding, the stay of 11 U.S.C. § 362(a)(1) continues until "the time the case is closed" or "the time a discharge is granted or denied," 11 U.S.C. § 362(c)(2)(A) and (C), which ordinarily is the moment of confirmation of the Chapter 11 Plan of Reorganization, 11 U.S.C. § 1141(d)(1). A Chapter 11 Plan, however, may except this general rule for the timing of the discharge. 11 U.S.C. § 1141(d)(1). In this case, Debtor's Plan of Reorganization provides such exception by specifying that this Court will retain jurisdiction "to hear and determine all claims against Allied." The Plan provides further exception by reserving the questions within Debtor's Application to assume the subject lease for this Court's postconfirmation resolution, thus holding in abeyance the discharge of those claims to be resolved within the Application. Of necessity, resolution of Debtor's Application to assume the subject lease includes determination by this Court of Lessor's allegation of prepetition forfeiture (to determine the lease's existence) and the amount of damages, if any (to determine if Debtor is capable of curing).
It is the determination of this Court that Lessor's state court action is blatantly violative of both this Court's Order of Confirmation of Debtor's Plan, and of the automatic stay of 11 U.S.C. § 362(a)(1). In the state court action, Lessor essentially requests resolution of a claim pending before this Court. The claim is vested within this Court's jurisdiction pursuant to 28 U.S.C. § 1471, as retained within the Court's postconfirmation jurisdiction by specific provision within the Plan of Reorganization, which is binding upon Lessor. 11 U.S.C. § 1141(a). Furthermore, since this claim has not yet been discharged, and no request for relief from stay has been filed, the automatic stay of 11 U.S.C. § 362(a)(1) has therefore been in effect continuously since commencement of the instant bankruptcy case. 11 U.S.C. §§ 362(c)(1)(C) and (d), and 1141(d)(1).
The Court notes that this Court's Order of Dismissal dated 3 March 1982 within Adversary X-XX-XXXX cannot act as a bar to the above determinations. Since the Court's earlier Order was premised upon the matter then before the Court being mooted by confirmation of the Plan, and since the Plan itself calls for resolution of the matter herein, a violation of 11 U.S.C. § 362 as incorporated into the Plan of Reorganization may be remedied herein as a violation of the Court Order upon which the earlier Order of Dismissal was premised, and is in no way barred by the earlier Order. Furthermore, such a specious argument flies in the face of the exclusive and conclusive statutory effect of the confirmation order. 11 U.S.C. § 1141.
It is the further determination of the Court that Lessor's action constitutes misconduct, and as such should be sanctioned as contempt of Court. 11 U.S.C. § 105. Lessor was fully cognizant of the posture of the questions being litigated before this Court. No reasonable interpretation of these proceedings, (which the Court notes are binding upon Lessor, 11 U.S.C. § 1141(a)), could justify commencement of a nonbankruptcy proceeding regarding identical issues for which this Court's determination would necessarily be res judicata. Such attempted collateral attack, though disguised by legal artifice, should be recognized as such, and should not be tolerated.
IT IS HEREBY ORDERED, ADJUDGED AND DECREED that Debtor's *502 Application to assume the subject lease is APPROVED.
IT IS FURTHER ORDERED, ADJUDGED AND DECREED that the Unsecured Creditors' Committee's Application to subordinate any assumed claim is DENIED.
The Court further finds that Lessor has acted in contempt of this Court's jurisdiction, and IT IS THEREFORE FURTHER ORDERED that Lessor reimburse Debtor for all attorney fees and litigation expenses incurred in connection with both the defense of the state court action and the protection of Debtor's rights before this Court in Adversary No. 3-82-0522.
It is the further finding of the Court that the subject lease has been cured in satisfaction of 11 U.S.C. § 365(b), and that Lessor is, therefore, enjoined from any further action to collect any claim based upon the subject lease arising prior to assumption of the lease.
NOTES
[1] The Plan essentially calls for merger of Debtor in Possession with TSC, Inc., a former subsidiary of Debtor. The resulting corporation assumed the name, TSC, Inc. The Adversarial Proceeding No. 3-82-0522, presently before the Court, was accordingly captioned with "TSC, Inc. formerly Allied Technology" as Plaintiff. For convenience, the Court will use the single nomenclature, "Debtor," throughout this opinion, since distinguishing the legal entities asserting Debtor's interest is unnecessary for determination of the questions before the Court.
[2] The Court notes that in the state court eviction action Lessor has asserted only the latter two grounds as bases for the eviction.
[3] Although Lessor refers to Debtor's previous "poor" payment record, nothing in record substantiates Lessor's allegation. The only reference in record to Debtor's payment history is allusion to Debtor's delinquent payments by hearsay contained in correspondence itself of little probative value. The Court also notes that it is undisputed that there is presently no rent arrearage.
[4] In this regard, the Court notes that 11 U.S.C. § 365(f), regarding postpetition assignments, is inapplicable to the instant facts, although the provision does indicate that the assumption of a lease may be validly premised upon the business judgment of anticipated profit in a subsequent assignment, which does appear consistent with the instant holding. The Court also notes that 11 U.S.C. § 365(k), which absolves a debtor from continuing liability under an assigned assumed lease, is also inapplicable to pre petition assignments by the debtor, and thus also inapplicable to the case at bar.
[5] This ratio decidendi is not changed by allegation that the alleged breach of the ipso facto clause is a "postpetition" claim, since such claim is not cognizable for purposes of distribution of a debtor's estate. 11 U.S.C. § 365(e)(1)(B).
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883 S.W.2d 791 (1994)
Jeannie GRINNELL, et al., Appellants,
v.
The AMERICAN TOBACCO COMPANY, INC., Appellee.
No. 09-93-039 CV.
Court of Appeals of Texas, Beaumont.
Submitted February 17, 1994.
Decided September 29, 1994.
Rehearing Overruled November 17, 1994.
David B. Gaultney, Dewey J. Gonsoulin, Mehaffy & Weber, Beaumont, for appellant.
Sam Cruse, Jr., Cruse, Scott, Henderson & Allen, Houston, Hubert Oxford, III, Benckenstein, Oxford & Johnson, Beaumont, for appellee.
Before WALKER, C.J., and BROOKSHIRE and BURGESS, JJ.
OPINION
BROOKSHIRE, Justice.
This legal proceeding was originally filed by Wiley Grinnell, Jr., and his wife, Jeannie Grinnell. The Grinnells pleaded to recover damages for personal injuries and personal damages allegedly suffered by Wiley Grinnell, Jr. These personal injuries and damages were said to be the result of smoking *792 cigarettes which were designed, manufactured, marketed, and sold by the defendant-appellee.
In July of 1985, Grinnell, Jr., an original plaintiff, was diagnosed by medical doctors as having lung cancer. This suit was then filed on October 9, 1985. Wiley Grinnell, Jr., was deposed at some length on April 30, 1986. Later that year in late May, Grinnell, Jr., died.
The plaintiffs' first amended petition was filed on April 1, 1987, by his surviving widow, Jeannie. Jeannie had been appointed and qualified as independent executrix of the estate of her husband. Grinnell, Jr.'s surviving parents were added as plaintiffs as was his surviving adult son, Kevin. By these first amended pleadings the plaintiffs sought to recover actual and punitive damages under several theories and under the Texas Wrongful Death Act as well as under the Texas Survival Statute.
In late May of 1987 the trial court granted to the appellee a partial summary judgment. This partial summary judgment dealt with the plaintiffs' various claims which had challenged the adequacy of a congressionally mandated statute and warnings as well as the propriety of the appellee's advertising and promotional practices from and after the date of January 1, 1966.
Then in mid-April of 1989 the trial judge granted the appellee's later filed motion for partial summary judgment, dismissing the plaintiffs' claims that arose as post-1965 claims. These summary judgments were partial summary judgments only and because of the nature of the suit below and because of the wording of the partial summary judgments, neither of these partial judgments was final or appealable.
Later in the first week of January, 1993, the trial court considered the appellee's renewed motion for summary judgment. This later-filed renewed motion attempted to cover all of the plaintiffs' causes of action and sought to dismiss the entirety of the causes of action that were pleaded in the plaintiffs' third amended original petition. The trial court entered a nunc pro tunc order and then entered an amended order in the latter part of January 1993 which granted the tobacco company's renewed motion for summary judgment and on January 29, 1993, the trial court dismissed all of the plaintiffs' claims and causes of action and pleaded grounds for relief. This action of January 29, 1993, was a final judgment and an appealable judgment. This appeal was timely and properly perfected.
This appellate proceeding now before us seeks relief from the orders entered by the trial court and especially from the final, appealable order of January 29, 1993. Another defendant below, namely, Price & Company was dismissed out of the lawsuit. Price & Company was not named in the plaintiffs' second amended original petition. The record before us clearly reflects that the defendants, The American Tobacco Company (ATC) and American Brands, Inc., are actually one and the same company; therefore, this is an appeal from a final judgment below.
The appellants bring five points of error. Appellants properly group point of error number one and point of error number two. Point of error number one states the trial court erred in granting the appellee's motion for partial summary judgment in respect to all of the appellants' claims challenging the adequacy of the congressionally mandated warnings and the propriety of The American Tobacco Company's advertising and promotional practices beginning and since January 1, 1966. The second point of error is similar to the first. The second point states the trial court erred in granting the appellee's motion for summary judgment dismissing all of the appellants' post-1965 claims. Concededly, however, point of error number two is much broader in scope than point of error number one.
Within about three months after Wiley Grinnell, Jr., had been correctly diagnosed with lung cancer, his original petition was filed. In this first pleading the plaintiffs below alleged that this action arose out of the illness of lung cancer suffered and sustained by Grinnell, Jr., caused by cigarette smoking. Grinnell's condition was described as a progressive condition and the petition affirmatively set out that the causation and cause or *793 causes of Grinnell's lung cancer was brought about and contributed to by cigarettes manufactured, designed, marketed, and sold by the defendant.
In the original pleadings, the first plaintiffs below allege various theories of liability and various causes of action including civil conspiracy, intentional wrongs, intentional torts, negligence, gross negligence, fraud, and unconscionable conduct; each of which and all of which resulted in actual damages as well as punitive damages to Grinnell, Jr.
In the first amended original petition, the numerous plaintiffs alleged that the defendant knew, or in the exercise of ordinary care and diligence, should have known that the cigarettes that it had designed, manufactured, marketed and sold were dangerous products and contained dangerous ingredients and harmful substances capable of causing injury and death to the intended consumers of its cigarette products, which consumers used these products in the manner intended to be used.
The plaintiffs additionally set forth that the defendant knew or should have known that the cigarettes it made could not be used safely; but, nevertheless, the manufacturer represented to the users of its cigarettes that the cigarettes were not harmful, that the cigarettes were not dangerous, and the cigarettes were not capable of causing injury or death to the users. On the contrary, it was alleged that the manufacturer made every effort to conceal and to hide certain material facts concerning the dangers of and the defects of the cigarettes made by ATC. The manufacturer made no effort to remove the toxic substances and the dangerous substances from its products although it knew of said toxic and dangerous substances or should have known of the same.
Fraud was pleaded against the defendant below in that it had designed and manufactured and sold defective products which were unreasonably dangerous when used by users in the cigarettes intended use; and therefore, the defendant was responsible for damages caused by such dangerous and defective products.
The plaintiffs in this additional pleading invoke the doctrine of strict liability, pleading under section 402A of the Restatement (Second) of Torts as the same was adopted by the Supreme Court of Texas. In addition, the plaintiffs alleged that the defendant (manufacturer) had expressly and impliedly warranted to the public as well as to Grinnell, Jr., that its product, the cigarettes, were of merchantable quality and that the cigarettes were safe and the cigarettes were fit for their intended use and fit for the purpose for which they were intended to be used under ordinary conditions and in an ordinary manner. The pleadings stated that Grinnell, Jr., relied upon these express and implied warranties and suffered injury and actual death as a proximate result of the breach of these implied warranties and express warranties.
There was a count of negligence stating that the defendant below was negligent in the design of and in the manufacture of and in the marketing of its cigarettes.
The defendant, ATC, after answering the plaintiffs' pleadings filed a motion for partial summary judgment. This first motion addressed the plaintiffs' claims with respect to smoking and health wherein the plaintiffs challenged the adequacy of the warnings placed on cigarette packages pursuant to the Federal Cigarette Labeling and Advertising Act, 15 U.S.C. §§ 1331-1340. And ATC attacked the plaintiffs' challenging of the propriety of the tobacco company's actions with respect to the advertising and promotion of the cigarettes. The tobacco company alleged that all of such claims of the plaintiffs were preempted by the Federal Cigarette Labeling and Advertising Act.
The plaintiffs filed a response to such motion for partial summary judgment. The trial court considered the matter and later entered an order granting the defendants' motion for partial summary judgment disallowing all of the plaintiffs' claims challenging the adequacy of the congressionally mandated warnings on cigarette packages and the propriety of ATC's advertising and promotions since the date of January 1, 1966.
Subsequent to the action in January of 1966, in February of 1989 ATC filed another *794 motion for summary judgment to dismiss all of the plaintiffs' post-1965 claims. This later pleading was based on the ground that all such claims were totally preempted by the Federal Cigarette Labeling and Advertising Act. The plaintiffs filed a response and filed their second amended original petition. On April 11, 1989, the trial court signed and entered an order granting the defendant's motion for summary judgment which dismissed all of the plaintiffs' post-1965 claims.
Summary judgments are reviewed de novo in accordance with the following standards:
1. The movant for summary judgment has the burden of showing that there is no genuine issue of material fact and that the movant is entitled to judgment as a matter of law.
2. In deciding whether or not there is a disputed material fact issue precluding summary judgment, evidence favorable to the non-movant will be taken as true; and
3. Every reasonable inference must be indulged in favor of the non-movant and any doubts resolved in his favor.
Nixon v. Mr. Property Management, 690 S.W.2d 546, 548-549 (Tex.1985); Turboff v. Gertner, Aron & Ledet, Inv., 763 S.W.2d 827, 829 (Tex.App.-Houston [14th Dist.] 1988, writ denied). Moreover, the usual presumption that the judgment is correct does not apply. See Montgomery v. Kennedy, 669 S.W.2d 309, 311 (Tex.1984); Great American R. Ins. Co. v. San Antonio Pl. Sup. Co., 391 S.W.2d 41, 47 (Tex.1965).
Justice Doggett speaking and writing for an unanimous Supreme Court of Texas in Acker v. Texas Water Com'n, 790 S.W.2d 299, 302 (Tex.1990), wrote and held as follows:
In the review of a summary judgment, the movant has the burden of showing that there is no genuine issue of material fact and that it is entitled to judgment as a matter of law. Evidence favorable to the non-movant will be taken as true when deciding whether a material fact issue exists. All reasonable inferences must be indulged in favor of the non-movant and any doubts resolved in its favor. Nixon v. Mr. Property Management Co., 690 S.W.2d 546, 548-49 (Tex.1985).
ATC in each of its first two motions seeking partial summary judgment relief, argued to the trial judge that the Federal Cigarette Labeling and Advertising Act as it was first enacted in 1965 and which became into full force and effect as of January 1, 1966, actually preempted all of the plaintiffs' claims and causes of action of whatever type or description or based upon whatever theory for any damages or injuries that occurred after January 1, 1966.
ATC argued that the Federal Cigarette Labeling and Advertising Act had mandated a certain type of specific warning to be used on cigarette packages. ATC maintained that the federal act prohibited states from requiring any other warning or statement relating to the smoking problems or the health problems involved in any advertising or advertising scheme or any promotion of cigarettes. Very interesting and significant is the warning label as originally required by Congress is 1965. The so-called warning label read:
"Warning: Cigarette Smoking May Be Hazardous to Your Health."
This language was amended by Congress in 1969 to provide:
"Warning: The Surgeon General Has Determined That Cigarette Smoking is Dangerous to Your Health."
Apparently the Congress determined that the first warning was not adequate.
The appellee, in support of its contention that all claims after January 1, 1966, were preempted, cited Cipollone v. Liggett Group, Inc., 789 F.2d 181 (3rd Cir.1986), cert. denied, 479 U.S. 1043, 107 S. Ct. 907, 93 L. Ed. 2d 857 (1987). We note that the trial judge did not have the benefit of later decisions and opinions involving Rose Cipollone. But the appellee's major reliance upon the 1986 decision of the Third Circuit Court is not sound.
Rose Cipollone had filed a complaint in 1983 in a federal court. The suit was based on diversity of citizenship. She alleged that she developed lung cancer because she had smoked cigarettes since 1942 which cigarettes *795 had been designed, manufactured and sold by three different defendants. After her death in 1984, her husband filed an amended complaint in federal court and after the husband's death, their son Thomas filed an amended complaint.
Thomas Cipollone alleged in his complaint that the defendant-manufacturers were responsible for his mother's death because they breached express warranties contained in their advertising and in their promotional programs and because they failed to warn consumers of the hazards of smoking. Thomas pleaded other allegations concerning fraudulent misrepresentation and he alleged that the defendants had conspired to deprive the public of certain medical and scientific information about smoking.
Thomas relied upon several different causes of action, including strict liability, negligence, express warranty, and intentional tort. The defendants, as against Thomas, pleaded that the Federal Cigarette Labeling Act enacted in '65 and its successor, known as the Public Health Cigarette Smoking Act of 1969, protected them from any liability based on their conduct after 1965, which is the position taken by the appellee in this appeal sub judice.
At a later time the case was tried on its merits and after a jury verdict, the Thomas Cipollone case was again appealed. The United States Supreme Court eventually granted a writ of certiorari. In Cipollone v. Liggett Group, Inc., 505 U.S. ___, 112 S. Ct. 2608, 120 L. Ed. 2d 407 (1992), the Supreme Court of the United States rejected a number of contentions and allegations that were made by the appellee in this appeal. We perceive that the basic, bare-bones decision in Thomas Cipollone's case was that the Federal Cigarette Labeling and Advertising statutes preempted some, but certainly not all, of state-law damages claims with respect to the smoking of cigarettes.
Inter alia, the United States Supreme Court held:
(1) that the 1965 Act did not preempt state-law damages claims against cigarette manufacturers and sellers;
(2) that § 5(b) of the 1969 Act preempted state-law damages claims against cigarette manufacturers and sellers, where such claims were based on theories of
(a) failure to provide a warning sufficient to make a product reasonably safe, suitable, and fit for its intended use, to the extent (but only to the extent) that a claim required a showing that the manufacturers' and sellers' post-1969 advertising or promotions ought to have included additional, or more clearly stated, warnings of the health consequences of cigarette smoking, and
(b) that also preempted were claims based on fraudulent misrepresentations but only to the extent that this theory was based on allegations that the manufacturers and sellers, through their advertising, neutralized the effect of federally mandated warning labels, in alleged violations of state-law prohibitions against statements in advertising and promotional materials that tended to minimize the health hazards associated with smoking, and that
(3) the 1969 Act did not preempt state-law damages claims against manufacturers and sellers to the extent that such claims were viable under state law where such claims were based upon theories of
(a) failure to provide a warning sufficient to make a product reasonably safe, suitable, and fit for its intended use, to the extent that a claim relied on the manufacturers' and sellers' testing or research practices or other actions unrelated to advertising or promotion;
(b) that the breach of an express warranty that goods conform to an affirmation of a fact or promise relating to such goods even if the evidence of the alleged warranty consists largely of statements made in the manufacturers' and sellers' advertising, and
(c) intentional fraud and misrepresentation by alleged concealment of material facts, insofar as this theory of recovery relied on a state-law duty to disclose such facts through channels of communication other than advertising or promotion,
*796 (d) nor did it preempt intentional fraud and misrepresentation by making allegedly false statements of material facts in advertising and promotions, or
(e) the 1969 Act did not preempt state-law damages claims based on an alleged conspiracy among the manufacturers and sellers to misrepresent or conceal material facts concerning the health hazards of smoking.
The actions dealt with in (a) through (e) were not preempted.
Justice Stevens in Thomas Cipollone reasoned that his Court must construe the provisions of the warning provisions of the 1965 Act in light of the presumption against the preemption of state police power regulations. Justice Stevens wrote that the regulatory actions of the Federal Trade Commission (FTC) and state requirements animated the passage of § 5 of the 1965 Act. Section 5 reflected Congress' efforts to prevent a multiplicity of state and local regulations pertaining to the labeling of cigarette packages thus, to preempt and disallow federal state and local authorities from requiring any statement relating to cigarettes and smoking and health in the advertising of cigarettes.
The Court then stated that § 5 of the 1965 Act only preempted state and federal rulemaking bodies from mandating particular cautionary statements and did not, therefore, preempt state-law damages actions.
The Public Health Cigarette Smoking Act of 1969 enacted a preemption of plaintiffs' claims based on a failure to warn and the attempted neutralization of a federally mandated warning to the extentbut only to the extentthat these claims rely on omissions or inclusions in the tobacco manufacturer's advertising of cigarettes or its promotions. Nextly, the Public Health Cigarette Smoking Act of 1969 failed to preempt the plaintiffs' claims based on express warranty, intentional fraud, intentional tort, misrepresentation or conspiracy. We quote from Thomas Cipollone:
To summarize our holding: The 1965 Act did not pre-empt state law damages actions; the 1969 Act pre-empts petitioner's claims based on a failure to warn and the neutralization of federally mandated warnings to the extent that those claims rely on omissions or inclusions in respondents' advertising or promotions; the 1969 Act does not pre-empt petitioner's claims based on express warranty, intentional fraud and misrepresentation, or conspiracy.
The Supreme Court in Cipollone also took note that the Act does not generally preempt state law obligations to avoid the marketing or selling of cigarettes with manufacturing defects or to use a demonstrably safer alternative design for cigarettes. Concerning the plaintiffs' claims herein and under Cipollone for a breach of an express warranty, the Supreme Court held that such claims were not preempted by the 1969 Act for the reason that:
A manufacturer's liability for breach of an express warranty derives from, and is measured by, the terms of that warranty. Accordingly, the "requirements" imposed by a [sic] express warranty claim are not "imposed under State law," but rather imposed by the warrantor. If, for example, a manufacturer expressly promised to pay a smoker's medical bills if she contracted emphysema, the duty to honor that promise could not fairly be said to be "imposed under state law," but rather is best understood as undertaken by the manufacturer itself. While the general duty not to breach warranties arises under state law, the particular "requirement ... based on smoking and health ... with respect to the advertising or promotion [of] cigarettes" in an express warranty claim arises from the manufacturer's statements in its advertisements. In short, a common law remedy for a contractual commitment voluntarily undertaken should not be regarded as a "requirement ... imposed under State law" within the meaning of § 5(b).
That the terms of the warranty may have been set forth in advertisements rather than in separate documents is irrelevant to the pre-emption issue (though possibly not to the state law issue of whether the alleged warranty is valid and enforceable) because although the breach of warranty claim is made "with respect to advertising" it does not rest on a duty imposed under *797 state law. Accordingly, to the extent that petitioner has a viable claim for breach of express warranties made by respondents, that claim is not pre-empted by the 1969 Act. (footnotes omitted) (italic emphasis theirs) (underlined emphasis ours)
The Court reasoned that the petitioner's claims in Cipollone of fraudulent misrepresentation that arise with respect to advertising and promotions are not preempted by section 5(b). Such claims, the High Court reasoned, were based on a general obligation and a general duty not to deceive and this understanding and interpretation of fraud by intentional misstatement is appropriate for a number of reasons.
In the 1969 Act Congress offered no sign that it wished to insulate cigarette manufacturers from long-standing rules governing fraud. Indeed, to the contrary, both the 1965 and the 1969 congressional Acts explicitly reserve the FTC's authority to identify and punish deceptive advertising practices. The Court concluded that the phrase "based on smoking and health" should be narrowly construed and does not encompass the more general duty not to make fraudulent statements. Therefore, the petitioner's claims based on allegedly fraudulent statements made in the respondent's advertising and advertisements were not preempted by § 5(b) of the 1969 Act.
Therefore, in this appeal before us we are constrained to hold that the trial court's orders of May 28, 1987, and April 11, 1989, must be reversed. These trial court orders of May 28, 1987, and April 11, 1989, granted the appellee's motions for partial summary judgments with respect to all of the plaintiffs' claims that challenged the adequacy of congressionally mandated warnings and the propriety of the tobacco company's advertising and promotional schemes and practices since January 1, 1966those orders were in error. Those orders were too broad as noted above. And as to the plaintiffs' post-1965 claims, the orders were erroneous since the federal legislation of '65 failed to preempt any valid state-law damages claims. Cipollone, supra. See and compare Carlisle v. Philip Morris, Inc., 805 S.W.2d 498 (Tex.App.-Austin 1991, writ denied). Thus, we think it is clear, and so hold, that The American Tobacco Company failed to establish as a matter of law their entitlement to the relief attempted to be granted to them under the trial court's order of May 28, 1987, and April 11, 1989.
However, appellee maintains that the "common knowledge" doctrine as announced in Joseph E. Seagram & Sons v. McGuire, 814 S.W.2d 385 (Tex.1991), upholds the trial court's orders and final judgment. We disagree and observe that McGuire is inapposite; it is distinguishable and clearly not controlling. McGuire will be discussed below.
The United States Supreme Court has recognized a basic presumption against preemption. See Maryland v. Louisiana, 451 U.S. 725, 746, 101 S. Ct. 2114, 2129, 68 L. Ed. 2d 576, 595 (1981). Thus, in matters of law and claims traditionally regulated by state law, the presumption against preemption is much stronger and heightened. The state police powers are not to be superseded by federal legislation unless that was a clear and manifest purpose of the congressional Act. We are not to conclude and determine that Congress intended to legislate the ouster of state statutes or state law causes of action in the absence of an unambiguous congressional mandate to that exact effect. Florida Avocado Growers, Inc. v. Paul, 373 U.S. 132, 83 S. Ct. 1210, 10 L. Ed. 2d 248 (1963).
The Labeling Act attempts to touch in a limited way upon matters of public health and public safety and the Labeling Act, therefore, regulates an area of traditional state control because the regulation of health and safety and matters relating thereto is primarily and historically a matter of local concern. See Carlisle v. Philip Morris, Inc., supra.
Thus concerning the question of the congressional intent to preempt the common law claims, the Austin Court of Appeals in Carlisle identified six factors that lead to the conclusion that the Labeling Act failed to preempt that field and to disallow such common law claims in the state courts. The six factors briefly were:
*798 (1) the effect of any such common law claims on any congressional goals is very speculative;
(2) avoiding diverse labeling regulations is the secondary goal of the Labeling Act; the primary goal being to inform the public of the hazards of cigarette smokingthis primary goal could reasonably be said to be enhanced by permitting common law tort claims;
(3) a holding that plaintiff's claims (common law or statutory) are preempted and disallowed would leave them without any remedy for the defendant's allegedly tortious conduct;
(4) Congress could very easily have expressly and clearly preempted the common law tort claims; Congress failed to do so;
(5) the legislative history of the Labeling Act gives no indication that Congress actually intended to preempt common law tort claims; and
(6) the Comprehensive Smokeless Tobacco Health Education Act of 1986 evinces congressional intent that common law tort claims are not preempted.
The Austin Court, writing through Justice Jones, held that the Labeling Act and its legislative history did not result from any conflict with state law; therefore, the clear, manifest and unambiguous expression of congressional intent needed to uphold the preemption and disallowance of the common law tort claims was not expressed. Therefore, the common law tort claims were not preempted by the Labeling Act.
We, likewise, conclude that the Federal Cigarette Labeling and Advertising Act does not reflect a clear, manifest and unambiguous congressional intent which is necessary to preempt state common law claims for injuries, damages, or death allegedly suffered and sustained as a result of smoking cigarettes. And under the heightened presumption against preemption and disallowance as to areas of traditional state control, we thus decide that the following causes of action are simply not subject to preemption: strict liability claims for defective design and defective manufacture of cigarettes, negligence, strict liability claims for failure to warn, express warranty and implied warranty claims, and claims based on alleged misrepresentations and civil conspiracy. The preemption does apply to certain very limited classes of claims based on the failure to warn as set out in Cipollone, supra, ___ U.S. at ___-___, 112 S.Ct. at 2624-25, 120 L.Ed.2d at 431-32. Appellants' points of error one and two are sustained. Appellee was not entitled to the summary judgment as a matter of law.
Appellants urge points of error three and four which complain of the trial court's granting the appellee's renewed motion for summary judgment, which judgment struck down: (a) the appellants' strict liability cause of action; (b) the appellants' negligence, willful misconduct, and gross negligence cause of action; (c) the appellants' cause of action for breach of warranty; (d) the appellants' causes of action for misrepresentation, fraud, and Deceptive Trade Practices violation; (e) the appellants' cause of action for civil conspiracy; and (f) the appellants' causes of action under §§ 321, 389, 519, and 520 of the Restatement (Second) of Torts. And further, the appellants argue that the trial court erred in granting the appellee's renewed motion for summary judgment because genuine issues of material fact existed.
Under points of error three and four, it must be noted that the plaintiffs below filed a fourth amended original petition. In that fourth petition, they asserted and alleged various causes of action including strict liability, negligence, willful misconduct, gross negligence, breach of express warranties, breach of implied warranties, fraud and misrepresentation, violations of the Texas Deceptive Trade Practices Act, civil conspiracy, actions based on the Restatement (Second) of Torts §§ 321, 389, and ultra-hazardous activities under §§ 519 and 520. The plaintiffs below sought damages recoverable under article 16 § 26 of the Texas Constitution and under the Texas Survival Statutes and under the Texas Wrongful Death Act.
ATC, as stated above, filed a renewed motion for summary judgment in which it sought dismissal of all of the claims asserted by the plaintiffs in any of their pleadings. ATC's defense was based on the language of *799 Restatement (Second) of Torts § 402A, citing comments i and j, in which ATC purportedly asserted that there was no duty to warn of ordinary and commonly known dangers possessed by the consumer and that specific products such as those like tobacco are neither defective nor unreasonably dangerous as a matter of law. This was the gravamen and thrust of the defendant's renewed motion for summary judgment.
Although good tobacco without any additives or foreign substances, per se, may not be "unreasonably dangerous", tobacco containing arsenic, carcinogens, toxic chemicals, unusually high nicotine content, and tars may be "unreasonably dangerous." Reports, letters, and other evidence exist in the record indicating that ATC used or experimented with the fumigation of certain Turkish tobaccos. In this fumigation process methyl bromide and other chemicals were employed. The record additionally reflects that nicotine in cigarettes is addictive and the nicotine is an agent of true physiological addiction and that nicotine is a powerful addictive substance in cigarettes. In this regard, "addiction" or "addictive" is defined as a substance that is neurologically activebeing a substance that actually results in a particular exhortation of certain receptors in the central nervous system. Thus, under this record, appellee's reliance on § 402A, comments i and j, is misplaced.
The trial judge apparently granted the defendant's renewed motion for summary judgment following the reasoning and rationale of Joseph E. Seagram & Sons v. McGuire, supra. Nevertheless, the order granting the summary judgment stated that it was granted on all grounds urged by the appellee. Therefore, in addition to the issue of appealing the common knowledge question, this appeal implicates errors by the trial court in granting summary judgment on each and every basis and ground asserted by ATC.
Partial Background History
Grinnell, Jr., prior to his demise, testified that he first started buying cigarettes and that about the only advertisement that Grinnell had seen or heard about had to do with Luckies, so he bought a pack of Luckies. Grinnell smoked Lucky Strikes for only a very brief period of time. He then switched to Pall Mall Red, an unfiltered but extra long cigarette, manufactured by ATC. He smoked these Pall Malls for most of his life. He switched from Lucky Strikes to Pall Malls. When he was finally diagnosed with lung cancer, Grinnell was smoking about three packs of cigarettes a day. He testified that he knew nothing about smoking cigarettes that would have made him think that by so smoking he was doing something harmful to him and to his health until his diagnosis of cancer. He said that when he first started smoking back in about the year 1952 he had not seen anything or heard anything about any risk of lung cancer associated with smoking cigarettes. He specifically remembered reading advertisements of tobacco companies, including The American Tobacco Company and R.J. Reynolds, in the late 70's and at other times suggesting that there was no evidence of proof that cigarette smoking caused lung cancer.
Documents were obtained from ATC clearly raising the issue that ATC's advertisements were intended to give Grinnell, Jr., and other smokers the message that the greater length of the Pall Mall cigarettes filtered the smoke and that therefore the cigarette smoking itself was safe. As an example, there was an ad in favor of Pall Mall cigarettes appearing in a national magazine that represented to the user that the product, that is, the Pall Mall cigarette was of greater length and the greater length filters the smoke and that fine tobacco filters best.
We have tried to carefully examine some of the more relevant exhibits and without getting into too much detail, we notice that at least one of Pall Mall's advertisements took the position that Pall Malls had a very satisfying flavor and that the cigarette was so friendly to your taste. We opine that something that's "friendly to your taste" is certainly not harmful or unsafe and the ad says that Pall Mall's greater length filters the smoke but does not filter out the flavor. The ad admonishes the user not to give up flavor to get mildness and that for flavor and mildness fine tobacco filters bestand that Pall *800 Mall tobaccos are the finest quality money can buy. We determine there are a number of reasonable inferences and intendments that create express warranties and certainly implied warranties that these cigarettes are friendly and that the greater length of the cigarette filters the smoke and that for flavor and mildness that the fine tobaccos in Pall Malls filter the best.
Grinnell, Jr., testified that he tried to stop smoking on a number of occasions but could not stop smoking and that when he did temporarily stop smoking, he became very irritable. He couldn't concentrate. He couldn't concentrate on his job. He couldn't operate efficiently. He experienced a general uneasiness. Grinnell, Jr., testified that he switched from Pall Mall Red to Pall Mall Gold and Pall Mall filters because he thought that a filtered Pall Mall cigarette would be a smoother smoke and that he liked them better and that the filtered smoke would not burn his throat but when he started smoking filtered cigarettes, he began smoking more. Grinnell, Jr., had seen some cigarette advertisements from several tobacco companies, but specifically including ATC and R.J. Reynolds. After his doctors diagnosed his lung cancer, he stated that had he known cigarette smoking was so closely related to lung cancer that he would have never touched a cigarette.
The referred-to Pall Mall advertisement occurred at about the time when filter cigarettes were being introduced into the market. Therefore, the unfiltered cigarettes were losing market shares. There is in the record a motivational research study concerning the position of Pall Mall in the cigarette market. This report in general states that there is a tendency to attribute to Pall Mall certain characteristics of filtration even though it is a non-filtered cigarette. This tendency may be the result, at least partially, of advertising claims absorbed over the years of attesting to the self-filtration qualities of Pall Mall's longer length.
We have tried to carefully reseal the exhibits and the depositions in every instance. In the record (which we have carefully unsealed and resealed), there exists a press release from the president of ATC. This president took issue with what he called "loose talk" on the subject of smoking in relation to lung cancer. The president stated that the public should be reassured on the subject of smoking and health. He stated that no one has yet proved that lung cancer in any human being is directly traceable to tobacco or its product in any form.
The president further stated that believing as "we do", that cigarette smoking is not injurious to health. The president felt that a statement of reassurance to the public should be made. The statement in substance was, what the public wants to know about is whether it is true that smoking has been proved to contribute to the incidence of lung cancer. In fact, the president said, of course, that has not been so proved. In this press release other rather lengthy statements were made to the general effect that there was no proven connection between smoking and lung cancer. This statement was made by the president about one year after Grinnell, Jr., started smoking cigarettes.
In the record there is an article entitled "Why We're Dropping the New York Times". The disagreement was that the New York Times had declared it would accept cigarette ads only if the ads contained a health caution notice and "tar" and nicotine figures. The ATC ad took the position that ATC would not go along with this, that it had taken its ads off T.V. only because of the claim that this particular media, the T.V. media, may have reached large numbers of children. The ad further stated in substance that no scientist had produced clinical or biological proof that cigarettes caused the disease that they are accused of causing.
The deposition evidence of Mr. Robert Heimann is in the record. He was a former executive officer of ATC. He stated in substance that it was believed that the public was entitled to all the information that had been developed and that advertising does play a definite role in a person's selection of a particular cigarette or brand of cigarettes. Finally and importantly, Mr. Heimann stated in substance that there was no reason why an individual could not accept ATC's position that the products made by the tobacco company were not injurious to health. In substance, *801 Mr. Heimann testified that the advertising of his company was truthful and that in general his company anticipated that users would and could rely upon it.
There was further interesting and significant testimony from this executive official to the effect that the smokers and users would not be considered to be at fault if they continued to smoke based on ATC's policy. We find:
A. No, we would not fault an individual.
Q. For continuing to smoke?
A. For continuing to smoke.
When asked specifically if advertising played a role in a person's selection of a cigarette, Heimann answered in substance, ATC hoped so when it advertised, and he thought that it was fair to assume that the expenditures of large funds for advertising does give status to a brand and influences some people to select that brand and that extensive advertising would attract new smokers and keep their loyalty. He stressed brand loyalty. A question was put to him like this:
Q. Would you expect a consumer to rely upon your advertisements?
A. Yes, our advertising is truthful and we anticipate that they would rely on it if they chose, certainly.
Q. That's sort of your promise for the consumer to expect from your product?
A. Yes, I am sure that it is.
He was further asked questions:
Q. Throughout your tenure with American, it was not only American's position but your position that cigarettes were not injurious to health; is that correct?
. . . . .
A. Yes, that's so.
Q. That's something American wanted the public to believe, is that correct?
A. Yes.
Q. It's a statement American Tobacco placed great reliance upon?
A. We issued that statement. Yes. Certainly, we wanted them to believe.
One exhibit before us bears the date of December 7, 1959. This was a memorandum in which the executives of ATC were advised, inter alia, that in general there were many and repeated correlations of smoking and lung cancer and until these correlations are fully explained, it is doubtful whether most scientists would accept the "disproof" claim that there was no correlation between cigarette smoking and lung cancer. This memorandum urged that at that time a dramatic statement of disbelief should be written for general public consumption for issuance either by Mr. Hartnett or Mr. Richards and that such a statement could discuss in forceful language the non-scientific or propaganda influence which have been brought to bear to create the "cigarette scare". It was suggested that the president of ATC could conceivably send a special letter to the stockholders bringing the stockholders up to date on smoking and health and that such a letter to the stockholders might be worded so dramatically that it would bring attention and would attract media attention.
There exists in the record also an additional memorandum directed to Mr. R.K. Heimann, vice-president, from the assistant marketing director of ATC. This memorandum noted that the tobacco industry in general had been faced with declining sales and declining profits and possible forthcoming governmental regulation. The memorandum urged that the company's management ought to take steps to help destroy the image created by the American Cancer Society in connection with its research in the smoking and health area and that the industry should immediately enlist the aid of the American Statistical Association to evaluate this research to determine to what extent the results can be classified as significant. This memorandum took the position basically that perhaps the American Cancer Society's work should be labeled as an interesting experiment in numbers, proving nothing.
There exists another exhibit that makes reference to arsenic. It is in the form of a letter from the director of research to Mr. Robert K. Heimann as the executive assistant of ATC located on Fifth Avenue in New York City. The letter raises the issue that *802 admittedly arsenic is not an experimental carcinogen like benzpyrene and arsenic's presence in cigarette smoke has long been regarded as a carcinogen in some form but that the quantity of arsenic is very small. There exists in the record many other exhibits. We are persuaded that the appellee had the burden of establishing as a matter of law that there existed no genuine issue of a material fact as to one or more of the essential elements of the plaintiffs' various causes of action. We determine that the appellee has failed to do so, especially in regard to points of error three and four. See and compare Rogers v. R.J. Reynolds Tobacco Co., 761 S.W.2d 788 (Tex.App.-Beaumont 1988, writ denied). Any and all reasonable inferences concerning the existence of a material fact question must be resolved against the movant in a summary judgment proceeding and all the evidence and all of the inferences from the evidence must be viewed in a light that is most favorable to the non-moving party. We must accept as true non-movants' evidence. Even doubts must be resolved in favor of the non-movants.
Under this record for summary judgment purposes, we conclude that it is shown that Grinnell, Jr., began smoking at an early age and he smoked cigarettes manufactured by ATC for a long time and, indeed, for the rest of his life up until the time he was diagnosed with lung cancer in July of 1985. Grinnell, Jr., did not think or believe that cigarettes were harmful to his health. He became addicted to cigarettes. He couldn't quit smoking cigarettes. He was addicted because of the nicotine and that his lung cancer was caused by smoking the cigarettes of ATC.
Under this record we opine that the dangers and hazards involved were not common knowledge. And, indeed, there is some evidence that demonstrates that the appellee with certain other cigarette manufacturers engaged in a disinformation campaign to assure the public in a general way that their cigarettes were simply not injurious to health. However, the appellee places heavy reliance upon the common knowledge defense, citing Joseph E. Seagram & Sons v. McGuire, supra. We perceive the McGuire case is not controlling here because the Texas Supreme Court there held that the defendant was not excused from warning of all the product's dangers but only those of which the public had common knowledge. Certainly Grinnell, Jr., had no such common knowledge of all of the product's dangers. Even if a finding that the dangers of cigarette smoking were common knowledge had been made, this would not excuse the appellee totally from any and all tort claims other than its failure to warn. Appellee disputes this.
Interesting and significant is the holding of the Supreme Court in McGuire: that from ancient times the danger of alcoholism from prolonged and excessive consumption of alcoholic beverages has been widely known and recognized. Consequently, Seagram had no duty to warn or instruct of this particular danger. In this appeal the dangers are several and different.
We glean that cigarettes and cigarette smoking do not go back to ancient times. A date of around 1850 or later is widely accepted as the date when cigarettes were first used. McGuire and Restatement (Second) of Torts 402A, comments i and j, are not controlling of the appeal sub judice. As we understand the Cipollone decision in the United States Supreme Court, the Supreme Court has simply ruled that no attack or challenge may be made as to the adequacy of the prescribed warning on cigarette packages, billboards, advertisements of any type containing the prescribed warning and further, the opinion stands for the proposition that the states or state law cannot neutralize the adequacy of the prescribed warnings. This prohibits the states through health codes or even federal agencies from challenging the adequacy of the warning. We therefore sustain the appellants' points of error three and four.
By like reasoning we also sustain appellants' point of error number four, because, as noted above, we are persuaded that the trial court erred in granting the appellee's motion for summary judgment because there did exist in the record genuine issues of material facts.
We decline to sustain appellants' point of error number five, however. The trial court did not err in denying the plaintiffs' *803 motion for summary judgment. Under point of error number five the plaintiffs take the position that the trial court should hold the defendant liable as a matter of law because, it is claimed by the plaintiffs, that it is beyond dispute that cigarettes cause cancer and are unfit for human consumption. We do not think that that was proven as a matter of law as to Grinnell, Jr. We overrule appellants' point of error five. However, in doing so, we do not retreat from our opinion in Rogers v. R.J. Reynolds Tobacco Co., supra.
For the reasons stated above, we reverse the judgment and remand the cause for a trial on the merits. We sustain in full all the appellants' points of error except point of error five. As we construe the Cipollone decision, the plaintiffs are limited to the extent, but only to the extent, that they cannot attack the adequacy of the warnings on cigarette packages and advertising and promotions and they cannot rely upon state law to try to neutralize or diminish the effect of these particular warnings. But the warning issues involve, as we understand it, only one leg of the three-legged stool of products liability. That one leg diminishes very limitedly the obligation to not defectively market a product. This limitation does not affect the duty to not defectively design and not to defectively manufacture a product. The warning is only a portion of the question of whether or not the product was defectively marketedand nothing else.
Under this lengthy record, following accepted standards of review of summary judgment proceedings, we conclude that appellee was not entitled to the orders and final judgment it obtained below. Also, we conclude that appellants raised numerous genuine issues of material facts on each cause of action pleaded in the appellants' live pleadings.
As an additional, separate ground, having found error and having reversed the judgment, we remand the case for a full trial on the merits on all issues in the interest of justice in accordance with this opinion. It is so ordered.
REVERSED AND REMANDED.
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25 B.R. 128 (1982)
In re Charles O. SHROPSHIRE and Ewondia Anece Shropshire, his wife, Debtors.
Bankruptcy No. 82-677T.
United States Bankruptcy Court, W.D. Washington.
November 10, 1982.
*129 Bart L. Adams, Tacoma, Wash., for debtors.
Douglas P. Wyckoff, Olympia, Wash., for contemnor.
DECISION ON APPLICATION FOR CONTEMPT
ROBERT W. SKIDMORE, Bankruptcy Judge.
This matter came on regularly for hearing upon the debtors' Application for Order to Show Cause Re: Contempt and Attorneys Fees for violation of the automatic stay under 11 U.S.C. § 362, which named Grimm Collections, Inc. as the contemner. The debtors were represented by Bart L. Adams and Grimm Collections, Inc. was represented by Douglas P. Wycoff.
Grimm Collections, Inc. entered a default judgment against the debtors on March 13, 1981, in Thurston County District Court for the amount of $349.13. On February 22, 1982, Grimm Collections, Inc. moved for entry of an order for Charles Shropshire to appear for examination in supplemental proceedings, and he was so ordered to appear on April 9, 1982. Mr. Shropshire failed to appear as directed. On April 22, 1982, Grimm Collections, Inc. made application for a bench warrant to issue for Charles Shropshire's failure to appear at the supplemental proceeding.
On April 9, 1982, the Shropshires filed a petition for relief under Chapter 7 of the Bankruptcy Code. The debt to Grimm Collections, Inc. was duly listed on the debtors' bankruptcy schedules, and Grimm Collections, Inc. received the initial bankruptcy notice during the week of May 3, 1982. John Grimm, President of Grimm Collections, Inc. testified that Thurston County District Court was contacted on May 11, *130 1982 regarding the bench warrant. No other efforts were taken to quash the bench warrant.
An order on Grimm Collections, Inc.'s application for a bench warrant was entered on June 30, 1982, setting bail in the sum of $250.00. On July 6, 1982, a Thurston County Sheriff appeared at the Shropshire home, placed Charles Shropshire under arrest and took him to the County jail, where he was held in custody for one hour prior to being released.
11 U.S.C. § 362(a) provides that certain activity on pre-petition claims is stayed by the commencement of a case under 11 U.S.C. § 362.
(a) Except as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title operates as a stay, applicable to all entities, of
(1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other proceeding against the debtor that was or could have been commenced before the commencement of the case under this title;
(2) the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under this title;
(3) any act to obtain possession of property of the estate or of property from the estate;
(4) any act to create, perfect, or enforce any lien against property of the estate;
(5) any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this title;
(6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title;
(7) the setoff of any debt owing to the debtor that arose before the commencement of this case under this title against any claim claimed against the debtor; and
(8) the commencement or continuation of a proceeding before the United States Tax Court concerning the debtor.
The basic remedy available to a debtor for a creditor's violation of the automatic stay is an application for an order of contempt. 3 Collier Bankruptcy Practice Guide, 640.05[1].
The bankruptcy court's authority to enter orders for contempt is set forth in the Bankruptcy Code under 11 U.S.C. § 105. "The bankruptcy court may issue an order, process, or judgment that is necessary or appropriate to carry out the provisions of this title." The only limitation on the bankruptcy court's contempt powers is contained in 28 U.S.C. § 1481, which states that a bankruptcy judge may not ". . . punish a criminal contempt not committed in the presence of the judge of the court or warranting a punishment of imprisonment."
The bankruptcy court's entry of the automatic stay is a specific order of court which may be enforced by contempt proceedings. In Re Stacy, 21 B.R. 49 (Bkrtcy.1982). Abt v. Household Finance Co., 2 B.R. 323 (Bkrtcy.1980). The bankruptcy court may award compensatory damages, costs and attorney's fees for violations of the automatic stay.
An award of compensatory damages, costs, and attorney's fees is not punitive in nature, but rather is designed to indemnify and make the debtor whole for losses suffered by reason of the wrongful acts of the condemn[e]r. Indeed, the very purpose of a civil contempt proceeding, unlike its criminal counterpart, is to coerce with an order of the court and compensate a party litigant for injuries occasioned by the contemn[e]r's non-compliance..... In Re Brooks, 12 B.R. 283, 285 ([Bkrtcy.] 1981) [citing In Matter of Preferred Surfacing, Inc., 3 B.C.D. 94, 96 (1976)].
The bankruptcy court's ability to fine or award compensatory damages is not limited to $250.00 as set forth under Federal Bankruptcy *131 Procedure Rule 920, since said limitation is inconsistent with the provisions of the Bankruptcy Code, In Re Stacy, supra; Matter of Lowe, 18 B.R. 20 (Bkrtcy.1980); 1 Norton Bankruptcy Law and Practice, Part 4, § 4.31; Part 20 § 20.36.
The majority of the reported cases on civil contempt for violations of the automatic stay focus on what responsibility the creditor has to prevent legal proceedings and collection proceedings from continuing beyond the filing of the petition. Numerous cases hold that the creditor must take affirmative steps to halt the legal proceedings. In Re Miller, 10 B.R. 778 (Bkrtcy. 1981) affirmed 22 B.R. 479 (1982); In Re Baum, 15 B.R. 538 (Bkrtcy.1981); In Re Elder, 12 B.R. 491 (Bkrtcy.1981); In re Shiko, 21 B.R. 203 (Bkrtcy.1982).
The absence from § 362 of any express provision that a creditor take affirmative action does not mean that receiving notice of the filing by a debtor of a petition in bankruptcy, a creditor may do nothing. He may, for example, be required to cancel a foreclosure sale, postpone a hearing scheduled in a matter pending against the debtor, dismiss an action filed against the debtor in violation of the stay, or to take other affirmative action, the failure of which would itself constitute a violation or continuing violation of the stay. It is implied in § 362 that a creditor is under an obligation to maintain the status quo as of the moment of the filing of the petition and to take whatever affirmative action is necessary to do so. In Re Miller, supra, p. 780.
The court in In Re Shiko, 21 B.R. 203 (Bkrtcy.1982) held a bank in contempt for violation of the automatic stay for repossession of an automobile on May 12, 1981, when the petition had been filed on April 6, 1981, and the bank had received notice of the bankruptcy on May 11, 1981. The court found that the bank's single telephone call to stop the repossession was not a ". . . sufficient nor a reasonable effort under the circumstances, In Re Shiko, supra, p. 204."
The creditor's application for a bench warrant on April 22, 1982, is clearly a violation of 11 U.S.C. § 362(a). The subsequent efforts made by Grimm Collections, Inc. to abate the issuance of the warrant were not sufficient to discharge its implied responsibility under 11 U.S.C. § 362 to discontinue all collection efforts and legal proceedings. Therefore, the court finds that Grimm Collections, Inc. is in contempt of this court's order imposing the automatic stay.
As a result of Grimm Collections, Inc.'s contemptuous conduct, Charles Shropshire was arrested by a deputy sheriff at his abode and was held in custody at the Thurston County jail for a period of one hour. His testimony was that he was humiliated in front of his family and neighbors. He was further demeaned while in custody at the jail. The court finds that the debtor's dignity in the community was damaged and hereby awards the debtor compensatory damages in the amount of $2,500.00.
In his application the debtor has requested an award of reasonable attorney fees. The court finds that there is ample authority for an award of attorney fees for contempt in a bankruptcy case. See In Re Brooks, 12 B.R. 283, 286 (Bkrtcy.1981). Therefore, the debtor is awarded attorney fees in the amount of $600.00.
Therefore, it is now ORDERED, ADJUDGED AND DECREED that the debtor is awarded judgment against Grimm Collections, Inc. in the amount of $3,100.00.
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25 B.R. 297 (1982)
In re William L. GARDNER and Janice M. Gardner, Debtors.
GENERAL MOTORS ACCEPTANCE CORPORATION, Plaintiff-Appellant,
v.
William L. GARDNER and Janice M. Gardner, Defendants-Appellees.
No. 81-1120.
United States District Court, W.D. Arkansas, El Dorado Division.
September 28, 1982.
*298 Randolph B. Hopkins, Barber, McCaskill, Amsler, Jones & Hale, Little Rock, Ark., for plaintiff-appellant.
Robert E. Adcock, El Dorado, Ark., for defendants-appellees.
MEMORANDUM OPINION AND ORDER
OREN HARRIS, District Judge.
The appellant, General Motors Acceptance Corporation (GMAC), brings this appeal to this Court from a ruling of the Bankruptcy Court for the Western District of Arkansas, El Dorado Division[1], that requires GMAC to turn over to the debtors, William L. and Janice M. Gardner (debtors), a 1980 Pontiac Grand Prix automobile. The parties having filed the record of the Bankruptcy Court's proceeding in this Court, and having filed a brief on the issues in this case, the Court is now ready to make a determination of this appeal.
JURISDICTION
The Court has jurisdiction of this bankruptcy appeal pursuant to 28 U.S.C. § 1334, which gives the District Court appellate jurisdiction of final decisions of Bankruptcy Courts in its district.
STATEMENT OF FACTS
The automobile in question in this case was brought from George Morgan Motors, Inc. of El Dorado, Arkansas, under a retail sales installment contract. The appellant GMAC was assigned the contract. The date of the purchase of the automobile was August 20, 1980. The last payment that GMAC received under the contract was in February, 1981.
On March 4, 1981, the debtors filed their first Chapter 13 petition with the Bankruptcy Court. The plan that the debtors filed with the Bankruptcy Court for its approval, and the bankruptcy case of the debtors, was dismissed by the Bankruptcy Court on July 16, 1981 for lack of feasibility.
For two weeks, the debtors took no action. The appellant GMAC then took action by repossessing the automobile on July 31, 1981. On that same day the debtors filed in the Bankruptcy Court a second Chapter 13 petition, No. ED 81-43. On *299 August 5, 1981 the debtors instituted an adversary proceeding against GMAC and the selling dealer for the turn over of the automobile. GMAC and the selling dealer filed an answer and a counter-claim against the debtors for relief from the automatic stay so that they could proceed to sell the automobile. GMAC also asked that the petition of the debtors' be dismissed on the grounds of lack of feasibility of the plan. GMAC also asked that the petition be dismissed due to the plan being filed with a lack of good faith.
In the second petition, the income for Mr. Gardner was listed at $232.16 per month. Mrs. Gardner's income was listed at $550.20 per month. The total combined monthly income, including income from other sources, was listed at $1,626.36 per month. The total monthly expenses and the plan payments was listed at $1,491.17 per month. The debtors had a surplus of $135.19 per month.
At the hearing it was determined that the debtor William Gardner was at the time of the hearing drawing unemployment benefits which had been declared as part of his income. He also worked at ENSCO from 8 to 24 hours a week at a rate of $3.90 per hour. The wage would reduce the amount that Mr. Gardner would receive in unemployment benefits. Mr. Gardner also receives $340.00 per month for being pastor at two different churches in the area. The unemployment benefits were to run out in December, 1981. Mrs. Gardner was bringing home about $275.10 on a semi-monthly basis.
Mr. Gardner stated at the hearing that he had a verbal promise for a teaching position in the Strong Public School System. Mr. Gardner also interviewed for other jobs outside of the area.
The plan of the debtors' offered to pay debts in the amount of $17,022.75 over a period of three years at a monthly rate of $520.14 per month. On September 1, 1981, a hearing was held on the petition of the debtors' to compel the turn over of the automobile and also to hear the objections of GMAC against the confirmance of the plan of the debtors' and for the lifting of the automatic stay. The Bankruptcy Court denied GMAC in its claim seeking relief from the automatic stay, allowed the debtors to regain possession of the automobile, and confirmed the plan of the debtors'.
CONCLUSIONS OF LAW
The issue that this Court has to determine in this case is whether the Bankruptcy Court, in the hearing on the matter before this Court, was correct in its factual determination that the income of the debtor and the payments to be made under the plan was feasible. This is a factual determination in that the Bankruptcy Court had to decide from the evidence before it whether the debtors were capable of making payments under the plan, whether the plan was filed in good faith, and whether GMAC was adequately protected in its claim against the debtors and whether the automatic stay would remain in effect.
The determination of the Bankruptcy Court as to the feasibility of the plan is a factual determination that it makes. Rule 810 of the Rules of Bankruptcy Procedure states:
"Upon an appeal the district court may affirm, modify, or reverse a referee's judgment or order, or remand with instructions for further proceedings. The court shall accept the referee's findings of fact unless they are clearly erroneous, and shall give due regard to the opportunity of the referee to judge the credibility of the witnesses."
Previous cases that have cited this statute and the standard set forth have decided that the one who contests the finding of fact had the burden of proof of showing that the judge's finding of fact was "clearly erroneous." A mere showing that the Bankruptcy Court could have decided one way or another based on the facts is not sufficient to overcome the burden of proof that the objecting party has. In Re Huntington, Ltd., 654 F.2d 578 (9th Cir. 1981). In such a case, the findings of fact of the Bankruptcy Court will be upheld.
*300 At the hearing in the Bankruptcy Court, GMAC invoked 11 U.S.C. § 362(d) of the Bankruptcy Code, which provides that an automatic stay can be revoked for cause, including lack of adequate protection on the part of the creditor seeking relief. The general issue presented at the hearing was whether GMAC would be adequately protected upon the turn over of the collateral. A sub-issue was whether the proposed plan of the debtors' was feasible enough to be affirmed and to provide adequate protection for GMAC.
This Court finds that the findings of fact of the Bankruptcy Court below was not clearly erroneous.
The decision of the Bankruptcy Court will be affirmed.
According to GMAC, the question of adequate protection and feasibility are interwoven. 11 U.S.C. § 1325(a)(6) provides that a plan would not be confirmed if it were not feasible. GMAC cites cases such as In Re Lucas, 1 C.B.C.2d 833 (Bkrtcy.S.D. Cal.1980), and In Re Hockaday, 1 C.B.C.2d 933 (Bkrtcy.S.D.Cal.1980) for the proposition that § 1325(a)(6) requires a court to be satisfied that the debtor has not only the present ability, but the future ability to comply with the plan, and that there was not enough shown income by the debtors in this case that would show an ability to comply with the plan, at least the present ability to comply with the plan. This, according to GMAC, is an indication that it lacks adequate protection on the automobile, it is not the equivalent of possession of the automobile, and that it should be allowed to either repossess the auto or that the debtors' plan be denied confirmation by the Bankruptcy Court.
The Court does not find this to be the case. The Bankruptcy Court had ample opportunity to listen to the testimony of the parties involved in this case and to judge the credibility of the witnessess. GMAC, while it cites certain cases that would tend to look at the evidence presented in this case in a lesser light than the Bankruptcy Court, does not present to this Court any case law that indicates that the Bankruptcy Court considered improper factors in its determination of the feasibility of the plan. The Court is made aware of cases such as In Re McLeod, 2 C.B.C.2d 319, that considered the fact of the debtor's unemployment and still did not consider that to be a factor that would cause a Bankruptcy Court to deny confirmation of a plan by itself. The court took it into consideration along with other factors in reaching its decision. This Court finds that there was more than enough in this case as to the debtors' earning history that would allow the Bankruptcy Court to find that the plan was in fact feasible and should be confirmed. Therefore, it was not clearly erroneous to find that the plan was feasible, that GMAC was adequately protected, and to allow the turn over of the automobile.
GMAC also raises an issue as to the lack of "good faith" of the debtors in their pursuance of the Chapter 13 petition. GMAC points to the six months "free ride" that the debtors had up until the time the last creditor's meeting was held, the lack of any affirmative action of the part of the debtors for a period of two weeks from the time that the first petition was denied and the second petition was filed, and the lack of any ability to make the payments at the time the second petition and plan was filed. $1325, according to GMAC, requires a "good faith" effort to be made by the debtor in satisfying the requirements of a Chapter 13 petition and its procedures.
Again, this Court does not see anything in this record that would require a different result that the one reached by the Bankruptcy Court. There appears to be adequate evidence that would support any finding of a "good faith" effort on the part of the debtors, and, under the mandate of Rule 810, the decision of the Bankruptcy Court will not be disturbed.
IT IS, THEREFORE, THE ORDER of this Court that the judgment of the Bankruptcy Court for the Western District of Arkansas, El Dorado Division, granting the debtors' petition for the turnover of the automobile and denying GMAC in its counterclaim *301 for relief from the automatic stay and denial of the confirmation of the plan will be affirmed.
NOTES
[1] The Honorable Charles W. Baker, United States Bankruptcy Judge.
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883 S.W.2d 784 (1994)
KOCH OIL COMPANY, A DIVISION OF KOCH INDUSTRIES, INC., Appellant,
v.
ANDERSON PRODUCING, INC., Appellee.
No. 09-93-144 CV.
Court of Appeals of Texas, Beaumont.
September 29, 1994.
*785 Terrell L. Pace, Livingston, D'Lyn Davison, Sherrill & Pace, Wichita Falls, Thomas A. Loftus, III, Koch Industries, Tye G. Darland, Koch Industries, Wichita, for appellant.
John Zukowski, Campbell, Zukowski & Bresenhan, Susan C. Stevenson, Hays, McConn, Price & Pickering, Houston, B.J. Mann, Ft. Worth, for appellee.
Before WALKER, C.J., and BROOKSHIRE and BURGESS, JJ.
OPINION
WALKER, Chief Justice.
Appellant Koch Oil Company, a division of Koch Industries, Inc., makes its appeal seeking reversal of an adverse judgment rendered in the Second 9th Judicial District Court of Polk County, Texas. Anderson Producing, Inc., is before this Court as appellee. In this opinion we shall refer to Koch Oil Company as appellant or Koch while Anderson Producing, Inc., shall be referred to as appellee or Anderson.
Procedurally and factually, on August 15, 1990, Anderson obtained a judgment in the amount of $120,891.43 against John R. Watson (Watson), H.L. Wagner Oil & Gas Reporting, Inc. (Wagner), and John R. Watson, Trustee of H.L. Wagner Oil & Gas, Inc. (Watson-Trustee). Subsequent to obtaining this judgment, Anderson brought the underlying action as a garnishment proceeding against Koch for funds which Koch owed Watson, Wagner and Watson-Trustee, referred to collectively as "Judgment Defendants." When Koch was served with the Writ of Garnishment, Koch held $18,728.66 attributable to oil produced from leases which Wagner had previously operated. It was determined by Koch that only $3,967.42 of this sum was owed to either the Judgment Defendants or parties who held their interest by, through or under any of the Judgment Defendants. Koch paid the $3,967.42 into the court's registry, distributing the balance to parties entitled to same. Thereafter, Anderson amended its garnishment action making claims against Koch in the judgment and Transferee Defendants for fraudulent transfer and conspiracy to defraud Anderson. These Transferee Defendants were parties who had acquired their interests from one or more of the Judgment Defendants. Prior to trial, the Judgment Defendants filed for bankruptcy and three of the Transferee Defendants were dismissed from the case. The Judgment Defendants were severed and the case went forward against Koch and the remaining Transferee Defendants.
*786 This case was tried to a jury in December 1992, said jury finding that Koch was liable along with other defendants for fraud in the amount of $164,360.35; for conspiracy to commit fraud in the amount of $200,000; individually for wrongfully paying garnished funds in the amount of $100,000; individually for exemplary damages in the amount of $100,000 and for attorneys' fees of $1,000,000 through trial, $2,000,000 if appealed to the court of appeals; $3,000,000 if Koch seeks a Writ of Error to the Supreme Court; and $4,000,000 if the Supreme Court should grant the Writ.
The trial court entered judgment for compensatory damages in the amount of $152,722.84 against Koch and other defendants, jointly and severally; exemplary damages of $100,000 against Koch and separately against each of the other defendants; assessed against Koch and the other defendants, jointly and severally, attorneys' fees of $119,198.84; prejudgment interest of $2,119.74, post-judgment interest, and costs. Koch is the only appellant in this appeal.
Appellant brings to this Court seven points of error; we choose to address appellant's point of error two at the outset.
POINT OF ERROR TWO
The trial court erred in overruling Koch's Motion to Disqualify Counsel or Strike Witnesses, Motion to Compel Discovery and/or Motion to Disqualify Counsel and/or Strike Testimony, and Motion for New Trial because Anderson's attorney performed the dual roles of advocate and witness during trial. The trial court further erred in permitting K. Ray Campbell to testify to matters as to which there was no showing of personal knowledge.
Appellant contends that the testimony of Mr. K. Ray Campbell, attorney for Anderson, appeared and testified both as a fact witness and an expert witness in violation of Disciplinary Rule 3.08. Tex. Disciplinary R.Prof. Conduct 3.08 (1989), reprinted in Tex. Gov't Code Ann., tit. 2, subtit. G app. (Vernon Supp.1994) (State Bar Rules art. X, § 9). This Court agrees with appellant's contention and holds that Mr. Campbell's appearance and testimony as a witness in this case violates both the letter and the spirit of Disciplinary Rule 3.08.
Rule 3.08 of the Texas Disciplinary Rules of Professional Conduct provides:
LAWYER AS WITNESS
(a) A lawyer shall not accept or continue employment in a contemplated or pending adjudicatory proceeding if the lawyer knows or believes that the lawyer is or may be a witness necessary to establish an essential fact on behalf of the lawyer's client, unless:
(1) the testimony relates to an uncontested issue;
(2) the testimony will relate solely to a matter of formality and there is no reason to believe that substantial evidence will be offered in opposition to the testimony;
(3) the testimony relates to the nature and value of legal services rendered in the case;
(4) the lawyer is a party to the action and is appearing pro se; or
(5) the lawyer has promptly notified opposing counsel that the lawyer expects to testify in the matter and disqualification of the lawyer would work substantial hardship on the client.
(b) A lawyer shall not continue as an advocate in a pending adjudicatory proceeding if the lawyer believes that the lawyer will be compelled to furnish testimony that will be substantially adverse to the lawyer's client, unless the client consents after full disclosure.
(c) Without the client's informed consent, a lawyer may not act as advocate in an adjudicatory proceeding in which another lawyer in the lawyer's firm is prohibited by paragraphs (a) or (b) from serving as advocate. If the lawyer to be called as a witness could not also serve as an advocate under this Rule, that lawyer shall not take an active role before the tribunal in the presentation of the matter.
Approximately three weeks prior to trial, appellant received notice via appellee's answers to interrogatories propounded by Royalty Owners Service, Inc., CSJ, Inc., and *787 Combined Systems, Inc., that K. Ray Campbell, attorney for appellee, would testify as an expert witness at trial of this cause. Appellant Koch, then undertook to have Mr. Campbell disqualified by way of Motion to Disqualify Counsel or Strike Witness. This motion properly set out that Mr. Campbell's testimony would only be proper pursuant to Exception No. 3 relating to the nature and value of legal services rendered. The trial court overruled appellant's motion to disqualify attorney K. Ray Campbell.
Texas Disciplinary Rules of Professional Conduct have the same force and legal effect upon matters to which they relate as do the Texas Rules of Civil Procedure upon matters to which procedural rules relate. Warrilow v. Norrell, 791 S.W.2d 515 (Tex. App.-Corpus Christi 1989, writ denied); citing Cochran v. Cochran, 333 S.W.2d 635, 640 (Tex.Civ.App.-Houston 1960, writ ref'd n.r.e.). Texas Disciplinary Rules of Professional Conduct are mandatory in character because they establish the minimum level of conduct below which no lawyer can fall. Warrilow, 791 S.W.2d at 519 citing United Pacific Ins. Co. v. Zardenetta, 661 S.W.2d 244, 249 (Tex.App.-San Antonio 1983) (orig. proceeding). This Court must determine whether the trial court abused its discretion by refusing to order the disqualification of attorney K. Ray Campbell once it was brought to the trial court's attention that Mr. Campbell would testify as a fact witness and an expert witness.
From the inception of litigation preceding this appeal, K. Ray Campbell signed as attorney of record on the following pleadings:
(1) Petition for Temporary Restraining Order, Injunction and Declaratory Judgment, filed May 16, 1990signed by K. Ray Campbelllisting John M. Zukowski and K. Ray Campbell as attorneys for Plaintiff Anderson Producing, Inc.
(2) Plaintiff's Application for Writ of Garnishment After Judgment, signed K. Ray Campbelllisting K. Ray Campbell and John M. ZukowskiAttorneys for Plaintiff Anderson Producing, Inc.filed November 2, 1990;
(3) Controverting Affidavit of Plaintiff, Anderson Producing, Inc., filed April 11, 1991signed by K. Ray Campbelllisting K. Ray Campbell and John M. Zukowski as attorneys for Plaintiff, Anderson Producing, Inc.;
(4) Plaintiff's Second Supplemental Pleadings to Application for Writ of Garnishment After Judgment filed January 16, 1992 signed by K. Ray Campbelllisting K. Ray Campbell and John M. Zukowski as attorneys for Plaintiff, Anderson Producing, Inc.;
(5) Motion to Sever filed August 24, 1992 signed by K. Ray Campbell listing John M. Zukowski and K. Ray Campbell as attorneys for Plaintiff, Anderson Producing, Inc.
Suffice it to say that attorney K. Ray Campbell was intently involved as attorney of record for Anderson Producing from the inception of all legal matters relating hereto, up until appellant Koch filed its Motion to Disqualify K. Ray Campbell as a witness in this cause. In Anderson's Response to Motion to Disqualify counsel or strike witness, Anderson contends that Koch's Motion to Disqualify counsel amounts to nothing more than a motion for continuance, further stating that Koch's Motion to Disqualify is incompetent. Anderson faults Koch for failing to obtain a correct understanding of K. Ray Campbell's role at the trial of this matter. Anderson contends that Campbell is not a trial lawyer and that it had always been Anderson's intention to have John M. Zukowski listed as advocate during the trial of this matter. In listing K. Ray Campbell as an expert witness only three weeks prior to trial, Koch in response, listed one of its attorneys as a potential witness. Anderson attempts to excuse Campbell's conduct by stating that, "Anderson has no objection to Koch's counsel appearing at trial as both an advocate and as a witness."
We submit that Rule 3.08 is not a rule subject to lawyer compromise, and that Mr. Campbell and the law firm of Campbell, Zukowski, Bresenhan & Woods, L.L.P., have failed to grasp the import of this Disciplinary Rule. Mr. Campbell attempts to excuse his conduct by suggesting compliance with Rule *788 3.08(b) by pleading client consent after full disclosure. Our question is: What evidence was presented to the trial court to bring Mr. Campbell's testimony under the exception provided by Rule 3.08(a)(5)? This Court cannot accept that Mr. Campbell "promptly notified" opposing counsel that Mr. Campbell expected to testify in the trial of this matter and, most importantly, counsel for Anderson has never explained why Mr. Campbell's disqualification would work a substantial hardship on his client, Anderson.
Mr. Campbell attempts to justify his conduct by relying upon COMMENT 8 to Rule 3.08. This comment provides the following:
This rule does not prohibit the lawyer who may or will be a witness from participating in the preparation of a matter for presentation to a tribunal. To minimize the possibility of unfair prejudice to an opposing party, however, the Rule prohibits any testifying lawyer who could not serve as an advocate from taking an active role before the tribunal in the presentation of the matter. See paragraph (c). Even in those situations, however, another lawyer in the testifying lawyer's firm may act as an advocate, provided the client's informed consent is obtained.
We do not believe the import of Comment 8 to be that "catch-all" exception for lawyers to testify as to matters excluded by Rule 3.08. We do not believe that the intent of Comment 8 is to allow an attorney to consistently act as counsel for his/her client, then suddenly prior to trial reveal himself/herself as an expert witness in the matter. We view Comment 8 as subservient to those purposes set forth in Comment 4 to Rule 3.08 which provides:
In all other circumstances, the principal concern over allowing a lawyer to serve as both an advocate and witness for a client is the possible confusion that those dual roles could create for the finder of fact. Normally those dual roles are unlikely to create exceptional difficulties when the lawyer's testimony is limited to the areas set out in sub-paragraphs (a)(1)-(4) of this Rule. If, however, the lawyer's testimony concerns a controversial or contested matter, combining the roles of advocate and witness can unfairly prejudice the opposing party. A witness is required to testify on the basis of personal knowledge, while an advocate is expected to explain and comment on evidence given by others. It may not be clear whether a statement by an advocate-witness should be taken as proof or as an analysis of the proof.
A party is prejudiced when opposing counsel acts as both advocate and witness, and this conduct becomes intolerable when the attorney-witness fails to show that he has attempted to contact others who might act as an expert witness and found them lacking in knowledge of the relevant area. Warrilow, 791 S.W.2d at 523.
In Warrilow, the Corpus Christi Court placed emphasis on the fact that the testimony of the attorney who testified at trial comprised approximately one-third of all testimony adduced in the presentation of the plaintiff's case. In our case, Mr. Campbell's testimony comprised approximately 403 pages of the total Statement of Facts which is approximately 578 pages in length. A review of the record reveals that the only testimony provided by Mr. Campbell which met an exception to Rule 3.08, was testimony relating to the nature and value of legal services rendered in the case.
An attorney's decision to testify regarding substantive matters, especially expert testimony, should not be viewed solely from the prospective of client interest. There exist plateaus of equal consideration which an attorney cannot ignore, i.e., the preservation and promotion of public trust in the legal profession and the legal process, and the concept of fairness to opposing interest. We believe the following quote from Warrilow to be appropriate here:
The rule of disqualification involves a balancing of the likelihood of public suspicion against the interest in retaining counsel of one's choice. Cossette v. County Style Donuts, Inc., 647 F.2d 526, 530 (5th Cir.1981). When the client's right to counsel of his choice and the need to maintain ethical standards of professional responsibility clash, "[T]he preservation of public trust both in the scrupulous administration of justice and in the integrity of the bar is *789 paramount ..." and "[The client's recognizably important right to counsel of his choice] must yield, however, to considerations of ethics which run to the very integrity of the judicial process." Zardenetta, 661 S.W.2d at 248, quoting, Hull v. Celanese Corp., 513 F.2d 568, 572 (2nd Cir.1975). There exists a broader concern for public confidence in the administration of justice"justice must satisfy the appearance of justice." Jones v. City of Chicago, 610 F. Supp. 350 at 357 n. 3 (N.D.Ill. 1984).
. . . .
"The practice of attorneys furnishing from their own lips and on their own oaths the controlling testimony for their client is one not to be condoned by judicial silence * * * nothing short of actual corruption can more surely discredit the profession." Ferraro v. Taylor, 197 Minn. 5, 265 N.W. 829, 833 (1936).
Warrilow, 791 S.W.2d at 523.
We find that the trial court abused its discretion by failing to disqualify attorney Campbell as mandated by Rule 3.08, Texas Disciplinary Rules of Professional Conduct. Mauze v. Curry, 861 S.W.2d 869 (Tex.1993).
To warrant reversal and remand, appellant Koch must show that the violation of Rule 3.08 by Anderson was error and amounted to such a denial of appellant's rights as was reasonably calculated to cause and probably did cause an improper judgment to be rendered. Tex.R.App.P. 81(b)(1). In this regard, the record reveals that Mr. Campbell's testimony touched upon every question presented to the jury for their determination. It is apparent to this Court that the jury placed great weight upon Mr. Campbell's testimony. Upon hearing the testimony in this cause, most of which was furnished through the expert testimony of Mr. Campbell, the jury rendered a verdict in the approximate and potential sum of $9,500,000.
It takes little effort to conclude that Mr. Campbell's testimony was reasonably calculated to cause the rendition of an improper verdict. Mr. Campbell testified that Koch showed Watson "a way to beat the system," offering no explanation as to what the "system" was or the "way" Koch "showed" him how to "beat" same. Apparently, this conclusory testimony, unsupported in fact, was even unknown to Mr. Campbell's client, Mr. Anderson. Mr. Anderson, a party and witness having personal knowledge testified:
Q. Okay. Thank you sir. And you don't know of any meetings or conversations or whether there was any plots or schemes to conspire against you by Koch Oil, do you sir?
A. I don't know of any.
Q. Thank you sir.
MR. PACE: That's all I have.
MR. MANN: I have no other questions, Your Honor.
MR. ZUKOWSKI: Nothing further.
We offer yet one other consideration where review of Comment 8 to Rule 3.08 is, as here, used defensively. Comment 8 speaks of minimizing "the possibility of unfair prejudice to an opposing party...." Query: What could be more prejudicial to an opposing party than the substantive testimony of a lawyer, as an expert witness, having full and detailed knowledge of all related matters, all discovery, all potential testimony, having been responsible or partially responsible for the "creation of the case?" We submit that seldom, if ever, does a non-lawyer witness, fact or expert, possess or have accessible, such full and complete knowledge of a case. In this scenario, even Rule 267 TEX. R.CIV.P. (placing witness under the rule) provides no meaningful nor intended protection to the party opponent. Appellant's point of error two is sustained.
In sustaining point of error two, a remand is necessary unless we can render judgment based upon appellant's point of error one complaining of the factual and legal sufficiency of the evidence to support the conspiracy and fraud issues. See Warrilow, 791 S.W.2d at 524. In reviewing appellant's attack on the legal sufficiency of evidence to support an adverse finding on an issue on which it did not have the burden of proof, appellant must demonstrate that there is no evidence to support said adverse finding. Tex.R.App.P. 74(d), Raw Hide Oil & Gas, *790 Inc. v. Maxus Exploration, Inc., 766 S.W.2d 264 (Tex.App.-Amarillo 1988, writ denied). In examining "no evidence" points, we will consider only the evidence and inferences that tend to support the finding, and we will disregard all evidence and inferences to the contrary. Weirich v. Weirich, 833 S.W.2d 942 (Tex.1992). If there is any evidence of probative force to support the finding, the point must be overruled and the finding upheld. In re King's Estate, 150 Tex. 662, 244 S.W.2d 660 (1951). Likewise, if there is more than a scintilla of evidence to support the finding, the no evidence challenge fails. Stafford v. Stafford, 726 S.W.2d 14 (Tex. 1987). If there is any evidence of probative value which supports the finding then the point of error fails. Holley v. Watts, 629 S.W.2d 694 (Tex.1982).
When reviewing a "factual" sufficiency point of error of an adverse finding on an issue on which appellant did not have the burden of proof, the reviewing court should examine all of the evidence and set aside the finding only if it goes against the overwhelming weight and preponderance of the evidence so as to be clearly wrong and unjust. Cain v. Bain, 709 S.W.2d 175 (Tex.1986). Moreover, under both standards of review, the evidence examined includes improperly admitted evidence which, in the instant case, includes the testimony of appellee's witness, K. Ray Campbell. Mary Lee Foundation v. Tex. Emp. Com'n, 817 S.W.2d 725, 729 (Tex. App.-Texarkana 1991, writ denied); Tarkington v. Beneficial Finance Co. of Port Arthur, 516 S.W.2d 722, 723 (Tex.Civ.App.-Beaumont 1974, writ ref'd n.r.e.).
The testimony of Campbell revealed that approximately eleven days following the August 15, 1990 judgment in appellee's favor against John R. Watson and Wagner Oil & Gas, the royalty interests of the Watson and Wagner Oil & Gas leases at issue were supposedly assigned to an entity named, "Royalty Owners Service, Inc." Several exhibits introduced into evidence by appellee purport to be instruments memorializing said assignments. These exhibits indicate that John R. Watson executed said instruments on behalf of both Wagner Oil & Gas and Royalty Owners Services, Inc. In essence, all of these assignments raise questions of genuineness. Other exhibits introduced into evidence revealed that well after the assignments took place, appellant continued making crude oil purchases from and payments to Wagner Oil & Gas Reporting, Inc. From all of this it can at least be inferred that appellant was not all that interested in ensuring that the proper royalty owners be promptly paid as appellant had insisted was their reason for initially dividing the $18,728.66, with $3,967.42 paid into the court for appellee, and $14,761.24 paid to some thirty other royalty interest owners. Appellant's unilateral division and distribution of the $18,728.66 took place after being served with the Writ of Garnishment, and after being informed by appellee that John R. Watson, and his son, Charles S. Watson, were engaging in the above-mentioned assignments.
The jury was provided the following instructions:
Each person who participates in any fraudulent transaction is responsible for any acts of any others done in furtherance of the fraudulent scheme.
Each person who participates in any fraudulent transaction is liable for any fraud, irrespective of whether that person shared in any profits, for the focus of the action is any injury to the plaintiff and not any benefit to the defendant.
A person has knowledge of any fraud if that person has actual awareness of any facts constituting a fraud or has knowledge of facts that would cause a reasonable prudent person to inquire into such facts and, as a result, would lead to the discovery of the fraud.
A person may become liable by mere silent acquiescence for fraudulent misrepresentations of a third party.
We find that, under the applicable standards of review, the evidence is legally and factually sufficient to sustain the verdict. We are unable to render judgment in favor of appellant. However, in view of our sustaining of point of error two, the cause is remanded *791 to the trial court for further proceedings consistent with this opinion.
REVERSED AND REMANDED.
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25 B.R. 293 (1982)
In re WHITE MOTOR CORPORATION, Gemini Manufacturing Co., White Motor Corporation of Canada Limited, the White Motor Credit Corporation of Canada Limited, Debtors.
ROCKWELL INTERNATIONAL CORPORATION, et al., Appellants,
v.
WHITE MOTOR CORPORATION, Appellee.
The TIMKEN COMPANY, Appellant,
v.
WHITE MOTOR CORPORATION, Appellee.
SKF INDUSTRIES, INC., Appellant,
v.
WHITE MOTOR CORPORATION, Appellee.
Robert L. DEATON, Garelick Farms, Inc. and Hanover Insurance Company, Appellants,
v.
WHITE MOTOR CORPORATION, Appellee.
Elva C. LEAPHART and Quentin R. Corrie, Esq., Administrators of the Estate of Newton Bennie Leaphart, Appellants,
v.
WHITE MOTOR CORPORATION, Appellee.
Larry MOORE and Brenda Moore, Appellants,
v.
WHITE MOTOR CORPORATION, Appellee.
Misc. Nos. 82-38 to 82-42 and Civ. A. No. C82-2426.
United States District Court, N.D. Ohio, E.D.
September 28, 1982.
*294 MEMORANDUM AND ORDER
ANN ALDRICH, District Judge.
The Court, having ruled from the bench in this matter on September 24, 1982, hereby submits its findings of fact and conclusions of law pursuant to Rule 52 of the Federal Rules of Civil Procedure. Pending before the Court are five Applications for Leave to Appeal filed by: (1) Rockwell International Corporation, Misc. No. 82-38; (2) The Timken Company, Misc. No. 82-39; (3) SKF Industries, Inc., Misc. No. 82-40; (4) Robert L. Deaton, Garelick Farms, Inc. and Hanover Insurance Company, Misc. No. 82-41; and (5) Elva C. Leaphart and Quentin R. Corrie, Esq., Administrators of the Estate of Newton Bennie Leaphart, Misc. No. 82-42. Also pending is a Notice of Appeal filed by Larry and Brenda Moore, C82-2426 which, pursuant to Interim Bankruptcy Rule 8004(d), this Court may view as a timely and proper Application for Leave to Appeal. Also pending is a Motion for Reconsideration of this Court's Order granting SKF Industries' Application for Leave to Appeal. Noting that SKF has not yet filed a brief or acted in reliance on this Court's grant of Leave to Appeal, this Court will continue to treat SKF's application as pending and has considered White's Motion for Reconsideration in the opinion below.
Also pending with respect to two cases, 82-41 and 82-42, is a Joint Motion to Consolidate. For purposes of this opinion, the Court hereby consolidates all of the above cases.
These Applications for Leave to Appeal (hereinafter "Applications") and the Notice of Appeal all arise from the Bankruptcy Court's adoption of an Order Regarding Product Liability Claims Disposition Program, dated July 7, 1982 (hereinafter the "Order"). Pursuant to that Program, the Special Master issued a Special Master Hearing Memorandum, undated, which the parties requested be stayed by this Court. On September 13, 1982, this Court granted a 10-day stay of the Memorandum. The Bankruptcy Court's Order applied to over 120 different product liability suits which have been filed against the debtor-appellee White Motor Corporation (hereinafter "White") during its many years of operation prior to the filing of its petition for reorganization. The Orders entered with respect to each of these suits are substantially similar, differing only with respect to the particular named product liability suit to which each order applies. The appellants all assert the substantially similar claim that the Order is invalid. The parties before this Court constitute just a handful of those who are affected by the Order.
This Court has jurisdiction pursuant to the Bankruptcy Reform Act of 1978, Pub.L. No. 95-598, Title IV, sec. 405(c)(2), 92 Stat. 2549, 2685 (1978) which provides that, during the transition period from October 1, 1979 through March 31, 1984, the jurisdiction of the district courts to hear bankruptcy appeals shall be governed by the future 28 U.S.C. § 1334.[1]
While final orders can be appealed as a matter of right, Interim Bankruptcy Rule 8004 requires that leave to appeal under 28 *295 U.S.C. § 1334(b) be requested prior to the appeal of an interlocutory order. Accordingly, this Court must determine whether the Bankruptcy Judge's Order is a final order appealable of right or an interlocutory order from which leave to appeal must be granted.
Sections 236-238 of the Bankruptcy Act established an appellate system granting the right to appeal from final judgments, orders and decrees of bankruptcy judges under 28 U.S.C. § 1293 and § 1334(a). However, the Act does not define "final". This is procedurally troublesome because it is not always clear whether a particular order is final or interlocutory. See, Collier on Bankruptcy, para. 3.03(7)(d)(v) at 3-308 (15th ed. 1982). Section 1293 governing bankruptcy appeals appears to have been modelled after § 1291 which establishes the authority of the federal courts of appeals to review civil decisions of the district courts. Id. at 3-309.
Pursuant to 28 U.S.C. § 1291, matters which otherwise might have been considered interlocutory have been deemed final and appealable under the "collateral order doctrine". Cohen v. Beneficial Loan Corp., 337 U.S. 541, 69 S. Ct. 1221, 93 L. Ed. 1528 (1949). The collateral order doctrine permits the review of decisions which "finally determine claims of right separable from, and collateral to, rights asserted in the action, too important to be denied review and too independent of the cause itself to require that appellate consideration be deferred until the whole case is adjudicated." Id. at 546, 69 S.Ct. at 1225. Once an order meets the collateral order test, it falls into "that small class" of interlocutory orders which are final, and therefore appealable, unlike interlocutory orders which do not meet the collateral order test and therefore must meet the two-part test for appealable interlocutory orders. Id.
Under Cohen and Coopers & Lybrand v. Livesay, 437 U.S. 463, 98 S. Ct. 2454, 57 L. Ed. 2d 351 (1978), the three-part test for qualification as a collateral order requires that the order: (1) conclusively determine the disputed question; (2) resolve an important issue completely separate from the merits of the action, and; (3) be effectively unreviewable on appeal from a final judgment. The Supreme Court recognized that, in some cases, review after a final order has been issued in the main action will come too late to prevent the irreparable loss of a claim. The collateral order doctrine is designed to protect the rights of all the parties when no other effective alternative is available. Swift & Co. Packers v. Compania Columbiana Del Caribe, 339 U.S. 684, 689, 70 S. Ct. 861, 865, 94 L. Ed. 1206 (1950).
In the instant case, the policy behind the collateral order doctrine is especially applicable and the order appealed from satisfies the Cohen requirements. The order governs a matter "fairly severable from the context of a larger litigious process." Id. The Bankruptcy Judge's Order is a procedural step wholly collateral to the merits of the product liability claims against the debtor White. The claimed basis for the applicants' appeals that the Bankruptcy Court lacks jurisdiction to approve the creation of a Program under which a Special Master will determine the merits of numerous product liability claims is distinctly separate from the dominant questions of the merits of the products liability suits.
The bankruptcy appellate scheme has adopted the collateral order doctrine. See, In Re Casco Bay Lines, Inc., 14 B.R. 846 (Bkrtcy.App. 1st Cir.1981).
It is clear that the Order sought to be appealed has conclusively determined that the challenged Program be implemented. The Special Master has already begun formulating a plan of action under the Program and has issued a Special Master Hearing Memorandum.
Should applicants be forced to delay an appeal of this collateral order until after White's reorganization is completed and final judgment entered by the Bankruptcy Court, the jurisdictional challenge will be effectively unreviewable. Assets will have been depleted and other potentially liable parties dismissed or discharged. This Court *296 is compelled by the collateral order doctrine's policy of protecting the parties to rule that applicants' appeals should be granted. An immediate appeal is necessary to prevent the irreparable loss of assets resulting from the payment of fees arising from implementation of the challenged Program. To require applicants' appeal to atrophy as the Program functions during the pendency of White's extended bankruptcy proceedings would be in defiance of the line of cases recognizing Cohen's importance. See also, Coopers & Lybrand v. Livesay, supra.
Even if the Bankruptcy Judge's Order did not meet the collateral order test, the Order would still be appealable under 28 U.S.C. § 1334(b), with leave of this Court.
This is not the first court to note that neither 28 U.S.C. § 1334(b), quoted above, nor any of the Interim Rules or provisions of the Bankruptcy Reform Act enunciate standards for determining when leave to appeal should be granted. See, In Re DenCol Cartage & Distribution, Inc., 20 B.R. 645 (D.C.Col.1982). Collier on Bankruptcy para. 3.03(7)(d)(v) (15th ed. 1982). In the absence of any other standards, courts have held that it is appropriate to apply the statutory standards governing interlocutory appeals from district courts to courts of appeals pursuant to 28 U.S.C. §§ 1291-1292. Id. In the instant case, § 1292(b) is appropriately applied. If the bankruptcy judge's decision involves a "controlling question of law as to which there is substantial ground for difference of opinion" where "an immediate appeal from the order may materially advance the ultimate termination of the litigation", then an interlocutory appeal will be justified. Id., citing § 1292(b).
The challenged Order satisfies this two-part test. First, applicants' jurisdictional challenge to the Bankruptcy Court's power to approve the Program involves a controlling question of law. In light of the United States Supreme Court's decision in Northern Pipeline Construction Co. v. Marathon Pipe Line Co., ___ U.S. ___, 102 S. Ct. 2858, 73 L. Ed. 2d 598 (1982), it is evident that the precise extent of the bankruptcy courts' jurisdiction and power is a matter as to which there is substantial ground for difference of opinion. Applicants' constitutional claims are substantial and worthy of closer scrutiny on appeal.
In its Motion for Reconsideration, White argues that the jurisdictional challenge, while generally a suitable ground for interlocutory appeal, is not appropriately appealable in this particular case because the United States Supreme Court stated that its decision in Northern Pipeline should be stayed until October 4, 1982. This Court rejects White's argument that the Northern Pipeline decision has that effect on this case. This Court specifically found, in its opinion of September 20, 1982, that the Supreme Court's ruling in Northern Pipeline, to the effect that it is to be applied only "prospectively", does not prohibit a direct appeal which challenges the Bankruptcy Court's subject matter jurisdiction. Decision of September 20, 1982 at 9, and authorities there cited.
As to the second part of the interlocutory appeal test, a determination of the Bankruptcy Court's authority to approve this Program for its stated purpose will materially advance the ultimate termination of the litigation surrounding White's reorganization. Should it be determined that the Program cannot be used for the disposition of the product liability claims, that decision is best made before waste or delay caused by the Program's implementation occurs.
Having determined that the challenged Order is properly reviewable, this Court next considers the timeliness of the Applications. Interim Bankruptcy Rule 8004(a) adopts a ten day period for filing the Notice of Appeal provided for in Bankruptcy Rule 802. Accordingly, the applications and notice must have been filed on or before July 19, 1982. Case No. C82-2426, and Misc. Nos. 82-38 and 82-40 meet the filing deadline. In Misc. Nos. 82-41 and 82-42 an extension was requested pursuant to Rule 802(c), and the applications were filed within the twenty day extension granted. *297 Therefore the five above applications were timely filed. Misc. No. 82-39, The Timken Company, however was not filed on time and no extension of time was requested. Despite Timken's failure to timely file, this Court will grant its application under Bankruptcy Rule 802(a) which states in part: "If a timely notice of appeal is filed by a party, any other party may file a notice of appeal within 10 days of the date on which the first notice of appeal was filed . . ." This Court finds that because Timken is a co-defendant in the same product liability suit brought against SKF Industries and Rockwell International, Timken is a "party" as contemplated by Rule 802. Rockwell and SKF both timely filed their applications, and therefore this Court finds that Timken's application can ride on the coattails of those timely filed applications and thereby be considered filed on time.
For the above reasons, the Applications for Leave to Appeal are granted and White's Motion for Reconsideration is denied.
On September 13, 1982, this Court issued a Stay of the implementation of the Special Master's Hearing Memorandum pursuant to Bankruptcy Rule 805. The rule permits district courts to entertain such a motion if it can be shown why the requested relief was not obtained from the bankruptcy court. This Court notes that the Motion for a Stay presented to the Bankruptcy Court by the Leapharts and Deaton on September 9, 1982, has not yet been ruled on by that court. Accordingly, this Court finds that it may appropriately entertain the motion in light of the pending appeals. In considering bankruptcy cases involving stays pending appeal, the criteria invoked in determining whether to grant an injunction under the Federal Rule of Civil Procedure 62(c), are applicable. In re Sung Hi Lim, 7 B.R. 319 (D.Haw.1980).
This Court finds:
(1) That in light of this Court's decision of September 20, 1982, 23 B.R. 276 (D.C. 1982) ruling that the Bankruptcy Court did not have the authority to appoint a Special Master for the disposition of product liability claims, and recognizing that the Special Master's only purpose was to formulate the challenged Program, the appellants are likely to succeed on the merits of their appeal challenging the Bankruptcy Court's approval of the Program;
(2) That irreparable harm will result to appellants and the judicial system from the continued implementation of a Program which may be determined to be constitutionally impermissible;
(3) That no other parties will be substantially harmed by this Court's stay, maintaining the status quo for the next few days pending a decision on the merits of the appeal; and
(4) That the public interest will be served by prohibiting all parties from incurring additional expenses and further depleting the assets of the Bankrupt's estate through continued implementation of the challenged Program.
For the above reasons, the Stay is continued until October 1, 1982.
IT IS SO ORDERED.
NOTES
[1] Title 28 U.S.C. § 1334 provides in part: (a) The district courts . . . shall have jurisdiction of appeals from all final judgments, orders, and decrees of bankruptcy courts. (b) The district courts . . . shall have jurisdiction of appeals from interlocutory orders and decrees of bankruptcy courts, but only by leave of the district court to which the appeal is taken.
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883 S.W.2d 117 (1994)
K.J.B., Appellant,
v.
C.A.B., Respondent,
C.A.B., minor child, Defendant,
Jackson County, Missouri, Intervenor.
No. WD 48644.
Missouri Court of Appeals, Western District.
September 13, 1994.
*119 Kimberly Hughes, Grandview, for appellant.
Christine R. Russell, Kansas City, for respondent.
Before KENNEDY, P.J., and BRECKENRIDGE and SPINDEN, JJ.
SPINDEN, Judge.
K.J.B. appeals the trial court's transfer of physical custody of her son to C.A.B., the boy's father, and the court's modification of support provisions of a dissolution decree. We affirm the trial court's custody modification, and we reverse the child support modification and remand the matter to the trial court with directions.
K.J.B. and C.A.B. divorced in 1992. The dissolution decree provided for joint custody of their son and placed the boy in the physical custody of K.J.B. It ordered C.A.B. to pay child support. The boy lived with his mother, and visited his father on alternate weekends.
C.A.B. sought a change in custody after he decided in May 1992 that his son had been sexually abused while in K.J.B.'s custody. The boy, then three years of age, was visiting his father's house when the boy told the father's fiancée that K.J.B.'s brother had stuck pencils in the boy's "butt." C.A.B. asked the police to investigate and took his son to Children's Mercy Hospital. The examining physician detected a bruise on the son's right buttock, weakened anal tone, and a five millimeter displacement of the rectal sphincter. The physician concluded that the boy had suffered anal trauma consistent with sexual assault. When asked who injured him, the boy named four male relatives of K.J.B.: an adult uncle, two teenage cousins, and a two-year-old child.
In his motion to modify custody, the father accused the mother of neglecting their son, of not protecting him from physical and sexual abuse, and of exposing him to a dangerous environment. He also alleged that, while in the mother's custody, the son was injured with cuts, bruises, and welts, was subjected to poor hygiene, was inappropriately dressed in dirty clothing, was susceptible to ear aches, and was allowed to carry a firearm.
K.J.B. filed a counter motion in which she alleged that C.A.B. had repeatedly threatened to remove the boy so she would not see him. She contended that C.A.B. had not cared properly for the child during visits and did not return him at the proper time. She asked that C.A.B.'s visits with the boy be supervised.
The trial court appointed a guardian ad litem. The Division of Family Services investigated the matter. After trial, the court granted C.A.B.'s motion and transferred physical custody to C.A.B. and granted K.J.B. visitation rights. The trial court also ordered K.J.B. to pay C.A.B. $371 a month for child support.
K.J.B. raises five points on appeal. She complains that the trial court erroneously (1) considered hearsay evidence of her son's out-of-court statements; (2) excluded testimony by a prosecuting attorney indicating that C.A.B. did not truly believe that his son had been abused; (3) considered a social worker's and a psychotherapist's recommendations concerning custody; (4) ordered transfer of physical custody against the weight of the evidence; and (5) ordered K.J.B. to pay C.A.B. $371 a month for child support.
Hearsay Evidence of Victim's Statements
Over K.J.B.'s objections, the trial court allowed a therapist, C.A.B., and C.A.B.'s relatives to quote the boy's out-of-court statements. They quoted the boy as saying numerous times that (1) his mother always left him with his grandparents to be with her boyfriend; (2) that his grandfather let him carry a gun, called "Big Bertha"; (3) that his grandfather had hit him two or three times; (4) that his aunt and cousins had pinched and punched him; and (5) that he was afraid to go to his mother's home because his uncle would hurt him.
K.J.B. argues on appeal that none of the statements fit within any hearsay exception and were significant in the trial court's modification of custody. She contends that the *120 hearsay's cumulative effect unduly prejudiced her by portraying her family unfavorably.
Testimony concerning a child's statements to a witness is hearsay and generally should be excluded from evidence. Hord v. Morgan, 769 S.W.2d 443, 446 (Mo. App.1989). Nevertheless, admission of improper evidence in a non-jury trial is not grounds for reversal of judgment unless that evidence appears to have played a critical role in the court's decision. Id. Further, courts have shown increased flexibility in admitting a child's statements to others in cases involving emotional or physical abuse of the child. See id. at 447.
We disagree with K.J.B.'s contention that the hearsay evidence played a critical role in the court's modification. The trial court entertained abundant testimony and evidence from both parents concerning their son's relationships with family members. K.J.B. extensively cross-examined witnesses who testified about her son's statements. Nothing in the court's findings indicates improper reliance on the hearsay evidence.
In reviewing non-jury cases, we presume that the trial court did not give improper weight to incompetent testimony. McClelland v. Ozenberger, 841 S.W.2d 227, 231-32 (Mo.App.1992). We find no merit to her first point.
Assistant Prosecutor's Testimony
K.J.B. next contends that the trial court erroneously excluded the testimony of an assistant prosecuting attorney. At trial, the mother subpoenaed the prosecutor who testified that he had interviewed both parents regarding the allegation of child abuse. The court interrupted when the prosecutor was asked to read from a document in his file. The court had its bailiff read the closed records law to the prosecutor. The prosecutor chose not to testify about the document but continued answering questions about his conversation with C.A.B. The prosecutor testified that C.A.B. had expressed some disbelief about whether his son had been abused. At that point, the prosecutor asserted his Fifth Amendment right against self-incrimination, so the trial court excluded all of the prosecutor's testimony.
K.J.B. argues that the court misapplied the closed records law in striking the prosecutor's testimony. She contends that nothing in the closed records law prohibits a law enforcement official from providing relevant testimony otherwise admissible under the rules of evidence and that the testimony regarding C.A.B.'s disbelief provided proper impeachment to C.A.B.'s testimony that he had no doubt that the son had been molested. K.J.B. asserts prejudice in that the court's action deprived her of vital evidence to impeach C.A.B.'s credibility.
The closed records law in § 610.100, RSMo Cum.Supp.1993,[1] prohibits public disclosure of records of persons arrested but not charged. Violation of § 610.100 constitutes a Class A misdemeanor. Section 610.115, RSMo 1986. Access to closed records is available to courts and governmental agencies for the limited purposes "of prosecution, sentencing, parole consideration, criminal justice employment, child care employment, nursing home employment," § 610.120, RSMo Supp.1993, none of which apply here.
K.J.B.'s suggestion that the prosecutor's testimony was admissible to impeach C.A.B.'s credibility is unfounded because she did not question C.A.B. about the alleged prior inconsistent statement. A witness should not be permitted to testify to a previous witnesses' prior inconsistent statement if the previous witness has not been confronted with the statement and given an opportunity to explain it. State v. Denmon, 635 S.W.2d 345, 348 (Mo.1982). We deny the point.
Recommendations Concerning Custody
K.J.B. contends that the trial court erred in admitting custody recommendations from Angela Pasiglia, a social worker, and Cora *121 Thompson, a psychotherapist. Pasiglia, who held a master's degree in social work and received training in working with sexually-abused children from the Metropolitan Organization to Counter Sexual Assault, met with K.J.B.'s son six times. At trial, over K.J.B.'s objection, Pasiglia opined that K.J.B. should be allowed no unsupervised visits until she was able to protect her son from sexual abuse. Thompson, who held a Ph.D. degree in Christian counseling and had received training by MOCSA, counseled C.A.B. and the boy in sessions paid for by C.A.B. At trial, without specific objection, Thompson recommended that the court transfer physical custody of the boy to C.A.B.
K.J.B. maintains that Pasiglia and Thompson lacked the credentials to make custody recommendations. She stresses that neither interviewed her or her family and that they based their recommendations on inaccurate information about her. She asserts, therefore, that the recommendations invaded the province of the trial court.
Generally, a trial court has full discretion to rule on questions regarding the admission of expert testimony and a witness' expertise. D.L.H. v. H.T.H., 780 S.W.2d 104, 106 (Mo.App.1989). We will reverse the trial court's rulings on these matters only if we find plain evidence that the court has abused its discretion. M.D. v. C.D., 691 S.W.2d 406, 408 (Mo.App.1985). Further, issues concerning an expert's experience or training goes to the weight of the expert's testimony, not to its admissibility. Hord, 769 S.W.2d at 448.
K.J.B. did not challenge the experts' qualifications and objected only to Pasiglia's recommendation on the ground that it invaded the trial court's province. We conclude that the trial court did not abuse its discretion. In this non-jury case, the trial court could appropriately make its own determination whether the recommendations invaded its province. In cross-examination, K.J.B. established that neither expert had interviewed the mother. The evidence included other expert testimony and reports providing recommendations favorable to the mother. We find no merit to the point.
Weight of the Evidence
K.J.B. complains that transfer of the boy's custody was against the weight of the evidence. She emphasizes evidence of her son's confusion about being sexually abused, C.A.B.'s manipulation of the sexual abuse claims, and her efforts to protect her son once she learned of the possibility of sexual abuse.
She contends that her son's confusion casts doubts on the occurrence and the extent of the abuse. She noted that social workers and therapists who worked with her son commented that he was often confused and had difficulty distinguishing truth from fiction. He varied in identifying who had inserted objects in his rectum, touched his genitals, and had engaged him in oral sex. He even recanted, saying the incidents never occurred. Other times he refused to discuss the matter.
K.J.B. accuses C.A.B. of manipulating the abuse allegations. She points to evidence that, before filing his modification action, C.A.B. began keeping extensive logs and photographs of the boy's cuts, bruises, and injuries; that he checked out books from the library on sexual abuse to use in discussing the matter with his son; and that his actions raised the suspicions of one social worker.
K.J.B. insists that, once she learned of the alleged abuse, she immediately took steps to protect her son. She said that she barred her brother from any contact with her son and restricted the cousins' visits with her son. DFS workers described the mother as very receptive, cooperative, and determined to protect her son. They said that she complied with all their recommendations.
K.J.B. argues that this evidence contradicts the trial court's findings that her son's health and welfare were in jeopardy and that she was unable to protect her son. She asserts that transferring physical custody to C.A.B. was against the weight of the evidence.
In assessing the sufficiency of the evidence, we examine the evidence and its inferences in the light most favorable to the trial court's order. Long v. Long, 771 S.W.2d 837, 839 (Mo.App.1989). We defer to *122 the trial court's assessment of witnesses' credibility and accept the trial court's resolution of conflicting evidence. W.E.F. v. C.J.F., 793 S.W.2d 446, 451 (Mo.App.1990). We presume that the trial court reviewed all evidence and based its decision on the child's best interests. Hord, 769 S.W.2d at 450. We will reverse a custody modification on the ground that it is against the weight of the evidence only when we firmly believe that the decision is wrong. Id.
The evidence upon which K.J.B. relies does not persuade us that transfer of physical custody was against the weight of the evidence. K.J.B. acknowledges, and the medical evidence substantiates, the physical trauma which the son suffered while in her custody. Substantial evidence supports the trial court's finding that the boy's environment posed potentially adverse effects. The trial court heard much evidence supporting each parent's claim to custody. In resolving that conflict, weighing the evidence, and determining credibility, the trial court concluded that the boy's best interests were served by transferring primary custody to C.A.B. We have no basis for a firm belief that the trial court's decision is wrong.
Calculation of Child Support
In its modification, the trial court ordered K.J.B. to pay monthly child support of $371. In the original decree, C.A.B.'s monthly child support obligation was $268.20, and the court ordered him to pay $37 a month for past due temporary child support.
K.J.B. argues that the trial court erred in ordering her to pay child support because C.A.B. did not submit a Form 14 and because the record does not reveal how the trial court calculated her child support obligation of $371. She notes that her Form 14 calculations showed a combined child support obligation of $686 and that her share, 34 percent, should be $233. Although C.A.B. testified that his earnings were $20,377 for 1992, he provided no other financial information.
Section 452.340.7, RSMo Cum. Supp.1993, mandates the use of the child support guidelines in determining the amount of child support. Vehlewald v. Vehlewald, 853 S.W.2d 944, 951 (Mo.App.1993). Section 452.340.8 and Rule 88.01(e) create a rebuttable presumption that the amount calculated under the guidelines is the amount of child support to be awarded. To rebut the presumption, the court must issue a specific finding that the amount calculated under the guidelines would be unjust or inappropriate. Harding v. Harding, 826 S.W.2d 404, 407 (Mo.App.1992). Form 14 provides a worksheet for calculating presumed child support. Both parents should submit completed Form 14s. See Glenn v. Francis, 864 S.W.2d 947, 950 n. 5 (Mo.App.1993). The record on appeal must demonstrate the basis for the Form 14 calculation. Id. at 950. When neither the trial court's order nor the record demonstrates how the court determined the child support ordered, we believe that we must reverse and remand on the matter of child support. Id. at 953-54.
We are unable to ascertain from the record in this case the basis for the trial court's setting K.J.B.'s child support obligation at $371 a month. The trial court does not explain why it deviated from the guidelines. The record lacks the data necessary to show that the child support calculation was consistent with Form 14 and complied with Rule 88.01.
We reverse the order on the amount of child support. We remand the matter to the trial court with directions to comply with Rule 88.01(e). The court shall supplement the record with the appropriate findings. The court may, in its discretion, require additional evidence or argument of counsel.
All concur.
NOTES
[1] That statute says, "If any person is arrested and not charged with an offense against the law within thirty days of his arrest, official records of the arrest and of any detention or confinement incident thereto shall thereafter be closed records except that the disposition portion of the record may be accessed for purposes of exculpation and except as provided in section 610.120."
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883 S.W.2d 779 (1994)
The ESTATE OF Lola MILO, Yannequa Graham, James Milo, Individually and as Parent and Legal Guardian of the Minor, Jamie Milo, Katherine Graham, as Next of Friend of Sholanda January, and Katherine Graham, Individually, Appellants,
v.
PARK PLACE HOSPITAL, Dorris Jones, and George Zuzukin, M.D., Appellees.
No. 09-94-008 CV.
Court of Appeals of Texas, Beaumont.
Submitted May 3, 1994.
Decided September 29, 1994.
Rehearing Overruled October 21, 1994.
*780 K. Omari Fullerton, Clark & Fullerton, Houston, for appellants.
Curry L. Cooksey, Orgain, Bell & Tucker, Beaumont, Joel Randal Sprott, Sally Takacs Miller, Munisteri, Sprott, LeFevre & Rigby, Houston, for appellees.
Before WALKER, C.J., and BROOKSHIRE and BURGESS, JJ.
OPINION
BROOKSHIRE, Justice.
Appeal from a summary judgment granted in favor of the appellees herein, being George Zuzukin, Dorris Jones, and Park Place Hospital. The cause of action was generally alleged as a medical malpractice case brought by the appellants. The allegations were that the decedent, Lola Milo, had obtained the age of 32 years at the time of her death. She was a patient, it was alleged, at Park Place Hospital when certain medical negligences on the part of the appellees caused her untimely demise. The decedent, Milo, went to the Park Place Hospital for treatment of a hiatal hernia operation. Her estate alleged that Milo was prematurely weaned by the appellee, George Zuzukin, M.D., and that this premature weaning caused the death of Milo. Milo's estate cites a certified copy of her death certificate stating that Lola Milo died of and from ischemic brain damage. Another appellee, Dorris Jones, was the nurse assigned to the decedent, Milo. The allegations were that Ms. Jones rendered substandard medical care as a nurse to the decedent.
The appellants brought their cause of action pursuant to TEX.CIV.PRAC. & REM.CODE (Texas Wrongful Death Act) § 71.004, originally against Park Place Hospital, Drs. George Zuzukin, Cecil Walkes, Joseph Badlissi, Hussam Fadhli, and Dorris Jones, a registered nurse, alleging both negligence and gross negligence. Later, Drs. Walkes, Badlissi, and Dr. Fadhli were subsequently dismissed from this lawsuit. After a hearing the trial court granted summary judgment in favor of Park Place Hospital, Dorris Jones, and George Zuzukin based on lack of causation. The appellants perfected a proper and timely appeal.
The Cross Point
An interesting and dispositive cross point is brought forward, argued, and briefed in the brief of certain appellees. These appellees are Park Place Hospital and Dorris Jones. The other appellee makes no such complaint or cross point. The cross point maintains that the appellants' brief is deficient in that appellants' brief fails to identify places in the record that support their claims, contentions, and arguments. We have carefully read and reread the appellants' brief herein. The brief is concise, consisting of about seven or eight pages of a preliminary statement and four points of error.
However, without criticism of anyone and with due deference to all, we do not find in the appellants' brief any reference to the transcript or the record before us. The record is somewhat lengthy.
An appellant or appellants (as situated here) are generally required to identify the places and the pages in the record and in the transcript that support the appellants' complaints, briefs, and arguments. See and compare Keene Corporation v. Gardner, 837 S.W.2d 224 (Tex.App.-Dallas 1992, writ denied); Barham v. Turner Const. Co. of Texas, 803 S.W.2d 731 (Tex.App.-Dallas 1990, writ denied).
Very importantly, Tex.R.App.P. 89 provides in relevant part as follows:
... and nothing herein shall be construed to limit or impair the power of the court of *781 appeals to otherwise tax the cost for good cause.
The appellees, Park Place Hospital and Dorris Jones, in their brief, misquote a rule of Appellate Procedure that they designate as 50(f)(1). Apparently they meant to refer to Tex.R.App.P. 74(f) reading as follows:
(f) Argument. A brief of the argument may present separately or grouped the points relied upon for reversal. The argument shall include: (1) a fair, condensed statement of the facts pertinent to such points, with reference to the pages in the record where the same may be found; and (2) such discussion of the facts and the authorities relied upon as may be requisite to maintain the point at issue. (emphasis added)
We agree that our appellate court is not required to search through the entire record to determine if the appellants' contentions and arguments are valid and if they are based upon and actually found in the summary judgment record on appeal before us.
See Kropp v. Prather, 526 S.W.2d 283 (Tex.Civ.App.-Tyler 1975, writ ref'd n.r.e.).
As noted above, we do not find any reference in appellants' brief to any pages in the record as required by Rule 74(f)(1).
This cross point may be and probably is dispositive of the appeal on procedural matters. However, out of an abundance of precaution, we have attempted to carefully examine the index to the various transcripts and dig through the transcripts. We have located a response to the appellees' motion for summary judgment filed by the appellants. The appellants argue "flat footedly" in their brief that there is a certain, crucial, and vital death certificate attached to their responses. We cannot find the same in their first response, but significantly in their first response there is a rather detailed and specific, factual affidavit made and sworn to by a medical doctor, one Boniface Gbalazeh, M.D.
Dr. Gbalazeh's affidavit swore that he was a physician and duly licensed to practice since 1976. His practice was concentrated in the area of emergency medicine and family practice medicine in Harris County and Victoria County, but that he was familiar with the standard of care of practicing physicians in Jefferson County, and similar counties in Texas at all times material to this litigation. This doctor swore that the care that was given to the deceased, Lola Milo, was not within the standard of care and that the standards of care were breached in Milo's case; Gbalazeh swore that the care was below standard. This doctor swore that he had reviewed the medical records on Milo generated from June through September of 1989, and that he had discovered multiple, substandard medical practices which contributed to the death of Mrs. Milo.
Whether we agree or not or whether we want to or not, we must accept this statement and affidavit as true and we must accept as true the non-movants' summary judgment proof. We think this affidavit raises the issue of causation.
But this doctor gave more in his sworn affidavit. It contained acceptable summary judgment evidence. This doctor swore that foreseeable, post-operative complications were ignored until an advance stage of septic shock and intestinal infarction resulted. After this result, the chances of survival of Mrs. Milo were significantly decreased. This doctor swore to other numerous facts that we must take as true, which in our opinion under our unique summary judgment practice in Texas, defeats the appellees' motion for summary judgment on the merits of the summary judgment proceedings.
For example, this physician found, among other things, that no objective guidelines for anticipating and managing a respiratory problem that was consequent to her second surgery appear in or on the record and as a result thereof and as a consequence thereof, Milo was weaned off the respirator prematurely resulting in anoxic brain damage. Also the cardiac arrest was, in the opinion of this doctor, caused by prematurely weaning Mrs. Milo off the respirator and resulted also from other substandard medical care. This physician unequivocally stated and swore that it was obvious that the medical management personnel at Park Place Hospital (by their own admissions) did not know what was going on and did not know what to do to find *782 out what was going on. This personnel waited until Mrs. Milo had sustained irreversible cardio pulmonary and central nervous system damage before transferring her to St. Lukes Hospital where she could have been probably, successfully helped if transferred much earlier.
This doctor concluded his affidavit by saying that there were many other deficiencies on the record concerning the management of Mrs. Milo at Park Place Hospital which showed that Mrs. Milo received substandard care which within reasonable medical probability resulted in her death. There appears to be some other evidence in the record to the effect that when Mrs. Milo was taken off of the respirator or the mechanical ventilator that shortly thereafter Mrs. Milo told some personnel that she could not breathe, but that thereafter some personnel told Mrs. Milo that she could breathe and that Mrs. Milo should not worry.
Additionally, we must consider another lengthy affidavit made by one Silvia Tiller, a LVN. Tiller's affidavit is lengthy and in detail. It raises numerous genuine issues of material facts regarding the alleged substandard care. Tiller basically swore that the nursing care afforded to Mrs. Milo was not up to standard and that Mrs. Milo should have been very closely watched by the nurse in charge and that the nurse in charge failed to watch Mrs. Milo closely. This LVN affiant stated that according to the nurse's notes and notations that the patient Milo was placed back in the bed at a certain time and soon thereafter experienced difficulty breathing. The attendant nurse noted an astolic line on the monitor. The standard of care then would call for a nurse similarly situated to immediately remove the T tube and to "bag" the patient at the first notation of difficulty in breathing.
Then, the standard of care would require a nurse to immediately initiate the emergency system as it was clear that the doctor needed to be notified at once and further additional assistance was needed immediately. Should the patient go into arrest, then the nurse must necessarily initiate cardio pulmonary resuscitation. The basic thrust and gravamen of Tiller's affidavit was that the nursing care breached and fell below the medical standard of care as it applies to nurses that possessed the degree of learned capability as the nurse possessed in this case. The last paragraph of Tiller's affidavit reads thus: "For the foregoing and many other deficiencies on record in the management of Mrs. Milo's nursing care at Park Place Hospital, I believe she received substandard care which within reasonable medical probability caused her death." We must take this affidavit as true under the standards and rules of summary judgment practices.
A comprehensive and inclusive statement of the standards of review as applicable here is set out clearly in Nixon v. Mr. Property Management, 690 S.W.2d 546 (Tex. 1985). We quote from Nixon:
1. The movant for summary judgment has the burden of showing that there is no genuine issue of material fact and that the movant is entitled to judgment as a matter of law.
2. In deciding whether or not there is a disputed material fact issue precluding summary judgment, evidence favorable to the non-movant will be taken as true; and
3. Every reasonable inference must be indulged in favor of the non-movant and any doubts resolved in his favor.
Notice that any doubts are resolved in favor of the non-movant. Id., at 548-549; Turboff v. Gertner, Aron & Ledet, Inv., 763 S.W.2d 827, 829 (Tex.App.-Houston [14th Dist.] 1988, writ denied). Moreover, the usual presumption that the judgment is correct does not apply. See Montgomery v. Kennedy, 669 S.W.2d 309, 311 (Tex.1984); Great American R. Ins. Co. v. San Antonio Pl. Sup. Co., 391 S.W.2d 41, 47 (Tex.1965).
Justice Doggett speaking and writing for an unanimous Supreme Court of Texas in Acker v. Texas Water Com'n, 790 S.W.2d 299, 302 (Tex.1990), wrote and held as follows:
In the review of a summary judgment, the movant has the burden of showing that there is no genuine issue of material fact and that it is entitled to judgment as a matter of law. Evidence favorable to the *783 non-movant will be taken as true when deciding whether a material fact issue exists. All reasonable inferences must be indulged in favor of the non-movant and any doubts resolved in its favor. Nixon v. Mr. Property Management Co., 690 S.W.2d 546, 548-49 (Tex.1985).
Having located the death certificate in the record, it is concluded that it does raise an issue of causation, when taken with and coupled with the other summary judgment proof. The immediate cause of death and the final disease was listed as ischemic brain damage due to respiratory and cardiac arrest due to abdominal sepsis and abdominal abscess. The death certificate was signed by Frederic Hochman, M.D., of Houston, Texas.
The Venue Question
Concerning the transferring of venue of this case from Harris County to Jefferson County, the record fails to reveal error in such transfer. The appellants have failed to bring forward a sufficient and adequate record for review on this point. A number of the trial court's records are missing. The burden is certainly upon the appellant to present a sufficient record to show reversible error. Appellants have not done so. We simply do not have a complete nor do we have an adequate record before us on this point. There was no error in the transferring of this case to Jefferson County.
It should be stressed that the affidavits referred to above tendered by the plaintiffs were based upon reasonable medical probability.
Dr. Zuzukin's Position on Appeal
Dr. George Zuzukin's position on appeal is that the plaintiffs below claimed and alleged that Dr. Zuzukin's medical negligence caused the death of Mrs. Lola Milo. Dr. Zuzukin denies this allegation. Dr. Zuzukin's motion for summary judgment was based on the fact that his summary judgment motion negated the issue of proximate cause. Dr. Zuzukin's position is that according to the pleadings and the evidence, Dr. Zuzukin's involvement with this patient was limited to weaning her from a respirator after surgery. Dr. Zuzukin's contention is that at the time he began to treat Mrs. Milo that Mrs. Milo had suffered certain post-operative and multi-system organ failures and had less than a 40 percent chance of survival. This doctor's brief concedes that the motion for summary judgment was granted to him on the issue of proximate cause. Zuzukin's first point of error is that our appellate court has no jurisdiction to decide this case because the appeal bond was not timely filed. We have carefully examined the transcript, including page 304-A, and we note that a proper certificate of cash in lieu of bond was made, filed, and acknowledged by the district clerk on December 13, 1993. The critical order was signed September 20, 1993. Therefore, the cash certificate in lieu of bond was timely filed. We overrule jurisdictional point one.
Zuzukin's next point of error is that the appellants failed to submit summary judgment evidence to the effect that Dr. Zuzukin's alleged negligent acts were not based upon a reasonable medical probability and, therefore, showed no proximate cause for the death of Milo. As discussed and set out above in the two affidavits, we are required to overrule this point of error.
The doctor's next point of error is that the appellants have waived any complaint of insufficient notice of the date of the hearing of the motion for summary judgment. Under our disposition of the case, that point of error is now moot and is not dispositive. It is a non-point.
In a reply point, Dr. Zuzukin takes the position that the granting of the summary judgment was based upon a total lack of evidence in the element of causation. As noted above, we are required under accepted rules to overrule this point of error in view of the non-movants' proof.
The last point of error of Dr. Zuzukin reads:
Appellants have wholly failed to establish that the trial court erred in granting the motion to transfer venue.
We sustain this final point and conclude that the transfer to Jefferson County was proper. Having found error, we reverse the judgment and remand the cause. Having found reversible error and in the interests of justice and *784 in the exercise of our broad discretion in the interests of justice, we, on this additional, separate and independent ground, reverse the judgment and remand the cause for a full trial on the merits.
Costs of appeal are taxed against appellants.
REVERSED AND REMANDED.
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883 S.W.2d 386 (1994)
Burnice Joe BIRDO, Appellant,
v.
Bruce W. SCHWARTZER, et al., Appellees.
No. 10-94-050-CV.
Court of Appeals of Texas, Waco.
August 24, 1994.
Burnice J. Birdo, pro se.
Before THOMAS, C.J., and CUMMINGS and VANCE, JJ.
OPINION
VANCE, Justice.
In this appeal we determine the propriety of a dismissal, under section 13.001 of the Civil Practice and Remedies Code, of a suit filed in forma pauperis. See TEX.CIV.PRAC. & REM.CODE ANN. § 13.001 (Vernon Supp.1994).
PROCEDURAL HISTORY
Burnice Birdo, a prison inmate, brought a pro se action in forma pauperis against the Texas Department of Criminal Justice-Institutional Division (TDCJ-ID) and employees Bruce Schwartzer, Norman Singleton, Janie Sweeney, Elton Brock, Sherry Brown, and Jack Douglas. Before the defendants were served with process, the court dismissed the cause as being frivolous and malicious. See id. Birdo complains that the court abused its discretion when it dismissed the cause before service of process and that the court's dismissal "exhibits a prolaw enforcement bias" in violation of his constitutional rights. We will affirm the judgment of dismissal.
THE STATUTE
Section 13.001 provides:
*387 (a) A court in which an affidavit of inability to pay under Rule 145, Texas Rules of Civil Procedure, has been filed may dismiss the action on a finding that:
(1) the allegation of poverty in the affidavit is false; or
(2) the action is frivolous or malicious.
(b) In determining whether an action is frivolous or malicious, the court may consider whether:
(1) the action's realistic chance of ultimate success is slight;
(2) the claim has no arguable basis in law or in fact; or
(3) it is clear that the party cannot prove a set of facts in support of the claim.
(c) An action may be dismissed under Subsection (a) as frivolous or malicious either before or after service of process.
TEX.CIV.PRAC. & REM.CODE ANN. § 13.001.
THE ALLEGATIONS OF BIRDO'S PETITION
Birdo's petition alleges three causes of action. The first is an action against Schwartzer, Singleton, Sweeney, and Brock, in their individual capacities, for "retaliation for exercising protected constitution rights." He alleges that the defendants, in violation of prison policy, denied him "properly requested and entitled inmate legal visits" and confiscated personal legal materials. Birdo alleges that he was placed on thirty-day "law books delivery restriction" because Schwartzer falsely accused him of failing to return the pocket part to Volume 29 of West's Texas Digest.
His second cause of action alleges that Schwartzer, Singleton, Sweeney, Brock, Brown, and Douglas, in their individual capacities, acted in "deprivation of state prison-created liberty and property interest rights pursuant to and by improper application of [prison] policies/regulations ... without predeprivation hearing or opportunity to be heard."
Birdo's third cause of action alleges that the TDCJ-ID is liable under the Texas Tort Claims Act for its employees' negligent use or misuse of tangible property, i.e., misinterpretation of prison policies and regulations.
THE COURT'S ORDER OF DISMISSAL
The court dismissed Birdo's lawsuit as "frivolous and malicious" because his claims had no arguable basis in law or in fact. As to causes of action one and two, the court found that Birdo failed to state a cause of action "with sufficient sufficiency ... to ascertain what specific acts of the individual defendants are complained of and whether or not a cause of action is stated against each individual defendant." The court determined that Birdo failed to state a cause of action in his third complaint.
STANDARD OF REVIEW
Trial courts have broad discretion in dismissing frivolous or malicious in forma pauperis actions. Thomas v. Texas Dept. of Criminal Justice, Inst. Div., 848 S.W.2d 797, 798 (Tex.App.-Houston [14th Dist.] 1993, writ denied). We review a dismissal under section 13.001 by determining whether the court abused its discretion. See TEX.CIV. PRAC. & REM.CODE ANN. § 13.001; Johnson v. Peterson, 799 S.W.2d 345, 347 (Tex.App.-Houston [14th Dist.] 1990, no writ). Abuse of discretion is determined by whether the court acted without reference to any guiding principles. Craddock v. Sunshine Bus Lines, 134 Tex. 388, 133 S.W.2d 124, 126 (1939). Stated another way: Was the act of the court arbitrary or unreasonable? Smithson v. Cessna Aircraft Co., 665 S.W.2d 439, 443 (Tex.1984); Landry v. Travelers Insurance Co., 458 S.W.2d 649, 651 (Tex.1970).
Federal and state courts have approved dismissal of lawsuits filed in forma pauperis that have no basis in law or fact. Johnson v. Lynaugh, 796 S.W.2d 705, 706 (Tex.1990); Pugh v. Parish of St. Tammany, 875 F.2d 436, 438 (5th Cir.1989); Thomas, 848 S.W.2d at 798. The purpose in allowing trial courts to dismiss these cases is to prevent the filing of abusive lawsuits by in forma pauperis litigants who have no financial incentive to refrain from filing such suits. Neitzke v. Williams, 490 U.S. 319, 324, 109 S. Ct. 1827, 1831, 104 L. Ed. 2d 338 (1989).
*388 REVIEW OF THIS DISMISSAL
Although Birdo's complaints are based on the defendants' alleged violation of prison policies and regulations, he did not seek to redress his grievances through the prison grievance system. TDCJ-ID has, pursuant to statute, developed a system for the resolution of inmate grievances. See Tex.Gov't Code Ann. § 501.008 (Vernon Supp.1994). The TDCJ-ID board policy on inmate grievances specifically applies to Birdo's complaints about the interpretation and application of policies, denial of access to the grievance procedure, and reprisals against inmates for filing grievances. See Tex.Dep't Corrections, Inmate Grievances (Inst.Div. January 1988). To the extent Birdo failed to exhaust his administrative remedies, the court did not abuse its discretion in dismissing his suit. See Pedraza v. Tibbs, 826 S.W.2d 695, 699 (Tex.App.-Houston [1st Dist.] 1992, writ dism'd w.o.j.).
Even assuming for the sake of argument that Birdo stated a cause of action under the Texas Tort Claims Act, he claims the employees' negligence caused him mental anguish and emotional distress. Negligent infliction of mental anguish is no longer a cause of action. See Birdo v. Williams, 859 S.W.2d 571, 573 (Tex.App.-Houston [1st Dist.] 1993, no writ) (citing Boyles v. Kerr, 855 S.W.2d 593 (Tex.1993)). Thus the court did not abuse its discretion in dismissing his in forma pauperis suit for having no arguable basis in law or fact. See id. We overrule point one.
As to Birdo's request that we take "judicial notice" of the trial court's "pro-law enforcement" bias, we decline. Nothing in the record indicates that the court acted improperly. We overrule point two. We affirm the judgment.
ABUSIVE LAWSUITS
Birdo is no stranger to the legal system. This court has reviewed several in forma pauperis lawsuits filed by him. See, e.g, Birdo v. Ament, 814 S.W.2d 808 (Tex. App.-Waco 1991, writ denied) (sued prison employees for serving him hot coffee in a "flimsy" paper cup); Birdo v. DeBose, 819 S.W.2d 212 (Tex.App.-Waco 1991, no writ). Birdo has flooded our sister courts of appeals with his lawsuits. See, e.g., Birdo v. Williams, 859 S.W.2d 571 (Tex.App.-Houston [1st Dist.] 1993, no writ) (sought $200,000 for "mental anguish" for negligent investigation of employee allegedly throwing hot coffee on him); Birdo v. Hammers, 842 S.W.2d 700 (Tex.App.-Tyler 1992, no writ) (trial on merits for prison employee's confiscation of headphones, radio, and magazines); Birdo v. Parker, 842 S.W.2d 699 (Tex.App.-Tyler 1992, no writ) (trial on merits against prison employees alleging slip and fall).
The Fort Worth court addressed Birdo's litigiousness in Birdo v. Holbrook, 775 S.W.2d 411 (Tex.App.-Fort Worth 1989, writ denied). In affirming a take-nothing judgment, the court noted that it had dealt with a prior appeal and six mandamus actions filed by Birdo. Id. at 412. Furthermore, Birdo's "pointless litigation" had begun not in Texas but in New Mexico. See id. (citing Birdo v. Rodriquez, 84 N.M. 207, 209, 501 P.2d 195, 197 (1972)). We also note that this list is not exhaustiveit only represents the published opinions of cases brought by Birdo. Doubtless others have been filed in our state-court system which have not been designated for publication and thus are not readily available for our review.[1]
Birdo has not limited himself to state courts. He has been sanctioned by the Western District of Texas for filing frivolous excessive-force suits. Birdo v. Carl, No. W-92-CA-186 (W.D.Tex., August 10, 1993). Not to be deterred, Birdo has now sued prison employees for alleged violations in filing disciplinary reports and irregularities in his many grievance proceedings. See Birdo v. Mata, W-94-CA-201 (W.D.Tex.). Finally, although we do not know the specifics of the cases, Birdo has filed lawsuits in the federal district courts in Tyler, Amarillo, and Fort Worth. He also has a suit pending in a Houston federal court.
*389 SANCTIONS
This appeal is frivolous. We agree with the First Court of Appeals that damages should be assessed against persons bringing frivolous appeals from dismissals under section 13.001. See Smith v. Stevens, 822 S.W.2d 152 (Tex.App.-Houston [1st Dist.] 1991, writ denied); TEX.CIV.PRAC. & REM. CODE § 13.001; Tex.R.App.P. 84. We assess damages against Birdo of $100, which is less than ten times the otherwise taxable costs. See Tex.R.App.P. 84.
NOTES
[1] For example, our search revealed an unpublished denial of leave to file a writ of mandamus in the Fourteenth Court of Appeals. See Birdo v. Moore, No. C14-90-00558-CV (Tex.App.-Houston [14th Dist.], July 12, 1990, orig. proceeding) (not designated for publication).
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883 S.W.2d 672 (1994)
Ex Parte John Alex HALLMARK, Appellant.
No. 71865.
Court of Criminal Appeals of Texas.
June 15, 1994.
Rehearing Denied September 21, 1994.
*673 John Alex Hallmark, pro se.
Daniel C. Rice, Dist. Atty., Michael R. Davis, Asst. Dist. Atty., Conroe, and Robert Huttash, State's Atty., Austin, for the State.
OPINION
PER CURIAM.
This is a post-conviction application for a writ of habeas corpus filed pursuant to Article 11.07, § 2, V.A.C.C.P. In 1983 Applicant pled guilty and was convicted of murder and attempted capital murder. He was sentenced to confinement for forty years and twenty years, respectively. Both offenses were committed in October, 1982. Applicant contends he is being denied restoration of good conduct time that he forfeited while incarcerated because of retroactive application of V.T.C.A. Government Code, § 498.005. Applicant alleges this violates the ex post facto provisions of the United States Constitution, Article 1, § 9, and the Texas Constitution, Article 1, § 16.
Section 498.005 states:
At least annually, the board shall review the institutional division's rules relating to restoration of good conduct time that has been forfeited, the manner in which inmates are reclassified, and the manner in which additional good conduct time is awarded retroactively to inmates who have been reclassified. The board shall consider in its review whether the inmate overcrowding in the institutional division has decreased and whether it is necessary for purposes of decreasing overcrowding to classify inmates according to Section 498.002 to restore good conduct time under Section 498.004, or to award additional good conduct time retroactively to inmates who have been reclassified. If the board determines that overcrowding has decreased and it is not necessary to restore good conduct time or award additional good conduct time, it shall direct the institutional division to discontinue those practices.
Applicant states that the Institutional Division of the Texas Department of Criminal Justice issued an order pursuant to § 498.005, effective November 20, 1993, directing that forfeited good conduct time will no longer be restored. He contends that application of this policy to his case constitutes an ex post facto violation because his offense occurred prior to the effective date of this policy and § 498.005.
In Ex Parte Rutledge, 741 S.W.2d 460 (Tex.Cr.App.1987), this Court addressed an ex post facto claim in the context of good time credit. We held ex post facto provisions of the state and federal constitutions were violated by retroactive application of an amendment to the Prison Management Act, Article 6184o, V.A.C.S. Such application prevented a defendant from receiving good time credit for which he would have otherwise been eligible based upon law in effect on the date of the commission of his offense. We analyzed the issue under then-applicable interpretation of ex post facto law to find that retroactive application of the amendment acted "to the substantial disadvantage of the *674 applicant (whether or not it is technically considered an increase in the punishment)." Id. at 462.
Since our decision in Ex Parte Rutledge we have followed the reasoning of the United States Supreme Court and returned to an earlier interpretation of ex post facto law. In Grimes v. State, 807 S.W.2d 582 (Tex.Cr.App.1991), we disavowed the "substantial protections" concept used in Ex Parte Rutledge, and adopted the analysis in Collins v. Youngblood, 497 U.S. 37, 110 S. Ct. 2715, 111 L. Ed. 2d 30 (1990). Therefore, for purposes of an analysis under the state or federal constitution of a claimed ex post facto violation we determine (1) whether the statute punishes as a crime an act previously committed which was innocent when done; (2) whether the statute changes the punishment and inflicts greater punishment than the law attached to a criminal offense when committed; or (3) whether the statute deprives a person charged with a crime of any defense available at the time the act was committed. Collins v. Youngblood, 497 U.S. at 42-43, 110 S.Ct. at 2719, 111 L.Ed.2d at 38-39.
Applicant contends application of § 498.005 and the policy adopted pursuant to that section is an ex post facto violation under Ex Parte Rutledge, presumably because it increases the punishment attached to his offense. We do not agree.
In 1977 Article 6181-1, § 4, V.A.C.S., replaced Article 61841, V.A.C.S., concerning good conduct time. Article 6181-1, § 4 specifically stated that good conduct time "applies only to eligibility for parole or mandatory supervision,...." This section also declared that all or part of an inmate's accrued good conduct time could be forfeited based upon violations of rules within the department. The director might, in his discretion, restore that forfeited time. Subsequent statutory provisions up to and including the current provisions, V.T.C.A. Government Code, §§ 498.003, 498.004, and 498.005, state that good conduct time applies only to eligibility for parole or mandatory supervision and may be forfeited for violation of the rules within the department.
Section 498.005 and the policy enacted pursuant thereto refusing to restore forfeited good time do not increase the punishment proscribed for an offense. The statutes governing good time and forfeiture have, since 1977, specifically stated that good conduct time applies only to eligibility for parole or mandatory supervision. Art. 6181-1, § 4; § 498.003. Once an inmate is paroled or released to mandatory supervision the period of parole is equal to the maximum term for which the person was sentenced less calendar time actually served on the sentence. A person's sentence is not reduced by good time credit. Article 42.18, § 8, V.A.C.C.P. Unlike the Florida statute in Weaver v. Graham, 450 U.S. 24, 101 S. Ct. 960, 67 L. Ed. 2d 17 (1981), in which good time decreased the actual sentence, our statutes use good time credit only for eligibility for parole or mandatory supervision. Good time credit has no effect on the length of sentence imposed. Therefore, Applicant's punishment has not been affected by the forfeiture of good time. Retroactive application of the policy ordered pursuant to § 498.005 does not violate ex post facto provisions of the state or federal constitutions. All relief is denied.
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25 B.R. 703 (1982)
In re Olen C. HARBIN, Individually and dba Harbin Auto Sales, Debtor.
Olen C. HARBIN, Individually and dba Harbin Auto Sales, Plaintiff,
v.
J. Hall BROOKS, dba Brooks Auto Service, Defendant.
Bankruptcy No. 80-10737, Adv. No. 82-3129.
United States Bankruptcy Court, W.D. Tennessee, E.D.
December 23, 1982.
*704 Lloyd A. Utley, Jackson, Tenn., for plaintiff-debtor.
Charles M. Cary, Bolivar, Tenn., for defendant.
*705 MEMORANDUM OPINION AND ORDER
WILLIAM B. LEFFLER, Bankruptcy Judge.
In this Chapter 7 proceeding the debtor, Olen C. Harbin, dba Harbin Auto Sales, filed a complaint against the defendant, J. Hall Brooks, dba Brooks Auto Service (hereinafter "Brooks") for injunctive relief, for monetary damages, and to hold the creditor in contempt for issuing a garnishment on certain escrow funds. The Court finds that the complaint should be dismissed for reasons set forth hereinafter.
Brooks obtained a judgment against the debtor in the Chancery Court of Hardeman County, Tennessee on September 15, 1980, and registered the judgment as a judgment lien in the Register's Office of Hardeman County, Tennessee on September 26, 1980. The debtor filed a Chapter 7 bankruptcy petition on October 7, 1980 and therein listed Brooks as an unsecured creditor. The debtor received a discharge under Chapter 7 of the Bankruptcy Code on February 4, 1981.
On October 6, 1982 the debtor sold certain real property in which he had an interest. Sale proceeds in the amount of $3,349.79 were held in an escrow account by the realty company conducting the sale with instructions on the settlement sheet (Exhibit D) that due to the judgment lien the proceeds from the sale were to be "held in escrow until legal settlement determined."
After receiving authorization from the Bankruptcy Court, the trustee on October 14, 1982 disclaimed his interest in the real property that was sold. Thereafter Brooks issued a garnishment against the above-mentioned proceeds held in the escrow account. The debtor filed a complaint on October 27, 1982 alleging that the action taken by Brooks in the form of a garnishment was in violation of the injunction pursuant to 11 U.S.C. § 524.
The debtor contends that the debt owed to Brooks was discharged in bankruptcy and that Brooks had also lost his judgment lien by not issuing an execution on the land and selling the land within one year after the rendition of the judgment pursuant to Tenn.Code Ann. § 25-5-105. Brooks maintains that the above-mentioned limitations period of one year was tolled by the automatic stay provisions in the Bankruptcy Code.
The filing of a Chapter 7 petition operates as a stay, as to all entities, of "the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case." 11 U.S.C. § 362(a)(2). Under 11 U.S.C. § 362(c) the automatic stay of an act such as an execution or garnishment against property of the estate continues until such property is no longer property of the estate and at such time as the case is either closed, dismissed or the discharge is denied or granted, whichever occurs first.
Property remains property of the estate until the trustee, after notice and a hearing, abandons the property. 11 U.S.C. § 554(a), (b), (c). In the present case the debtor's interest in the real property at bar became property of the estate under § 541 of the Bankruptcy Code when the Chapter 7 petition was filed on October 7, 1980. Brooks was enjoined under § 362 from enforcing his judgment against that property so long as it remained property of the estate.
The debtor's interest in the land in this case remained property of the estate until October 14, 1982 when the trustee abandoned his interest in the property. Thus, an injunction was in effect from when the Chapter 7 petition was filed on October 7, 1980 until the trustee abandoned the real property on October 14, 1982, and during that period Brooks could not enforce his judgment lien.
Tenn.Code Ann. § 25-5-106 sets out the following extension of the judgment-lien enforcement period:
If the sale within the twelve (12) months is prevented by injunction writ of error, appeal in the nature of a writ of error, or other adverse proceeding in court, or by appeal from judgments and decrees of courts of equity in this state to the Supreme Court, or Court of Appeals, *706 the lien shall be continued, provided the creditor shall issue execution and sell the land within one year after the injunction is dissolved, the judgment or decree affirmed, or adverse legal proceeding dismissed.
In applying the above Tennessee statute to the present case the Court finds that the one-year limitations period was tolled and the judgment lien was in effect on the date that the garnishment was issued. The Chapter 7 petition was filed less than a month after Brooks obtained his judgment against the debtor, and the garnishment on the proceeds in the escrow account was issued soon after the trustee abandoned his interest in the real property which made it no longer property of the estate and thus starting the one-year limitations period on the judgment lien running again.
Since the Court has found that at the time of the garnishment the judgment lien had not expired the next question to be addressed is whether Brooks could properly issue a garnishment on the sale proceeds in the escrow account. Because the debt owed to Brooks had been discharged in bankruptcy, the only action left for Brooks was enforcement of the judgment lien. The question thus arises as to whether the garnishment issued against the sale proceeds in the escrow account was a valid enforcement of the judgment lien, or more specifically, whether the judgment lien extended to the proceeds from the sale of the real property upon which there was a judgment lien.
The general rule is that once a judgment lien attaches to land it remains with the land and cannot be destroyed by the debtor's subsequent alienation of the property. 49 C.J.S. Judgments § 296 (1982). If the debtor sells the property to a third party then the purchaser would take the land subject to the judgment lien unless the judgment creditor waives or releases the lien. Id.
In Tennessee if a judgment creditor enforces his judgment lien by issuing an execution and certain land of the debtor is levied upon and sold within one year after rendition of the judgment, such levy and sale will overreach and avoid all intermediate alienations by the debtor. 10 Michie's Digest Judgments and Decrees § 140 (1938; cases cited therein).
Seeing that a judgment lien remains with the land it accordingly does not attach to any funds received from the sale of the land or any issues or profits from the land. 49 C.J.S. supra; 46 Am.Jur.2d supra at § 246. Therefore, the Court must conclude that the judgment lien did not extend to the proceeds and Brooks, as a consequence of this, is in contempt for using an improper means of process to enforce his judgment lien in violation of the discharge and injunctive provisions of the Bankruptcy Code.
Civil contempt remedies generally fall into two categories, one being for the purpose of making a party comply with a court order and the other being compensatory in that its purpose is to reimburse an injured party for losses due to the adversary's noncompliance. In re Hill, 19 B.R. 375 (Bkrtcy. N.D.Tex.1982).
The Court cannot discover any actual damages in this case from Brooks' action which actually amounted to a disregard or a misinterpretation of the bankruptcy laws. Moreover, the Court cannot find that the action taken by Brooks was a conscious and intentional violation of the bankruptcy laws of such a magnitude that would merit an award of damages to the debtor.
The obvious effect of the judgment lien remaining with the land in this case would be that there is a cloud upon the title to the land that was sold. The satisfaction of the judgment by a payment to Brooks from the proceeds in the escrow account and a release of the judgment lien in turn by Brooks should of course eliminate the cloud on the title caused by the judgment. However, such a resolution of the dispute remains within the prerogative of the parties.
IT IS, THEREFORE ORDERED that the above-mentioned Complaint filed by the debtor is hereby dismissed with prejudice.
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25 B.R. 71 (1982)
In re Joe Franklin REDIKER, Jr., Debtor.
Bankruptcy No. 380-01623.
United States Bankruptcy Court, M.D. Tennessee.
September 29, 1982.
*72 Peter V. Hall, Murfreesboro, Tenn., for creditor, Elfriede Amos.
John E. Buffaloe, Jr., Nashville, Tenn., for debtor.
MEMORANDUM
GEORGE C. PAINE, II, Bankruptcy Judge.
This matter is before the court on the debtor Joe Franklin Rediker, Jr.'s petition to reopen his closed Chapter 7 bankruptcy case for the purpose of amending his schedules to include debts of his former spouse Elfriede Amos and her attorney and to have those debts declared dischargeable. Amos objected to the debtor's petition on the grounds that the application was untimely and that, in any event, the debts in question are nondischargeable under either 11 U.S.C. § 523(a)(3) or (5). Upon consideration of the proof presented at the hearing on March 8, 1982, stipulations, exhibits, briefs of the parties and the entire record, this court is of the opinion that the debtor's case should be reopened for the purpose of determining whether the aforementioned debts are dischargeable. The court concludes that the $13,950.00 judgment for child support awarded to the debtor's former spouse is nondischargeable and that the $1,000.00 awarded to the former spouse's attorney is dischargeable.
The following shall constitute findings of fact and conclusions of law pursuant to Rule 752 of the Federal Rules of Bankruptcy Procedure.
The debtor and his former wife were married in West Germany in January of 1964. In February of 1964, their son Thomas was born. The debtor returned to the United States in February of 1965 due to his father's illness. Marital difficulties subsequently developed between the debtor and his wife and the debtor obtained an ex parte divorce in the Fourth Circuit Court of Davidson County, Tennessee, in December of 1966. The divorce decree contained no provision for custody or child support.
The debtor never returned to West Germany and remained in Tennessee after the divorce. Amos remained in West Germany and maintained custody of the minor child in that country. During this time, the debtor sent a total of $310.00 to his former wife as child support for their son.
On December 7, 1979, Amos filed a petition for child support in the Circuit Court of Davidson County. The debtor was served with a copy of this petition and the summons in May of 1980. On May 15, 1980, the debtor filed his answer to the petition.
*73 On May 28, 1980, thirteen days after filing his answer to Amos' child support action, the debtor filed a voluntary Chapter 7 petition in this court. The attorney who filed the bankruptcy petition for the debtor was the same attorney who represented the debtor in the child support proceeding. The debtor did not list his former spouse as a creditor in his Statement of Schedules and Affairs. The order and notice setting the date for the first meeting of creditors, which was mailed to all scheduled creditors on June 13, 1980, contained a no asset notice as provided by Federal Rules of Bankruptcy Procedure 203(b) and 302(e)(4). The no asset notice advised unsecured creditors that "it is not necessary for creditors to file unsecured claims at this time" and that "[I]f it subsequently appears that there are assets from which a dividend might to [sic] be paid on unsecured claims, creditors will be so notified and given an opportunity to file such claims." On August 15, 1980, the trustee filed a no asset report with the court. The debtor was granted a discharge on October 20, 1980. The court thereafter entered an order approving the trustee's report of no assets and closing the estate on December 31, 1980.
On October 27, 1981, the Circuit Court of Davidson County entered an order awarding Amos a judgment of $13,950.00 for child support, which sum included $1,800.00 for traveling expenses incurred by Amos in attending the trial. The court further ordered the debtor to pay to Amos' attorneys the amount of $1,000.00 as attorneys' fees. Rediker v. Rediker, Case No. 48152 (4th Cir.Ct. Davidson Co., Tenn. October 27, 1981). The debtor thereafter filed this motion to reopen his closed bankruptcy case for the purpose of amending his schedules to add Amos and her attorney to his list of creditors.
At the hearing of this matter, the debtor testified that he did not list Amos on the original bankruptcy petition because he presumed that she did not have a valid claim against him. The debtor further testified that two associates of Amos' attorney represented other creditors in his bankruptcy proceeding. In fact, the court records reflect that Bill Burton, an associate of the attorney employed by Amos, did attend the debtor's meeting of creditors and later filed a complaint objecting to the dischargeability of a debt.
The debtor seeks to reopen this closed bankruptcy case pursuant to 11 U.S.C.A. § 350(b) (West 1979) which provides that a case may be reopened "to accord relief to the debtor, or for other cause." The reopening of a case rests within the sound discretion of the court, and the case will only be reopened upon the demonstration of compelling circumstances justifying the reopening. Reid v. Richardson, 304 F.2d 351, 355 (4th Cir.1962); Stephenson v. General Motors Acceptance Corp., 19 B.R. 185, 187 (Bkrtcy.M.D.Tenn.1982).
The crux of the debtor's complaint is his request that the debts in question be found dischargeable. To obtain this relief, the debtor initially petitions the court for leave to amend his schedules by adding his former spouse and her attorney to his list of creditors. The debtor would, however, gain nothing by the court's allowance of this amendment since the addition of these creditors' names to the debtor's schedules would have no affect upon the ultimate determination of whether these debts were dischargeable. In re Holt and Derryberry, Case No. 180-01488 and Bk. No. 79-10140, slip op. at 6 (Bankr.M.D.Tenn. September 30, 1981). The debtor's discharge entered on October 20, 1980, provides that the debtor "is released from all dischargeable debts." 11 U.S.C. § 523(a)(3) specifically states that an unscheduled debt is nondischargeable unless the creditor received notice or actual knowledge of the bankruptcy case in a timely fashion. The issue posed by the debtor's complaint is thus not whether the debtor's case may be reopened to amend his schedules to add creditors but, instead, whether the case may be reopened to determine the dischargeability of this debt. This court has in the past been besieged by applications similar to the debtor's in this case. From this point forward, the proper form for such requests in Chapter 7 cases will be an application to reopen *74 to determine the dischargeability of a particular debt with the service of an appropriate summons and complaint on the affected creditor.
This court is of the opinion that the debtor may reopen this case in order to obtain a determination of whether the debt in question is dischargeable under either 11 U.S.C. § 523(a)(3) or (5). The Bankruptcy Court possesses concurrent jurisdiction with any appropriate non-bankruptcy forum to determine the dischargeability of debts under these sections. 11 U.S.C.A. § 523(c) (West 1979). See also Romeo v. Romeo, 16 B.R. 531, 534 (Bkrtcy.D.N.J.1981); Kuzminski v. Peterman, 5 B.R. 687, 690 (Bkrtcy.E. D.Pa.1980); Williams v. Gurley, 3 B.R. 401, 402-403 (Bkrtcy.N.D.Ga.1980). At least one court has held, however, that a debtor's desire to litigate the issue of dischargeability in a bankruptcy rather than a non-bankruptcy forum is insufficient cause to reopen a closed bankruptcy case. In re Iannacone, 21 B.R. 153, 155 (Bkrtcy.D.Mass.1982); Cf. In re McNeil, 13 B.R. 743, 747 (Bkrtcy.S.D. N.Y.1981) (debtors could not reopen their closed bankruptcy case to determine a dischargeability issue where the debtors had already asserted their discharge as a defense to the creditor's state court action on the debt); 3 COLLIER ON BANKRUPTCY ¶ 523.13[9], at 523-93 (15th ed. 1982) (should a creditor bring an action in a court other than a bankruptcy court to collect a debt which he contends is excepted from discharge pursuant to § 523(a)(3), then the local court must resolve the dischargeability issue unless the debtor can successfully remove the case to the bankruptcy court.).
This court respectfully disagrees with such a result. Rule 409(a) of the Federal Rules of Bankruptcy Procedure expressly provides that a debtor or creditor may at any time file a complaint with the bankruptcy court to obtain a determination of the dischargeability of a debt, subject to certain exceptions listed in 11 U.S.C. § 523(c) which are not relevant herein.[1] Rule 409(a) further contemplates that "a case may be reopened without the payment of an additional filing fee for the purpose of filing a complaint under this rule." Fed.R. Bankr.P. 409(a). To preclude the debtor from reopening this case to litigate the dischargeability issue in this forum would require the debtor to expend additional funds in pursuing this issue in state court and thereby unduly hamper his ability to obtain a fresh start. See In re Holt and Derryberry, Case No. 180-01488 and Bk. No. 79-10140, slip op. at 6 (Bankr.M.D. Tenn. September 30, 1981). The circumstances herein are sufficient to justify the reopening of this case pursuant to 11 U.S.C. § 350(a) to determine the dischargeability of the debt in question.
The creditor first asserts that the debt is nondischargeable under 11 U.S.C. § 523(a)(3)(A) (West 1979) which provides in pertinent part:
"(a) A discharge under section 727, 1141, or 1328(b) of this title does not discharge an individual debtor from any debt
. . . . .
(3) neither listed nor scheduled under section 521(1) of this title, with the name, if known to the debtor, of the *75 creditor to whom such debt is owed, in time to permit
(A) if such debt is not of a kind specified in paragraph (2), (4), or (6) of this subsection, timely filing of a proof of claim, unless such creditor had notice or actual knowledge of the case in time for such timely filing; ...."
It is undisputed that the debtor in this case failed to list the creditors in question in his bankruptcy schedules. Once this is established, the burden is on the debtor to prove that the creditor had timely notice or knowledge of the debtor's bankruptcy petition and thus comes within the exception set forth in § 523(a)(3)(A). Hill v. Smith, 260 U.S. 592, 594-595, 43 S. Ct. 219, 220, 67 L. Ed. 419 (1923); Milando v. Perrone, 157 F.2d 1002, 1004 (2d Cir.1946); In the Matter of Robertson, 13 B.R. 726, 732 (Bkrtcy.E.D. Va.1981).
The debtor has met this burden in the present case and therefore the debts of both Amos and her attorney are dischargeable under § 523(a)(3). The attorney for Amos is one of five attorneys in a law firm located in Murfreesboro, Tennessee. During the course of this attorney's representation of the creditor, one of his associates not only participated in the debtor's bankruptcy proceeding by attending the debtor's meeting of creditors but also filed an objection to the discharge of the debtor on behalf of another of the debtor's creditors. Under these circumstances, this court must conclude that the creditor's attorney did possess knowledge of the debtor's bankruptcy petition.
Furthermore, the knowledge of the creditor's attorney is necessarily imputed to the creditor. As this court has previously recognized, "notice of bankruptcy proceedings or actual knowledge thereof by an attorney authorized under the facts to receive notice is the equivalent of notice to the creditor." Warren v. Watson, Bk. Nos. 78-20052 and 78-20053, slip op. at 8-9 (Bankr.M.D.Tenn. November 18, 1981). See also Klein v. Davis, 19 B.R. 487, 488 (Bkrtcy.S.D.Fla.1982); Porter v. Arrow Investment Corp., 16 B.R. 229, 232 (Bkrtcy.D.Mass.1981); In the Matter of Robertson, 13 B.R. at 733; 3 Collier on Bankruptcy ¶ 523.13[5][c] at 523-87 to 523-88 (15th ed. 1982). In reaching this result, this court quoted with approval the following language from In re Locust Building Co., 299 F. 756, 769 (2d Cir.1924):
"The attorney is conclusively presumed to have informed his client of all material facts which the attorney acquires knowledge of, and which affect the client's rights, while the attorney is acting in the course of his employment and within the scope of his authority." (emphasis added).
See also Link v. Wabash Railroad Company, 370 U.S. 626, 633-634, 82 S. Ct. 1386, 1390-1391, 8 L. Ed. 2d 734 (1962); In re DiDio, 1 B.R. 196, 199 (Bkrtcy.E.D.Pa.1979).
This finding does not, however, completely resolve the dischargeability issue since the creditor also claims that a portion of the debt is for child support and thus nondischargeable pursuant to 11 U.S.C. § 523(a)(5).[2] In this case, the circuit court judge found that "an equitable amount for the support of the minor child from the date of the divorce of the parties until the day the minor child reaches its 18th birthday should be in the amount $13,950.00."[3]Rediker v. Rediker, Case No. 48152 (4th Cir.Ct. Davidson Co., Tenn. October 8, 1981). The court further found that this amount included the travel expenses incurred by the debtor's former spouse in the *76 amount of $1,800.00. The debtor has presented no evidence which would indicate that the amount awarded by the Circuit Court was not in the nature of child support. The award of travel expenses to the mother as child support can certainly be justified as a necessary expense incurred in the collection of such support. This court will not and cannot reconsider at this time whether the actual amount awarded as child support was justifiable. Benz v. Nelson, 16 B.R. at 660. The Circuit Court, however, chose not to characterize the award of attorney's fees to Amos' attorney as child support. This amount, therefore, comes within the scope of the debtor's discharge.
The court will accordingly enter an order reopening this case and finding that the $13,950.00 judgment for child support is nondischargeable and that the $1,000.00 awarded to Amos' attorney as attorney's fees is dischargeable.
IT IS, THEREFORE, SO ORDERED.
NOTES
[1] The Bankruptcy Code does not prescribe who may file dischargeability complaints. 11 U.S.C.A. § 523(c) (West 1979) does provide:
"(c) Except as provided in subsection (a)(3)(B) of this section, the debtor shall be discharged from a debt specified in paragraph (2), (4), or (6) of subsection (a) of this section, unless, on request of the creditor to whom such debt is owed, and after notice and a hearing, the court determines such debt to be excepted from discharge under paragraph (2), (4), or (6) as the case may be of subsection (a) of this section." (emphasis added).
The language of § 523(c) should not, however, be read to restrict a debtor from initiating a dischargeability complaint. Section 523(c) merely stands for the proposition that a debtor shall be discharged from a debt specified in § 523(a)(2), (4) or (6) if the creditor fails to timely commence a proceeding in the bankruptcy court to except this debt from discharge. This language is not inconsistent with Rule 409(a) and therefore Rule 409(a) continues to apply under the Bankruptcy Code. See § 405(d) of Title IV of the Bankruptcy Code (codified in note proceeding 28 U.S.C.S. § 1471 (Law Co-op. Supp.1982)). In fact, the proposed new bankruptcy rules would continue to permit a debtor to file a dischargeability complaint with the bankruptcy court. Fed.R. Bankr.P. 4007(a) (proposed March, 1982).
[2] 11 U.S.C.A. § 523(a)(5) (West 1979) provides:
"(a) A discharge under section 727, 1141, or 1328(b) of this title does not discharge an individual debtor from any debt
. . . . .
(5) to a spouse, former spouse, or child of the debtor, for alimony to, maintenance for, or support of such spouse or child, in connection with a separation agreement, divorce decree, or property settlement agreement, but not to the extent that
(A) such debt is assigned to another entity, voluntarily, by operation of law, or otherwise; or
(B) such debt includes a liability designated as alimony, maintenance, or support, unless such liability is actually in the nature of alimony, maintenance, or support; ...."
[3] The fact that the judgment for child support was obtained near when the child had reached the age of majority does not alter the nature of the obligation and does not render the debt nondischargeable. See Hylek v. Hylek, 148 F.2d 300, 302 (7th Cir.1945), aff'g, 53 F. Supp. 657 (D.Ind.1944); Benz v. Nelson, 16 B.R. 658, 660 (Bkrtcy.M.D.Tenn.1981), rev'd on other grounds, 20 B.R. 1008 (M.D.Tenn.1982); Splittgerber v. Church, 1 Bankr.Ct.Dec. (CRR) 993, 993-994 (Bankr.W.D.Wis.1975); Roble v. Roble, 41 Tenn.App. 412, 295 S.W.2d 817, 818 (1956).
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883 S.W.2d 349 (1994)
R.D. PLUNKETT, Appellant,
v.
The STATE of Texas, Appellee.
No. 10-94-041-CR.
Court of Appeals of Texas, Waco.
August 17, 1994.
Rehearing Denied September 14, 1994.
*351 James H. Kreimeyer, Belton, for appellant.
Thomas B. Sehon, Dist. Atty., Marlin, for appellee.
Before THOMAS, C.J., and CUMMINGS and VANCE, JJ.
OPINION
VANCE, Justice.
R.D. Plunkett was indicted for theft by check in Cause No. 6308 in Falls County. Allegations of witness and jury tampering arose prior to trialbut after the jury had been impaneledand the court granted a mistrial sua sponte. Plunkett was reindicted in Cause No. 6627, and the case was transferred to Robertson County. He filed a pretrial writ of habeas corpus, asserting double jeopardy. The court denied the writ. He now appeals on four points, asserting that the court abused its discretion in declaring a sua sponte mistrial. We will affirm.
POINTS OF ERROR
We note at the outset that Plunkett has not directed any point of error towards the order he has appealed from, i.e., the order denying relief from confinement.[1] However, applying our liberal briefing rules, we will treat each point as attacking the correct order because it is clear that he complains that his continued confinement is illegal due to the court's prior action in granting a sua sponte mistrial. See Tex. R.App. P. 74(p).
FACTUAL BACKGROUND
Plunkett was indicted for felony theft by check in Cause No. 6308 in Falls County. See Tex.Penal Code Ann. § 31.06 (Vernon 1989 & Supp.1994). He was accused of paying Ray Walterscheid for hay with a bad check of approximately $2700. The court impaneled a jury on October 26, 1992, but recessed the jury until further direction of the court. The jury was reconvened November 11 but, due to unresolved legal questions, was released again subject to recall. That day, Plunkett was arrested on a new charge of tampering with a witness. The State moved to revoke his bond and, under Article I, section 11a, of the Texas Constitution, sought to have him held without bond. See Tex. Const. art. I, § 11a.[2]
At the hearing on the motion to revoke bond, the State attempted to prove that Plunkett had "tampered" with Ray Walterscheid, the complaining witness. Billy Hill, a bail bondsman and acquaintance of Plunkett, testified that two days before the hearing Plunkett had borrowed $2800. Plunkett explained to Hill that "he had bought a lot of hay, but he needed to pay this man off before he got into some trouble." Hill wired the money to a Western Union in New Mexico. Hill then called a New Mexico phone number provided by Plunkett and spoke to a woman later identified as Walterscheid's mother. He informed the woman that the money was at the Western Union office. When she asked whether her son had agreed with the transaction, Hill told her he did not know anything. He left his name and number.
Walterscheid testified that during the week before the hearing, he had received anonymous calls from a man asking if he would accept the money Plunkett owed. Walterscheid told the man he would accept the money but needed to talk to the district attorney's office. The man would not leave his name or number but informed Walterscheid that he should not contact the district attorney. The man wanted Walterscheid to sign a non-prosecution agreement in exchange for sending the money. Walterscheid refused.
Plunkett testified that he did not make the anonymous calls to Walterscheid. He did *352 borrow money to make an attempt to pay the bill he owed Walterscheid after his attorney had advised him that there was nothing illegal in paying the money he owed. Plunkett denied talking to any jurors. The court revoked Plunkett's bond and ordered him held without bond.
After Plunkett was removed to the county jail, a conference was held in chambers between his attorney, the prosecutor, and the judge. Plunkett's attorney re-urged his motion to withdraw as counsel:
MR. HUNT: Your honor, at this time, out of the presence of the jury and after the defendant has been placed in jail without bond, I, Russell Hunt, as counsel for the defendant will once again renew my motion that had been previously made to withdraw as counsel for the Defendant. In the past I have based my motion primarily on Rule 1.15 Subsection B5, which is failure to pay fines and fees I'm sorryfees to counsel. At this time, I would amend that and renew it but add Subsection B Subparagraphs 2, 3, 4 and 5, which say, in summary, that the client persists that I wantthat I shall withdraw because the client persists in a course of action involving the lawyer's services that the lawyer reasonably believes may be criminal or fraudulent, and the client has used the lawyer's services to perpetuate a crime of fraud, and the client insists upon pursuing an objective that the lawyer considers repugnant as well as Subparagraph B5, which is failure to pay fees. Although, since the last time I talked to the Court, the Defendant has paid an additional $2,000. This objection in the motion to withdraw is not primarily on fees although that's a secondary motive. The previously stated things are far more important to me.
Because of attorney/client privilege and because I have an obligation to protect my client because he's still my client, I don't feel that I can tell the specifics to the Court although I would like to represent to the Court that I'm doing it and give the Court a hypothetical that would come up with a very analogous situation to the reason that I have to withdraw.
If hypothetically speaking, the client was to come to me and tell me, on the day before trial, that not just one but three jurors had been bought and paid for and that the outcome of the trial was guaranteed to be at least a hung jury, and if the client went further, hypothetically speaking, and told me that a certain family member of the client had, in fact, paid someone an amounthypothetically speaking let's say$10,000 in order to assure that one of the jurors who has reason to be antagonistic toward some of the State or State's witnesses and has paid that person in order to make certain that there is going to be a hung jury, if hypothetically speaking that was to come to the attorney's attention, I think it would be the attorney's obligation to inform the Court and to absolutely say, "I cannot participate in this fraud [on the] court, and I seek to withdraw."
I would represent to the Court that there is an analogous situation that I take very seriously and think absolutely has basis in fact, and for that reason, I would ask the Court to grant permission to withdraw.
THE COURT: Mr. Sehon, any position the State has to the motion to withdraw?
MR. SEHON: The State has no objection to it under the [Canons] of Ethics. We feel that the Court has no choice but t[o] grant Mr. Hunt's motion.
THE COURT: Motion is granted. Mr. Hunt, if you will, send me a little order so we'll have something in the file. I'll give you the mailing address in a few minutes. All right.
The court allowed Mr. Hunt to withdraw from the cause. On November 30, the court filed its own "Order Granting Mistrial Upon Sua Sponte Motion." The court's order declared that, "based upon the record and the affidavit attached to this order, manifest necessity dictates that a mistrial be declared." The court found that three or more jurors were absolutely disqualified, having been approached by unauthorized persons on behalf of Plunkett; that the presence of the disqualified *353 persons on a jury were grounds for manifest necessity; that the court had discretion to determine whether the jurors' bias or prejudice was to such a degree as to disqualify them; and that the juror contact by the unauthorized person resulted in harm. The court further found that, giving due consideration to Plunkett's double jeopardy rights, there were no lesser alternatives to declaring a mistrial.
Attached to the order were two affidavits. The first was from Benny Bender, a deputy sheriff of Falls County. Bender's affidavit stated that on November 11 he had been escorting Plunkett by car to the Robertson County jail. Plunkett, to the best of Bender's recollection, had stated, "I don't know about tampering with a witness. I didn't even talk to the man. But I got it done." The second affidavit was from Tom Sehon, prosecuting attorney for Falls County. The affidavit stated in part:
On or about the 11th day of November, 1992, I received information from a credible source that three jurors previously selected for the trial herein have been contacted on behalf of Defendant R.D. Plunkett; that substantial amounts of money were paid to one or more of these jurors; and that a hung jury was guaranteed.
I have had many conversations with the credible source over a period of years, and the source has always been truthful and accurate in representations to me.
Unless the jury in this case were discharged, it would be impossible to investigate thoroughly the possibilities of corrupt conduct involving the jury. If the same jury remained impaneled, neither this office nor agents of this office would be able to make inquiries of any of the jurors themselves.
Following the mistrial, Plunkett was reindicted in Cause No. 6627, and the case was transferred to Robertson County. Plunkett filed a writ of habeas corpus asserting his double jeopardy claim. On January 31, 1994, the court held a hearing on the writ. Plunkett introduced as exhibits the indictments in Cause Nos. 6308 and 6627 from Falls County, the docket sheet in Cause No. 6308, the statement of facts from the November 11, 1992, hearing, the court's sua sponte order granting a mistrial, and the order granting Hunt's request to withdraw as counsel. The State did not introduce any evidence. Plunkett filed a brief in support of his position with the court after the hearing.
The court made Findings of Fact and Conclusions of Law:
FINDINGS OF FACT
Plunkett was indicted in Cause No. 6308 for theft of property over $750 but less than $20,000; he entered a plea of "not guilty"; a jury was impaneled and sworn on October 26, 1992, but released to return at the court's discretion; and the jury was called back on November 11 and again released subject to recall.
On November 11, 1992, Plunkett was arrested on a new charge of tampering with a witness; after a hearing and a substantial showing by the State that a crime had been committed, bail was denied and Plunkett was incarcerated; and after Plunkett had been taken to jail, his attorney, Russell Hunt, was allowed to withdraw as counsel.
The hearing on the motion to withdraw was in camera with only the judge, the prosecutor, and Hunt present; Plunkett was not present; Hunt stated hypothetically that the client had paid jurors to guarantee a hung jury; and the court found the hypothetical remarks were attributable to Plunkett.
On November 30, 1992, the court entered an "Order Granting Mistrial Upon Sua Sponte Motion" based on the record and affidavits having found manifest necessity; the jury was discharged; and Plunkett neither waived his presence nor consented to the order and was without counsel on that date.
On December 28, 1993, Plunkett was indicted in Cause No. 6627 for the exact same transaction and event that gave rise to the indictment in Cause No. 6308.
CONCLUSIONS OF LAW
Plunkett's actions, as related by Hunt, constituted a "sudden and overwhelming *354 emergency beyond the control of court and unforeseeable ... where, due to circumstances beyond control of parties it no longer [became] possible to conduct trial or to reach a fair result based on the evidence, i.e., manifest necessity." Black's Law Dictionary 963 (6th ed. 1990).
The affidavits of Bender and Sehon corroborated Hunt's statements that the jury was not impartial and that three jurors had already prejudiced the merits of the case.
The court had evidence before it that there was gross misconduct on the part of Plunkett in contacting jurors; the court had "multiple sources of suspicion" indicating that the ends of public justice would be defeated by the continued empanelment of the jury.
Manifest necessity for a mistrial permitting a second trial includes a tainted jury.
Retrial is not barred by double jeopardy because the mistrial was attributed to Plunkett.
Taking all circumstances into consideration, there was manifest necessity for declaring the mistrial, or the ends of public justice would otherwise be defeated.
There were no less drastic alternatives available other than declaring a mistrial.
MANIFEST NECESSITY
In his first two points, Plunkett argues that the court abused its discretion in declaring a sua sponte mistrial because the hypothetical statements of Hunt were not probative evidence. The court's order declaring a mistrial and its findings of fact indicate that the court took into consideration both Hunt's statements, which the court found were attributable to Plunkett, and the affidavits of Bender and Sehon.
Once jeopardy attaches, as it did for Plunkett when the jury was impaneled and sworn, he possessed a valued right to have his guilt or innocence determined before the first trier of fact. See Torres v. State, 614 S.W.2d 436, 441 (Tex.Crim.App. [Panel Op.] 1981). An exception to this rule exists when the defendant consents to a retrial or if retrial is mandated by some form of manifest necessity. Id.; Arizona v. Washington, 434 U.S. 497, 98 S. Ct. 824, 54 L. Ed. 2d 717 (1978). Plunkett did not consent to the retrial; thus, the propriety of a retrial depends on the finding of manifest necessity.
A court may declare a sua sponte mistrial "whenever, in [its] opinion, taking all circumstances into consideration, there is a manifest necessity for the act, or the ends of public justice would otherwise be defeated.... [T]he power ought to be used with the greatest caution, under urgent circumstances, and for very plain and obvious causes." United States v. Perez, 22 U.S. (9 Wheat.) 579, 6 L. Ed. 165 (1824); Torres, 614 S.W.2d at 442. Because a mistrial affects a constitutionally protected right, the reviewing court must determine that the court did not act irrationally or irresponsibly, and that the mistrial order reflects the exercise of sound discretion. Arizona, 434 U.S. at 515, 98 S.Ct. at 835. The exercise of sound discretion normally requires the court to consider less drastic alternatives to a mistrial and to give adequate consideration to the defendant's double jeopardy right before declaring a mistrial. Torres, 614 S.W.2d at 442; Harrison v. State, 788 S.W.2d 18, 22 (Tex.Crim. App.1990).
Manifest necessity is more easily answered in some cases than others. Arizona, 434 U.S. at 508-09, 98 S.Ct. at 831-32. If a mistrial is declared because of prejudicial impact on the jury due to some impropriety, the court's decision is entitled to great deference. Id. However, if some intentional misconduct of the prosecutor is the basis for the mistrial, the court's decision is subject to the strictest scrutiny. Id.; Ex parte Brown, 839 S.W.2d 164, 166 (Tex.App.-Fort Worth 1992, writ granted) (when mistrial declared due to unavailability of critical prosecution evidence, trial court action is reviewed with the strictest scrutiny).
Under Rule 1.05 of the Texas Disciplinary Rules of Professional Conduct:
(c) A lawyer may reveal confidential information:
*355 (4) When the lawyer has reason to believe it is necessary to do so in order to comply with a court order, a Texas Disciplinary Rule of Professional Conduct, or other law.
. . . . .
(7) When the lawyer has reason to believe it is necessary to do so in order to prevent the client from committing a criminal or fraudulent act.
(8) To the extent revelation reasonably appears necessary to rectify the consequences of a client's criminal or fraudulent act in the commission of which the lawyer's services had been used.
TEX. DISCIPLINARY R. PROF. CONDUCT 1.05(c)(4), (7), (8) (1991), reprinted in Tex. Gov't Code Ann., tit. 2, subtit. G app. (Vernon Supp.1994) (State Bar Rules art. X, § 9). The comments to Rule 1.05 state that a lawyer has professional discretion, based on reasonable appearances, to reveal both privileged and unprivileged information in order to prevent the client's commission of any criminal or fraudulent act. Id. cmt. 13. If the lawyer's services will be used by the client in materially furthering a course of criminal or fraudulent conduct, the lawyer must withdraw. Id. cmt. 21. Rule 3.03 states that a lawyer may not knowingly fail to disclose a fact to a tribunal when disclosure is necessary to avoid assisting a criminal or fraudulent act. Id. 3.03(a)(2) (1989).
Hunt was obligated to inform the court of his belief that the jury had been compromised by his client. The affidavits of Bender and Sehon provided some corroboration of Hunt's statements. The court had "multiple sources of suspicion" that the events leading up to the mistrial were attributable to Plunkett.
The basis of the mistrial was the alleged impropriety of Plunkett, not the State. Although the better course of action would have been to question the individual jurors to determine if they had, in fact, been contacted,[3] we defer to the court's decision to grant the mistrial. See Arizona, 434 U.S. at 514-16, 98 S.Ct. at 834-36. We cannot say that the court abused its discretion. We overrule points one and two.
ABSENCE OF DEFENDANT
In point three, Plunkett complains that the court abused its discretion in granting the mistrial when he was not present at the hearing to withdraw on which the mistrial was based. In point four, he complains that the court abused its discretion in hearing and granting Hunt's motion to withdraw while he was not present.
Plunkett cites article 33.03 of the Code of Criminal Procedure which states in part:
In all prosecutions for felonies, the defendant must be personally present at the trial ... provided, however, that in all cases, when the defendant voluntarily absents himself after pleading to the indictment or information, or after the jury has been selected when trial is before a jury, the trial may proceed to its conclusion.
TEX.CODE CRIM.PROC.ANN. art. 33.03 (Vernon 1989). Plunkett was not present at the in-chambers conference. Because he was entitled to be present, the court erred in proceeding without him. We then address the question of whether the error was "harmless."
The Court of Criminal Appeals has recently elaborated on the harmless-error review when a trial court has erred in conducting proceedings in the defendant's absence. Adanandus v. State, 866 S.W.2d 210 (Tex. Crim.App.1993). Prior to Rule 81(b)(2), when the presence of the defendant did not bear a "reasonably substantial relationship to the opportunity to defend," no harm was shown by his absence. Id. at 219 (citing Cooper v. State, 631 S.W.2d 508, 512 (Tex. Crim.App.1982); Mares v. State, 571 S.W.2d 303, 307 (Tex.Crim.App.1978)).
The "reasonably substantial relationship" rule seeks to determine the effect of the *356 defendant's absence on the advancement of his defense as opposed to Rule 81(b)(2), which seeks to determine the effect of the defendant's absence on the outcome of the guilt/innocence or punishment proceedings. Adanandus, 866 S.W.2d at 219-20. In light of the distinct focus of the two tests, the Court held in Adanandus that Rule 81(b)(2) does not supplant the reasonably substantial relationship test, but rather should be applied in addition thereto. Id. at 220.
The remedy under either test assuming the reviewing court finds harmis reversal. However, we are not reviewing a trial on the merits; rather, we are reviewing the court's denial of relief on Plunkett's writ of habeas corpus. Thus, Rule 81(b)(2) does not apply. Using the "reasonably substantial relationship" test, we cannot say that Plunkett's absence at the hearing on the motion to withdraw affected his opportunity to defend himself on the charges of theft by check. See Cooper, 631 S.W.2d at 512. We overrule points three and four.
We affirm the order denying relief.
NOTES
[1] Assertions of former jeopardy commonly arise on direct appeal, but may also form the basis of a writ of habeas corpus. Ex parte Rathmell, 717 S.W.2d 33, 34 (Tex.Crim.App.1986).
[2] A person accused of a felony who has two prior felony convictions or is accused of committing a felony while on bail for a prior felony for which he has been indicted may, after a hearing and upon evidence of substantial guilt, be denied bail pending trial.
[3] See, e.g., McMahon v. State, 582 S.W.2d 786, 793 (Tex.Crim.App.1978), cert. denied, 444 U.S. 919, 100 S. Ct. 238, 62 L. Ed. 2d 175 (1979) (juror who was offered five hundred dollars by anonymous telephone caller if she would "hang the jury" immediately contacted the court and evidentiary hearing was held).
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181 F.2d 5
DEAUVILLE ASSOCIATES, Inc.v.LOJOY CORPORATION et al.
No. 12862.
United States Court of Appeals Fifth Circuit.
April 14, 1950.Rehearing Denied June 5, 1950.
Samuel J. Kanner, Miami, Fla., Stuart W. Patton, Miami, Fla., Samuel H. Rubin, Detroit, Michigan, for appellant.
Jerome C. Hofmayer, Miami, Fla., Albert M. Lehrman, Miami Beach, Fla., Arthur S. Friedman, Miami, Fla., and Glynn O. Rasco, Miami Beach, Fla., for appellees.
Before HUTCHESON, Chief Judge, and WALLER and RUSSELL, Circuit Judges.
HUTCHESON, Chief Judge.
1
The suit attacks a title to property acquired under and resting on an order in cause No. 1148-M-Civil in the United States District Court for the Southern District of Florida, and has for its object the nullifying of that order.
2
Filed in the Circuit Court in and for Dade County, Florida, on April 13, 1949, nine days after the date fixed by this court1 for plaintiff's permitted intervention in the court below, it was brought to circumvent and nullify that determination by attempting to relitigate in the sate court matters which had been finally determined in the federal court.
3
On April 21, it was removed to the federal court on the ground that the suit was one arising out of an attack upon the validity of an order of sale issued out of the United States District Court for the Southern District of Florida, in No. 1148-M-Civil, and, therefore, was a civil action founded on a claim or right arising under the laws of the United States.
4
On April 29, defendants, appellees here, filed a motion to dismiss the action because the complaint fails to state a claim against the defendant, and the motion coming on for hearing, the same was, on May 9, 1949, granted, and the suit was dismissed with prejudice.
5
On May 11, 1949, plaintiff filed in the trial court: (1) its motion to remand; and (2) its motion to vacate the order dismissing plaintiff's complaint. It also filed an amended complaint, in which, still attacking the action of the court in No. 1148-M-Civil, as invalid, it prayed that the court enter a declaratory decree determining and defining the respective rights of the parties, plaintiff and defendants, and further determining that the defendants have no interest in and to the property, but the only interest therein is in the plaintiff.
6
On May 13, these motions, on notice of the hearing, coming on to be heard, the district court entered two orders. One was an order denying the motion to vacate the May 6, 1949, order which had dismissed its original complaint.
7
The other was an order: reciting the examination by the court of the original record and proceedings in the cause No. 1148-M-Civil, the decree in which was attacked on the complaint; determining, from that examination, that the plaintiff has no cause of action against the moving defendants; and adjudging, that the complaint is not capable of being amended, that plaintiff's rights, if any, are limited to its claim upon the proceeds of the receiver's sale in said cause No. 1148-M-Civil, and that the complaint be, and the same is hereby, dismissed with prejudice.
8
Plaintiff, appealing from the orders of May 6th and May 13th, 1949, is here urging: (1) that its suit was not based upon a federal question, and, therefore, it should have been remanded; and (2) that, if the federal court had jurisdiction, it was error to dismiss the bill of complaint because it set forth facts which, if true, stated a cause of action.
9
We cannot agree with either of these contentions. It is quite clear, upon the authorities,2 that the suit was founded upon, and raised, a federal question authorizing its removal to the federal court. It is further clear, that the complaint and the amended complaint present nothing more than an effort, to do by indirection in the state court what it had been denied the right to do by intervention in the federal court. This was to relitigate in the state court matters already determined in the federal court.
10
It is quite plain that this is just another of the attempts of appellant, persisted in almost to the point of, if not beyond, contumacy, to continue to litigate matters already conclusively determined against its predecessor in title and itself.3 The judgment appealed from is
11
Affirmed.
1
Deauville Associates, Inc. v. Eristavi-Tchitcherine, et al., 5 Cir., 173 F.2d 745
2
South Dakota Cent. Ry. Co. v. Continental & Commercial Trust & Savings Bank, 8 Cir., 255 F. 941, and cases cited
3
Deauville Associates, Inc. v. Eristavi-Tchitcherine, et al., 5 Circ., 173 F.2d 745, note 1, supra; Deauville Associates, Inc. v. Murrell, 5 Cir., 180 F.2d 275
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909 F. Supp. 1047 (1993)
John D. MOON, Plaintiff,
v.
Donald F. WHITE, III, and Unum Life Insurance Company of America, Defendants.
No. Civ. 1-92-0487 (jury).
United States District Court, E.D. Tennessee, at Chattanooga.
September 16, 1993.
*1048 *1049 Arthur P. Brock and William R. Dearling, Stophel & Stophel, Chattanooga, TN, for plaintiff.
Kenneth R. Starr, Chattanooga, TN; Elaine B. Winer, Rice, Kreitzer and Winer, P.C., Chattanooga, TN, for defendants.
MEMORANDUM OPINION
JORDAN, District Judge.
This civil action is before the court for consideration of the defendants' motions for summary judgment. The defendant UNUM Life Insurance Company of America (UNUM) filed its motion [doc. 6; supporting brief, doc. 7] on February 10, 1993. The plaintiff, relying on an extension of time granted by the court, responded [doc. 13] on April 19, 1993. As part of his response, the plaintiff moved for leave to amend his complaint.
The defendant Donald F. White, III (White) filed his motion for summary judgment [doc. 14; supporting brief, doc. 15] on April 28, 1993. The court allowed the plaintiff an extension of time, through May 31, 1993, within which to respond. The court heard the arguments of counsel on June 1, 1993, and took the motions under advisement in light of the fact that the plaintiff's response to the second motion for summary judgment was not due until just before the argument. Having reviewed the briefs and other materials submitted by the parties, including materials submitted after oral argument, the court is now prepared to rule on these motions.
The plaintiff John D. Moon (Moon) commenced this civil action in the Circuit Court for Hamilton County, Tennessee by filing his complaint on September 1, 1992. The defendant UNUM removed it to this court, both on the ground that it is governed at least in part by the Employee Retirement Income Security Act of 1974, as amended, 29 U.S.C. §§ 1001, et seq. (ERISA), see Metropolitan Life Insurance Company v. Taylor, 481 U.S. 58, 107 S. Ct. 1542, 95 L. Ed. 2d 55 (1987), and on the ground of diversity of citizenship. The plaintiff does not challenge this court's jurisdiction of the subject matter of this civil action, and concedes that his claim against UNUM is governed by ERISA.
In his complaint, Moon alleges that he became disabled from performing his work as a stockbroker on February 10, 1988, that the defendant White, a longtime friend, was an agent of the defendant UNUM, that the UNUM policy under which he claims disability insurance benefits in this litigation was in effect at the time of his disability, that he gave notice to White of his disability "[a]round May of 1988", and that White advised him that he did not have a disability insured by the UNUM policy or by another policy not in issue here. Moon says that White misinformed him, and that White neither submitted a claim on his behalf nor contacted either of the insurers for him.
As a result of these alleged errors and omissions, Moon says, he suffered emotional distress, and was forced into bankruptcy. He seeks damages against White on theories of negligence, negligent misrepresentation, professional negligence, fraud, and constructive fraud. In his original complaint, Moon seeks damages against UNUM on the theory that White was its agent when he committed his alleged errors and omissions, and also sues UNUM for breach of contract for its denial of his claim for disability insurance benefits.
Some of the facts shown by the record before the court are as follows. The plaintiff was working as a stockbroker employed by J.C. Bradford & Co. in February, 1988. The disability insurance in issue here was part of the employee welfare benefit plan sponsored by the plaintiff's employer. UNUM was the *1050 underwriter of this disability insurance until July 1, 1990.
On February 26, 1992[1], Moon, through counsel, applied to UNUM for disability insurance benefits. In his application, Moon stated that he had been unable to work because of his disability since February 10, 1988, and that he was first treated for his illness or injury on February 11, 1988. He stated that he had returned to work on a part-time basis on April 10, 1988. On the line provided to describe the first symptoms of his illness and the nature of it, Moon wrote, "Stress/alcoholism."
According to the employer's report of claim dated April 15, 1992, and filed in support of his claim, the plaintiff last worked for J.C. Bradford & Co. on February 2, 1989.
Attending physicians' statements submitted in support of the plaintiff's claim indicated that whether he was totally disabled was unknown according to one physician, that his disability continued to August, 1991 according to another, and that he recovered for the purposes of his occupation on August 20, 1989 according to a third. One physician stated February 11, 1988 as the date on which Moon became totally disabled. Another stated June 27, 1989 as such date.
As stated above, Moon submitted his application for disability insurance benefits, or at least the first part of it, on February 26, 1992. UNUM received this application on February 28, 1992. An authorization to obtain medical records and information accompanied this application. On April 20, 1992, UNUM received additional material in support of this application, including the employer's report of the claim dated April 15, 1992. On May 8, 1992, UNUM received the written statements from the attending physicians, which completed Moon's application for benefits.
UNUM denied Moon's claim for disability insurance benefits on the ground that it had not been submitted by the deadline set by the policy. The plaintiff requested and obtained review of this decision, but the insurer did not change its position. There is no contention in this case that Moon did not comply with the applicable plan procedures in submitting his claim, the issue of the timeliness of it aside. In response to the claim, UNUM stated clearly its denial, and the policy language on which it relied. The plaintiff does not contend that UNUM failed to comply with the requirements of 29 U.S.C. § 1133 in according him a right of review, and in advising him of the denial of his claim.
I
The policy which UNUM says applies in this case requires written notice of a disability claim within 30 days of the date disability starts, if possible, and if not possible, then "as soon as it is reasonably possible to do so." The policy requires a proof of claim "no later than 90 days after the end of the elimination period." The "elimination period" is 180 consecutive days of the insured's disability, beginning on the first day of disability.[2]
The policy's proof-of-claim section continues,
If it is not possible to give proof within these time limits, it must be given as soon as reasonably possible. But proof of claim may not be given later than one year after the time proof is otherwise required.
UNUM says that the last sentence of this provision in effect sets a deadline for submitting a proof of claim of 180 days plus 90 days plus one year after the onset of disability. Moon did not meet this deadline, even if the later date of onset found in one attending physician's statement, June 27, 1989, is used as the starting point.
This policy differentiates between notice of a claim and proof of claim. It allows UNUM a period of time after receipt of written notice of a claim within which to provide claim forms. However, even if the date of UNUM's receipt of its first notice of Moon's claim, February 28, 1992, is used as the date *1051 on which Moon made proof of his claim, this lawsuit did not come before the deadline of 180 days plus 90 days plus one year.
Moon opposes UNUM's motion for summary judgment on three grounds. He argues that the policy on which UNUM relies is not the applicable one, because the amendment of the policy by the substitution of a new policy effective January 1, 1988 did not, Moon argues, become effective in his case. Second, Moon argues that the only summary plan description (SPD) delivered to him does not warn that failure to submit a proof of claim within the time limit stated in the policy might lead to a loss of benefits.
Third, Moon argues that even if the version of the policy on which UNUM relies, the one which was substituted for the former one effective January 1, 1988, applies in this case, UNUM's construction of it is incorrect. Moon says that the correct reading of this policy is that the insured must submit a proof of claim as soon as reasonably possible, and that late submission of a proof of claim does not require denial of the claim. As an alternative argument, Moon says that the policy is ambiguous, and that the doctrine of construction of contra proferentem should be applied in this case in his favor.
Taking up the first issue first, the policy on which UNUM relies in moving for summary judgment includes an amendment which states that the policy attached to the amendment replaces the entire policy effective January 1, 1988. The amendment states also, "This change only applies to disabilities which start on or after the effective date." The actual date of the amendment, as opposed to its effective date, is February 19, 1988.
The policy replaced by this amendment, in the version on which Moon relies, contains, in a rider stated to be effective January 1, 1979, a provision which states,
Policy changes to the employer's plan of insurance will not apply to any insured employee who is absent from work because of a sickness or injury. In this event, the policy changes will become effective on the first day that the employee returns to full-time active work in an eligible class.
Concerning the issue of submitting proofs of claims, this policy states,
Written proof covering the occurrence, the character, and the extent of loss must be furnished to the Company within 90 days after the termination of the period for which the Company is liable. Failure to furnish such proof within the time required shall not invalidate nor reduce any claim if it was not reasonably possible to give proof within such time, provided such proof is furnished as soon as reasonably possible.
Viewing the evidence in a light most favorable to Moon for the purpose of considering this issue, he became disabled on February 10, 1988, and his disability continued to August, 1991, according to one of the attending physicians who submitted statements to UNUM. Assuming such a period of disability, Moon commenced his lawsuit within the maximum three-year period stated by the policy on which he relies. Therefore, if this were the applicable policy, an issue of fact concerning whether he made a claim "as soon as reasonably possible" would be presented. This is not an issue subject to summary adjudication.
In reply to Moon's response, however, UNUM shows that the version of the policy on which Moon relies was amended before the amendment effective January 1, 1988, and therefore before the onset of Moon's alleged disability. The long-term group disability insurance policy issued by UNUM to J.C. Bradford & Company and in effect on December 31, 1987 contains the following language:
Written proof concerning the occurrence, the character, and the extent of loss must be furnished to the Company within 90 days after the termination of the period for which the Company is liable. Failure to furnish such proof within the time required shall not invalidate nor reduce any claim if it was not reasonably possible to give proof within such time, provided such proof is furnished as soon as reasonably possible and in no event later than one year from the time proof is otherwise required.
As stated above, this language came into the policy before the onset of Moon's alleged *1052 disability, and so there is no reason why the policy language quoted further above concerning the delayed effectiveness of any policy change promulgated during an insured's absence from work due to sickness or injury would prevent it from being effective in this case. Similar language delaying the effectiveness of any policy change is in the only summary plan description (SPD) concerning the group disability insurance which Moon says he received. If the provision quoted immediately above is the applicable policy language, it required Moon to submit a proof of claim no later than 90 days plus one year after the termination of his disability. Accepting for the purpose of this argument the one attending physician's statement that Moon's disability lasted until August, 1991, he met this deadline.
This is even more true if one accepts the affidavit testimony of Mark W. Peterson, M.D., who says that Moon, his patient, suffered a disability directly related to alcoholism during the period that he treated Moon, which lasted through 1991. Moon himself testified at his deposition that he considers his disability to be ongoing even now.
The policy in effect on December 31, 1987 contains the same language as that quoted above concerning the delayed effectiveness of any policy change promulgated during an insured's absence from work due to sickness or injury. Therefore, if one accepts Moon's view of the facts, that he became disabled on February 10, 1988, while the policy in its form as of December 31, 1987 was in effect, there is an issue of fact whether Moon submitted a proof of claim as soon as reasonably possible. There is also an issue of fact concerning when Moon's disability (assuming its existence) ended, because if it ended more than 90 days plus one year before he submitted a proof of claim, then the language of the policy in effect on December 31, 1987 would bar this lawsuit.
The court cannot rule as a matter of law that the policy amendment effective January 1, 1988 provides the controlling language, because if Moon was absent from work due to sickness or injury beginning on February 10, 1988, before this policy amendment was signed on February 19, then the pre-existing policy language prevented him from becoming subject to the new policy language, including the proof-of-claim language on which UNUM relies, until "the first day that [Moon] return[ed] to full-time active work in an eligible class." The court recognizes, as UNUM argues, that ERISA does not mandate that benefits under employee welfare benefit plans, as opposed to pension benefit plans, be vested, Musto v. American General Corporation, 861 F.2d 897, 901 and n. 2 (6th Cir.1988), cert. denied, 490 U.S. 1020, 109 S. Ct. 1745, 104 L. Ed. 2d 182 (1989), and that therefore even retroactive amendments of group insurance policies are not prohibited merely because those policies form ERISA plans. That ERISA does not mandate vesting of rights under a welfare benefit plan does not mean that there cannot be an enforceable intention expressed in policy language to vest a right or to delay effectiveness of policy changes under certain conditions. See International Resources, Inc. v. New York Life Insurance Company, 950 F.2d 294, 301 (6th Cir.1991), cert. denied, 504 U.S. 973, 112 S. Ct. 2941, 119 L. Ed. 2d 565 (1992). What makes a difference in this case is the plain language of UNUM's policy which prevented any policy change from becoming effective with respect to an employee while he or she was away from work due to sickness or injury. Giving effect to a back-dated amendment like the one on which UNUM relies here would permit the insurer to nullify the protection granted by this plain language with respect to any employee away from work for one of the specified reasons for a period of time beginning after the effective date of the amendment and ending after the actual date of the amendment. The court's duty to enforce the plain language of the policy prohibits it from allowing any such nullification of this clearly expressed provision for the delayed effectiveness of policy changes.
If, however, Moon was not, on February 19, 1988, away from work due to sickness or injury within the meaning of the version of this policy in effect on December 31, 1987, then the version of the policy on which UNUM relies became effective in his case. This is an issue of fact. Furthermore, even *1053 if Moon was away from work on February 19, 1988 for one of the specified reasons, the policy language quoted above made the version of the policy on which UNUM relies applicable to him on the first day he returned to full-time active work for J.C. Bradford & Co. There is evidence on the basis of which a trier of fact might find that Moon did return to such work at his employer's Nashville office in April, 1988, after which he worked for the same employer in Asheville, North Carolina. If the trier of fact were so to find, it might also conclude that when the version of the policy on which UNUM relies became applicable to Moon, the time for submitting a proof of claim began to run, and ran out before Moon made UNUM aware of his claim. The court cannot make either this finding or this conclusion on the basis of the record before it.
Moon argues that a welfare benefit plan beneficiary has some vested right in the proof-of-claim provisions applicable at the time his or her disability commences, even if he or she has no vested right in the benefits provisions, but there is no authority to support any such rule. If Moon could not, for example, have prevented the termination of the UNUM group disability insurance policy at any time during his tenure with J.C. Bradford & Co., then he could not have prevented changes in the policy's proof-of-claim and other provisions, absent some right granted him by the policy itself.
The court is aware of the applicable law, under which review of a plan administrator's denial of benefits is de novo on the record which the administrator reviewed. See Perry v. Simplicity Engineering, a division of Lukens General Industries, Inc., 900 F.2d 963 (6th Cir.1990). The court's reading of a plan must be the most reasonable interpretation of it, and the court must read the plan in its entirety, so as not to construe any provision out of its context. See Aubrey v. Aetna Life Insurance Company, 886 F.2d 119 (6th Cir.1989). Applying these precepts, the court perceives several issues of fact not susceptible to summary adjudication, all of which arise out of the issue of which policy applies in this case. To summarize the discussion to this point, these issues are as follows:
(1) Did Moon become disabled within the meaning of any of the group disability insurance policies issued by UNUM to J.C. Bradford & Co.?
(2) If Moon did become disabled within the meaning of any of these policies, when did his disability commence?
(3) If Moon did become disabled within the meaning of any of these policies, when did his disability cease (if it did cease)?
(4) Was Moon away from work due to sickness or injury on February 19, 1988 (in which case the policy in effect on December 31, 1987 remained applicable to Moon's case until he returned to "full-time active work")?
(5) If Moon was away from work due to sickness or injury on February 19, 1988, when did he return to full-time active work for J.C. Bradford & Co., if he did (in which case the policy in effect as of January 1, 1988 became applicable to his case)?
(6) Regardless of whether the December 31, 1987 or the January 1, 1988 version of the policy applies in this case, did Moon give proof of his claim to UNUM "as soon as reasonably possible"?
(7) If the December 31, 1987 version of the policy applies in this case, did Moon give proof of his claim to UNUM within 90 days after his disability ceased (if it did cease)?
(8) If the January 1, 1988 version of the policy applies in this case, did Moon give proof of his claim to UNUM within 270 days plus one year after he became disabled?
With all of these issues unresolved, the court cannot grant UNUM's motion for summary judgment. The court can, however, state for the guidance of the parties in this litigation the conclusions which the court is able to reach as a matter of law on the basis of the record now before it. First, the court finds that the dispute in this case concerning which UNUM disability insurance policy applies is limited to the policies in effect on December 31, 1987 and on January 1, 1988. *1054 UNUM has shown conclusively that the earlier version of the policy relied on by Moon in his initial response to UNUM's motion for summary judgment was amended or replaced before the onset of Moon's claimed disability, no matter which date of onset of disability the court accepts.
Second, if Moon did not submit a timely proof of claim under the version of the policy applicable in his case, the court will be compelled to hold for UNUM. The court rejects Moon's argument that because neither policy states explicitly that failure to file a proof of claim by the stated deadline will bar the insured's claim, this is not the result which follows from missing the deadline.
The policy effective as of January 1, 1988 states that "proof of claim must be given to the Company," and that proof of claim may not be given after the stated deadline. The earlier policy states that proof of loss "must be furnished" by a certain deadline, and that failure to meet this deadline "shall not invalidate nor reduce any claim if it was not reasonably possible to give proof within such time," provided that proof of loss is submitted "as soon as reasonably possible and in no event later than one year from the time proof is otherwise required."
It is difficult to imagine any reading of these provisions other than UNUM's readings of them which would not render the stated outside time limitations superfluous or nonsensical. Under the more recent version of UNUM's policy, if the phrase "otherwise required" in "one year after the time proof is otherwise required" does not refer to the time limitation of "90 days after the end of the elimination period" in the immediately preceding subsection, as does the phrase "these time limits" in the immediately preceding sentence, then both the limitation of 90 days after the end of the elimination period and the outside limitation of one year later would be subordinate to the indeterminate limitation of "as soon as reasonably possible". A similar problem would be presented if the court were to accept Moon's construction of the earlier version of this policy.
Furthermore, the court cannot draw any inferences in Moon's favor from the fact that neither policy states in its termination-of-benefits provisions anything about whether failure to submit a timely proof of claim bars the claim. There is no logical reason why a provision stating the circumstances under which insurance benefits never become payable would be stated in the same place as a provision stating the circumstances under which benefits already payable will cease to be paid.
Terms in plans are construed without deferring to either party's interpretation and in accordance with established canons of contract interpretation. With the goal of giving effect to the parties' true intent, a court gives the terms of the Plan the common and ordinary meaning that a reasonable person in the position of an employee would give them. Stated another way, plans are to be construed according to their plain and ordinary meaning in the absence of an ambiguity. The plain meaning of written terms is not to be supplanted with contrary interpretations of the parties. Another basic canon is that a term is interpreted in harmony with other terms in the instrument. The meaning of a contract should not be determined from looking only at a single or isolated provision. Courts are not to rewrite or insert terms that impart an intent for the agreement that was never expressed at the time of execution.
Christie v. K-Mart Corporation Employees Retirement Pension Plan, 784 F. Supp. 796, 802-803 (D.Kan.1992) (citations omitted). The court concludes, applying these canons of construction, that a reasonable person in Moon's position would understand the proof-of-loss provisions in the two policies in issue to state outside time limits for submitting proofs of loss, and would understand these time limits, like statutes of limitations, to bar claims submitted too late. See Christie, supra (claimant barred by failure to submit her application for disability benefits and medical evidence of total and permanent disability within 12 months after the commencement of her alleged disability).
For this reason, this is not the case in which to consider whether this circuit *1055 should apply the rule of construction of contra proferentem to welfare benefit plans governed by ERISA. The rule is invoked only upon a finding of an ambiguity in the plan being construed, see generally Phillips v. Lincoln National Life Insurance Company, 978 F.2d 302 (7th Cir.1992), and neither policy's proof-of-loss provision is ambiguous.[3]
Moon's argument that because the SPD given to him said nothing about a claim being barred in the absence of a timely filing of a proof of claim, that is not the effect in this case, presents more difficulty. In the only SPD which Moon says that he received, all that is stated on the subject is, "We must receive proof that you are totally disabled...."
The SPD for the policy effective as of January 1, 1988, in contrast, summarizes this policy's proof-of-claim provisions accurately. It advises the insured that he or she must submit proof of his or her claim "no later than 90 days after the end of the elimination period," and as soon as reasonably possible if it is not possible to comply with this limitation period of the elimination period plus 90 days, "[b]ut you may not give proof later than one year after the time it is otherwise required." UNUM has shown that it delivered copies of this SPD to J.C. Bradford & Co. for distribution to the latter's employees in March, 1988, but Moon denies that he received a copy of this SPD.
As Moon points out, assuming that J.C. Bradford & Co. distributed this second SPD in March, 1988, this was after the beginning of what he characterizes as an absence from work due to sickness, in which case the effectiveness of the policy changes summarized in the SPD was delayed. Furthermore, in considering UNUM's motion for summary judgment, the court must resolve all reasonable doubts in Moon's favor. For these reasons, while the court will not, as Moon urges it to do, strike the evidence of the second SPD from the record, neither will the court resolve this issue on the basis of the second SPD.
The deficiency of the first SPD is that it says nothing about the proof-of-claim deadlines, not that it conflicts with the language of the policy. This distinguishes Edwards v. State Farm Mutual Automobile Insurance Company, 851 F.2d 134 (6th Cir.1988), on which Moon relies, because in Edwards, the court found the language in the SPD, which, contrary to the policy language, counted time on sick leave in calculating eligibility for retirement disability benefits, "obviously misleading." The rule in this circuit that in the event of a conflict between an ERISA plan and its SPD, the latter controls, does not help Moon, because there is no such conflict in this case, only silence.
Part of the requirement of 29 U.S.C. § 1022(a)(1) is that the SPD "be sufficiently accurate and comprehensive to reasonably apprise ... participants and beneficiaries of their rights and obligations under the plan." Moon has not cited any authority to establish that a SPD which is silent on the subject of proof-of-claim deadlines fails to satisfy the statute's comprehensiveness requirement. In the applicable regulations, 29 C.F.R. § 2520.102-2(a) repeats the statutory comprehensiveness requirement almost verbatim. In § 2520.102-3(1), the regulations require a SPD to include "a statement clearly identifying circumstances which may result in disqualification, ineligibility, or denial, loss, forfeiture or suspension of any benefits that a participant or beneficiary might otherwise reasonably expect the plan to provide" in light of the SPD's description of benefits. Section 2520.102-3(s) requires the SPD to include "[t]he procedures to be followed in presenting claims for benefits under the plan...."
However, as UNUM points out, the statutory duty to distribute a SPD which complies with the applicable law falls on the plan administrator, 29 U.S.C. § 1021(a)(1), which in a case such as this is generally the plan sponsor, i.e., the employer. See 29 U.S.C. § 1002(16). Compare VanderKlok v. Provident Life and Accident Insurance Co., Inc., 956 F.2d 610, 617-18 (6th Cir.1992) *1056 (where the plan identified the employer as the plan administrator, the insurer could not be held liable for a penalty under 29 U.S.C. § 1132(c), which concerns an administrator's duty to furnish requested information). While the two policies in issue require UNUM to deliver to J.C. Bradford & Co. certificates for the insured employees, which according to the earlier policy "shall state the insurance to which [each] employee is entitled and shall summarize the provisions of this policy principally affecting the employee," there is no evidence that J.C. Bradford & Co. and UNUM agreed that the latter would undertake the former's statutory plan administration responsibilities.
Furthermore, the general rule appears to be that a claimant is entitled to recover damages based on a technical violation of ERISA, such as a violation of these regulatory provisions, only on a showing of bad faith, active concealment of plan provisions, or misrepresentation which induced reliance on a flawed SPD. See Christie v. K-Mart Corporation Employees Retirement Pension Plan, supra, 784 F.Supp. at 805-806, and authorities cited therein. Moon has not made any such showing in response to UNUM's motion for summary judgment. There is no evidence that he relied on the SPD which he says that he received to plan when to submit proof of his claim.[4]
For the reasons stated, the court concludes that Moon cannot enforce any claimed right against UNUM in this civil action on the basis of the failure of any SPD given to him to advise him of the plan's proof-of-claim deadlines or of the effect of a failure to meet any such deadline. Moon argues that if the court accepts UNUM's position concerning notice and proof of claim, he nevertheless complied with the plan's requirements by giving notice to the defendant White of his disability. Having considered the evidence, however, including Moon's and White's deposition testimony, the court can conclude as a matter of law that White was not UNUM's agent, and that therefore whatever knowledge he had of Moon's condition and possible eligibility for disability insurance benefits cannot be imputed to UNUM.
The evidence is uncontroverted that White was not the agent or broker of record with respect to the UNUM group long-term disability insurance policy sold to J.C. Bradford & Co., and that he was never employed by or affiliated with the agent or broker of record. White and Moon knew one another from boyhood, and, when they were young men and White was selling insurance for a living, he approached Moon about making a presentation to Moon and others working at J.C. Bradford & Co. concerning some disability insurance product other than the UNUM policy. When Moon agreed to purchase what White was selling, White discovered that due to oversight or clerical error, Moon had never enrolled in the disability insurance plan offered through his employer. White thought it best that Moon apply for disability insurance under the UNUM policy at the same time as he was applying for the insurance sold by White, which appears to have provided supplemental disability coverage. To be helpful (and to consummate his own sale), White, while in Moon's office at J.C. Bradford & Co., obtained a form for applying for the UNUM insurance, and filled it out for Moon's signature while asking Moon for responses to the questions on the form.
Moon, who at the time was ignorant of insurance matters, was happy to let his friend take care of such details for him. White did not represent to Moon that he was an agent or broker for UNUM. Nor is Moon able to point to any evidence that UNUM made any representation which might be understood as having clothed White with some authority on its behalf. There is thus no evidence on the basis of which any trier of fact might find that notice to White was notice to UNUM for any purpose. UNUM being entitled to partial summary judgment on this point, it is unnecessary to address the issue whether Tennessee Code Annotated § 56-6-147, which concerns the agency of insurance agents for insurers and not for insureds, has been preempted by ERISA.
*1057 The final argument raised by Moon against UNUM which the court is able to address on the latter's motion for summary judgment is that UNUM cannot rely on either policy's proof-of-claim provisions to defeat Moon's claim because UNUM has in its claim practices recognized exceptions to its readings of these policies. Moon relies on a portion of its general claims procedure guidelines produced by UNUM in this litigation, in which the insurer, referring to its policy in effect as of January 1, 1988, states that claims received "beyond the end of the elimination period plus the previously referenced 15 months" are subject to denial, but that "exceptional circumstances" might occasionally "justify further inquiry and ultimate acceptance of a claim." The guideline calls for consideration of the amount of time by which the claimant missed the proof-of-claim deadline, the reason for missing the deadline, and the nature of the claimed disability. The guideline states as an example of a late-filed claim which might be accepted a claim filed in the sixteenth month after the end of the elimination period by a paralyzed individual.
Contrary to Moon's argument, this guideline establishes that UNUM's (and the court's) reading of the policy provisions concerning proofs of claim is correct, and is the reading which UNUM has followed with consistency. The guideline allowing relief from the deadline in "exceptional circumstances" would be unnecessary if the "otherwise required" language in the provisions concerning proofs of claim did not state, in the context of the other language in these provisions, a proof-of-claim deadline of 180 days (the elimination period) plus 90 days plus one year.
If instead Moon is arguing that this claims procedure guideline provides the basis for an estoppel in his favor, the court cannot accept this argument. Even assuming that the guideline, which was not an interpretation of the policy communicated to insureds, might provide the basis for an equitable estoppel, see Kane v. Aetna Life Insurance, 893 F.2d 1283 (11th Cir.), cert. denied, 498 U.S. 890, 111 S. Ct. 232, 112 L. Ed. 2d 192 (1990), Moon has not shown any reliance by him on a guideline unknown to him until after he commenced this lawsuit. Some evidence of such reliance would be required for an estoppel. See Van Gunten v. Central States, Southeast and Southwest Areas Pension Fund, 672 F.2d 586, 589 (6th Cir.1982).
To summarize, the court finds too many issues of fact outstanding to award summary judgment in favor of UNUM. The court will, however, if it finds the facts in UNUM's favor, enforce provisions of the applicable policy which require an insured to submit proof of his or her claim by a deadline, or to suffer a loss of the claim. Nothing in any summary plan description or claims procedure guideline justifies a different result. White was not UNUM's agent for any purpose, and there is no basis in this case for an estoppel which might allow Moon to surmount any proof-of-claim deadline which might otherwise work against him under the facts of this case.
II
In support of his motion for summary judgment, White relies on evidence that Moon was not disabled due to alcoholism or abuse of other drugs during the relevant time period. If Moon was not disabled because of abuse of alcohol or any other drug, White argument goes, then any representation by White concerning whether disability insurance benefits were available could not have been the cause of any loss suffered by Moon. White's other argument in support of his motion is that all of Moon's claims against him are time-barred.
With respect to the issue of proximate causation, Moon has offered in opposition to White's motion affidavit evidence that he did indeed suffer from a disability caused by alcoholism during the relevant time period. With such opposing evidence in the record, the court cannot award summary judgment in White's favor on this ground.
As for White's limitations argument, he says that Moon's claim for damages for alleged economic losses, i.e., the lost disability insurance benefits and financial losses stemming from his inability to recover such insurance benefits, which claim is based on theories of negligence and fraud, is controlled *1058 by the three-year limitation period stated in Tennessee Code Annotated § 28-3-105. White says that Moon's claim for damages for emotional distress is controlled by the one-year limitation period stated in T.C.A. § 28-3-104(a).
Moon does not dispute that these are the applicable statutes of limitations. He does argue, however, that his cause of action against White accrued not when they last discussed the issue of disability insurance benefits, in June, 1988, but much later, when he discovered or reasonably should have discovered his cause of action against White. Moon says that this raises an issue of fact which is not subject to summary adjudication.
White argues that there is no tolling of either limitation period in this case, because fraudulent concealment cannot toll the period with respect to a claim based on a theory of negligence, and because, with respect to Moon's claim based on a theory of fraud, the misrepresentation which constitutes fraudulent concealment must concern the existence of a cause of action, as opposed to the underlying assertion on which the claim of fraud is based, e.g., the unavailability of disability insurance benefits in an alcoholic's case. In response to White's motion, Moon states that he is not relying on a theory of fraudulent concealment, but instead is arguing that the accrual of his cause of action was delayed under the discovery rule. Moon also relies on T.C.A. § 28-1-106, which tolls a limitation period during a period of disability if the plaintiff is "at the time the cause of action accrued ... of unsound mind."
White argues that there exists no reported case in which a Tennessee appellate court has applied the discovery rule concerning when a cause of action accrues to a claim involving purely property or economic damage or loss. While it is true that the facts in Prescott v. Adams, 627 S.W.2d 134 (Tenn.Ct. App.1981), permission to appeal denied, id. (Tenn.1982), revealed an issue of fact concerning whether there had been fraudulent concealment, the court of appeals did not state its holding in such limited terms: "It seems clear, then, that in a suit for damages under T.C.A. § 28-3-105, the cause of action accrues at the time the injury occurs, or when it is discovered, or when in the exercise of reasonable care and diligence the injury should have been discovered." Id. at 138. Furthermore, in Hill v. A.O. Smith Corporation, 801 F.2d 217 (6th Cir.1986), a decision which this court is bound to follow, the federal court of appeals, following, inter alia, Prescott v. Adams, supra, applied the discovery rule to determine when a claim for damages on a civil conspiracy theory under Tennessee law accrued.
On the basis of these authorities, the court must conclude that when Moon's cause of action against White accrued is an issue of fact which is not subject to decision on a motion for summary judgment. Furthermore, the court agrees with Moon that T.C.A. § 28-1-106 creates an issue of fact concerning when this cause of action accrued. This statute provides in pertinent part for tolling the accrual of a cause of action "[i]f the person entitled to commence [the] action is, at the time the cause of action accrued, ... of unsound mind."
White concedes that there is a paucity of case law defining "unsound mind" for the purpose of this statute, and that there is no Tennessee decision which holds that one suffering from alcoholism is of unsound mind for this purpose. White points to the facts that during the relevant time period, Moon worked again for J.C. Bradford & Co. as a broker, and was a petitioner in bankruptcy. There is in the record before the court, however, affidavit evidence that in the opinion of at least one physician who treated Moon during the relevant time period, through 1991, Moon was disabled due to alcohol addiction [see doc. 22].
Nothing in this statute limits the court to a construction of "unsound mind" which would accept only an adjudication of insanity or of disability of a nature which would justify the appointment of a guardian or conservator. In Porter v. Porter, 22 Tenn. 586, 589 (1842), in applying the predecessor statute, the Tennessee Supreme Court referred to it as a statute in favor of persons non compos mentis, and applied it in favor of an individual who due to "extreme old age and mental imbecility," was "incapable of attending to *1059 any business, or of taking care of herself." While the facts of Moon's employment and of his status as a party to bankruptcy proceedings are relevant to the issue of the soundness of his mind during the relevant time period, they are not determinative in the face of conflicting evidence. In this case, as in Foster v. Allbright, 631 S.W.2d 147, 150 (Tenn.Ct.App.), permission to appeal denied, id. (Tenn.1982) (citation omitted), "there [being] conflicting evidence on the issue of the competency of plaintiff on the date the cause of action accrued, there [is] a genuine issue as to a material fact, and summary judgment [is] not in order."
III
For the reasons stated, the court will grant in part and deny in part the motion for summary judgment of UNUM Life Insurance Company, leaving for trial the issues as narrowed by the court's rulings stated in this memorandum opinion. The court will deny the motion for summary judgment of the defendant Donald F. White, III.
In light of these rulings, the court will grant the plaintiff's motion for leave to amend his complaint.
NOTES
[1] This is the date of Moon's attorneys' letter to UNUM.
[2] The policy also provides, "If disability stops during the elimination period for any 14 (or less) days, then the disability will be treated as continuous. But days that the insured is not disabled will not count toward the elimination period."
[3] "The issue of whether a contract is ambiguous is one of law for the court to decide." Christie v. K-Mart Corporation Employees Retirement Pension Plan, supra, 784 F.Supp. at 803 (citation omitted).
[4] At his deposition, Moon testified that he received a handbook when he went to work for J.C. Bradford & Co., that he does not know whether the handbook concerned the UNUM insurance policy, and that he probably did not ever read the handbook.
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227 N.J. Super. 29 (1988)
545 A.2d 786
WAWA FOOD MARKET, A CORPORATION OF THE STATE OF PENNSYLVANIA, PLAINTIFF-RESPONDENT,
v.
PLANNING BOARD OF THE BOROUGH OF SHIP BOTTOM, DEFENDANT-APPELLANT.
Superior Court of New Jersey, Appellate Division.
Argued March 7, 1988.
Decided July 15, 1988.
*31 Before Judges J.H. COLEMAN and HAVEY.
Philip G. Pagano, argued the cause for appellant (Magee & Graham, attorneys; Granville D. Magee of counsel; Philip G. Pagano on the brief).
Janine G. Bauer argued the cause for respondent (Szaferman, Lakind, Blumstein, Watter & Blader, attorneys; Arnold C. Lakind of counsel; Janine G. Bauer on the brief).
The opinion of the court was delivered by HAVEY, J.A.D.
The central issue raised by this appeal is whether a planning board may relax, as part of a site plan review, the off-street parking space and driveway width requirements contained in the municipality's zoning ordinance. Defendant Planning Board of the Borough of Ship Bottom (Board) treated plaintiff Wawa Food Market, Inc.'s (Wawa) request to deviate from the requirements as an application for a hardship variance under N.J.S.A. 40:55D-70 c(1), and denied the application. The trial judge reversed, concluding that the requirements were design standards, and that the Board had the power to grant "exceptions" from the requirements of the ordinance as part of site plan review under N.J.S.A. 40:55D-51 b. The judge determined Wawa was entitled to the "exceptions" and ordered that site plan approval be granted. We reverse and remand for further proceedings. We conclude that off-street parking space and driveway width requirements, contained in the zoning ordinance, cannot be waived or relaxed by the planning board as part of site plan review. Relief from the provisions of a zoning ordinance must be sought under the variance procedure. We therefore remand to permit Wawa to apply for a c(2) variance *32 under N.J.S.A. 40:55D-70 c(2). On remand, the Board shall also reconsider Wawa's site plan application.
Wawa is the lessee of property located at the intersection of 12th Street and Long Beach Boulevard in Ship Bottom. The property is 80' X 160' and contains an existing brick structure, now vacant, previously occupied by New Jersey Bell Telephone Company (N.J. Bell). The property is zoned commercial. Wawa applied to the Board for site plan approval and related variances to use the existing structure as a convenience store, a permitted use. It requested variances from the rear yard, side yard and distance between buildings requirements of the zoning ordinance. It also sought "variances or design waivers" from the zoning ordinance's off-street parking and driveway width requirements.
Under the zoning ordinance, one parking space for each 200 square feet of commercial use of floor area is required. Floor area used exclusively for storage is not included in the calculation. Further, one parking space for each employee must be provided. Wawa's site plan provided 2,000 square feet of floor area for the convenience store. However, approximately 450 square feet are to be utilized for a platform area exclusively by employees for food preparation. Also, Wawa expected to have three employees working at the store. Under the ordinance, 2,000 square feet of floor area and employment of three employees requires 13 parking spaces. Wawa's site plan provided for 11 spaces. The plan also provided for a 25-foot wide driveway, whereas the ordinance requires a 20-foot maximum width.
Wawa's project engineer testified that only 11 parking spaces should be required since the 450-square foot platform area would not be accessible to the public. He also stated that if the driveway was only 20 feet wide, delivery trucks would have difficulty negotiating turns on the site. Wawa's real estate manager testified that he anticipated the store would serve approximately 1,200 customers per day and the site would *33 receive 10 to 13 delivery trucks per week, including large tractor-trailers. Wawa's traffic expert testified that in his opinion 11 parking spaces were sufficient for the area and that a 25-foot driveway was necessary to permit trucks to enter and exit the site.
Six members of the public appeared in opposition to Wawa's application. Their concerns included increased traffic problems generated by the convenience store, the potential that the store will become a "hang out" for local juveniles, and inadequate parking spaces.
The Board treated Wawa's request to deviate from the parking space and driveway width requirements as an application for a "hardship" variance under N.J.S.A. 40:55D-70 c(1). By written resolution the Board denied both the site plan and variance applications, finding Wawa had
... not met the requirements for parking and the aforementioned rear and side yard setbacks and minimum distances; that the operation of this type of food market business will be detrimental to the public good and welfare of the residents, as on-site and off-site traffic will substantially increase, as well as unsafe ingress and egress of the site, as well as the detrimental effect to the immediate surrounding residences which will occur from the existence of a business operating at 24 hours and other considerations as set forth in the record and the Board further finds that the applicant has failed to show any appropriate hardship or set forth any testimony of a hardship to meet the positive criteria of the [Municipal] Land Use Act....
Wawa filed the present action in lieu of prerogative writs challenging the Board's denial. The trial judge reversed the Board and ordered approval of the site plan, concluding that no variance was required from the set-back requirements since the N.J. Bell building was a legal nonconforming structure. He also concluded the Board erroneously treated Wawa's request for relief from the parking space and driveway width requirements as a variance application. The judge held that the requirements were design standards and therefore waivable under N.J.S.A. 40:55D-51 b, which permits planning boards to grant "exceptions" from site plan regulations as part of site plan review. The judge determined Wawa was entitled to the "exceptions" and directed the Board to grant site plan approval.
*34 In our view the trial judge erred in concluding that the requirements were waivable as part of site plan review. Under N.J.S.A. 40:55D-51 b, a planning board, when acting on a site plan application:
... shall have the power to grant such exceptions from the requirements for site plan approval as may be reasonable and within the general purpose and intent of the provisions for site plan review and approval of an ordinance adopted pursuant to this article, if the literal enforcement of one or more provisions of the ordinance is impracticable or will exact undue hardship because of peculiar conditions pertaining to the land in question. [Emphasis added].
The "article" referred to in the statute is Article 6 of the Municipal Land Use Law, regulating subdivision and site plan review and approval. Therefore, by the express terms of N.J.S.A. 40:55D-51 b, on a site plan review the planning board may only grant "exceptions" from the standards set forth in the subdivision and site plan ordinances. See Cranmer v. Township of Evesham, 162 N.J. Super. 204, 210 (Ch. Div. 1978). The statute does not provide for "exceptions" from the provisions of the zoning ordinance. Here, both the parking space and driveway width requirements were contained in Ship Bottom's zoning ordinance. Thus, under the literal reading of the statute, the Board was not empowered to waive the requirements as part of site plan review.
The trial judge was of the view he was not bound by the fact that the governing body had placed the requirements in the zoning rather than site plan ordinance. We do not agree. The governing body has the exclusive local power to regulate land use, subject to the strictures imposed by enabling legislation. N.J. Const. (1947), Art. IV, § VI, par. 2; N.J.S.A. 40:55D-62; PRB Enterprises, Inc. v. South Brunswick, 105 N.J. 1, 7 (1987); Lusardi v. Curtis Point Prop. Owners Ass'n., 86 N.J. 217, 226 (1981). Once the governing body exercises its zoning power and places standards in its zoning ordinance, its action enjoys a "strong presumption in favor of validity which continues unless overcome by clear showing that it is arbitrary and unreasonable." Zilinsky v. Zoning Bd. of Adj. of Verona, 105 *35 N.J. 363, 368 (1987), quoting Davidow v. Bd. of Adj. Tp. of South Brunswick, 123 N.J. Super. 162, 166 (App.Div. 1973).
One of the purposes of zoning is to lessen vehicular congestion in the streets and highways. N.J.S.A. 40:55D-2 h. A necessary corollary to that purpose is that off-street parking requirements also advance the legitimate municipal interest in decreasing traffic congestion since vehicles, which would otherwise park on the streets, are required to park on the proposed site. See Zilinsky, supra, 105 N.J. at 369; see also 5 Yokley, Zoning Law and Practice (Michie 4th ed. 1980), § 33-1 at 299. Therefore, it was entirely reasonable for Ship Bottom to have placed the off-street parking requirement in its zoning ordinance, rather than site plan ordinance. This conclusion is further supported by reference to N.J.S.A. 40:55D-65 d which provides that a zoning ordinance may "[e]stablish ... standards for the provision of adequate physical improvements including ... off-street parking. ..." [Emphasis added]. For essentially the same reasons, we cannot conclude that the governing body was arbitrary or unreasonable in also placing the driveway width requirement in the zoning ordinance. Inherent in the governing body's legislative power to regulate the nature and extent of land use, off-street parking and loading areas, access roads and roadways, circulation facilities and the free flow of traffic, is its power to establish as a zoning standard on-site driveway requirements. See N.J.S.A. 40:55D-2 h and 40:55D-65 d; see also Zilinsky, supra, 105 N.J. at 368.
We recognize that under N.J.S.A. 40:55D-41 site plan ordinances must include standards for "[s]afe and efficient vehicular and pedestrian circulation, parking and loading[.]" The statute facially suggests that parking space and driveway standards should be incorporated within the site plan ordinance, thereby permitting waiver of the standards as part of site plan review under N.J.S.A. 40:55D-51 b.
*36 However, we read N.J.S.A. 40:55D-41 as requiring site plan ordinances to provide for standards as to the layout and configuration of proposed parking and vehicular circulation, but not as intending to vest in the planning board discretionary powers over matters the governing body has determined involve zoning considerations. Once off-street parking and driveway requirements become part of the zoning scheme, the planning board is bound by them in its site plan review. This is made clear by N.J.S.A. 40:55D-38 d, which requires site plan ordinances to contain provisions ensuring that a "site plan shall conform to the applicable provisions of the zoning ordinance...."
Relief from the standards contained in a zoning ordinance may be sought only through the variance procedure pursuant to N.J.S.A. 40:55D-70, since a "variance" is the only procedure by which one may seek "permission to depart from the literal requirements of a zoning ordinance...." N.J.S.A. 40:55D-70. To conclude otherwise would permit the planning board to "change zoning requirements in a wholesale manner, commandeering power over variances vested in the board of adjustment...." Cranmer, supra, 162 N.J. Super. at 210. Sheston Oil v. Bor. of Avalon Planning Bd., 214 N.J. Super. 593, 598 (App.Div.), certif. den. 107 N.J. 134 (1987), which held that the variance procedure was not available to seek relief from curb-cut and access-driveway requirements, is clearly distinguishable since there the standards were contained in the site plan ordinance and thus waivable as part of the site plan review pursuant to N.J.S.A. 40:55D-51 b. The question of whether the requirements should have been included in the zoning rather than site plan ordinance was not raised in Sheston.
We conclude the board properly treated Wawa's application regarding the parking space and driveway requirements as an application for a variance under N.J.S.A. 40:55D-70 c. Applying the traditional "hardship" criteria under N.J.S.A. 40:55D-70 c, see Nash v. Board of Adjustment of Morris Tp., 96 N.J. 97, *37 102 (1984); Chirichello v. Zoning Board of Adj. Monmouth Beach, 78 N.J. 544, 552 (1979), we cannot say that denial of the variance was arbitrary, capricious or unreasonable. See Charlie Brown of Chatham v. Board of Adjustment, 202 N.J. Super. 312, 321 (App.Div. 1985).
Wawa raises the argument, for the first time on appeal, that the parking lot is part of the existing N.J. Bell "structure" and thus is a protected legal nonconforming structure. The N.J. Bell facility was constructed prior to adoption of the present ordinance which requires the pertinent off-street parking requirements. N.J.S.A. 40:55D-68 provides that any nonconforming structure existing at the time of the passage of an ordinance may be continued upon the lot without the necessity of a variance.[1] Wawa argues that since the parking lot is a nonconforming structure, it is required to provide no more parking spaces than were provided for by N.J. Bell.
Arguably, a parking lot might be deemed a "structure," considering the liberal definition of that term contained in N.J.S.A. 40:55D-7. See Cox, New Jersey Zoning and Land Use Administration (1988) § 6-3.4 at 73. However, unlike the existing building, which establishes a "footprint" on the character of the property precluding compliance with the set-back requirements, the number of parking spaces is computed based on floor area and the number of employees. Thus, the number of parking spaces required is dictated by the extent and manner by which the facility is used, not the preexisting nature of the structure. Distinguishable is the case where property has been used for a particular business purpose since prior to the passage of an off-street parking ordinance. In such a circumstance, where the nature and intensity of the business remains the same, continued use of the property without off-street *38 parking is protected as a nonconforming use. See Dresner v. Carrara, 69 N.J. 237, 240 (1976).
In any event, we are not prepared to address the nonconforming structure issue on the record before us. The transcript of the Board hearing is devoid of any description of N.J. Bell's use. We do not know whether the use was "commercial," nor do we know to what extent the "floor area" of the structure was utilized. The building may well have been used chiefly for clerical purposes. We are also unable to determine to what extent the building was used for "storage." Any relief predicated on the pre-existing nonconforming nature of the "structure" must be addressed first to the Board, which is particularly well suited to resolve the issue. See Bell v. Tp. of Bass River, 196 N.J. Super. 304, 313-314 (Law Div. 1984).
Finally, we reject Wawa's argument that the 450 square foot platform area, from which the public will be excluded, should not be considered in computing the number of parking space required. The ordinance expressly states that only floor area "used exclusively for storage" is excluded from the calculation. Courts must refrain from usurping the function of the legislative body when its intent is clearly expressed. Kim Real Estate Ent. v. North Bergen Tp., 215 N.J. Super. 255, 257 (App.Div. 1987). Applying the unambiguous language of the ordinance, the Board correctly included the platform area in its calculation of square footage for parking.
Although we hold that the Board was correct in treating Wawa's application as a variance rather than a design waiver request, we are satisfied that Wawa should be permitted to apply for relief under N.J.S.A. 40:55D-70 c(2), commonly known as the "c(2)" variance procedure. No such application was made to the Board.
Subparagraph c(2) permits relief from the zoning ordinance where the purposes of the Municipal Land Use Law (MLUL) will be advanced by granting the variance, the benefits of the *39 deviation would substantially outweigh any detriment and the variance may be granted without substantial detriment to the public good or impairment of the intent and purpose of the zoning plan and ordinance. See Richard Kaufmann, et al. v. Planning Board for the Township of Warren, et al., 110 N.J. 551, 561 (1988). The intent of the Legislature in adopting c(2) was to broaden the "c" variance by permitting relief without a showing of "hardship" as required by N.J.S.A. 40:55D-70 c(1), "for a very limited class of nonhardship variances in which `the purpose of [the MLUL] would be advanced by a deviation' from zoning standards and with the benefits substantially outweighing any corresponding detriment." Kaufmann, supra, at 561; see also Trinity Baptist v. Louis Scott Hold., 219 N.J. Super. 490, 500 (App.Div. 1987).
In our view, the c(2) procedure is particularly well suited where, as here, site plan and planning aspects are dominant and the zoning variance issue is relatively incidental. See Cox, supra, § 6-3.3 at 65-68. It may well be that if the proofs are considered in the context of paragraph c(2), Wawa will be entitled to relief. However, as our Supreme Court in Kaufmann recently pronounced:
... no c(2) variance should be granted when merely the purposes of the owner will be advanced. The grant of approval must actually benefit the community in that it represents a better zoning alternative for the property. The focus of a c(2) case, then, will be not on the characteristics of the land that, in light of current zoning requirements, create a "hardship" on the owner warranting a relaxation of standards, but on the characteristics of the land that present an opportunity for improved zoning and planning that will benefit the community. [Kaufmann, supra, 110 N.J. at 563; emphasis in original].
Since no application under paragraph c(2) was made, and because the Board made no findings under that paragraph, we, of course, cannot and should not consider whether relief should be granted.
On remand to the Board for consideration of Wawa's application under paragraph c(2), the Board shall also reconsider the *40 site plan application. In remanding, it is necessary we express our unsettling feeling that the denial of Wawa's site plan may have been predicated, at least in part, on the overall nature of the proposed use. In denying the application, the Board expressed concern that "this type of food market business ... will be detrimental to the public good," and that "the existence of a business operating at 24 hours" will affect adjoining property values. Individual members feared the store will become a teenage "hang out." Such concerns must be remedied by an amendment to the zoning ordinance rather than the denial of the site plan. See PRB Enterprises, Inc. supra, 105 N.J. at 9. While site plan review gives the Board wide discretion to assure compliance with the objectives and requirements of the site plan ordinance, "it was never intended to include the legislative or quasi-judicial power to prohibit a permitted use." Id. at 7, quoting Lionel's Appliance Center, Inc. v. Citta, 156 N.J. Super. 257, 264 (Law Div. 1978).
Further, Wawa's operation as a food market per se cannot be a basis for denying a c(2) variance. The Board must: (1) consider whether the specific variances sought will advance the purposes of the MLUL; (2) weigh the benefits of the variance against "any detriment," and (3) consider whether they can be granted without substantial detriment to the public good or impairment of the intent and purpose of the zoning ordinance. In that regard, while we agree with the Board that the 450 square foot platform area does not constitute "storage area" for the purpose of computing parking spaces, the public's exclusion from the area may be a relevant factor in deciding, under a c(2) variance, whether the parking space deviation can be deemed a "detriment."
We reverse and remand to the Law Division with instructions that the matter be remanded to the Board for further proceedings in accordance with this opinion.
NOTES
[1] As we understand the Board's position on appeal, it does not challenge the trial judge's conclusion that no set-back variances from the side and rear yard requirements were required because of the existing nonconforming structure. See N.J.S.A. 40:55D-68.
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909 F. Supp. 63 (1995)
Sandra L. DI TOMMASO, Plaintiff,
v.
The BOEING COMPANY, et al., Defendants.
Civ. No. 95-1327(DRD).
United States District Court, D. Puerto Rico.
November 29, 1995.
Richard Schell-Asad, Francisco M. Troncoso-Cortes, Troncoso & Becker, San Juan, PR, for Sandra L. Di-Tommaso.
A.J. Bennazar-Zequeira, Gonzalez, Bennazar, Garcia-Arregui & Fullana, Hato Rey, PR, for Boeing Company.
Luis R. Mellado-Gonzalez, San Juan, PR, for Weber Aircraft Special Products Division of Walter Kidde & Co., Inc.
*64 ORDER
DOMINGUEZ, District Judge.
Pending before the Court is defendant's, the Boeing Company (hereinafter referred to as "Boeing"), Motion to Dismiss (Docket No. 6) and Plaintiff's Opposition thereto (Docket No. 15).
A stewardess of American Airlines filed the instant complaint for an accident she suffered when the jumpseat of the plane she was serving collapsed on landing in Puerto Rico. She has sued the manufacturer of the plane and the jumpseat.
I. Time Bar Allegations
The manufacturer of the plane, defendant Boeing, firstly, alleges that the complaint is time barred, because the accident object of the case occurred on October 3, 1993 and the complaint was not filed until March 16, 1995. Although the statutory period is one year, Article 1868 of the Civil Code, P.R.Laws Ann.Tit. 31 Sec. 5298(2), the period has been tolled by disposition of the Puerto Rico Workmen Compensation Act, 11 LPRA Sec. 32 because plaintiff received medical treatment until March 17, 1994, Decision of the State Insurance Administrator dated March 17, 1994. Pursuant to Tropigas de P.R. v. Tribunal Superior, 102 D.P.R. 630 (1974) the one-year period is tolled until the worker receives the final decision from the State Insurance Fund and commences to run anew on a said date. Since Plaintiff filed on March 16, 1995, the complaint is not time barred. (See Marginal Order of August 10, 1995 at Docket No. 6).[1]
II. In Personam Jurisdiction
Defendant Boeing also alleged lack of in personam jurisdiction because although "Boeing" manufactured and delivered the plane in Seattle Washington and has its business in the State of Washington, "Boeing had no part in the decision or the act to fly the aircraft to Puerto Rico or put it in the streams of commerce."
Boeing further avers that it is not registered to do business in Puerto Rico, nor has distributors, dealers, sales agents or employees in Puerto Rico.
Pursuant to the complaint it is alleged that the "jumpseat" used by Plaintiff stewardess in an American Airlines airplane manufactured by Boeing collapsed during landing causing damages to plaintiff.
In deciding an in personam jurisdiction challenge the Court must use Puerto Rico's Long Arm Statute. Pizarro v. Hoteles Concorde Int., 907 F.2d 1256, 1258 (1st Cir.1990). Under Puerto Rico's Long Arm Statute the Court shall have jurisdiction over a non-domiciled person if said person "transacted business in Puerto Rico." The phrase "transacted business in Puerto Rico" has been interpreted to mean "the chain of a business transaction deliberately designed, or conscientiously used by the non resident to obtain benefit in our jurisdiction." Siderúrgica v. Thyssen Steel Caribbean, 114 D.P.R. 548 (1983). This District Court in Borschow Hosp. & Medical Supplies v. Burdick-Siemens Corp., 143 F.R.D. 472, 482 (D.P.R. 1992), interpreting and citing Ind. Siderúrgica v. Thyssen Steel Caribbean, supra, followed the norm established by the Supreme Court in Siderúrgica, supra.
In World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 100 S. Ct. 559, 62 L. Ed. 2d 490 (1980) the Court expressly held that local forum states are authorized pursuant to the due process clause to "assert" personal jurisdiction over a corporation that delivers its products into the stream of commerce with the expectation that they will be purchased by companies in the forum state. Following the lead of World-Wide Volkswagen Corp. v. Woodson, supra, in Swank v. Carmona, 603 F. Supp. 1092 (D.P.R.1985) the District Court of Puerto Rico authorized in personam jurisdiction over a defendant that delivers products into the stream of commerce with the expectation that they will be purchased by consumers in the forum state.
*65 Boeing in manufacturing a plane, parts thereof, or spare parts, and selling the same to American Airlines cannot avoid being subject to the jurisdiction of Puerto Rico, a place where American Airlines regularly flies. Boeing placed the airplane in the stream of commerce, although Boeing denies this fact, by selling the same to American Airlines; it is not illogical that consumers or workers in Puerto Rico where American Airlines regularly flies, the forum state, be potentially adversely affected by the plane placed on the stream of commerce by Boeing.
The forum state does not exceed its powers under the due process clause if it asserts personal jurisdiction over a corporation that delivers its products into the stream of commerce with the expectation that they will be purchased by consumers in the forum state.
World-Wide Volkswagen Corp. v. Woodson, supra.
The Court is of the opinion that Boeing has sufficient minimum contacts with the forum of Puerto Rico complying with the criteria of A.H. Thomas v. Superior Court, 98 PRR 864, 870 (1978). Three criteria have to be met.
(1) The defendant must perform an act or a transaction with the forum. It is not necessary that the activity be physically within the forum.[2]
(2) The cause of action must be one which arises out of, or results from, the activities of a defendant within the forum.[3]
(3) The assumption of jurisdiction must be consonant with the due process tenet of "fair play" and substantial justice.[4]
All three criteria are met under the facts narrated above.
The Court, thus holds that Boeing has "transacted business" in Puerto Rico. Ind. Siderúrgica v. Thyssen Steel Caribbean, supra. The Motion to Dismiss based upon in personam lack of jurisdiction is DENIED.
IT IS SO ORDERED.
NOTES
[1] The decision of the Administrator of the State Insurance Fund is not final until thirty days after the notification of the decision, that is until April 16, 1994; hence, the year commences to run after said date, Tropigas de P.R., supra p. 638.
[2] The transaction was the placing in the stream of commerce of a plane manufactured by Boeing, sold to American Airlines, an airline that regularly flies to Puerto Rico.
[3] The cause of action is related to the manufacture of the plane and the landing of said airplane in Puerto Rico.
[4] International Shoe Co. v. Washington, 326 U.S. 310, 316, 66 S. Ct. 154, 158, 90 L. Ed. 95 (1945); World Wide Volkswagen Corp. v. Woodson, supra at p. 291, 100 S.Ct. at p. 564. Boeing should have known that American Airlines, the purchaser of the product, regularly flies to Puerto Rico and in fact has a hub in this forum.
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25 B.R. 162 (1982)
In re Wayne G. BUCHANAN, a/k/a Asbery Buchanan, and Carolyn G. Buchanan, Debtors.
In re Don A. MORTON, Debtor.
Leon STEINBERG, Trustee and Douglas Q. Wickham, Trustee, Plaintiffs,
v.
Don MORTON; Michael Max Talley and wife, Eleanor Jean Talley; William Roger Phillips and wife, Gwendolyn Phillips; David F. Hill; Robert N. Navratil, Trustee, Defendants.
Bankruptcy Nos. 3-82-00037, 3-82-00489, Adv. No. 3-82-0128.
United States Bankruptcy Court, E.D. Tennessee.
November 29, 1982.
*163 Goddard & Gamble, Carl P. McDonald, Maryville, Tenn., for plaintiffs.
Perry P. Paine, Jr., Maryville, Tenn., for defendants Michael Max Talley, Eleanor Jean Talley, William Roger Phillips, and Gwendolyn Phillips.
Mack Garner, Maryville, Tenn., for defendant Don Morton.
Horace M. Brown, Maryville, Tenn., for debtors Wayne G. Buchanan and Carolyn Buchanan.
Bird, Navratil & Bird, Frank B. Bird, Maryville, Tenn., for defendant Robert N. Navratil, Trustee.
Meares & Meares, P.C., Rom Meares, Maryville, Tenn., for defendant David F. Hill.
Poore, Cox, Baker, Ray & Byrne, W. Edward Parrott, Knoxville, Tenn., for Meares & Meares.
MEMORANDUM AND ORDER ON MOTION TO DISQUALIFY
CLIVE W. BARE, Bankruptcy Judge.
At issue is the propriety of the continued representation by Meares & Meares of David F. Hill, a/k/a Dave F. Hill, a party defendant, in this adversary proceeding commenced by Leon Steinberg, trustee for the bankruptcy estate of Wayne G. Buchanan and his wife, Carolyn Buchanan, to avoid a previous nonjudicial foreclosure sale. The trustee in bankruptcy for the Buchanans (Mr. Steinberg), the trustee in bankruptcy for Don A. Morton (Mr. Wickham), and the debtors contend that the law firm of Meares & Meares should be disqualified from representing Dave F. Hill, or any other defendant in this case, due to conflicts of interest. Rom Meares denies there is any conflict of interest or danger of disclosure of confidence. It is Meares' contention that the issues in the instant proceeding are unrelated to those involved in any previous representation by Meares & Meares of any party with a stake in the outcome of this case.
I
Leon Steinberg was appointed as trustee when Wayne G. Buchanan and Carolyn Buchanan filed their joint chapter 7 bankruptcy petition on January 12, 1982. Mr. Steinberg, as trustee, filed a complaint on February 23, 1982, seeking the avoidance of the September 10, 1979, nonjudicial foreclosure sale of the "Simple Simon" property.[1] It is alleged that this foreclosure sale is a preferential transfer, voidable under 11 U.S.C.A. § 547(b) (1979), and a fraudulent conveyance, avoidable under both 11 U.S.C.A. § 548 (1979) and Tenn.Code Ann. § 64-301 (1976).[2]
The Simple Simon property was previously owned jointly by the Buchanans and Don Morton, their former business partner. Morton, who was named as a party defendant in this adversary proceeding, has also filed a chapter 7 bankruptcy petition. His voluntary petition was filed on April 7, 1982.
By an Order of this court dated June 18, 1982, Douglas Q. Wickham, trustee for Morton's bankruptcy estate, replaced Morton as a party in this adversary proceeding. Since the avoidance of the challenged sale would mutually benefit the creditors of Morton and the Buchanans, Wickham has been realigned as a party-plaintiff.[3]
*164 II
A narration of the underlying facts, predicated upon affidavits, depositions, and exhibits, is necessary. In 1971, Michael Max Talley and his wife, Eleanor Jean Talley, and their business partners, William Roger Phillips and Gwendolyn Phillips, also husband and wife, purchased a 2.8-acre tract from J. Leon Teffeteller, R.H. Hitch, and their wives. A deed of trust note in the amount of $124,000.00 and a first deed of trust were executed in consideration of the conveyance of the 2.8-acre tract. Five years later, in 1976, the same 2.8-acre tract was conveyed to Charles J. Talley[4] and Judith T. Talley, his wife. The consideration was the assumption of the unpaid first mortgage indebtedness and the execution of a $15,000.00 note, with payments thereon to commence one month after the last payment was due on the $124,000.00 note. This $15,000.00 note was secured by a second deed of trust against the tract.
A portion of the 2.8-acre tract upon which the Simple Simon Restaurant was situated was conveyed by Charles J. Talley and Judith T. Talley to Wayne Buchanan, Carolyn Buchanan, and Don Morton (debtors) by warranty deed, dated October 11, 1977, and received for recordation on October 26, 1977. The debtors executed their promissory note in the amount of $142,000.00 and a third deed of trust against the Simple Simon property in favor of their grantors.
After the policy which the debtors had initially obtained to insure the Simple Simon Restaurant was cancelled, either Wayne Buchanan or Don Morton, or both, contacted Gerald C. Russell, an attorney in Maryville, about procuring insurance. Coverage effective January 18, 1979, in the amounts of $150,000.00 on the building and $50,000.00 on its contents was obtained on behalf of the debtors and their mortgagees from Travelers Insurance Company. The Simple Simon Restaurant was destroyed by fire on January 21, 1979.
According to his affidavit, Wayne Buchanan accompanied Don Morton on a visit to the law offices of Meares & Meares during the latter part of January or early part of February of 1979. Arrangements were made for Rom Meares to represent the debtors for the purpose of collecting the insurance proceeds purportedly due from Travelers on account of the fire loss. Rom Meares agreed to represent the debtors and became privy to the events leading up to the debtors' purchase of the Simple Simon Restaurant, their financial liabilities, and their acquisition of insurance.
On May 8, 1979, a declaratory judgment action was commenced by Travelers in the Circuit Court of Blount County. Travelers alleged that the debtors made material misrepresentations in connection with their application for insurance coverage for the Simple Simon Restaurant and requested that the policy be voided. On June 29, 1979, Rom Meares represented the debtors at the discovery depositions of Gerald C. Russell, who had been instrumental in obtaining the insurance policy for the debtors from Travelers, and Barbara Grubb, an underwriter for Travelers. On August 16, 1979, in response to the complaint of Travelers, an answer and counter-complaint was filed on behalf of the debtors by Rom Meares. On November 21, 1979, Meares filed a motion to withdraw from his representation of the debtors. An order permitting his withdrawal from the case was entered on December 11, 1979.
Meares notified Wayne Buchanan by letter of his intention to terminate his representation of the debtors. Quoting from Buchanan's affidavit:
After receiving the letter Mr. Morton and myself visited Mr. Meares and he advised that he did not see any money in the case, therefore he was withdrawing. There was never any other discussion by Mr. Meares as to why he could not continue representing myself and Don A. Morton.
After Meares' withdrawal, the debtors retained the law firm of Crawford & Crawford to represent them in the declaratory action. The counter-complaint of the debtors *165 was sustained, and judgment was entered against Travelers on August 18, 1980. Ultimately, Travelers paid in excess of $200,000.00 into the registry of the Blount County Circuit Court in satisfaction of its liability. All of the liens against the Simple Simon property were satisfied through the disbursement of the insurance proceeds distributed pursuant to an Order of the circuit court dated October 28, 1980. Additionally, the debtors and their attorney in the declaratory action, Duncan V. Crawford, received a check dated October 28, 1980, in the amount of $34,817.53.
On or about June 6, 1979, less than one month after the commencement of the declaratory action by Travelers, Frank B. Bird, the law partner of Robert N. Navratil, trustee of the second deed of trust against the Simple Simon property, prepared the following notation across the bottom of the $15,000.00 deed of trust note executed by Charles J. Talley and Judith T. Talley and held by Michael Max Talley, William Roger Phillips, and their wives:
TO: CHARLES J. AND JUDITH T.
TALLEY
June 6, 1979
Pursuant to the terms thereof, we exercise our option to declare the entire balance due and payable at once.
Michael Max Talley
Eleanor Jean Talley
William Roger Phillips
Gwendolyn Phillips
By: /s/ Michael Max Talley
/s/ Wm. R. Phillips
Received a copy of the above this the 6 day of June, 1979, and agree that the grounds for the exercise of this option exists.
/s/ Charles J. Talley
Charles J. Talley, for self & wife
Bird cannot remember whether the acknowledgment that grounds existed for the acceleration was signed by Charles J. Talley in his presence.
Bird had been contacted about foreclosing the second deed of trust against the Simple Simon property because the Talleys and Phillipses, as first mortgagors, were making payments to the first mortgagees due to the default of the second and third mortgagors.[5] Furthermore, property taxes were unpaid, tax liens had been filed, and the existence of insurance coverage for the fire loss was being contested.
The Simple Simon property was sold subject to the outstanding first mortgage at the trustee's September 10, 1979, foreclosure sale to Michael Max Talley and William Roger Phillips and their wives on the basis of a bid of $1.00.[6] The unpaid balance on the first mortgage was approximately $95,000.00 and the fair market value of the property sold was between $60,000.00 to $70,000.00 at or about the time of the trustee's sale, according to the July 20, 1979, affidavit of Michael Max Talley and William Roger Phillips. However, the September 10, 1979, Trustee's Deed conveying the property was not recorded until more than one year later, on October 30, 1980, two days after the circuit court Order which provided for the disbursement of the insurance proceeds. The delay in recordation is unexplained in the present record.[7]
The following excerpt from the April 29, 1982, deposition of Michael Max Talley explains the involvement of the defendant Dave F. Hill in this case:
*166 Q Mr. Paine has provided to us, Mr. Talley, a copy of a Warranty Deed, which I show you, and ask if you have seen that before and what can you tell us about it? (The Warranty Deed is a deed of the Simple Simon property in favor of the debtors. It is dated October ____, 1980.)
A Well, immediately after the settlementafter the decision by the Judge on the part of the insurance, we received our settlement. And then Mr. Buchanan and Mr. Morton came to me and said that they felt like that we had been overcompensated and that they deserved something out of it and they had a buyer for the piece of property and I talked to my partner about it and we decided that possibly they were right and we told them what we would take and if they could make some money in it, fine. And we made this deed back for the property, back to them, and they gave us a cashier's check, which you have.
Q Now, when you say "they" as you know, Mr. Paine has also given us a copy of a cashier's check drawn on the Bank of Maryville
A Uh-huh.
Q in the amount of $22,500.00, payable to you, with the remitter being Hill Brothers Construction Company
A Right.
Q Is that what you and Mr. Phillips shared in connection with the deed which you have in front of you?
A Yes sir, sure is. They had some kind of agreement with by "they" Mr. Buchanan and Mr. Morton had some kind of agreement worked out with Mr. Hill he gave us this check it was a cashier's check, it was same as money, I didn't question it, I took it and we gave him the deed I was glad to get out of it.
Q What was your disbursement among you and Mr. Phillips?
A Down the middle.
Q So half of that $22,500.00 check was for you and your wife and half was for Mr. Phillips and his wife?
A Yes.
Q Was there some reason, Mr. Talley, why you'll just didn't prepare a Warranty Deed from yourself and Mr. Phillips straight to Mr. Hill, since he was the purchaser?
A Yes, sir.
Q What was the reason?
A We didn't trust these guys.
Q Including Mr. Hill?
A Mr. Hill we trust.
Q Then why didn't you give the deed to Mr. Hill?
A Because we wanted Mr. Buchanan and Mr. Morton to get the property back that's what they wanted and that's what we wanted.
Q I am not trying to argue with you, but I don't understand why it was important that it get back in the hands of Mr. Morton and
A Because we are sitting here today you understand that Mr. McDonald.
Q So the conveyance then to Mr. Morton and Mr. and Mrs. Buchanan was to put the property back in their hands for the sale to Mr. Hill?
A Yes, sir.
The deed from the Talleys and Phillipses to the debtors was acknowledged on October 31, 1980, by R.J. Talley, the father of Michael Max Talley. According to Michael Max Talley, this deed was executed at his father's apartment, which is just down the street from Hill's car lot. It is Talley's deposition testimony that he delivered the deed to Buchanan, Morton and Hill.
Talley's testimony relative to the delivery of the deed is inconsistent with the contentions of the defendant Dave F. Hill. In his Answer and his Response to Plaintiffs' Requests for Admission, Hill alleges that the deed from the Talleys and Phillipses to the debtors was delivered to his son, David T. Hill, and that the deed was never delivered *167 to either Buchanan or Morton. Hill also alleges that the deed in favor of the debtors, which has not been recorded, is in the possession of Rom Meares.
There is a second unrecorded warranty deed to the Simple Simon property dated October ____, 1980, and acknowledged on October 30, 1980, by David T. Hill. The grantors in this second deed are the debtors; Dave F. Hill is the grantee. Defendant Hill alleges that this second deed was also delivered to his son, David T. Hill, by Michael Talley, on either October 30th or 31st.
III
Another series of event unrelated to those outlined in Section II but apposite in resolving the present issue must also be examined. A final decree of divorce dissolving the marriage of the debtor Don Morton and Carma Leeta Morton was filed in Blount County on October 31, 1977. The debtor Morton was required to pay child support by the terms of the decree. A motion requesting that the debtor Morton be ordered to show cause why he should not be found in contempt for failure to make the support payments was filed on February 20, 1982, in Blount County Circuit Court, on behalf of Carma Leeta Morton by Martha Meares, of Meares & Meares. Since Martha Meares and Mack Garner, the attorney for the debtor Morton, thought that they had reached an amicable settlement, the motion was not presented in court. However, the parties subsequently found that there was some misunderstanding when an attempt was made to reduce their "agreement" to writing. Martha Meares suggested that the matter of the motion be held in abeyance until such time as it was determined whether Don Morton would be entitled to any proceeds in the instant adversary proceeding.
According to the affidavit of D. Kelly Thomas, Jr., an attorney in Maryville, Martha Meares telephonically contacted him about representing Carma Leeta Morton during the latter part of July of 1982. Martha Meares informed Thomas that she did not intend to continue to represent Carma Leeta Morton because the issue of conflict of interest had been raised by Carl P. McDonald, attorney for the plaintiff trustees in the instant case. An order whereby D. Kelly Thomas, Jr., was substituted for Martha Meares as counsel for Carma Leeta Morton was filed on August 30, 1982, in Blount County Circuit Court.
IV
Motions to disqualify the firm of Meares & Meares from representing any defendant in this adversary proceeding have been filed by the plaintiff trustees and by the debtors. It is contended that a conflict of interest exists between the present representation of Dave F. Hill by Rom Meares and Meares' former representation of Wayne Buchanan and Don Morton in the Travelers' declaratory judgment action involving the Simple Simon property. The movants assert that a substantial relationship exists between the subject matter in the instant proceeding and the facts in the Travelers' declaratory action. Meares & Meares dispute that assertion.
The movants also allege a second conflict of interest due to the former representation of Carma Leeta Morton by Martha Meares. Carma Leeta Morton is a creditor of the debtor Don Morton, and it is in her best interest that the plaintiff trustees succeed in their attempt to set aside the challenged foreclosure sale. On the other hand, it is in the best interest of Dave F. Hill, a remote grantee of the property which is the subject of the challenged sale, that the plaintiffs fail. An affidavit of Carma Leeta Morton has been filed in which she affirmed that she understands that Meares & Meares presently represents defendant Hill in this case, that she might benefit financially if the plaintiff trustees are successful, that her former husband and the trustees object to the representation of defendant Hill by the firm of Meares & Meares, and that she has no objection or reservation to the representation of Dave F. Hill by Meares & Meares.
*168 The affidavits of Rom Meares and Perry P. Paine, Jr., among others, have also been filed in response to the motions to disqualify. Rom Meares affirms that the firm of Meares & Meares represented Carma Leeta Morton at the time his firm was retained to represent Mr. Hill but that he was unaware that Martha Meares represented Carma Leeta Morton when the firm was employed by Mr. Hill. He further affirms that the issues in the instant case, in his opinion, are not so related to the issues presented in either his former representation of the debtors in the Travelers' declaratory action or the former representation of Carma Leeta Morton by Martha Meares, his sister, "as to give rise to any conflict of interest or possible disclosure of confidences and/or secrets of a former client."
Perry P. Paine, Jr., is the attorney for defendants Michael Max Talley and William Roger Phillips and their wives. Mr. Paine states that, in his legal opinion, no issue is raised by his clients in the instant case which in any way relates to the issues involved in the previous Travelers' declaratory action and that Meares & Meares had no involvement in the challenged foreclosure proceedings instituted by his clients.[8]
Finally, the affidavit of Dave F. Hill has also been filed. Mr. Hill avers that he is aware that Meares & Meares formerly represented the debtors and Carma Leeta Morton in two unrelated cases and that he desires to be represented by Rom Meares despite the requests that Meares & Meares be disqualified in this case.
V
The competing interests associated with a motion to disqualify counsel require balancing the right of a party to be represented by counsel of his choice and the right of an attorney to be gainfully employed in the representation of his client against the professional and the public interest in maintaining a standard devoid of even the appearance of any impropriety. If there be any doubt in ruling on a motion to disqualify, the doubt should be resolved in favor of disqualification. Westinghouse Elec. Corp. v. Gulf Oil Corp., 588 F.2d 221, 225 (7th Cir.1978).
Previous Representation of the Debtors by Rom Meares
As a general rule, an attorney who has acted on behalf of a client may not thereafter undertake to represent another client whose interests are adverse to those of the former client. 52 ALR2d 1243, 1247. One purpose of this general rule is to safeguard the confidential relationship between an attorney and his client. The client must enjoy the freedom of confiding in his attorney without fear of the subsequent adverse use or disclosure of confidential information. The attorney generally must not undertake representation of a party whose interest is adverse to the interest of the former client because there is a potential for a division of loyalty and an appearance of impropriety. The attorney may either consciously or unconsciously jeopardize the interest of the former client to the advantage of the second client by utilizing information communicated in confidence by the former client. Such misuse of confidential information is clearly unethical. Canon 4 of the Code of Professional Responsibility states: "A lawyer should preserve the confidences and secrets of a client."[9]
A motion to disqualify should be sustained if a substantial relationship exists between the matters involved in the former representation of a client and those in a pending suit in which the interest of a second client is adverse to that of the first client. Wilson P. Abraham Constr. Co. v. *169 Armco Steel Corp., 559 F.2d 250, 252 (5th Cir.1977); Emle Indus., Inc. v. Patentex, Inc., 478 F.2d 562, 570 (2d Cir.1973); T.C. & Theatre Corp. v. Warner Bros. Pictures, 113 F. Supp. 265, 268 (S.D.N.Y.1953). Establishment of such a "substantial relationship" is ordinarily sufficient to require disqualification. General Elec. Co. v. Valeron Corp., 608 F.2d 265 (6th Cir.1979), cert. denied, 445 U.S. 930, 100 S. Ct. 1318, 63 L. Ed. 2d 763 (1980); Melamed v. ITT Continental Baking Co., 592 F.2d 290, 292 (6th Cir.1979). Circuit Judge Edwards noted in Melamed that the simple appearance of a conflict would require disqualification in most situations.[10]
Meares & Meares contends that the substantial relationship standard involves a three-step analysis formulated by the Seventh Circuit Court of Appeals:
Initially, the trial judge must make a factual reconstruction of the scope of the prior legal representation. Second, it must be determined whether it is reasonable to infer that the confidential information allegedly given would have been given to a lawyer representing a client in those matters. Finally, it must be determined whether that information is relevant to the issues raised in the litigation pending against the former client.
Westinghouse Elec. Corp. v. Gulf Oil Corp., 588 F.2d 221, 225 (7th Cir.1978).
Rom Meares undertook to represent the debtors in either January or February of 1979 to enforce an insurance binder and recover proceeds allegedly due from Travelers for the fire loss of the Simple Simon Restaurant. At or about the same time that Meares attended discovery depositions and prepared a pleading on behalf of the debtors, Robert N. Navratil was preparing to enforce a second deed of trust against the Simple Simon property on behalf of the Talleys and the Phillipses. Despite the fact that the debtors were the owners of the Simple Simon property, there is no evidence in the record that the debtors had knowledge of the scheduled September 10, 1979, trustee's sale or that any action was taken by Meares & Meares on their behalf in connection with that sale.[11] The present record indicates that the activity of Meares & Meares on behalf of the debtors was limited to conferences with them and the attendance of deposition proceedings and preparation of a pleading on their behalf by Rom Meares. Meares continued to be the attorney of record for the debtors in the declaratory action commenced by Travelers until December 11, 1979.
The debtors fully cooperated with Rom Meares during the period of their representation by Meares & Meares. They fully disclosed their financial interests and the facts connected with their ownership of the Simple Simon property, according to the uncontroverted affidavit of Wayne Buchanan.
Although the debtors apparently confided in Rom Meares, it is not apparent whether the information they furnished about the Simple Simon property is relevant to the issues in this action to set aside the September 10, 1979, trustee's nonjudicial foreclosure sale. Some relevance may exist by virtue of the fact that the identical property is involved. However, beyond that, any determination of relevance or irrelevance by the court would necessarily be based upon conjecture since the court is not privy *170 to the particular information given to Meares & Meares by the debtors.
Previous Representation of Carma Leeta Morton by Martha Meares
Carma Leeta Morton was a client of Meares & Meares when Dave F. Hill, whose interest is adverse to that of Carma Leeta Morton, contacted Rom Meares about representing his interest in this adversary proceeding. Rom Meares has affirmed that he was unaware that his firm represented Carma Leeta Morton when he was retained as counsel by Mr. Hill. There is no evidence in the record to suggest that Meares & Meares withdrew from its representation of Carma Leeta Morton for any reason other than the challenge of the trustee in bankruptcy based on an alleged conflict of interest between the interest of Carma Leeta Morton and that of the defendant Hill.[12]
The Code of Professional Responsibility DR 5-105Refusing to Accept or Continue Employment if the Interests of Another Client May Impair the Independent Professional Judgment of the Lawyer recites in part:
(A) A lawyer shall decline proffered employment if the exercise of his independent professional judgment in behalf of a client will be or is likely to be adversely affected by the acceptance of the proffered employment, or if it would be likely to involve him in representing differing interests, except to the extent permitted under DR 5-105(C).
(B) A lawyer shall not continue multiple employment if the exercise of his independent professional judgment in behalf of a client will be or is likely to be adversely affected by his representation of another client, or if it would be likely to involve him in representing differing interests, except to the extent permitted under DR 5-105(C).
(C) In the situations covered by DR 5-105(A) and (B), a lawyer may represent multiple clients if it is obvious that he can adequately represent the interest of each and if each consents to the representation after full disclosure of the possible effect of such representation on the exercise of his independent professional judgment on behalf of each.
It was incumbent upon Meares & Meares to withdraw from either its representation of Carma Leeta Morton or Dave F. Hill since the interests of those clients are diametrically opposed to one another in the instant proceeding. It is obvious that it is ethically impermissible for two members of the same law firm to represent parties with diametrically opposed interests.
Furthermore, it appears that Meares & Meares should have declined the proffer of employment by Mr. Hill, since his interest was opposed to the interest of an existing client on the date of the proffered employment. However, Rom Meares, being unaware of the representation of Carma Leeta Morton by his partner, Martha Meares, agreed to represent Mr. Hill in this controversy.
VI
Canon 9 of the Code of Professional Responsibility provides that: "A lawyer should avoid even the appearance of professional impropriety." It is the conclusion of the court that permitting Meares & Meares to continue to participate as counsel in this proceeding would undermine the confidence of the public in the judicial system. The cumulative effect of the former representation of the debtors by Rom Meares, simultaneous with the occurrence of the challenged sale, and the withdrawal from representation of Carma Leeta Morton by Martha Meares and the present representation of Dave F. Hill, whose interest is opposed to the interests of the debtors and Carma Leeta Morton, results in an appearance of impropriety.
The information furnished by the debtors to Rom Meares in 1979, during the existence of the attorney-client relationship, *171 may have little, if any, relevance in the instant litigation. However, the court must not allow an attorney to represent a party with an interest adverse to that of a former client in a case involving both parties if the attorney may have acquired information which might either consciously or unconsciously be used to the disadvantage of the former clients. See Emle Indus., Inc. v. Patentex, Inc., 478 F.2d 562, 571 (2d Cir. 1973).
It is the duty of this court to disqualify the firm of Meares & Meares from participation as counsel in this case.
IT IS SO ORDERED.
This Memorandum constitutes findings of fact and conclusions of law pursuant to Bankruptcy Rule 752.
NOTES
[1] The Simple Simon property is a 1.2-acre tract in Blount County upon which the Simple Simon Restaurant was open for business until it was destroyed by fire on January 21, 1979.
[2] This statute has been recodified as Tenn.Code Ann. § 66-3-101 (1982).
[3] The Order of June 18, 1982, also provided for the modification of the automatic stay to allow the trustee for the Buchanan's estate to proceed to judgment on a claim of the Buchanans against Morton. However, the Order provided for a severance of that claim from the trial of the claim against the remaining defendants.
[4] Charles J. Talley and Michael Max Talley are brothers.
[5] Michael Talley's wife, Eleanor Talley, is the daughter of R.H. Hitch and his widow, Kathleen Hitch. According to the deposition of William Roger Phillips, R.H. Hitch was ill at the time of the default on payments by the second mortgagors, Charles and Judith Talley, and the third mortgagors, the debtors. The first mortgagors did not want to risk upsetting R.H. Hitch so they made the payments due on the $124,000.00 note and accelerated the payment due on the $15,000.00 note which they held to enforce the second deed of trust, as opposed to defaulting themselves and requiring acceleration by the first mortgagees.
[6] Notice of the trustee's sale was forwarded by certified mail to the Buchanans and Morton at their last known addresses. The notices were both returned unclaimed.
[7] Michael Max Talley, when asked about the delay in recordation during a deposition proceeding, replied that he had no idea why the delay had occurred.
[8] Mr. Paine filed a complaint on March 5, 1980, on behalf of Michael Max Talley, Eleanor Jean Talley, William Roger Phillips, and Gwendolyn Phillips against Travelers Insurance Company averring their status as mortgagees of the Simple Simon property, the destruction thereof by fire, and the liability of Travelers based on a binder for a fire insurance policy. This matter was consolidated for trial with the Travelers' declaratory judgment action.
[9] The Code of Professional Responsibility as adopted by the Tennessee Supreme Court is codified as Rule 8 of the court.
[10] Melamed involved a motion to disqualify a law firm chosen to represent the plaintiff trustee in bankruptcy for Laub Baking Co. in an antitrust action against Continental Baking Co., a major competitor of Laub. Continental was disturbed by the fact that the law firm for the plaintiff represented two other major competitors of Laub. Continental contended that the two other major competitors would have been named as co-defendants in the antitrust action were it not for the existence of an attorney-client relationship between those two competitors and the law firm representing the plaintiff. Laub and the trustee in bankruptcy both agreed that retention of the challenged law firm was in their best interest. The court of appeals concluded that disqualification was unnecessary since the only party whose interest might be adversely affected was Laub. Melamed, 592 F.2d at 293.
[11] As previously noted in footnote 6, notices of the trustee's sale to enforce the second deed of trust were sent by certified mail to the debtors and were returned as unclaimed.
[12] The record indicates that Carma Leeta Morton consented to substitution of counsel in her cause of action against her former husband. There is no evidence suggesting that the withdrawal by Martha Meares created any hardship for Carma Leeta Morton.
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883 S.W.2d 293 (1994)
Bennie GREEN, Appellant,
v.
UNAUTHORIZED PRACTICE OF LAW COMMITTEE, Appellee.
No. 05-93-00996-CV.
Court of Appeals of Texas, Dallas.
July 21, 1994.
*294 James R. Hilliard, Dallas, for appellant.
*295 Mark A. Ticer, Dallas, for appellee.
Before KINKEADE, ROSENBERG and MORRIS, JJ.
OPINION
ROSENBERG, Justice.
Bennie Green appeals a summary judgment rendered in favor of the Unauthorized Practice of Law Committee for the State Bar of Texas (Committee) in this suit brought by the Committee under section 81.101 of the Texas Government Code[1] to permanently enjoin Green from engaging in the unauthorized practice of law. In two points of error, Green contends that the trial court erred in granting the Committee's motion for summary judgment and that section 81.101 of the government code is unconstitutional. We reverse and remand in part and affirm in part the trial court's judgment.
BACKGROUND
Green owns and operates Eagle Consulting Firm, which assists individuals in settling their personal injury and property damage claims with insurance carriers. The Committee filed suit against Green seeking injunctive relief and an accounting of, and judgment for, sums resulting from Green's activities which the Committee alleged constituted the unauthorized practice of law.
After the trial court issued a temporary injunction, the Committee filed a motion for summary judgment seeking to permanently enjoin Green from engaging in certain acts which the Committee alleged constituted the unauthorized practice of law. Attached to the Committee's motion for summary judgment were excerpts from the temporary injunction hearing and excerpts from Green's deposition. The Committee alleged that Green engaged in the business of settling personal injury claims for a fee in which he handled disputed damage claims, negotiated damage settlements for his clients, implicitly approved of clients' settlements, and implicitly advised clients to accept settlements. It contended that, as a matter of law, these acts constituted the unauthorized practice of law and that Green should be permanently enjoined from such activities.
The Committee's summary judgment evidence showed: Green handled the four claims of Latrice Moore, Shirley McCullogh, Mary Moore, and Patricia Ann Moore. All claims arose from a motor vehicle accident and involved personal injury claims. Green made offers of settlement to the insurance company on behalf of these individuals regarding their injury claims, sent demand letters regarding these claims, negotiated on behalf of the clients, and settled the claims with the insurance company. None of the four individuals negotiated on their own behalf regarding their respective claims.
Green also handled a claim for Glenda O'Neal. Green furnished a power of attorney to the insurance company that indicated he was not an attorney. He initially attempted to negotiate a settlement without O'Neal present and was informed that O'Neal would have to be consulted. Green furnished a letter to the insurance company stating that he did have, "by rights of his attorney privileges," the right of discussing O'Neal's claim without her. However, all negotiations and settlement regarding O'Neal's claim occurred in her presence. During negotiations, Green discussed his evaluation of O'Neal's claim and the amount of damages he felt O'Neal was entitled for her claim. Green also advised O'Neal on whether to accept the settlement offer made to her. The insurance company settled with O'Neal on her claim.
Green testified at the temporary injunction hearing that (1) he assists people with their personal injury and property damage claims pursuant to a written contract or power of attorney on a contingency fee basis; (2) the power of attorney gives him the power to do whatever he needs to do to assist clients with their claims; (3) when he gets claims, the personal injury damages are unresolved; (4) damages are always at issue, and he acts on behalf of his clients in negotiating damages with the insurance companies pursuant to the clients' instructions; (5) he acts as a "go-between," merely passing information about *296 damages from the insurance company to the client and from the client to the insurance company; (6) he has taken on some cases where liability was in dispute; (7) when he settles a claim, his name goes on the check; therefore, his signature is required on the checks in order for the clients to get their money; (8) he implicitly approves of the settlement by signing off on the check; and (9) when he gets a release from the insurance company, he reviews the release to make sure that the proper parties are being released. In describing the nature of his business, Green admitted that a client comes to him, he "sign[s] them up," looks at the police report if there is one, talks to the client, and comes to an agreement on what they ought to ask the insurance company for. He then sends that information to the insurance company. He talks to the insurance company, going back and forth between the insurance company and his client, and agrees on a figure with the consent of his client.
Green testified in his deposition that he sends demand letters to the insurance companies on behalf of his clients in settlement of their claims. Green sent a demand letter to Travelers Insurance Company regarding a claim for Mary Moore. The demand letter set forth the facts of the accident, contained a liability section claiming four specific instances of negligence, and contained a section concerning damages for pain and suffering, mental anguish, disability and restrictions, medical expenses, and a summary of damages. Green put in the damage figures at Moore's instruction. Green composed his clients' demand letters, which contained the same type of information as Moore's letter, and either he or the clients "plugged in" the damage figures. Green also settled Angela McDonald's claim in which the insurance company contested liability or at least raised the issue of liability.
Green filed a response to the Committee's motion for summary judgment and attached his personal affidavit. Green contended that the Committee's summary judgment proof was insufficient to establish that his conduct constituted the unauthorized practice of law. Green asserted that genuine issues of material fact existed regarding his "representation" of individuals and whether such conduct constituted the unauthorized practice of law.
The trial court granted summary judgment in favor of the Committee, concluding that Green had engaged in the following conduct: (1) contracting with persons to represent them with regard to their personal causes of action for property damage and/or personal injury, (2) advising persons about their rights and the advisability of making claims for personal injuries and/or property damages, (3) advising persons whether to accept an offered sum of money in settlement of claims for personal injuries and/or property damage, (4) entering into contracts with persons to represent them in their personal injury and/or property damage matters on a contingent fee basis, together with an attempted assignment of a portion of the person's cause of action, and (5) advising clients of their rights, duties, and privileges under the law. The trial court found that these activities constituted the practice of law. The trial court's judgment permanently enjoined Green from engaging in these activities. It denied all other relief not specifically granted.
STANDARDS OF REVIEW
A. Permanent Injunction
Injunctive relief may only be granted upon a showing of (1) the existence of a wrongful act; (2) the existence of imminent harm; (3) the existence of irreparable injury; and (4) the absence of an adequate remedy at law. Priest v. Texas Animal Health Comm'n, 780 S.W.2d 874, 875 (Tex.App.-Dallas 1989, no writ). The grant or refusal of a permanent or temporary injunction is ordinarily within the trial court's sound discretion and, on appeal, review of the trial court's action is limited to the question of whether the action constituted a clear abuse of discretion. Priest, 780 S.W.2d at 875. Where the facts conclusively show that a party is violating the substantive law, the trial court should enjoin the violation, and in such case, there is no discretion to be exercised. Priest, 780 S.W.2d at 876.
*297 B. Summary Judgment
A trial court may render summary judgment only if the pleadings, depositions, admissions, and affidavits show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. Tex.R.Civ.P. 166a(c); Rodriguez v. Naylor Indus., Inc., 763 S.W.2d 411, 413 (Tex.1989). In a summary judgment proceeding, the plaintiff, as movant, must conclusively prove his entitlement to prevail on each element of the cause of action as a matter of law. Swilley v. Hughes, 488 S.W.2d 64, 67 (Tex.1972). When a plaintiff shows entitlement to summary judgment, the nonmovant defendant seeking to avoid the judgment must present to the trial court proof adequate to raise a fact issue. Brooks v. Sherry Lane Nat'l Bank, 788 S.W.2d 874, 876 (Tex.App.-Dallas 1990, no writ). In determining whether there is a disputed material fact issue precluding summary judgment, we review the summary judgment evidence in the light most favorable to the nonmovant and resolve any doubts in the nonmovant's favor. See Nixon v. Mr. Property Management Co., 690 S.W.2d 546, 548-49 (Tex.1985).
A summary judgment seeks to eliminate patently unmeritorious claims and untenable defenses, not to deny a party its right to a full hearing on the merits of any real issue of fact. Gulbenkian v. Penn, 151 Tex. 412, 252 S.W.2d 929, 931 (1952). The summary judgment rule does not provide for a trial by deposition or affidavit. The rule provides a method of summarily ending a case that involves only a question of law and no genuine fact issues. Spencer v. City of Dallas, 819 S.W.2d 612, 615 (Tex.App.-Dallas 1991, no writ). The trial court's duty is to determine if there are any fact issues to try, not to weigh the evidence or determine its credibility and try the case on affidavits. Spencer, 819 S.W.2d at 615. If conflicting inferences may be drawn from a deposition and from an affidavit filed by the same party in opposition to a motion for summary judgment, a fact issue is presented. Randall v. Dallas Power & Light Co., 752 S.W.2d 4, 5 (Tex.1988). However, legal conclusions and opinions made in an affidavit are not competent summary judgment evidence and are insufficient to raise an issue of fact in response to a motion for summary judgment. See Mercer v. Daoran Corp., 676 S.W.2d 580, 583 (Tex.1984).
UNAUTHORIZED PRACTICE OF LAW
In his first point of error, Green contends that the trial court erred in granting the Committee's motion for summary judgment. Green argues that his deposition testimony and his affidavit contain conflicting statements regarding his activities which raise material fact issues precluding summary judgment.
The Committee contends that Green's affidavit is conclusory and contains no specific reference to the testimony relied upon in the Committee's summary judgment motion. The Committee argues that Green's affidavit is incompetent summary judgment proof and, therefore, creates no material fact issues.
For the Committee to be entitled to summary judgment, it must conclusively prove that Green's activities constitute the unauthorized practice of law and that no material fact issues exist concerning Green's activities.
Section 81.101 of the government code defines the practice of law as:
[T]he preparation of a pleading or other document incident to an action or special proceeding or the management of the action or proceeding on behalf of a client before a judge in court as well as a service rendered out of court, including the giving of advice or the rendering of any service requiring the use of legal skill or knowledge, such as preparing a will, contract, or other instrument, the legal effect of which under the facts and conclusions involved must be carefully determined.
Tex. Gov't Code Ann. § 81.101(a) (Vernon 1988).
The statutory definition is not exclusive. Tex. Gov't Code Ann. § 81.101(b) (Vernon 1988). Courts inherently have the power to determine what is the practice of law on a case-by-case basis. See Tex. Gov't Code Ann. § 81.101(b) (Vernon 1988); Unauthorized Practice Comm. v. Cortez, 692 S.W.2d 47, 50 (Tex.), cert. denied, 474 U.S. *298 980, 106 S. Ct. 384, 88 L. Ed. 2d 337 (1985); Brown v. Unauthorized Practice of Law Comm., 742 S.W.2d 34, 41 (Tex.App.-Dallas 1987, writ denied). The practice of law embraces, in general, all advice to clients and all action taken for them in matters connected with the law. Brown, 742 S.W.2d at 41. A person may confer legal advice not only by word of mouth, but also by a course of conduct that encourages litigation and the prosecution of claims. Brown, 742 S.W.2d at 40.
This Court has held that the activities set forth in the trial court's judgment constitute the practice of law. See Brown, 742 S.W.2d at 42. The first question, therefore, is whether the Committee's summary judgment evidence establishes that Green engaged in these activities.
The Committee's summary judgment evidence shows that Green engaged in a course of conduct calculated to advise individuals of their legal rights, duties, and privileges. Green contracted with individuals under a power of attorney to assist them in settling their disputed property damage and personal injury claims for a contingency fee. The power of attorney gave Green the authority to do whatever he needed to do to settle his clients' claims. Settling disputed property damage or personal injury claims secures an individual's legal rights with respect to such claims and involves the use of legal skill and knowledge. When Green agreed to handle these claims for his clients, he impliedly advised them that they did in fact have legal rights and that they should make a claim. See Brown, 742 S.W.2d at 40.
Green composed and sent demand letters for settlement of his clients' claims. The demand letters contained a section on liability and a section on legally compensable damages. The preparation of these demand letters involves the use of legal skill and knowledge. In preparing these letters and assisting clients with "plugging in" the damage figures, Green impliedly advised his clients about the types and amount of damages they were entitled under the law. Additionally, in discussing O'Neal's claim with the insurance company, Green gave his evaluation of O'Neal's claim and the amount of damages he believed she was entitled for her claim. In doing this, Green impliedly advised O'Neal of the amount of damages he thought she was entitled under the law. Determining the extent of legally compensable damages, by its very nature, requires legal skill and knowledge. Brown, 742 S.W.2d at 40. Even if we accept Green's contention that he merely acted as a "go-between" and asked only for the damages requested by his clients, Green nevertheless impliedly advised his clients that the requested damages were the only damages to which they were entitled. See Brown, 742 S.W.2d at 41.
Further, Green's course of conduct showed that he negotiated his client's claims with the insurance companies. Again, even if Green acted only as a "go-between," merely passing information about damages between the insurance company and his client, Green's conduct still constitutes negotiation. A party negotiates if that party conducts communications or conferences with a view toward reaching a settlement or agreement. Black's Law Dictionary 1036 (6th ed.1990). Green testified that he met with his clients and came to an agreement on what damages they would seek from the insurance company. He admits that he then transferred the various offers and counteroffers between his clients and the insurance companies with the intent of reaching a settlement of his clients' claims. In negotiating his clients' claims, Green impliedly advised his clients of the propriety of the settlement offers made by the insurance companies.
Once a client's claim was settled, the insurance company would place Green's name on the settlement check. When Green signed the check, he impliedly approved of the settlement amount and impliedly advised his client to accept the settlement. Even if Green accepted settlements only with the consent of his clients or only at his clients' directives, Green nevertheless impliedly approved of the settlement amounts and impliedly advised his clients to accept the sum of money offered in settlement. Cf. Brown, 742 S.W.2d at 41. Further, the summary judgment evidence shows that he advised O'Neal on whether to accept the settlement offer made to her.
*299 We conclude that the Committee's summary judgment evidence conclusively establishes that Green (1) contracted with persons to represent them with regard to their personal causes of action for property damage or personal injury, (2) advised persons about their rights and the advisability of making claims for personal injuries or property damages, (3) advised persons whether to accept an offered sum of money in settlement of claims for personal injuries or property damages, (4) entered into contracts with persons to represent them in their personal injury or property damage matters on a contingent fee basis, and (5) advised clients of their rights, duties, and privileges under the law.
However, the Committee's summary judgment evidence does not establish, as a matter of law, that Green attempted to assign himself a portion of any client's cause of action. Without proof of unlawful conduct or proof of intent to commit such conduct, injunctive relief is improper. Priest, 780 S.W.2d at 878. Therefore, the Committee failed to establish its right to judgment on this ground. We sustain Green's first point of error with respect to this portion of the summary judgment.
We next determine whether Green's controverting affidavit raises a material fact issue precluding summary judgment on the other grounds. Green's affidavit states that "[a]t all times while doing business as a public adjuster [he] only assisted the person in performing those ministerial acts required to present a claim for personal injuries and/or property damage to the insurance carrier and conveyed to the carrier the directives and information instructed by the claimant." The affidavit further states that he did not (1) "enter into contracts to represent persons with regard to their claims for personal injury and/or property damages; but rather [he] acted in the capacity of an attorney-in-fact under a power of attorney and grant of authority from the individual to assist them in presenting their claim to the insurance carrier for consideration," (2) "directly or indirectly advise persons of their legal rights, duties or privileges," (3) "advise persons of the advisability of making a claim for personal injuries and/or property damages," (4) "negotiate or settle client's personal injury claims with insurance companies; but rather [he] at all times acted as an intermediary to transfer directives and information from the person to the insurance company," (5) "give approval of client settlements on their claims," (6) "advise persons as to whether to accept an offered sum in settlement of a claim for personal injuries and/or property damage," (7) "advise persons of the prospects of settling personal injury accidents or other legal claims," (8) "determine legal liability or the extent of legally compensable damages," or (9) "render any service requiring the use of legal skill or knowledge, such as preparing as [sic] will, contract, or other instrument."
Viewed most favorably to Green and resolving all doubts in his favor, we conclude that Green's affidavit states legal conclusions and fails to present enough facts to allow a court to consider Green's activities as anything other than the unauthorized practice of law. The affidavit repeats many of the trial court's conclusions of law contained in its judgment and does not allege any specific facts to rebut the testimony relied upon by the Committee. Green fails to raise any material issue of fact to preclude summary judgment. See Mercer, 676 S.W.2d at 583.
We conclude that the trial court properly granted summary judgment permanently enjoining Green from (1) contracting with persons to represent them with regard to their personal causes of action for property damage or personal injury, (2) advising persons about their rights and the advisability of making claims for personal injuries or property damages, (3) advising persons whether to accept an offered sum of money in settlement of claims for personal injuries or property damages, (4) entering into contracts with persons to represent them in their personal injury or property damage matters on a contingent fee basis, and (5) advising clients of their rights, duties, and privileges under the law. We overrule Green's first point of error with respect to these portions of the summary judgment.
*300 CONSTITUTIONAL CLAIMS
In Green's second point of error, he contends that section 81.101 of the Texas Government Code is vague, indefinite, and overly broad and, therefore, violates the Due Process Clause of the Fourteenth Amendment to the United States Constitution and article I, sections 10 and 19 of the Texas Constitution.
Except to attack the legal sufficiency of the movant's grounds for summary judgment, the nonmovant must expressly present to the trial court in a written answer or response to the motion any reason for avoiding the movant's entitlement to summary judgment. Spencer, 819 S.W.2d at 615. Any issue not expressly presented to the trial court in a written motion or response may not be raised as grounds for reversal on appeal. Tex.R.Civ.P. 166a(c). Constitutional arguments may be waived if not properly presented to the trial court for disposition at the summary judgment hearing. Fadia v. Unauthorized Practice of Law Comm., 830 S.W.2d 162, 165 (Tex.App.-Dallas 1992, writ denied).
Green failed to present the constitutional issue to the trial court in the summary judgment proceedings. He did not raise the argument in his response to the Committee's motion for summary judgment. Therefore, Green waived his right to complain of this issue on appeal. We overrule Green's second point of error.
CONCLUSION
We reverse the trial court's summary judgment to the extent that it concludes that Green contracted with persons for an attempted assignment of the person's cause of action and to the extent that it grants permanent injunctive relief on this ground. We dissolve the permanent injunction enjoining Green from such activity. We remand that issue to the trial court for further proceedings. We affirm the trial court's judgment in all other respects.
NOTES
[1] Tex. Gov't Code Ann. § 81.101 (Vernon 1988).
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883 S.W.2d 179 (1994)
CITY OF EL PASO, The State of Texas, and Office of Public Utility Counsel, Petitioners,
v.
PUBLIC UTILITY COMMISSION OF TEXAS and El Paso Electric Company, Respondents.
No. D-3053.
Supreme Court of Texas.
Argued September 13, 1993.
Decided June 22, 1994.
Rehearing Overruled October 6, 1994.
*181 Norman J. Gordon, El Paso, James G. Boyle, Austin, Nanette G. Williams, David C. Caylor, El Paso, Luis A. Wilmot, San Antonio, Stephen Fogel, William L. Magness, W. Scott McCollough, Dan Morales, Joe K. Crews and Richard A. Muscat, Austin, for petitioners.
James W. Checkley, Alan Holman, Austin, Thomas S. Leatherbury, Ferd C. Meyer, Jr., Kenneth C. Raney, Jr., Dallas, R. Eden Martin, Chicago, IL, Barry Bishop, John F. Williams, Austin, Harry M. Reasoner, Houston, Walter Demond, Austin, Alton J. Hall, Jr., Houston, Norma K. Scogin, Dan Morales, Joe N. Pratt, and Davison W. Grant, Austin, for respondents.
Justice ENOCH delivered the opinion of the Court, in which Chief Justice PHILLIPS, Justices HIGHTOWER, HECHT, and CORNYN join.
This is an administrative appeal from an order of the Public Utility Commission (Commission) setting rates to be charged by El Paso Electric Company (EPEC).[1] The order was consistent with a non-unanimous stipulation between EPEC and several parties, including the Commission General Counsel. In its final order, the Commission authorized EPEC to capitalize and include in rate base deferrals associated with certain post-in-service carrying costs and operating costs related to its investment in the Palo Verde Nuclear Generating Station (Palo Verde). The questions presented by this appeal are first, whether the Commission acted within its discretion by basing its final order, in part, on the nonunanimous stipulation agreement, and second, whether the Commission has the authority under the Public Utility Regulatory Act (PURA)[2] to allow a public utility to include in a utility's rate base certain costs incurred during the "regulatory lag" period.[3] We answer both issues yes, and consequently affirm the judgment of the court of appeals in part and reverse in part.
In April 1987, EPEC filed an application for a rate increase with the Commission seeking to recover costs associated with its investment in the Palo Verde Project. EPEC sought rate treatment related to its investment in the two units which had started commercial operation, Palo Verde Units 1 and 2.[4] On October 22, 1987, during the course of the hearing on EPEC's application, certain industrial intervenors and the Commission General Counsel announced and filed a stipulation agreement intended to resolve the case.[5] The Examiners scheduled an additional phase of the hearing to consider the stipulation, and eventually recommended to the Commission that the stipulation be rejected. The Commissioners modified the proposed stipulation and, as modified, adopted its terms in its final order.
As part of its request for a rate increase, EPEC requested that its rate base be increased *182 by the amount of carrying costs and operating and maintenance costs it incurred during the "regulatory lag" period. The utility had deferred these types of costs for Units 1 and 2, aggregating each type of cost for each unit into a separate capital account. EPEC obtained the Commission's prior permission to defer Unit 1 costs.[6] The Commission reserved the right, however, to refuse subsequently to include the deferred costs in the rate base to the extent they were unreasonable, related to plant not used and useful, or were spent or incurred imprudently. Although EPEC did not obtain prior permission to defer its post-in-service costs for Unit 2, it nevertheless deferred them. After the hearing, the Commission granted EPEC's request to include the deferred costs for both units in the rate base.
The City of El Paso (City), the State of Texas (on behalf of various state agencies located in western Texas) (State), and the Office of Public Utility Counsel (OPUC) sought judicial review of the Commission's order, contending that the Commission erred by basing its order, in part, on the non-unanimous stipulation. The City, State, and OPUC also argued that the Commission lacked the authority to permit EPEC to defer post-in-service costs, and subsequently to include the deferrals in the utility's rate base.
The trial court upheld the Commission's order. The court of appeals affirmed the portion of the trial court's judgment which affirmed the Commission's order allowing the inclusion of capitalized post-in-service operating costs in the utility's rate base. 839 S.W.2d 895, 934 (1991). The court of appeals reversed the portion of the trial court's judgment which affirmed the Commission's order allowing the deferral of post-in-service carrying costs. Id.[7] All parties filed applications for writ of error to this court. For the reasons stated below, we reverse the judgment of the court of appeals to the extent that it disallows the deferral of post-in-service carrying costs. In all other respects, the judgment of the court of appeals is affirmed.
I.
The Non-Unanimous Stipulation
The City and OPUC make several arguments supporting their position that the Commission erred by basing its order, in part, on a non-unanimous stipulation. They ask this Court to reverse the judgment of the court of appeals, contending that its holding affirms an action of the Commission that is not supported by substantial evidence, not consistent with Texas law, arbitrary and capricious and characterized by an abuse of discretion. We do not accept the City's or OPUC's arguments.
A.
Reliance on the Non-Unanimous Stipulation
The City and OPUC contend that where no evidence existed to support its decision, the Commissioners erroneously relied on the stipulation itself as a substitute for the evidence. The City argues that by relying on the stipulation as opposed to the evidence, the Commissioners violated the statutory requirement that every finding be based exclusively on the evidence. Tex.Gov't Code Ann. § 2001.141 (Vernon Pamphlet 1994). The City analogizes the present case to a civil cause in which the court renders an agreed judgment without consent of all the parties. It contends that in adopting the stipulation as a resolution of the case, the Commission improperly imposed the terms of the settlement on the non-signing parties.
We reject the City's analogy. In Mobil Oil Corp. v. Federal Power Commission, 417 U.S. 283, 94 S. Ct. 2328, 41 L. Ed. 2d 72 (1974), the Supreme Court upheld the Federal Power Commission's final order establishing a rate structure that was based, in part, on a non-unanimous stipulation. The Court emphasized *183 the importance of considering a non-unanimous proposal "on its merit:"
If a proposal enjoys unanimous support from all of the immediate parties, it could certainly be adopted as a settlement agreement if approved in the general interest of the public. But even if there is a lack of unanimity, it may be adopted as a resolution on the merits, if FPC makes an independent finding supported by `substantial evidence on the record as a whole' that the proposal will establish `just and reasonable' rates for the area.
417 U.S. at 314, 94 S.Ct. at 2348-49 (quoting Placid Oil Co. v. Federal Power Comm'n, 483 F.2d 880, 893 (5th Cir.1973)) (emphasis in original).
In Docket No. 7460, the Commission's order provided, in part:
4. Even where some parties to a proceeding do not agree to a stipulated result, it is reasonable to adopt such a stipulation if:
(a) The parties opposing the stipulation have notice that the stipulation may be considered by the Commission and an opportunity to be heard on their reasons for opposing the stipulation;
(b) The matters contained in the stipulation are supported by a preponderance of the credible evidence in the case;
(c) The stipulation is in accordance with applicable law;
(d) The stipulation results in just and reasonable rates; and;
(e) The results of the stipulation are in the public interest, including the interest of those customers represented by parties opposing the stipulation.
Docket No. 7460, supra note 1, at 1202-03 (emphasis added).[8] The Commission's order continued to conclude that:
5. Pursuant to the Findings of Fact and Conclusions of Law set forth below, the Commission finds the Amended and Restated Stipulation, as modified, is a reasonable basis for resolution of the issues in this case and that adoption of the Amended and Restated Stipulation, as modified, as the basis of the Commission's Order in this proceeding is in the public interest.
Finding of Fact No. 237 provided:
237. The provisions of the Amended and Restated Stipulation are reasonable and supported by a preponderance of the credible evidence in this record and should be adopted.[9]
It is clear from the Commission's order that, consistent with Mobil Oil, the Commission's decision in Docket No. 7460 was based on the merits; it was not simply an adoption of a non-unanimous "settlement." The Commission made an independent finding that the non-unanimous stipulation was supported by a preponderance of the record evidence and resulted in just and reasonable rates.[10] Thus, contrary to the City's arguments, the Commission's final order was consistent with the requirement that every finding be based exclusively on the evidence.
In addition to considering the non-unanimous stipulation on its merits, the Commission provided all parties, including non-signatories, *184 the opportunity to be heard on the merits of the stipulation. As the court of appeals notes, the Commission added an additional phase to the proceedings devoted exclusively to receiving evidence and argument on the propriety of using the stipulation as a basis for resolving the contested issues. 839 S.W.2d at 903. Thus, we reject the City's argument that the substantial rights of the City and other non-signatory parties were in some way prejudiced by the Commission's adoption of the non-unanimous stipulation.
The OPUC independently argues that the Commission's reliance on the non-unanimous stipulation agreement was arbitrary and capricious because the Commission failed to follow its own standards in relying on the stipulation. Specifically, the OPUC notes that the court of appeals concluded that the inclusion of deferred post-in-service carrying costs violates PURA section 41(a); and, because the stipulation included provisions concerning treatment of deferred carrying charges, the stipulation violates the Commission's own standard, see supra text above, that the stipulation be "in accordance with applicable law." As a result, the OPUC argues that the court of appeals should have reversed and remanded the Commission's final order in toto. Because we conclude that the inclusion of deferred post-in-service carrying costs does not violate PURA section 41(a), see infra IV., the OPUC's argument on this point is moot.
An agency's decision is arbitrary or results from an abuse of discretion if the agency: (1) failed to consider a factor the legislature directs it to consider; (2) considers an irrelevant factor; or (3) weighs only relevant factors that the legislature directs it to consider but still reaches a completely unreasonable result. Gerst v. Nixon, 411 S.W.2d 350, 360 n. 8 (Tex.1966). We agree with the court of appeals that the City and OPUC have failed to establish that the use of the stipulation as a partial basis for the final order involves consideration of factors other than those the legislature has directed the Commission to consider. 839 S.W.2d 895, 903-04.
B.
Section 21.151
Section 21.151 of the Public Utility Commission's Rules of Practice and Procedure provides:
After the expiration of the time for filing exceptions and replies thereto, the examiner's report and proposal for decision will be considered by the commission and either adopted, modified and adopted, or remanded to the examiner....
16 TEX.ADMIN.CODE § 21.151 (West 1990). The City and the OPUC argue that the Commission violated section 21.151 by basing its final order on a modified stipulation over the examiner's recommendation. This argument is without merit. First, section 21.151 does not speak to the Commission's ability to consider non-unanimous stipulations in reaching its orders. Second, the Commission is free to accept or reject the examiner's recommendations. See Ross v. Texas Catastrophe Prop. Ins., 770 S.W.2d 641, 642 (Tex.App.-Austin 1989, no writ). Section 21.151 does not require the Commission to accept or reject the examiner's report in its entirety. Rather, the Commission may repudiate part of the examiner's report and modify it by deletion as it did in this case.
C.
Findings of Facts/Substantial Evidence
In a final challenge to the Commission's use of the non-stipulation agreement, the City argues that "[t]he non-unanimous `stipulation' used by the Commission ... is not supported by substantial evidence and key findings of fact drafted to support the final order are inadequate to satisfy statutory requirements." We will discuss the City's specific substantial-evidence and finding-of-fact challenges. See infra II-III. However, to the extent the City makes a general complaint against the stipulation, we agree with the court of appeals that the City has waived any argument on this point as its point and argument are too general to preserve error. The City provides no substantive argument to support its legally conclusory statements.
*185 II.
Substantial Evidence"Decisional" Imprudence Disallowance[11]
The Commission concluded that due to imprudent decisions, $32 million of EPEC's costs should not be included in rate base. Both the City and OPUC argue that the disallowance is unsupported by substantial record evidence, claiming that the amount disallowed should have been greater.
At its core, the substantial evidence rule is a reasonableness test or a rational basis test. Railroad Comm'n of Texas v. Pend Oreille Oil & Gas Co., 817 S.W.2d 36, 41 (Tex.1991). The reviewing court, then, concerns itself with the reasonableness of the administrative order, not the correctness of the order. Id. In applying this test, we may not substitute our judgment as to the weight of the evidence for that of the agency. Id. (the substantial evidence rule "prevents the court from `usurping the agency's adjudicative authority even though the court would have struck a different balance'").
Although substantial evidence is more than a mere scintilla, the evidence in the record actually may preponderate against the decision of the agency and nonetheless amount to substantial evidence. Texas Health Facilities Comm'n v. Charter Medical-Dallas, Inc., 665 S.W.2d 446, 452 (Tex.1984). The true test is not whether the agency reached the correct conclusion, but whether some reasonable basis exists in the record for the action taken by the agency. Id. The findings, inferences, conclusions, and decisions of an administrative agency are presumed to be supported by substantial evidence, and the burden is on the contestant to prove otherwise. Id. at 453; Imperial American Resources Fund, Inc. v. Railroad Comm'n, 557 S.W.2d 280, 286 (Tex.1977); City of San Antonio v. Texas Water Comm'n, 407 S.W.2d 752, 758 (Tex.1966).
The City argues that although the City, EPEC, and the Commission staff each offered expert testimony on the decisional imprudence issue, the evidentiary record contains no specific reference to amount. Further, the City contends that the court of appeals erred by relying, in part, on matters included in the non-unanimous stipulation to conclude that the Commission's decision was supported by substantial evidence because the matters relied on were not independently supported by a preponderance of the evidence.
In the Findings of Fact, the Commission provided:
101. The Company was not entirely prudent in its planning and management of its participation in the Palo Verde project.
102. There is evidence in the record of imprudence in the Company's continuing evaluation of the level of its participation in the Palo Verde Project. The parties to the Amended and Restated Stipulation have quantified The [sic] cost of such imprudence as $22 million as applied to Units 1 and 2. The Company has conceded an additional $10 million disallowance to be applied to PVNGS Units 1 and 2.
103. Quantification of the effects of imprudence requires the exercise of judgment based upon the evidence. In light of the evidence relating to prudence and the difficulties in quantification, the quantification of decisional imprudence at $32 million for Units 1 and 2 is reasonable and appropriate.
Docket No. 7460, supra note 1, at 1250.
The record before this Court is extensive and contains substantial information relevant to the Commission's inquiry on this issue. The evidence includes expert testimony offered by the City, EPEC, and the Commission staff. The City's witness, Ben Johnson, stated that in his opinion the EPEC had made several imprudent decisions and that, as a result, the Commission should disallow 50% of its costs.[12] EPEC testified that there *186 should be a zero disallowance because there simply was no decisional imprudence. The Commission staff offered testimony that certain aspects of the Company's decision making process were imprudent. However, the Commission's witnesses did not conclude that the decision to participate in the project was itself imprudent. Rather, they focused on the perceived errors associated with EPEC's decision making process. The Commission's witnesses noted that they were unaware of any theory that would enable them to recommend any specific disallowance of project costs or capacity based on their conclusions.[13]
The evidence before the Commission therefore ranged from expert testimony that no imprudence disallowance should be imposed, to testimony that a 50% imprudence disallowance should be imposed, and finally to testimony that there is no known theory to quantify the flaws in EPEC's decision making process giving rise to its investment. In other words, several experts had significant differences of opinion on the proper method to determine and the proper amount of EPEC's imprudence disallowance. These differences are understandable when considering the enormous complexity involved in a utility's decision to construct or purchase new generating capacity.
In conducting a substantial-evidence review, we must determine whether the evidence as a whole is such that reasonable minds could have reached the conclusion the agency must have reached in order to take the disputed action. Texas State Bd. of Dental Examiners v. Sizemore, 759 S.W.2d 114, 116 (Tex.1988), cert. denied, 490 U.S. 1080, 109 S. Ct. 2100, 104 L. Ed. 2d 662 (1989). The true test is not whether the agency reached the correct conclusion, but whether some reasonable basis exists in the record for the action taken by the agency. Texas Health Facilities Comm'n v. Charter Medical-Dallas, Inc., 665 S.W.2d 446, 452 (Tex.1984). We agree with the court of appeals that the record contains substantial evidence to support a disallowance figure of zero for decisional imprudence; and, the record contains substantial evidence to support a Commission finding that 50 percent of EPEC's costs should have been disallowed. See 839 S.W.2d at 907. Thus, because of the admitted complexity in valuing the decisional imprudence in this case, we hold that there is a reasonable basis for the Commission to, in its discretion, select an amount within the range of figures provided by expert testimony of the parties.[14] Moreover, the City and OPUC have failed to explain why any one amount within that range is more reasonable or better supported by the evidence than the $32 million figure eventually reached by the Commission. The findings, inferences, conclusions, and decisions of an administrative agency are presumed to be supported by substantial evidence, and the burden is on the contestant to prove otherwise. Texas Health Facilities Comm'n v. Charter Medical-Dallas, Inc., 665 S.W.2d 446, 452 (Tex. 1984); Imperial American Resources Fund, Inc. v. Railroad Comm'n, 557 S.W.2d 280, 286 (Tex.1977); City of San Antonio v. Texas Water Comm'n, 407 S.W.2d 752, 758 (Tex. 1966). We do not accept that the City and OPUC have met their burdens to overcome the presumption in this case.
*187 III.
Final Revenue Requirement[15]
The City complains generally about the revenue requirement determination and then makes specific contentions concerning particular components of the revenue requirement. The City argues that the final revenue requirement of the Commission was based solely on the non-binding stipulation agreement and not on the record evidence. According to the city, the findings and conclusions adopted by the Commission do not allow this Court to analyze the decision because the agreement between the parties is not evidence and not a statutory standard for review. We disagree.
Finding of Fact No. 152 provides:
The preponderance of the evidence establishes that the company has a total revenue requirement with components as set forth in Exhibit B of the Amended and Restated Stipulation.
Docket No. 7460, supra note 1, at 1260. This finding is supported by twenty-five underlying findings of fact addressing the components of the total revenue requirement, with each finding supported by record evidence. Id. at 1260-1265 (Findings of Fact 153-87). Except for the specific challenges to three of the components making up the total revenue requirement, the City does not complain specifically that any particular underlying finding supporting Finding of Fact No. 152 is not supported by substantial evidence. We presume that the Commission's decision is supported by substantial evidence. Charter Medical, 665 S.W.2d at 453.
In addition, we reject the City's argument that the Commission applied no statutory standard in determining revenue requirements. As the City recognizes, the statutory standard that controls revenue requirement determinations is that rates be fixed to permit the utility a reasonable opportunity to earn a reasonable return on its invested capital plus "reasonable and necessary" operating expense to provide service. Tex.Rev.Civ.Stat.Ann. art. 1446c, § 39(a). The Commission's determination of the revenue requirement is supported by findings which detail the Commission's resolution of contested issues regarding the Company's "reasonable and necessary" operating expenses. Thus, the statutory standard for determining the revenue requirement was met.
The City makes numerous challenges to three components of the final revenue requirement, including (1) Operating and Maintenance expenses; (2) Employee Benefits; and (3) Taxes other than Federal Income Taxes. After reviewing the opinion of the court of appeals, the briefs of the parties, and the record, we conclude that the City's arguments on these issues are without merit. The court of appeals correctly articulates the error in the City's claims. 839 S.W.2d at 927-31.
IV.
Deferrals
The City, OPUC, and State make several arguments contesting the Commission's authority to permit the deferral of post-in-service costs, and the inclusion of the deferred costs in the utility's rate base.[16] In State of Texas v. Public Utility Commission, 883 S.W.2d 190 (Tex.1994), we held that the Commission possesses the authority to allow a utility to defer post-in-service costs in order to protect the utility's financial integrity. We further held that the subsequent inclusion of the deferred costs in the utility's rate base did not violate PURA section 41(a), nor did it violate the rule against retroactive ratemaking. As a result we reject the arguments of the City, OPUC and State on these issues. We will address only those issues that were not addressed in State of Texas v. Public Utility Commission.[17]
*188 A.
Test Year Requirement
PURA requires utilities to file for a rate increase by presenting revenue and expense data from the same 12-month period using an historical test year. Tex.Rev.Civ. Stat.Ann. art. 1446c, § 3(t); 16 Tex.Admin.Code § 23.21(a); Suburban Utility Corp. v. Public Utility Comm'n, 652 S.W.2d 358, 366 (Tex.1983). In State of Texas v. Public Utility Commission, we held that an accounting order authorizing deferred accounting treatment does not violate the test year requirement because there is no requirement in PURA or the Commission's procedures that the Commission must follow a test year when determining accounting policy. However, in the context of a rate case, the test year requirement applies. Thus, we must address the argument that the actual inclusion of deferred costs in a utility's rate base violates the test year requirement.
The State argues that post-in-service costs were deferred for up to 25 months and thus, the inclusion of such rates in EPEC's rate base violated the test year requirement.[18] However, the Commission may, in its discretion, go outside the test year when necessary to achieve just and reasonable rates. In Suburban Utility Corp. v. Public Utility Commission, 652 S.W.2d 358, 366 (Tex.1983), we stated that "[c]hanges occurring after the test period, if known, may be taken into consideration by the regulatory agency to help mitigate the effects of inflation and in order to make the test year data as representative as possible of the cost situation that is apt to prevail in the future." Because it ordered the deferral of post-in-service costs, the Commission understood the impact of deferring post-in-service costs on the test year. It is within the discretion of the Commission to consider expenditures that occur outside the test year if such consideration will assist the Commission in making the test year as representative as possible to the cost situation expected in the future.
B.
Standards Applied
The Commission granted EPEC's request to defer post-in-service costs for Unit 1 based upon a "financial integrity and viability" standard. Docket No. 6350, supra note 6, at 1239-41. However, the Commission granted EPEC's unit 2 request for deferred accounting based on a "measurable harm" standard. Docket No. 7460, supra note 1, at 1079. The City argues that the use of two different standards is arbitrary and capricious because the Commission has created new standards for each decision concerning deferred accounting.[19] We disagree.
In determining whether to allow a particular utility to defer post-in-service costs, the Commission has discretion to proceed on an ad hoc or "case-by-case" basis. See, e.g., Securities and Exch. Comm'n v. Chenery Corp., 332 U.S. 194, 67 S. Ct. 1575, 91 L. Ed. 1995 (1947); National Labor Relations Bd. v. Wyman-Gordon Co., 394 U.S. 759, 89 S. Ct. 1426, 22 L. Ed. 2d 709 (1969); Southwestern Bell Tel. Co. v. Public Util. Comm'n, 745 S.W.2d 918, 926 (Tex.App.-Austin *189 1988, writ denied). In SEC v. Chenery Corp., 332 U.S. 194, 202-03, 67 S. Ct. 1575, 1580-81, 91 L. Ed. 1995 (1947), the Court stated that ad hoc adjudication may be preferable to a formal rulemaking proceeding where "the agency may not have had sufficient experience with a particular problem to warrant rigidifying its tentative judgment into a hard and fast rule;" and where the problem is so "specialized and varying in nature as to be impossible of capture within the boundaries of a general rule." Both of the foregoing considerations apply in the Commission's early attempts to define the proper standard to apply to deferred accounting cases.[20]
Early in the process, the Commission was faced with numerous complex problems presented by the recent arrival of nuclear generation plants. While remaining within the statutory framework of PURA, the Commission had to balance the interests of consumers with the complex financial consideration created by public utilities investing large amounts of capital in nuclear plants. Proceeding on an ad hoc or "case-by-case" basis is fully understandable in the context of a newly created competitive market that involves complex technical considerations and competing statutory objectives. See Southwestern Bell Tel. Co. v. Public Util. Comm'n, 745 S.W.2d 918, 926-27 (Tex.App.-Austin 1988, writ denied); see also Securities and Exch. Comm'n v. Chenery Corp., 332 U.S. 194, 202-03, 67 S. Ct. 1575, 1580-81, 91 L. Ed. 1995 (1947). As a result, we hold that the Commission was within its discretion in proceeding on a "case-by-case" or ad hoc basis and applying different standards in different proceedings.[21]
V.
Conclusion
We hold that the Commission did not err by basing its final order, in part, on a non-unanimous stipulation. Further, based on our holding in State of Texas v. Public Utility Commission, 883 S.W.2d 190 (Tex.1994), we hold that the Commission has the authority under PURA to include deferred post-in-service costs in a utility's rate base. Further, the Commission did not abuse its discretion by applying different standards in determining whether to allow deferred accounting treatment for Palo Verde Units 1 and 2. We reverse the court of appeals to the extent that it disallows the deferral and inclusion in rate base of deferred post-in-service carrying costs. In all other respects, the judgment of the court of appeals is affirmed.
Justice SPECTOR, joined by Justice GONZALEZ, Justice DOGGETT, and Justice GAMMAGE, dissenting.
This case demonstrates the weakness of the safeguards relied upon today in State of Texas v. Public Utility Commission, 883 S.W.2d 190 (Tex.1994). In that case, the majority defends its approval of deferred accounting treatment on the ground that deferred cost assets will be included in rate base only to the extent that they are deemed "prudent, reasonable and necessary." Id. at 197-198 n. 12. In the present case, however, the majority approves the Public Utility Commission's application of a similar standard, despite a total lack of evidence supporting the Commission's findings. I dissent.
At the rate hearings below, the City of El Paso presented extensive evidence concerning the imprudence of El Paso Electric Company's decisions to become involved in the Palo Verde Project and to remain involved at the 15.8 percent participation level. See Tex. Pub. Utils. Comm'n, Application of El Paso Electric Company for Authority to Change *190 Rates, Docket No. 7460, 14 Tex.P.U.C.Bull. 932, 965-84 (June 16, 1988). The City's expert testimony concluded that 50 percent of the cost of all three Palo Verde units should be disallowed as imprudent. Id. at 983. Using this figure, some $350 million should have been disallowed for Unit 1 alone.
The Commission agreed that El Paso Electric was "not entirely prudent" in planning and managing its participation in the Palo Verde project. Id. at 1250. In determining the amount of the disallowance, however, the Commission chose not to rely on the evidence presented; instead, it seized upon a figure of $32 million that had been discussed in the course of settlement negotiations. Id. at 1250-51. El Paso Electric's own expert testified, in regard to the settlement amount, "I don't think it really relates to anything." The $32 million figure has no basis in reality; it resulted solely from the parties' efforts to buy peace.
The majority cites no evidence in support of the $32 million disallowance, because none exists. Nonetheless, the majority upholds the Commission's findings as supported by substantial evidence. Supra at 186.
With the standard of review applied today, it is difficult to imagine any Commission decision relating to prudence that would be set aside by the Court. This lack of review will be especially pernicious in the context of deferred cost assets. Valuing the prudence of such assets will involve the same degree of complexity as valuing the imprudence in this case. Thus, in approving deferred amounts for inclusion in rate base, the Commission may arbitrarily select a figure within a wide range, and its decision will effectively be immune from judicial review. Judging by the example of this case, the figure selected will typically be much closer to the utility's recommended figure than it is to the ratepayers'.
I would hold that the disallowance for decisional imprudence must be based on the evidentiary record. Additionally, for the reasons stated in my dissenting opinion in State of Texas v. Public Utility Commission, 883 S.W.2d at 205-209, I would hold that no expenses incurred after the beginning of commercial operation may be capitalized and included in rate base. Accordingly, I would remand this cause to the Commission for a determination of rates in keeping with traditional standards.
NOTES
[1] Tex. Public Utils. Comm'n, Application of El Paso Electric Company for Authority to Change Rates, Docket No. 7460, 14 Tex.P.U.C.Bull. 932, 1202 (June 16, 1988) (Docket No. 7460).
[2] Tex.Rev.Civ.Stat.Ann. art. 1446c (Vernon Supp. 1994).
[3] Generally, regulatory lag is the delay between the time when a utility's profits are above or below standard and the time when an offsetting rate decrease or rate increase may be put into effect by commission order or otherwise. This delay is due to the inherent inability in the regulatory process to allow for immediate rate decreases or increases. For purposes of this opinion, "regulatory lag" is the period between the date a new plant begins commercial operation (the "in-service" date) and the effective date of the new rates that result from including the new plant's costs in the rate base. See James C. Bonbright et al., Principles of Public Utility Rates 96 (2d ed. 1988).
[4] EPEC and four other utility companies agreed to partially fund and otherwise assist in building one or more nuclear steam electric generating units, with attendant common facilities. Construction is complete on the common facilities and two of the five units originally planned (Palo Verde Units 1 and 2). After construction began, EPEC modified its ownership interest in the units. Originally, EPEC owned an undivided interest in each of the units as a tenant in common with the other four project participants. Although EPEC retains its undivided interest in Unit 1, the company has sold its interest in Unit 2 and made arrangements to lease the unit back for the duration of EPEC's involvement in the project.
[5] EPEC, the Commission staff, and four corporate intervenors which purchased significant amounts of electricity from EPEC all signed the stipulation.
[6] The Commission authorized deferred accounting treatment for Unit 1 in Tex. Public Utils. Comm'n, Application of El Paso Electric Company for Authority to Change Rates, Docket No. 6350, 13 Tex.P.U.C.Bull. 1091, 1239-41 (1986).
[7] The court of appeals separated the costs into two categories: (1) operating and maintenance costs, and (2) carrying costs. Our holding makes no distinction between these costs.
[8] We note that the Commission has used these same standards to evaluate non-unanimous settlements in several other dockets. See, e.g., Tex. Public Utils. Comm'n, Application of El Paso Electric Company to Declare Palo Verde Unit 1 in Service, Docket No. 6764, 12 Tex.P.U.C.Bull. 1533, 1534-35 (November 14, 1986).
[9] In addition to the recitations above, Conclusion of Law No. 28 stated: "The Amended and Restated Stipulation, as modified per Finding of Fact No. 6, represents a reasonable resolution of the contested issues in this docket, is supported in the record, is in the public interest, and should therefore be adopted, as the basis for the Commission's order in this case." Docket No. 7460, supra note 1, at 1280.
[10] We note that the Commission's Final Order included 237 separate, specific Findings of Fact concerning the rate increase. The Commission specifically considered the amended and restated stipulation in the context of these findings as a whole. See Docket 7460, supra note 1, at 1233-74. Thus, contrary to the City's and OPUC's contentions, the Commission's findings supporting its reliance on the non-unanimous stipulation were not "wholly conclusory." Further, because the Commission explicitly provided that it was based on a review of the evidence in the record as a whole, we reject the City's contention that the Commission acted arbitrarily and abused its discretion as a fact finder and decision maker by adopting a contested settlement "without a review of the record or support in the evidentiary record."
[11] "Decisional" imprudence refers to EPEC's decisions to become involved in the Palo Verde Project, the extent of its involvement and its decisions to remain in the project at the 15.8% participation level.
[12] Although not clear from Mr. Johnson's testimony, under his suggested approach, the imprudence disallowance would have exceeded $350 million.
[13] We note that the Examiner likewise recognized flaws in EPEC's decision making process. However, the Examiner noted that "it is too much to ask that one reconstruct the appropriate process fifteen years after the fact in order [to] find whether a decision made on an inappropriate basis might still have been made on an appropriate one." Docket No. 7460, supra note 1, at 981.
[14] In affirming the Commission's order, the court of appeals relied in part on its determination that EPEC's agreement in the non-binding stipulation to a $32 million disallowance constituted a "quasi-admission." 839 S.W.2d at 907. The court of appeals concluded that "[b]ecause it is a statement contrary to EPEC's pecuniary interest, the concession has some evidentiary weight." Id. While we need not address whether the EPEC's agreement in the non-binding stipulation constituted a "quasi-admission," we note that it is debatable as to whether EPEC's acceptance of a $32 million figure was in fact a statement against its pecuniary interest, considering that the evidence could have supported a much higher disallowance. See supra note 12.
[15] The final revenue requirement represents the total revenues needed by the utility in order to cover its reasonable and necessary operating expenses and receive a return on the rate base.
[16] The Commission allowed EPEC to include $74,503,575 of deferrals in rate base. Docket No. 7460, supra note 1, at 1258 (Finding of Fact 144).
[17] In State of Texas v. Public Utility Commission, 883 S.W.2d 190, we held that the Commission must consider to what extent the inclusion of the deferred cost assets in rate base is actually necessary to preserve the utilities' financial integrity. 883 S.W.2d at 201. We noted that such a determination should be made at the rate hearing. Id. Because no party argued that the Commission should have made such a determination in this case, any argument on this point is waived.
[18] The deferral period for Palo Verde Unit 1 was twenty-five months and for Unit 2 was nineteen months.
[19] We note that in State of Texas v. Public Util. Comm'n, 883 S.W.2d 190 (Tex.1994), we held that the Commission possesses the authority to authorize deferred accounting treatment of post-in-service costs. Further, we concluded that it was not an abuse of discretion for the Commission to apply a financial integrity standard to determine whether to authorize deferred accounting because that standard "ensured that the utilities will receive an opportunity to recover the minimum rates mandated by PURA." Id. at 197. However, in Office of Public Utility Counsel v. Public Util. Comm'n, 883 S.W.2d 190 (Tex.1994), we held that the measurable harm standard lacked "a foundation in the regulatory scheme provided by PURA" and, as a result, the Commission abused its discretion by applying the measurable harm standard to determine whether to allow deferred accounting. 883 S.W.2d at 196. We note that the City does not contest the Commission's decision as to Unit 2 on the grounds that it was based on a standard that was too speculative. Thus, we do not address that issue in this case.
[20] In fact, the Commission ultimately concluded that the measurable harm standard was too speculative. See, e.g., Tex.Public Utils. Comm'n, Petition of Houston Lighting and Power Company for Approval of Deferred Accounting Treatment for Limestone Unit 2 and the South Texas Project Unit 1, Docket No. 8230, 14 Tex.P.U.C.Bull. 2752, 2811 (April 19, 1989).
[21] The Commission's discretion to proceed on a "case-by-case" basis is not absolute. When the underlying considerations that support ad hoc adjudication are no longer present, then the Commission will be bound to follow the formal rulemaking procedures set out in the Tex.Gov't Code Ann. § 2001.141. See Southwestern Bell Tel. Co. v. Public Util. Comm'n, 745 S.W.2d 918, 926-27 (Tex.App.-Austin 1988, writ denied).
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909 F. Supp. 1368 (1995)
INDUSTRIAL TRUCK ASSOCIATION, INC., a District of Columbia corporation, and Mitsubishi Caterpillar Forklift America, Inc., a Delaware Corporation, Plaintiffs,
v.
Dr. Carol HENRY, Director of the Office of Environmental Health Hazard Assessment, and Daniel D. Lungren, Attorney General for the State of California, Defendants.
Civil No. 94-1738-R (LSP).
United States District Court, S.D. California.
June 21, 1995.
*1369 *1370 Gary E. Cross, Dunaway & Cross, Washington, DC, William N. Kammer, Gray, Cary, Ware & Freidenrich, San Diego, CA, for plaintiffs.
Dennis A. Ragen, Deputy Attorney General, San Diego, CA, Carol R. Brophy, McKennan & Cuneo, Los Angeles, CA, for defendants.
ORDER GRANTING DEFENDANTS' MOTION TO DISMISS AND DENYING PLAINTIFFS' MOTION FOR SUMMARY JUDGMENT
RHOADES, District Judge.
The present case is before the Court on Defendants' motion to dismiss and Plaintiffs' motion for summary judgment. The Court heard oral argument on both motions on April 24, 1995. The Court also accepted amicus curie briefs filed on behalf of the organizations As You Sow and Coalition of Manufacturers for Responsible Administration of Proposition 65. The Court subsequently ordered further briefing from Plaintiffs and Defendants regarding the Supreme Court case Freightliner Corp. v. Myrick, ___ U.S. ___, 115 S. Ct. 1483, 131 L. Ed. 2d 385 (1995).
The Complaint filed by Plaintiffs seeks a declaratory judgment that the California Safe Drinking Water and Toxic Enforcement Act of 1986 ("Proposition 65") and its implementing regulations are preempted by the federal Occupational Safety and Health Act ("OSH Act") insofar as Proposition 65 and the regulations impose warning requirements on manufacturers and distributors of industrial trucks. After considering the historic presumption against finding preemption in areas of safety and health, rules of statutory interpretation, and the congressional intent in providing for preemption in the OSH Act, the Court concludes that no federal OSH Act standard exists with regard to whether industrial truck manufacturers or distributors must provide toxic warnings. The federal standards consequently cannot preempt Proposition 65 or the Proposition 65 regulations insofar as either the state statute or regulations require truck manufacturers or distributors to provide warnings.
Plaintiffs' motion for summary judgment is DENIED. Defendants' motion to dismiss is GRANTED.
I. Background
The Occupational Safety and Health Act ("OSH Act") authorizes the Secretary of Labor to "set mandatory occupational safety and health standards applicable to businesses affecting interstate commerce." 29 U.S.C. § 651(b)(3). Section 18 of the OSH Act provides that the OSH Act and the regulations promulgated pursuant to the OSH Act preempt state-law occupational safety and *1371 health requirements on issues that are subject to a federal standard unless the state law requirement is issued pursuant to a state plan that has been submitted to and approved by the Secretary of the U.S. Department of Labor. 29 U.S.C. § 667(a)-(c); Gade v. National Solid Wastes Management Association, 505 U.S. 88, 112 S. Ct. 2374, 120 L. Ed. 2d 73 (1992).
One standard promulgated under the OSH Act is the Federal Hazard Communication Standard ("HCS"), 29 C.F.R. § 1910.1200 (1994). The preamble to the HCS provides that the HCS is
intended to address comprehensively the issue of evaluating the potential hazards of chemicals, and communicating information concerning hazards and appropriate protective measures to employees, and to preempt any legal requirements of a state, or political subdivision of a state, pertaining to this subject.
29 C.F.R. § 1910.1200(a)(2). The HCS applies to "manufacturers," "importers," and "distributors" of chemicals and "employers." 29 C.F.R. § 1910.1200(b). Chemical manufacturers, importers, and distributors and employers are required to provide warnings to employees regarding the dangers associated with hazardous chemicals.
On November 4, 1986, California voters passed Proposition 65, known as the Safe Drinking Water and Toxic Enforcement Act of 1986. The substance of Proposition 65 is similar to the provisions of the federal HCS. The "warning requirement" of Proposition 65 prohibits "person[s] in the course of doing business" from "knowingly and intentionally expos[ing] any individual to a chemical known to the state to cause cancer or reproductive toxicity without first giving clear and reasonable warning to such individual." Cal. Health & Safety Code § 25249.6.
Some of the regulations implementing Proposition 65 are promulgated by the Office of Environmental Health Hazard Assessment ("OEHHA"), and are recorded in Title 22 of the California Code of Regulations ("the Title 22 regulations"). The Title 22 regulations establish specific means of compliance with Proposition 65 warning requirements for three types of exposure: consumer produce exposures, occupational exposures, and environmental exposures. Cal.Code Regs. tit. 22, § 12601(b)-(d). The regulations define "occupational exposure" as "an exposure, in the workplace of the employer causing the exposure, to any employee." Cal.Code Regs. tit. 22, § 12601(c).
California did not submit Proposition 65 or the Title 22 regulations to OSHA for approval as part of the State Plan until ordered to do so by the California Court of Appeal. On July 12, 1990, the California Court of Appeal issued a peremptory writ ordering the California Standards Board to incorporate the Proposition 65 occupational warning requirements into the State Plan. California Labor Fed'n v. Occupational Safety and Health Standards Bd., 221 Cal. App. 3d 1547, 271 Cal. Rptr. 310 (1990).[1] The Standards Board complied with the state court's order by directing the California Occupational Safety and Health Standards Board ("Cal-OSHA") to promulgate what is now Title 8, Section 5194(b)(6) of the California Code of Regulations. Section 5194(b)(6) requires compliance with Proposition 65 warning requirements. Cal.Code Regs. tit. 8, § 5194(b)(6). The Standards Board incorporated Section 5194(b)(6) into the State Plan on November 21, 1991.
After reviewing Section 5194(b)(6), OSHA concluded that the State Plan provisions are at least as effective as the federal standards and does not conflict with the federal standards, but has not granted final approval of the State Plan. The parties agree, however, that the State may enforce the provisions of the State Plan that are still pending OSHA approval.
*1372 Plaintiffs Industrial Truck Association and Mitsubishi Caterpillar Forklift America, Inc. filed the present action on November 14, 1994. Plaintiffs seek a declaratory judgment that Proposition 65 and the Title 22 regulations are preempted by federal law insofar as either requires manufacturers and distributors of industrial trucks to provide warnings about occupational exposures to hazardous substances, (Compl. at ¶¶ 31, 32, B.) Plaintiffs also seek an injunction permanently enjoining Defendants ("the State") from enforcing Proposition 65 or the Title 22 regulations to require manufacturers and distributors of industrial trucks to provide the warnings. (Compl. at 10:-11.)
The parties dispute two basic issues: (1) whether a federal standard exists that preempts the warning requirement of Proposition 65 as applied to manufacturers; and (2) whether Section 5194(b)(6) incorporates the general requirements included in Proposition 65 and the Title 22 regulations, thereby avoiding preemption of the general warning requirement.
II. Legal Standards
A. The Legal Standard for Dismissal Under Rule 12(b)(6)
On a motion to dismiss for failure to state a claim upon which relief can be granted under Rule 12(b)(6), the complaint is construed in the light most favorable to the plaintiff, and its allegations are taken as true. United States v. Gaubert, 499 U.S. 315, 327, 111 S. Ct. 1267, 1276, 113 L. Ed. 2d 335 (1991); McKinney v. De Bord, 507 F.2d 501, 503 (9th Cir.1974). A motion to dismiss is generally viewed with disfavor, and only rarely granted. United States v. Redwood City, 640 F.2d 963, 966 (9th Cir.1981). Factual or legal conclusions, inferences, or deductions, however, are not given a presumption of truthfulness. Western Mining Council v. Watt, 643 F.2d 618, 624 (9th Cir.), cert. denied, 454 U.S. 1031, 102 S. Ct. 567, 70 L. Ed. 2d 474 (1981). In reviewing a complaint, a court should let the claims stand "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45, 78 S. Ct. 99, 102, 2 L. Ed. 2d 80 (1957).
B. Legal Standard for Summary Judgment Under Rule 56
Rule 56(c) of the Federal Rules of Civil Procedure provides that summary judgment is appropriate if the "pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." One of the principal purposes of the rule is to dispose of factually unsupported claims or defenses. Celotex Corp. v. Catrett, 477 U.S. 317, 325, 106 S. Ct. 2548, 2553-54, 91 L. Ed. 2d 265 (1986). As noted by the Supreme Court, "[s]ummary judgment procedure is properly regarded not as a disfavored procedural shortcut, but rather as an integral part of the Federal rules as a whole, which are designed `to secure the just, speedy and inexpensive determination of every action.'" Celotex Corp., 477 U.S. at 327, 106 S.Ct. at 2555 (quoting Fed.R.Civ.P. 1).
In considering a motion for summary judgment, the Court must examine all the evidence in the light most favorable to the non-moving party. United States v. Diebold, Inc., 369 U.S. 654, 655, 82 S. Ct. 993, 994, 8 L. Ed. 2d 176 (1962). A moving party who bears the burden of proof at trial is entitled to summary judgment only when the evidence indicates that no genuine issue of material fact exists. Fed.R.Civ.P. 56(c); Celotex, 477 U.S. at 324, 106 S.Ct. at 2553 (1986).
Once the moving party meets the requirement of Rule 56 by either showing that no genuine issue of material fact remains, the burden shifts to the party resisting the motion, who "must set forth specific facts showing that there is a genuine issue for trial." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256, 106 S. Ct. 2505, 2514, 91 L. Ed. 2d 202 (1986). It is not enough for the party opposing a properly supported motion for summary judgment to "rest on mere allegations or denials of his pleadings." Id. Genuine factual issues must exist that "can be resolved only by a finder of fact because they *1373 may reasonably be resolved in favor of either party." Id. at 250, 106 S.Ct. at 2511.
To make such a showing, the nonmoving party must go beyond the pleadings to designate specific facts showing that there is a genuine issue for trial. Celotex, 477 U.S. at 325, 106 S.Ct. at 2553-54. Such evidence need not be in a form admissible at trial to avoid summary judgment. Id. The moving party is entitled to judgment as a matter of law if the nonmovant fails to make a sufficient showing of an element of its case with respect to which it has the burden of proof. Id.
III. The Question Posed
As mentioned above, the parties pose two separate questions for this Court to address: (1) whether a federal law or regulation exists that preempts Proposition 65 and the Title 22 regulations as applied to industrial truck manufacturers or distributors; and (2) whether the general warning requirement of Proposition 65 or the Title 22 regulations is incorporated into the State Plan and therefore avoids preemption. If no federal law or regulation exists that addresses the issue of whether the truck manufacturers or distributors must provide a warning, then preemption is not possible and the Court need not address the second question posed by the parties.
As explained below, no federal standard exists which addresses whether industrial truck manufacturers or distributors must provide warnings regarding toxic chemicals. Consequently, preemption is not possible and the Court need not reach the second question posed by the parties.
In Gade v. National Solid Wastes Management Association, 505 U.S. 88, 112 S. Ct. 2374, 120 L. Ed. 2d 73 (1992), the Supreme Court established that "the OSH Act preempts all state `occupational safety and health standards relating to any occupational safety or health issue with respect to which a Federal standard has been promulgated.'" Gade, at 103, 111, 112 S.Ct. at 2386, 2390 (quoting 29 U.S.C. § 667(b)).
One standard promulgated under the OSH Act is the Federal Hazard Communication Standard ("HCS"), 29 C.F.R. § 1910.1200 (1994). The preamble to HCS provides that the HCS is
intended to address comprehensively the issue of evaluating the potential hazards of chemicals, and communicating information concerning hazards and appropriate protective measures to employees, and to preempt any legal requirements of a state, or political subdivision of a state, pertaining to this subject.
29 C.F.R. § 1910.1200(a)(2).
The preamble establishes that the HCS is meant to preempt all state laws on the "subject" or "issue" addressed by the HCS. The precise question for this Court is whether the "issue" addressed by the HCS is broad enough to encompass warnings by industrial truck manufacturers and distributors. In light of the traditional presumption against preemption, rules of statutory interpretation, and the congressional intent in giving preemptive effect to regulations promulgated under the OSH Act, the answer to the question is "no."
IV. Discussion
The HCS limits the issue addressed by the HCS both in the subsection describing the scope of the HCS and throughout the HCS. The HCS only imposes restraints on parties other than industrial truck manufacturers or distributors. The limited scope of the actual regulations, when considered in conjunction with (i) the strong presumption against finding federal preemption with regard to health and safety regulations, (ii) rules of regulatory interpretation, and (iii) the congressional purpose in providing the OSH Act with preemptive power, compels the conclusion that the HCS does not preempt a state requirement that industrial truck manufacturers or distributors provide hazard warnings on the industrial trucks.
A. The Presumption Against Preemption of the States' Police Power Supports a Construction of the HCS Which Allows States to Regulate Industrial Truck Manufacturers and Distributors
Our federal system places the authority for regulating health and safety in the *1374 hands of the States. Federal regulations can deprive the states of the states' traditional power to regulate health and safety only when Congress clearly establishes that the federal regulations preempt state law. The presumption operates in the present case to prevent a broad construction of the "issue" addressed by the HCS.
As explained by Justice Kennedy in his concurring opinion in Gade: "we begin `with the assumption that the historic police powers of the States [are] not to be superseded ... unless that was the clear and manifest purpose of Congress.'" Gade, 505 U.S. at 111, 112 S.Ct. at 2390 (Kennedy, J., concurring) (quoting Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230, 67 S. Ct. 1146, 1152, 91 L. Ed. 1447 (1947)); see also Hillsborough County v. Automated Medical Lab., Inc., 471 U.S. 707, 715, 105 S. Ct. 2371, 2376, 85 L. Ed. 2d 714 (1985). A court must look to "the structure and purpose of the [regulation] as a whole" to determine whether the regulation preempts state law. Gade, 505 U.S. at 98, 112 S.Ct. at 2383.
The statement of preemption in the preamble of the HCS must be read in light of the historic preference against finding preemption where the State's power to regulate health and safety is at issue. The statement that the HCS preempts all state and local laws "pertaining to the subject" of communicating hazards to employees is clear. There is no doubt that the HCS does preempt state and local laws. See Nat'l Solid Wastes Management Ass'n v. Killian, 918 F.2d 671, 676 (7th Cir.1990) (citing the HCS as an example of express preemption by OSHA regulations), aff'd, Gade v. Nat'l Solid Wastes Management Ass'n, 505 U.S. 88, 112 S. Ct. 2374, 120 L. Ed. 2d 73 (1992); Environmental Encapsulating Corp. v. New York City, 855 F.2d 48, 54 (2d Cir.1988) (same). What is less clear is the scope of the "subject" or "issue" that the HCS preempts.
As already explained above, the preamble to the HCS describes a broad "issue" which is preempted: communication of hazards to employees. The "Scope and application" section, as well as the remaining text of the regulation, however, limit the scope of the issue only to communication to employees by employers and chemical handlers. The HCS leaves unregulated other groups who could provide separate warnings to employees, such as industrial truck manufacturers or distributors.
Where a group is left unregulated, it is not impossible for that group to comply with both federal and state law "because there is simply no federal standard for a private party to comply with" and the state regulation cannot "frustrate `the accomplishment and execution of the full purposes and objectives of Congress.'" Freightliner Corp. v. Myrick, ___ U.S. ___, ___, 115 S. Ct. 1483, 1488, 131 L. Ed. 2d 385 (1995) (concluding that a federal statute does not preempt state law where no federal standard exists with regard to ABS brakes) (quoting Hines v. Davidowitz, 312 U.S. 52, 67, 61 S. Ct. 399, 404, 85 L. Ed. 581 (1941)). In the absence of a federal requirement, the Court cannot assume that Congress meant to preempt state law with regard to the unregulated subject. The Court cannot infer preemption from silence.
The HCS is silent with regard to regulation of industrial truck manufacturers and distributors. The Court consequently cannot conclude that the HCS bars state regulation of industrial truck manufacturers and distributors.
In short, despite the broad sweep of the language in the preamble of the HCS, the HCS as a whole limits the issue addressed by the HCS because the HCS explicitly regulates only employers and chemical handlers. The HCS, when read in its entirety, falls short of demonstrating a "clear and manifest purpose" to deprive states of their right to regulate industrial truck manufacturers with regard to warning requirements. In light of the strong presumption against finding preemption of state law in the area of health and safety and the corollary that a court cannot infer preemption from the absence of regulation, the scope of the issue addressed by the HCS is properly limited to requiring employers and chemical handlers to participate in providing warnings to employees. Industrial truck manufacturers and distributors fall outside *1375 the scope of the HCS and consequently may be subject to state regulation.
B. The Doctrine of Ejusdem Generis Supports a Narrow Construction of the Preemptive Effect of the HCS
The doctrine of ejusdem generis requires that specific statements control the general statements in a statute or regulation. Ejusdem generis lends added support to the conclusion that the HCS does not preempt state regulation of industrial truck manufacturers or distributors because neither group is included among those explicitly regulated by the HCS.
A well-established rule of statutory interpretation, ejusdem generis, provides that, where specific words follow general words, "the general words are construed to embrace only objects similar in nature to those objects enumerated by the [subsequent specific words]." 2A C. Sands, Sutherland on Statutory Construction § 47.17, p. 188 (5th ed. 1992); see also, Breininger v. Sheet Metal Workers, 493 U.S. 67, 91-92, 110 S. Ct. 424, 438-39, 107 L. Ed. 2d 388 (1989) (applying the doctrine of ejusdem generis).
In the present case, the preamble of the HCS provides that the HCS is intended to preempt any legal requirements of a state regarding the subject of "communicating information concerning hazards" to employees. 29 C.F.R. § 1910.1200(a)(2). The preamble also notes that the HCS is meant to address the subject "comprehensively." Id.
The section of the HCS immediately following the preamble, entitled "Scope and application," however, limits the reach of the HCS to cover only employers and chemical manufactures, importers, and distributors. 29 C.F.R. § 1910.1200(b). A reading of the entire HCS confirms that the HCS imposes regulation on the four groups identified in the "Scope and application" section.
Application of the doctrine of ejusdem generis to the HCS compels the conclusion that the preemptive power of the HCS extends only to state or local regulations which impose warning requirements on the four groups specifically identified in the HCS. Despite the broad the language of the preamble, the HCS, when considered in its entirety, reveals that the Court should not grant the HCS preemptive power beyond barring States from imposing hazard warning or evaluation requirements on chemical manufacturers, importers, and distributors, or employers. The foregoing careful, narrow construction of the HCS is further supported by the character of the preemption for the OSH Act intended by Congress.
C. Congress' Purposes in Passing the OSH Act Support a Narrow Construction of the Issue Preempted by the HCS
Congress' reasons for providing preemptive effect to OSH Act regulations are not as broad as some other federal laws which provide for preemption, such as ERISA. The purpose for preemption by OSH Act standards is not to eliminate discrepancies between state standards, but, rather, to avoid the imposition of conflicting or duplicative standards on the regulated groups. A reading of the HCS with the congressional rationale for preemption in mind requires a construction of the HCS which preempts only those state laws which would subject particular groups to conflicting or duplicative standards.
The extent of preemption intended by Congress is the key factor in determining whether federal law preempts state law. As explained by the plurality in Gade: "The purpose of Congress is the ultimate touch-stone." Gade, 505 U.S. at 96, 112 S.Ct. at 2382-82 (quoting Allis-Chalmers Corp. v. Lueck, 471 U.S. 202, 208, 105 S. Ct. 1904, 1909-10, 85 L. Ed. 2d 206 (1985)). An examination of the congressional intent behind providing preemptive power for the OSH Act reveals that the preemptive effect of the HCS should not extend beyond the scope of covering those persons explicitly regulated by the HCS.
Some federal statutes provide for expansive preemption. ERISA, for instance, explicitly states that ERISA "supersede[s] any and all State laws insofar as they may now or hereafter relate to any employee benefit plan...." 29 U.S.C. § 1144(a). The ERISA *1376 preemption clause is a "`virtually unique preemption provision' whose language is `conspicuous for its breadth' and [is] `deliberately expansive.'" Trustees of Elec. Workers Health & Welfare Trust v. Marjo Corp., 988 F.2d 865, 866 (9th Cir.1992) (citations omitted). ERISA preempts every state law that "relates" to employee benefit plans in an attempt to establish a uniform national standard that guarantees efficient operation of the federal regulatory scheme. See Henry L. Drummonds, The Sister Sovereign States: Preemption and the Second Twentieth Century Revolution in the Law of the American Workplace, 62 Fordham L.Rev. 469, 523-24 (1993).
The OSH Act, however, is not designed to accomplish the same broad preemptive goals as ERISA. The purpose of the OSH Act is to ensure minimum standards of workplace health and safety. See 29 U.S.C. § 651(b); Gade, 505 U.S. at 96, 112 S.Ct. at 2382; Environmental Encapsulating Corp. v. New York City, 855 F.2d 48, 59 (2d Cir.1988) (the Act's purpose is to "assure minimumbut not necessarily uniformoccupational health and safety standards"). A state may supplant the federal standards, but only if the state standards meet or exceed the federal standards. 29 U.S.C. § 667(b). The OSH Act therefore does not aim to establish a uniform system of workplace health and safety regulations. Rather, the Act is designed to guarantee minimal workplace standards and to ensure that "employers and employees [are subject] to only one set of regulations, be it federal or state." Gade, 505 U.S. at 99, 112 S.Ct. at 2383.
A reading of the HCS with the specific preemptive purpose of the OSH Act in mind supports a narrow construction of the "issue" addressed by the HCS. As explained above, the scope of the HCS does not extend beyond the requirements imposed upon employers and chemical handlers. An interpretation of the HCS that extends the preemptive effect of the HCS beyond the clear scope of the HCS would ignore the fact that Congress' primary concern in providing for preemption in the OSH Act was to ensure minimal standards and to avoid the imposition of duplicative regulations on workers and employers.
The plurality in Gade repeatedly emphasized that Congress provided the OSH Act with preemptive powers in order to avoid placing duplicative regulations on workers and employers. See Gade, at 99-100, 101-02, 112 S.Ct. at 2384, 2385. The Gade plurality briefly hinted, however, that Congress may have intended a broader preemptive power for the OSH Act. The Gade plurality noted that a subsection of the OSH Act provides that the Secretary of Labor shall approve a state plan if, in the Secretary's judgment, the plan does not include product standards which "unduly burden interstate commerce." Gade, at 100, 112 S.Ct. at 2384 (citing 29 U.S.C. § 667(c)(2)). According to the plurality:
If a State could supplement federal regulations without undergoing the [state plan] approval process, then the protections that the [product standard provision] offers to interstate commerce would easily be undercut. It would make little sense to impose such a condition on state programs intended to supplant federal regulations and not those that merely supplement it: the burden on interstate commerce remains the same.
Gade, at 100-01, 112 S.Ct. at 2384.[2]
The language of the plurality, however, is not directly binding on this Court. First, the above-cited language qualifies as nothing more than dicta. The plurality based its conclusion that the OSH Act implicit wields *1377 implicit preemptive power on the observation that "the OSH Act as a whole evidences Congress' intent to avoid subjecting workers and employers to duplicative regulation." Gade, at 100, 112 S.Ct. at 2384. The plurality based finding of preemption largely on the language of section 18(a) and (b) of the OSH Act. Gade, at 99-100, 112 S.Ct. at 2384. The plurality's observations regarding the product standard were not a necessary, let alone integral, element the plurality's conclusion.
Second, the state law regulations at issue in Gade imposed duplicative regulations on the same groups employers and employees that the federal standards already regulated. The facts of Gade therefore are distinguishable from the present case, where the industrial truck manufacturers are not regulated by the federal standard. Consequently, the Supreme Court was not afforded the opportunity in Gade to consider whether the OSH Act would preempt a state standard which imposed requirements on persons other than those already regulated by the federal standard. This Court, having been afforded the opportunity, concludes that a federal OSH Act standard cannot preempt a state law where the state law place obligations on persons not regulated by the federal standard.
In short, the primary purpose of the OSH Act is to ensure minimum standards for workplace health and safety and to prevent states from issuing regulations that may impose duplicative responsibilities on those groups already regulated by the federal standards. Courts should apply the preemptive effect of a statute based on the congressional purpose in enacting the statute. Reading the HCS in light of Congress' preemptive purpose in passing the OSH Act, this Court concludes that the HCS preempts state law only insofar as the state law attempts to impose warning requirements on employers or chemical handlers. The HCS does not preempt a state law that requires industrial truck manufacturers to provide warnings on their products because the state law does not impose requirements on the same persons already regulated by the federal standard.
D. Summary
Three different considerations each support a narrow construction of the "issue" addressed by the HCS: (i) the presumption against finding preemption on issues involving regulation of health and safety, (ii) the rules of statutory interpretation, and (iii) Congress' purpose in granting preemptive power to OSH Act standards. Application of the doctrine of ejusdem generis reveals that the scope of the HCS is limited to the regulation of certain groups. The presumption against finding preemption of state law in areas regarding health and safety require the Court to strictly construe and to refuse to extend the preemptive scope of the HCS beyond those matters which are clearly regulated by the HCS. Finally, the congressional intent in passing the OSH Act requires this Court to rein in OSH Act standards short of allowing preemption of groups left unregulated by a federal standard.
In short, the preemptive effect of the HCS cannot extend beyond the scope of the HCS. Industrial truck manufacturers are not included within the scope of the HCS. State regulation of the industrial truck manufacturers therefore cannot be preempted by the HCS.
V. Conclusion
The initial question before this Court is whether the "issue" addressed by the HCS is broad enough to encompass hazard warnings by industrial truck manufacturers. As explained above, the doctrine of ejusdem generis as well as the traditional presumption against finding preemption in matters involving health and safety and the congressional intent behind the OSH Act all require the conclusion that the "issue" addressed by the HCS is not so broad as to include hazard warnings by truck manufacturers. The HCS consequently cannot preempt Proposition 65 and the Proposition 65 implementing regulations insofar as Proposition 65 or its implementing regulations (Title 22) require industrial manufacturers to provide hazard warnings to operators of the trucks.
Based on the foregoing analysis, this Court must reject the Complaint's contention that the HCS preempts state law and state regulations *1378 insofar as the state law or regulations require truck manufacturers to provide hazard warnings. Consequently, the State's motion to dismiss the Complaint is GRANTED and Plaintiffs' motion for summary judgment is DENIED.
IT IS SO ORDERED.
NOTES
[1] The California Appellate Court in California Labor Federation decided the issue of whether Proposition 97 required the California OSH Standards Board to include the provisions of Proposition 65 in the State Plan to be presented to OSHA. Proposition 97, passed in 1988, specified that "[t]he state plan shall be consistent with the provisions of state law governing occupational safety and health." Cal.Labor Code § 50.7. The California Labor Federation Court concluded that Proposition 97 required the State Standards Board to include the provisions of Proposition 65 in the State Plan.
[2] Justice Souter's dissent, joined by three other Justices, rejected the plurality's interpretation of the product standard clause:
The [product standard] puts a limit on the Secretary's authority to approve a plan that burdens interstate commerce, thus capping the discretion that might otherwise have been read into the congressional delegation of authority to the Secretary to approve state plans. From this restriction applying only to the Secretary's federal authority it is clearly a non-sequitur to conclude that pre-emption must have been intended to avoid the equally objectionable undue burden that independent state regulation might otherwise impose. Quite the contrary; the dormant Commerce Clause can take care of that, without any need to assume pre-emption.
Gade, at 120, 112 S.Ct. at 2394 (Souter, J., dissenting).
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25 B.R. 142 (1982)
In re Ray F. CHAVEZ and Stella A. Chavez, d/b/a Kettle Restaurants, Debtors.
Ray F. CHAVEZ and Stella A. Chavez, d/b/a Kettle Restaurants, also d/b/a Five Keys Corporation, Plaintiffs,
v.
4B's RESTAURANT, INC., d/b/a Imperial Foods of New Mexico, American Arbitration Association, Nobel, Inc., Cortez-Conley Insurance, Inc., Rainbo Baking Company, Borden's, Inc., Burns International Security Services, Inc., Cain's Coffee Company, Springdale Farms, Inc., Tele Hi-Fi Company, d/b/a Muzak, and El Encanto, d/b/a Bueno Brand Products, Defendants.
Bankruptcy No. 81-01343 M A, Adv. No. 82-0165 M.
United States Bankruptcy Court, D. New Mexico.
November 22, 1982.
*143 Jennie Deden Behles, Albuquerque, N.M., for plaintiffs.
Gregory D. Huffaker, Jr., Albuquerque, N.M., for defendant 4B's Restaurants, Inc.
Rosemary S. Page, Associate Gen. Counsel, New York City, Paul S. Wainwright, Albuquerque, N.M., for defendant American Arbitration Ass'n.
Charles N. Glass, Albuquerque, N.M., for defendant Nobel, Inc.
Thomas S. Watrous, Albuquerque, N.M., for defendant Cortez-Conley Ins., Inc.
John T. Fitzpatrick, Albuquerque, N.M., for defendant Burns Intern. Sec. Services, Inc.
Harold D. Stratton, Jr., Albuquerque, N.M., for defendant Cain's Coffee Co.
William J. Lock, Albuquerque, N.M., for defendant Springdale Farms, Inc.
Leo C. Kelly, Albuquerque, N.M., for defendant El Encanto, Inc.
MEMORANDUM OPINION
MARK B. McFEELEY, Bankruptcy Judge.
This matter came before the Court on the complaint of the debtors, Ray F. and Stella A. Chavez, d/b/a Kettle Restaurants and Five Keys Corporation (debtors), to avoid transfers made to several creditors. The debtor alleges, pursuant to § 547 of the Bankruptcy Code, 11 U.S.C. § 547, that the transfers were made on or within 90 days prior to the filing of their bankruptcy petition on account of antecedent debts and that the transfers resulted in the creditors' receiving more than they would have received if this bankruptcy had been filed pursuant to chapter 7 of the Bankruptcy Code. Between the filing of the complaint and the trial date, debtors reached settlements with creditors Rainbo Baking Company and Tele Hi-Fi Company, d/b/a Muzak, and the Motion to Dismiss filed by the American Arbitration Association was granted, dismissing the debtors' complaint as to that defendant. At trial, the debtors stipulated to a settlement with defendant Cortez-Conley Insurance, Inc., the Court dismissed the complaint against 4B's Restaurants, Inc., for failure of the debtors to prove any legal relation of that defendant to Imperial Foods of New Mexico, to whom the debtors made out their checks, and the Court denied the claim of the debtors as to Burns International Security Services, Inc., upon finding that payment to Burns was not made from funds of the estate. At the trial, the Court further found that $1,520.00 of the funds transferred to Nobel, Inc., were for contemporaneous transfers and did not constitute a preference. The Court took under advisement the remaining $3,000.00 transferred to Nobel, Inc., $3,000.00 transferred to Cain's Coffee Company, and the remaining claims of the debtors against Springdale Farms, Inc., and El Encanto, Inc., d/b/a Bueno Brand Products. As there was no evidence introduced at trial to show a preference, or even a transfer to Springdale Farms, Inc., or El Encanto, Inc., d/b/a Bueno Brand Products, the debtors' complaint as these defendants shall be dismissed.
As to those claims of the debtors which remain, $3,000.00 paid to Nobel, Inc., and $3,000.00 paid to Cain's Coffee Company, we have before us the testimony of debtor Ray F. Chavez that these amounts were for back bills to the defendants, with any concurrent delivery of goods being paid for with additional monies at the time of delivery. The back bills were paid with checks signed by the debtors but which were imprinted in the upper left hand corner with the name "FIVE KEYS CORP. dba PIZZA INN."
*144 Debtors testified that the account on which these checks were drawn was always used for both Pizza Inn and the Kettle Restaurants, and that at the time the checks were written, no Pizza Inn money remained in the account. Debtors used the Five Keys checks because he had them left over and thought not to waste them.
The Five Keys name did not appear above the line on which the debtor put his signature, nor does the debtor's signature indicate that he signed the checks in the capacity of a representative of Five Keys. The defendants contend that the Five Keys inscription on the checks somehow takes the money in the account outside the realm of property of the estate. However, defendants offered no evidence or authority to support this position. Conversely, it is clear that the debtor is personally obligated on these checks, N.M.Stat.Ann. § 55-3-403 (1978), that Kettle Restaurants were making deposits into the account on which the checks were drawn, and the Pizza Inn was not in operation during the period in which funds were transferred. Accordingly, we find that the funds transferred were the property of the debtors.
The standard which is applied to avoid a transfer as a preference is:
1. Property of the debtor is transferred to or for the benefit of a creditor;
2. The transfer was made for or on account of an antecedent debt;
3. The debtor was insolvent at the time of the transfer;
4. The transfer was made on or within 90 days before the date of filing of the bankruptcy petition; and,
5. The transfer has the effect of increasing the amount the transferee receives in excess of entitlement in a chapter 7 proceeding.
11 U.S.C. § 547; Coleman American Moving Services, Inc., v. First Nat'l Bank and Trust Company of Kearney, Nebraska (In re American Properties, Inc.), 5 C.B.C.2d 410, 8 B.C.D. 776, 14 B.R. 637 (Bkrtcy.D. Kan.1981).
The first of these requirements is discussed above. There was no evidence introduced by the defendants which disputed the nature of the debts as antecedent or which refuted the presumption of insolvency of the debtors, 11 U.S.C. § 547(f). The payments to the defendants were made within 90 days of the filing of the petition, and certainly have the effect of giving the defendants more than they would have gotten in a chapter 7 proceeding.
Accordingly, this Court finds that the transfer of $3,000.00 from the debtors to Nobel, Inc., and the transfer of $3,000.00 from the debtors to Cain's Coffee Company are preferences which are avoidable pursuant to 11 U.S.C. § 547.
An appropriate order shall enter.
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25 B.R. 713 (1982)
In the Matter of Shirley Diane HADLEY, Debtor.
FIRST NATIONAL BANK IN FT. MYERS, Plaintiff,
v.
Shirley Diane HADLEY, Defendant.
Bankruptcy No. 81-1851, Adv. No. 81-627.
United States Bankruptcy Court, M.D. Florida, Tampa Division.
December 28, 1982.
Gordon R. Duncan, Fort Myers, Fla., for plaintiff.
Herbert Fried, Fort Myers, Fla., for defendant.
FINDINGS OF FACT, CONCLUSIONS OF LAW AND MEMORANDUM OPINION
ALEXANDER L. PASKAY, Chief Judge.
THIS IS an adversary proceeding instituted by First National Bank in Ft. Myers (the Bank) and the matter under consideration is the dischargeability, vel non, of an obligation owed to the Bank by the Chapter 7 Debtor, Shirley Diane Hadley (the Debtor). The Bank seeks a determination that the balance owed by the Debtor on her Visa credit card is a non-dischargeable debt by virtue of § 523(a)(2)(A) of the Bankruptcy Code. The claim of non-dischargeability is premised on the allegation that the Debtor obtained property by false pretenses and false representation. Specifically, the Bank contends that the Debtor exceeded the credit limit set by the Bank and continued to use the Visa card although she was unemployed at the time relevant. She was without any significant means of support and without reasonable expectancy of an ability to pay for goods charged to the Visa account.
The facts germane to the resolution of this controversy as developed at a final evidentiary hearing are as follows:
*714 On March 29, 1980, the Debtor, in her individual capacity, applied for a Visa credit card which was issued by the Bank on April 14, 1980. The Bank mailed the Visa card, account number XXXX-XXX-XXX-XXX, to the Debtor. In the same communication, the Debtor was notified that the Visa card carried a $500 credit limit. The evidence revealed that the Debtor used the card frequently for small purchases throughout the months of May, June, July and August of 1980 and timely remitted payments to the Bank. Although the statement of August 27, 1981 reflected an outstanding balance which was $23.49 in excess of the Debtor's credit limit, the Bank did not formally notify the Defendant that she had exceeded the limit until September of 1980 when the Bank sent a special request with the September billing, that the Debtor remit a payment of $161.18 (in addition to the regular monthly payment) in order to bring the Debtor's credit balance within the credit limit set by the Bank. From October of 1980 until December 10, 1980, when the Debtor's Visa card was ultimately confiscated, the Bank's monthly billings reflected continuous charges (generally for items costing less than $50 each) and an outstanding balance always in excess of the credit limit, i.e. October closing balance $925; November closing balance $991.46; December closing balance $1,985. The Debtor failed to make any payments after September 22, 1980. (Exh. # 6) During this period, the Bank mailed at least seventeen (17) notices to the Debtor some of which were sent to her home address and some to her sister's address. The notices advised the Debtor of the extent of the over expenditures and that failure to cure the overages would result in revocation of her credit privileges.
It further appears from the record that between September, 1980 and December, 1980, the months during which the unusual and excessive purchases were made, the Debtor was separated from her husband and was unemployed without any meaningful income of her own. Her only source of income was money paid to her from an earlier sale of property which was insufficient to pay for the charges which were made between September and December of 1980.
The record further reveals that during the period relevant, the Debtor entered a drug rehabilitation program in a religious facility in Harmony, North Carolina, stayed with relatives in Jackson, Mississippi and eventually returned to Fort Myers sometime in mid-December. The Debtor testified that she had suffered from severe depression and, in fact, did not recall incurring many of the debts which appeared on the credit statements as December 1980 charges. It is sufficient to note, however, that the overwhelming majority of the purchases made during this time were made in multiples of three or four per day. Further, each of the items, which were purchased separately at the same store, cost less than $50. Therefore, the credit purchases did not require a pre-credit check which is standard procedure in many businesses for credit purchases exceeding $50.
The Debtor contends that she did not receive most of the monthly statements or notices of over extension, however, the evidence is clear that the Debtor did make one payment in September of 1980 shortly after a monthly billing was sent by the Bank. (Plf's Exh. # 6) This payment was received by the Bank on September 22, 1980 in the exact amount as the "minimum payment due" on the previous billing statement, i.e. closing date of August 27, 1980. It is also noteworthy that 12 days prior to the receipt of this payment, the Bank had mailed an "overlimit notice" to the Debtor. The documentary evidence supports a finding that the Debtor became aware of a credit limit through this notice, if not earlier; yet she continued to use her Visa card despite her admitted inability to pay for the purchased items.
On May 18, 1981, the Bank was awarded a money judgment against the Debtors in the County Court of Lee County in the amount of $1,985 plus $32 in costs. The Debtor consulted an attorney regarding her impending bankruptcy on August 5, 1981 and filed a Chapter 7 petition for relief on *715 October 8, 1981. The Bank challenges the dischargeability of the subject indebtedness on the grounds that the debts were incurred through false pretenses or false representation which acts as a bar to discharge under § 523(a)(2)(A) of the Bankruptcy Code.
Section 523 provides in pertinent part:
(a) A discharge under section 727 . . . of this title does not discharge an individual debtor from any debt
(2) for obtaining money, property, services, or an extension, renewal, or refinance of credit, by
(A) false pretenses, a false representation . . .
A claim of non-dischargeability under § 523(a)(2)(A) may be sustained where the Plaintiff establishes that the Defendant made, with intent to defraud, a materially false representation which was relied upon by the Plaintiff. In re Ciavarelli, 16 B.R. 369 (Bkrtcy.M.D.Fla.1982); In re Schnore, 13 B.R. 249 (Bkrtcy.W.D.Wis. 1981). Further, it is generally recognized that a credit card purchaser impliedly represents to both the merchant and the ultimate creditor not only his intent but also his ability to pay for any credit purchases. Thus, anyone who purchases on credit while knowing that he is unable to meet the financial obligations outlined in the credit contract obtains goods through false pretenses. In re Harper, 19 B.R. 207 (Bkrtcy. M.D.Fla.1982); In re Boydston, 520 F.2d 1098 (5th Cir.1975).
In this case, the Debtor by her own admission was aware of her inability to pay the debt which she incurred through excessive use of her Visa card. Further, although the Debtor claims no knowledge of a bank imposed credit limit, the Debtor appeared to exercise caution when using the credit card to keep the purchase amounts below $50 even though on several occasions multiple purchases were made in one store on the same day.
In light of the foregoing, this Court is satisfied that the debt due the Plaintiff on Visa Account No. XXXX-XXX-XXX-XXX which was reduced to judgment in the County Court of Lee County, Florida is non-dischargeable as incurred by false pretenses.
A separate final judgment will be entered in accordance with the foregoing.
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25 B.R. 418 (1982)
Virginia Arlene SHAW, Plaintiff,
v.
Jeanette EASTER, George Ledford, Trustee, Defendants.
In the Matter of Virginia Arlene SHAW, Debtor.
Adv. No. 3-82-0077, Bankruptcy No. 3-80-00633.
United States Bankruptcy Court, S.D. Ohio, W.D.
November 23, 1982.
*419 Lawrence T. Burick, Dayton, Ohio, for defendant.
George Ledford, Englewood, Ohio, trustee/defendant.
Lloyd Cohen, Dayton, Ohio, for plaintiff/debtor.
DECISION AND ORDER ON MOTION TO DISMISS BY DEFENDANT
CHARLES A. ANDERSON, Bankruptcy Judge.
This matter has been submitted upon the case record.
Plaintiff, as Debtor, filed a Chapter 13 Petition on 14 March 1979. The Plan contemplated payment to the mortgagee on her residence real estate "outside the Plan *420 ($18,131.03 due)." It further provided, "All unsecured claims, not classified herein, shall be paid 100 percent on the dollar." She scheduled unsecured debts in the amount of only $62.00. The Defendant was not listed.
The Plan was duly confirmed on 6 June 1980 and the Debtor ordered to pay $37.00 per week for not longer than 36 months. An amended Order of Confirmation was entered on 24 November 1980, not changing material details.
On 6 March 1981 George W. Ledford, Chapter 13 Trustee, objected to the allowance of a secured claim (Number 08) filed by Jeanette Easter in the amount of $6,153.80 because it was "Duplication of the claim filed by Lawrence T. Burick [her attorney]. . . ."
On 19 March 1981 Debtor filed an Amended Plan contemplating the sale of her residence real estate and proposing to distribute the proceeds to pay a realtor's commission, additional attorney fees, and payments under the Plan, and the balance refunded to Debtor.
On 1 April 1980, an order was entered that the claim of Jeanette Easter not be allowed, as claim No. 8, but allowed as claim No. 6, by request of the Chapter 13 Trustee. The Clerk's claim register does not explain the terminology used by the Trustee, although apparently all refer to the claim of Jeanette Easter in the amount of $6,153.80 filed on 23 April 1980.
This claim is based upon a judgment against Debtor on 4 December 1975 rendered by the Common Pleas Court of Montgomery County, Ohio, "arising out of assault and battery." The claim states that, "Since no payment has been received since January 31, 1980 Jeanette Easter invokes Paragraph 2 of the Agreement which provides for the right to collect the full amount of the judgment ($8,500.00) plus interest and costs, less any amounts actually paid by Virginia Shaw." Debits are tabulated in the claim in the sum of $1,272.59.
The claim recites that it is filed as "unsecured," although an expense item shown on August 9, 1979, is for court costs in filing a Certificate of Judgment lien.
By Order on 18 April 1981, the Amended Plan was confirmed.
On 30 April 1981 the Trustee filed a Motion to Allow Claims including Claim No. 6 of Jeanette Easter as secured, in the amount of $6,153.80.
On 1 June 1981 an Objection to Allowance of the Easter Claim was filed, reciting: "The Debtor objects to these claims cuase [sic] they are listed twice for the same claim. Further more the amount owed by the Debtor on this account is much less than the $1,653.80 that is listed. That was the amount originally owed and this was paid down over a series of years prior ot [sic] filing of the claim. The Debtor can present further evidence at hearing as to the actual amount of the claim."
On 25 June 1981 on application in behalf of Debtor, by her attorney, the realtor's commission, expenses of sale, and additional attorney's fees were disbursed.
On 29 June 1981 the following "Withdrawal of Objection to Allowance of Claims" was filed in behalf of Debtor by her attorney, as follows:
"Now comes the Debtor, through counsel who hereby withdraws the Objection to Allowance of Claims for Jeanette Easter and for Smith and Schnacke.
The Objection to these two claims were previously submitted, but since then the Trustee has further clarified the situation. Prior to filing the objection, it was impossible to get the Trustee's attention long enough to get the matter clarified. Now that this matter has been resolved, Debtor respectfully withdraws the objections."
On 10 February 1982 the Trustee filed his Final Report and account seeking a Final Decree and release of the Trustee. Jeanette Easter is listed as a secured creditor, showing both an amount allowed and an amount paid as $6,153.80.
On 12 February 1982 Debtor filed a Complaint against Jeanette Easter seeking an order of court "to reconsider the allowance of defendant's claim," that "defendant's *421 claim be reduced to the amount of $1,328.96," and the return of $4,824.84 to plaintiff, plus interest and attorney's fees, because of "defendant's misrepresentation."
On 15 March 1982 Defendant filed a motion to dismiss the Complaint for failure to state a claim upon which relief can be granted and for lack of jurisdiction.
CONCLUSIONS OF LAW AND FACT
Defendant urges dismissal because the complaint does not contain a "jurisdictional statement." This branch of the motion to dismiss must be summarily denied as specifically excepted under Rule 708 of the Rules of Bankruptcy Procedure and supercilious in light of the exclusive jurisdiction over all the property, wherever located, of the debtor, as of the commencement of the case. 28 U.S.C. § 1471(e) and 11 U.S.C. § 362.
The crucial question is whether a claim for relief has been alleged or can be construed so as to do substantial justice.
The record does not disclose the source of the $6,153.80 paid to defendant by the Trustee. Apparently it was derived from the proceeds of sale of the real estate. All the Trustee's account reveals, however, is the receipt "by or for the Debtor for benefit of creditors" of $15,611.82. There is no settlement sheet in the record of the total amount received from the sale and of the distribution thereof. The record likewise does not reveal who paid the necessary $6,153.80 to the Trustee and why the Debtor so belatedly questions the Trustee's allowance of the claim. A serious question of laches arises unless Debtor can submit evidence of misrepresentation or fraud by Defendant.
On the other hand, the record is silent on the question of how Defendant could summarily exercise acceleration of a default provision and thereby obtain funds from the Debtor after court jurisdiction had attached to the estate.
Obviously, the motion to dismiss activates a comedy of errors, primarily those of the Debtor. The controlling legal principles are routine. The Debtor is required by statute to examine any proof of claim and to cause a timely objection to be made to any improper claim. Bankruptcy Rule 13-307, 11 U.S.C. §§ 1302(b)(1) and 704(4). Otherwise, a proof of claim filed in accordance with 11 U.S.C. § 501 is deemed allowed, and the filing thereof is prima facie evidence of the claim. Bankruptcy Rules 301(b), 13-301(b), Interim Rule 3001(b)(5).
Before the case has been closed, an allowed claim may be reconsidered for cause. The claim may be reallowed or disallowed by the Court according to the equities of the case. 11 U.S.C. § 502(j). The terms "cause" and "equities of the case" are not defined and this is a matter of judicial construction.
It is the opinion of this Court that the movant for reconsideration of the order on allowance of claims bears a burden similar to a party seeking a reconsideration of a final order of the court under Civil Rule 60, such as discovery of a clerical error in the order of allowance; newly discovered evidence which could not have been presented to the court at an earlier date, as contemplated by established judicial procedures and before rights have attached; fraud, misrepresentation or other misconduct of Defendant; or the order is void.
The record sub judice does not permit a dismissal of the action before evidence is adduced. The Debtor-Movant has, at least, set forth a claim for relief conformably to Civil Rule 8(a)(2) and Bankruptcy Rule 708 and is entitled to an evidentiary hearing.
ORDERED, ADJUDGED AND DECREED, that Defendant's motion to dismiss is denied.
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25 B.R. 303 (1982)
In re Murray BEITMAN, Debtor.
Lawrence A. BOTTARO, t/d/b/a Lawrence A. Bottaro, Contractor, Plaintiff,
v.
Murray BEITMAN, Defendant,
v.
Penny S. BEITMAN, Third Party Defendant.
Civ. A. No. 1-82-1132.
United States District Court, M.D. Pennsylvania.
November 2, 1982.
*304 Charles E. Schmidt, Jr., Harrisburg, Pa., for plaintiff.
Walter K. Swartzkopf, Jr., Harrisburg, Pa., for defendant.
MEMORANDUM
CALDWELL, District Judge.
The plaintiff, Lawrence Bottaro, is a general contractor who constructed a home for the defendants, husband and wife, at 4214 Lisa Drive, Harrisburg, Pennsylvania. Upon completion in May of 1981, the defendants were unable to pay the full amount owed the plaintiff and executed as security a demand note in plaintiff's favor in the amount of $6,900.00 at 16% interest. Before payment was made on the note, the defendant, Murray Beitman individually, filed a petition in bankruptcy.[1] On schedule A-2, the defendant listed the joint debt to the plaintiff in the amount of $7,000.00 as an unsecured claim without priority. The marital residence at 4214 Lisa Drive was listed as an asset of the estate, but was claimed as exempt under Section 522(b)(2)(B) of the Bankruptcy Code and 42 Pa.C.S. §§ 8123 and 8124 of the Pennsylvania Judicial Code.
On August 6, 1982, the Bankruptcy Court modified its order of discharge as follows:
[T]he discharge of Murray Beitman is hereby modified to allow unsecured creditors to whom Murray Beitman and Penny S. Beitman are jointly liable, to seek judgment by state court proceedings against Murray Beitman and Penny S. Beitman, and to enforce any judgment so obtained against property in which Murray Beitman has an interest as tenant by the entirety, to the extent provided by the Law of Pennsylvania, without restraint by this Court. No judgment obtained against Murray Beitman shall establish or impose personal liability on him beyond his interest in such property held as tenant by the entirety.[2]
Defendants have appealed this order contending that Murray Beitman's discharge relieved him of his share of the joint debt and that creditors should not be permitted effectively to revive the debt by proceeding against entireties' property in state court.
We believe the Bankruptcy Judge acted properly. It is clear initially that the marital residence could not be properly claimed as an exemption pursuant to 11 U.S.C. § 522(b)(2)(B). That section provides for exemption of
any interest in property in which the debtor had, immediately before the commencement of the case, an interest as a tenant by the entirety or joint tenant to the extent that such interest as a tenant by the entirety or joint tenant is exempt from process under applicable nonbankruptcy law.
(Emphasis added). The language thus does not broadly exempt a debtor's marital residence, *305 but specifically predicates the exemption upon immunity from process. In the recent case of Napotnik v. Equibank and Parkvale Sav. Assn'n., 679 F.2d 316 (3d Cir.1982), the court pointed out that entirety property may be reached in Pennsylvania to satisfy the joint debts of husband and wife and thus is not immune from process. Id. at 320, citing Consumers Time Credit, Inc. v. Remark Corp., 248 F. Supp. 158 (E.D. Pa.1965); Swope v. Turner, 193 Pa.Super. 217, 163 A.2d 714 (1960); Arch Street Building & Loan Ass'n. v. Sook, 104 Pa.Super. 269, 158 A. 595 (1932). The court went on to hold that a creditor with a joint judgment on a joint debt may levy on the property itself and thus on the interests both of the debtor and his spouse, 679 F.2d at 321. Napotnik thus permits a judgment creditor to proceed against entireties property on a joint debt, even in situations in which only one spouse has filed a petition in bankruptcy.
We believe it is thus appropriate to allow the plaintiff to proceed against the entireties property in state court. The property was never properly the subject of an exemption in respect to joint debts of Mr. and Mrs. Beitman. We refuse to insulate the property from the plaintiff's claims by virtue of Mr. Beitman's discharge, for, by doing so, we would preserve the technical integrity of discharge at considerable cost to the broader purposes of the Bankruptcy Code. In Phillips v. Krakower, 46 F.2d 764 (4th Cir.1931), the Court said
The purpose of the bankruptcy act was to equitably distribute the assets of distressed debtors among their creditors and to discharge them from further liability after this had been done. It was never contemplated that it should be used to perpetrate fraud or to shield assets from creditors.
Id. at 765. We will not shield from creditors property which is properly subject to their claim and will, therefore, affirm the order of the bankruptcy judge.
NOTES
[1] The defendant filed his petition on August 21, 1982. Apparently, the plaintiff made demand on his note earlier in the same month, but the check with which he was paid was dishonored for insufficient funds.
[2] The August 6, 1982, order was issued to clarify an order of August 3, 1982, inconsistent in effect, in which the court permitted unsecured creditors to proceed in state court against entireties property on joint debts. The court, however, also stated that Murray Beitman's personal obligation to the plaintiff was discharged, that the discharge was to remain unimpaired, and that no judgment obtained against Murray Beitman was to impose personal liability on him.
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25 B.R. 471 (1982)
In re VANTAGE PETROLEUM CORP., Debtor.
George W. HUDTWALKER, Jr., Trustee for Vantage Petroleum Corp., Plaintiff,
v.
UNITED STATES DEPARTMENT OF ENERGY, Defendant.
Bankruptcy No. 882-81962-20, Adv. No. 882-0796-20.
United States Bankruptcy Court, E.D. New York at Westbury.
December 7, 1982.
*472 Hershcopf & Stevenson, New York City, for trustee; Abraham Backenroth, New York City, of counsel.
Thomas H. Kemp, Janice Alperin, Washington, D.C., of counsel, for Dept. of Energy.
MEMORANDUM
ROBERT JOHN HALL, Bankruptcy Judge.
George W. Hudtwalker, Jr., as Trustee for Vantage Petroleum Corp., a debtor under chapter 11 of the Bankruptcy Code, 11 U.S.C. § 1101 et seq. (Supp. IV 1980), by a complaint filed on 22 November 1982, prays for a judgment staying administrative proceedings against the debtor by the Economic Regulatory Administration (the "ERA") of the United States Department of Energy (the "DOE"). Simultaneously, the Trustee on three days telephonic notice obtained a temporary restraining order prohibiting the DOE from issuing a Final Remedial Order against the debtor pending the hearing and determination of the instant proceeding scheduled, held and completed on 30 November 1982.
Background
The debtor is in the business of leasing gas stations and distributing gasoline. At the present time, the debtor supplies and/or operates several dozen gas stations in the New York metropolitan area.
Based on the allegations in the DOE's responsive papers, it appears that on 7 April 1980, the ERA issued a Notice of Probable Violation ("NOPV"), later amended, charging the debtor with probable violations of DOE's gasoline price guidelines. In response, the debtor, by its then special counsel and accountants, submitted on 26 September 1980 a formal reply. Cf. 10 C.F.R. § 205.191 (1980). Thereafter negotiations ensued. However, on 23 February 1982, the ERA once again amended its NOPV. This time the debtor failed to respond which resulted in the issuance of a Proposed Remedial Order ("PRO") on default on 5 November 1982. Cf. id. (1982). The PRO which was published in the Federal Register on 15 November 1982, cf. id. at § 205.192, contained proposed conclusions of law stating that the debtor had overcharged its customers in violation of 10 C.F.R. Part 212 in the amount of $1,274,886.72 based on sales from 1 April 1979 through 31 August 1982. The proposed remedies would require the debtor to deliver a certified check within 30 days to the DOE in the amount of $1,274.886.72 for overcharges and $981,173.22 in interest from 1 April 1979 to November 1982.[1] Paragraph 4 of the PRO provides:
*473 The Administrator of the Economic Regulatory Administration shall direct that these monies be deposited in a suitable account for ultimate disposition by DOE in accordance with law.
Inasmuch as the DOE is authorized, inter alia, to order a roll back in prices, to refund the money to purchasers or to deposit it with the Treasury, 10 C.F.R. § 205.1991, where it will presumably escheat to the United States if not claimed, See, e.g., 28 U.S.C. § 2042 (1976), it is unclear to the Court what disposition of these funds is envisioned. Cf. Citronelle-Mobile Gathering, Inc. v. Edwards, 669 F.2d 717 (T.E.C.A. 1982).
Be that as it may, inasmuch as the PRO was apparently published in the Federal Register, the debtor had until 30 November 1982 to file a Notice of Objection. 10 C.F.R. § 205.193. The debtor's failure to file such an objection would likely result in a final Remedial Order being issued. Id. Similarly, the debtor's failure to appeal such Remedial Order to the Office of Hearings and Appeals within 30 days would result in the entry of a final non-appealable order, id. at § 205.199c, presumably requiring it to comply with the above-indicated remedies. But see note 1 supra.
In the interim, however, an involuntary petition in bankruptcy was commenced against the debtor on 2 August 1982 which was converted to a voluntary petition under chapter 11 on 24 August 1982. Thereafter, on 8 September 1982, after a two day trial, Lawrence and Cheryl Iorizzo, who were the controlling officers, directors and sole shareholders of the debtor, were removed from control of the debtor in favor of Mr. Hudtwalker as Trustee after it was established that the Iorizzos had defrauded their creditors out of millions of dollars. See In re Vantage Petroleum N.J. Corporation, No. 882-82411-20 (Bankr.E.D.N.Y. 16 Nov. 1982).[2] At this time, it is highly uncertain, even assuming the Iorizzos avoid prison, see id., whether they will ever regain control of or share an interest in the reorganized debtor.
The Hearing
At the 30 November 1982 hearing on the instant proceeding, the Trustee argued:
1. that the attorneys and accountants that had been representing the debtor before the DOE prior to the commencement of these proceedings were no longer representing the debtor;[3]
2. that the Trustee does not have the time nor expertise to contest these administrative actions;
3. that he has been quoted figures of $20,000.00 to retain competent counsel in Washington, D.C. to defend these actions;
4. that the estate can not afford this amount now;
5. that after investigation the Trustee might not object to the DOE's claim eliminating the need for any litigation;
6. and that in the absence of injunctive relief, the DOE will obtain a final non-reviewable judgment for the full amount sought by default without the Trustee having had a reasonable opportunity to inquire into the matter at a time when a reasonable delay would not prejudice the DOE as the representative of the allegedly overcharged public.[4]
In response, the DOE argued:
1. that inasmuch as the DOE is engaged in a regulatory action it is not stayed by section 362 of the Code;
*474 2. that the doctrine of sovereign immunity denies this Court the jurisdiction to enjoin the DOE proceeding under section 105 of the Code;
3. only the DOE has the jurisdiction and expertise to adjudicate this claim;
4. and that an extensive delay would prejudice the DOE by somehow invalidating their prior discovery.[5]
At this point, the Court informed the parties that it had no intention of trying this claim if only because it did not have the expertise, and that therefore if it were to be liquidated the litigation would have to be before the DOE.[6] This proposition was accepted by the Trustee. Accordingly, the issues to be resolved are:
1. Is the DOE presently stayed;
2. if not, does this Court have the power to enjoin it;
3. if yes, should this Court exercise that power?
1. Section 362
Section 362 provides in pertinent part:
(a) Except as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title operates as a stay, applicable to all entities, of
(1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title;
(2) the enforcement, against the debtor or against the property of the estate, of a judgment obtained before the commencement of the case under this title
....
(b) The filing of a petition under section 301, 302, or 303 of this title does not operate as a stay ...
(4) under subsection (a)(1) of this section, of the commencement or continuation of an action or proceeding by a governmental unit to enforce such governmental unit's police or regulatory power;
(5) under subsection (a)(2) of this section, of the enforcement of a judgment, other than a money judgment, obtained in an action or proceeding by a governmental until to enforce such governmental unit's police or regulatory power ....
11 U.S.C. § 362(a)(1) & (2), (b)(4) & (5) (emphasis added.)[7]
*475 In the instant case, although it is not completely clear,[8] the DOE is apparently attempting to fine the debtor for prepetition violations of gasoline price guidelines promulgated under the authority of the Emergency Petroleum Allocation Act of 1973, Pub.L. 93-159, 87 Stat. 628 and the Economic Stabilization Act of 1970, as amended, Pub.L. 93-28, 87 Stat. 27. The goal of this legislation was to provide an equitable allocation of crude oil at equitable prices as a response to the "national energy crisis" that crude oil shortages had caused, Pasco, Inc. v. Federal Energy Administration, 525 F.2d 1391, 1394 (T.E.C.A.1975), and to create an effective mechanism for enforcing such regulations on a national scale. Citronelle-Mobile Gathering, Inc. v. Edwards, 669 F.2d 717, 721 (T.E.C.A.1982). Moreover, agency enforcement proceedings are not designed to provide redress for a particular victim injured by a DOE regulation violation, Bulzan v. Atlantic Richfield Company, 620 F.2d 278, 282 (T.E.C.A.1980), although restitution may be ordered, Citronelle-Mobile, 669 F.2d at 721.
Accordingly, it would appear that this is the type of regulation that falls into the exception created by section 362(b)(4); and that therefore, absent an injunction, the DOE is not stayed from liquidating their claim against the debtor.[9]But cf. Missouri v. U.S. Bankruptcy Court, 647 F.2d 768, 776 (8th Cir.1981), cert. denied, 454 U.S. 1162, 102 S. Ct. 1035, 71 L. Ed. 2d 318 (1982); D.M. Barber, Inc. v. Valverde, 13 B.R. 962, 963 (Bkrtcy.N.D.Tex.1981).
2. Section 105
The DOE takes the position that absent a waiver the doctrine of sovereign immunity denies this Court the jurisdiction to enjoin their proceedings. United States v. Testan, 424 U.S. 392, 398, 96 S. Ct. 948, 953, 47 L. Ed. 2d 114 (1976). Moreover, the DOE argues, section 105 is not such a statutory grant.
The legislative history to sections 105 and 362(b)(4) and subsequent case law are, however, to the contrary.
The House Report explains the interaction between these two sections thusly:
Subsection (b) lists five exceptions to the automatic stay. The effect of an exception is not to make the action immune from injunction.
The court has ample other powers to stay actions not covered by the automatic stay. Section 105, of proposed title 11, derived from Bankruptcy Act § 2a(15), grants the power to issue orders necessary or appropriate to carry out the provisions of title 11. The bankruptcy courts are brought within the scope of the All Writs Statute, 28 U.S.C. 1651 (1970), and are given the powers of a court of law, equity, and admiralty (H.R. 8200, § 243(a), proposed 28 U.S.C. 1481). Stays *476 of injunction issued under these other sections will not be automatic upon the commencement of the case, but will be granted or issued under the usual rules for the issuance of injunctions. By excepting an act or action from the automatic stay, the bill simply requires that the trustee move the court into action, rather than requiring the stayed party to request relief from the stay. There are some actions, enumerated in the exceptions, that generally should not be stayed automatically upon the commencement of the case, for reasons of either policy or practicality. Thus, the court will have to determine on a case-by-case basis whether a particular action which may be harming the estate should be stayed.
With respect to stays issued under other powers, or the application of the automatic stay, to governmental actions, this section and the other sections mentioned are intended to be an express waiver of sovereign immunity of the Federal government, and an assertion of the bankruptcy power over State governments under the Supremacy Clause notwithstanding a State's sovereign immunity.
House Report at 342, U.S.Code Cong. & Admin.News, pp. 6298-6299 (emphasis added). And the case law, both under the former Act and present Code, has recognized this principle. See, e.g., Missouri v. U.S. Bankruptcy Court, 647 F.2d 768, 776-77 (8th Cir.1981), cert. denied, 454 U.S. 1162, 102 S. Ct. 1035, 71 L. Ed. 2d 318 (1982); Garrity v. Goldstein (In re National Hospital and Institutional Builders Company), 658 F.2d 39, 43 (2d Cir.1981); Securities and Exchange Commission v. First Financial Group, 645 F.2d 429, 439-40 (5th Cir.1981); In re Shippers Interstate Service, Inc., 618 F.2d 9, 13 (7th Cir.1980); National Labor Relations Board v. Jones, (In re Bel Air Chateau Hospital, Inc.), 611 F.2d 1248, 1251 (9th Cir.1979) (per curiam); National Labor Relations Board v. Brada Miller Freight Systems, Inc., 16 B.R. 1002, 6 C.B.C.2d 375, 389 (D.C.N.D.Ala.1981); In re Northern Boneless Meat Corp., 9 B.R. 27, 29 (D.C.S.D.N.Y.1981); Tuscon Yellow Cab Company v. National Labor Relations Board, 21 B.R. 166, 168 (Bkrtcy.D.Ariz.1982); Schatzman v. Department of Health and Rehabilitative Services (In re King Memorial Hospital, Inc.), 4 B.R. 704, 709 (Bkrtcy.S.D.Fla.1980).
Accordingly, it is clear that under the proper circumstances this Court has the power to enjoin proceedings before the DOE.
3. Should this Court Enjoin the Proceedings Before the DOE?
Consequently, this Court reaches the final question: should it enjoin the DOE's proceedings.
The above-cited cases speak of the propriety of such an action only when "the assets of the estate are threatened". Although there has been scant judicial elaboration on this phrase, Tucson Yellow Cab, supra, 21 B.R. at 168, the Act cases, under which the test arose, generally found it satisfied by threatened agency enforcement actions as opposed to agency adjudicatory activities. See, e.g., Bel Air, supra, 611 F.2d at 1251. However, inasmuch as section 362 now stays such enforcement activity automatically, the requirement of satisfying such a test before a section 105 injunction could issue, essentially renders section 105 superfluous. Such a statutory interpretation is never preferred. Marsano v. Laird, 412 F.2d 65, 70 (2d Cir.1969); accord In re Rimgale, 669 F.2d 426, 430-31 (7th Cir.1982).
Alternatively, one recent Code case held the assets of an estate to be sufficiently threatened to issue a section 105 injunction where the agency was about to determine a major claim in the case. Tucson Yellow Cab, supra, 21 B.R. 166.
Without attempting to define the parameters of what the test for the issuance of a section 105 injunction should be, the Court is convinced the Trustee has established justification in this case.
In the instant case, the Trustee was served with a Proposed Remedial Order which runs 84 pages and grew out of years of litigation to which he was not a party and informed that under the law he had 15 days to file a response. Clearly, he cannot. *477 Consequently, absent injunctive relief, the DOE will obtain an apparently non-reviewable default judgment, which fuller litigation may prove it not to be entitled to, to the detriment of the estate and its other creditors. This, the Court believes, is a sufficient threat to the estate to justify section 105 relief.
Finally, it is unclear to the Court whether the traditional test for the granting of a preliminary injunction is also applicable to this situation.
The standard in the Second Circuit for injunctive relief clearly calls for a showing of (a) irreparable harm and (b) either (1) likelihood of success on the merits or (2) sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly toward the party requesting the preliminary relief.
Jackson Dairy, Inc. v. H.P. Hood & Sons, Inc., 596 F.2d 70, 72 (2d Cir.1979) (footnote omitted).
Assuming this test also to be applicable, the Court finds the imminent threat of the DOE's obtaining a default judgment without the Trustee's having had an opportunity to examine into the underlying merits of the claim at a time when a reasonable delay would not prejudice the DOE to have satisfied the test.[10]
Conclusion
Based on the foregoing, the Court holds that:
1. The DOE is not stayed by section 362 from adjudicating its claim against the debtor although it is stayed from enforcing any judgment it obtains without leave of this Court;
2. this Court has the power to enjoin the proceedings before the DOE under section 105; and
3. this Court will exercise that power by granting the Trustee until March 31, 1983 to file with the DOE an appropriate response to the Proposed Remedial Order and hereby enjoins the DOE from issuing a final Remedial Order or taking any other equivalent action vis-a-vis the debtor pending the earlier of such date and the date, if any, the Trustee files such a response.
Settle Order.
NOTES
[1] The DOE now concedes that it cannot claim interest after the date the bankruptcy commenced, to wit, 2 August 1982. DOE Memorandum at 4 n. 4; see 11 U.S.C. § 502(b)(2). Additionally, the DOE appears to conceed that it cannot enforce any administratively obtained judgment against the debtor's assets without leave of this Court. DOE Memorandum at 8; 11 U.S.C. § 362(b)(5).
[2] Based on such facts, the Iorizzos have been replaced by a trustee in the related case of Vantage Petroleum N.J. Corporation.
[3] In fact, they are now apparently unpaid creditors.
[4] As indicated above, it is not at all clear whether the DOE intends to disburse the damages back to the public or keep them as a fine. In either case, no reason was offered as to why the DOE should be paid sooner or receive a higher percentage of its claim than other prepetition unsecured creditors of the debtor.
[5] It was also conceded by the DOE at the hearing that their administrative proceeding deals only with the alleged pre-petition violations of the debtor and that the DOE was not aware of any current violations by the present management.
[6] Additional authority for this proposition can be found in such sources as 28 U.S.C. § 1478(a); Nathanson v. National Labor Relations Board, 344 U.S. 25, 73 S. Ct. 80, 97 L. Ed. 23 (1952); Bulzan v. Atlantic Richfield Company, 620 F.2d 278, 283 (T.E.C.A.1980). But see 28 U.S.C. 1471; Neavear v. Schweiker, 674 F.2d 1201 (7th Cir.1982); Tucson Yellow Cab Company v. National Labor Relations Board, 21 B.R. 166 (Bkrtcy.D.Ariz.1982); Remke, Inc. v. United States, 5 B.R. 299 (Bkrtcy.E.D.Mich. 1980).
[7] The House Report to section 362(b)(4) & (5) provides:
Paragraph (4) excepts commencement or continuation of actions and proceedings by governmental units to enforce police or regulatory powers. Thus, where a governmental unit is suing a debtor to prevent or stop violation of fraud, environmental protection, consumer protection, safety, or similar police or regulatory laws, or attempting to fix damages for violation of such a law, the action or proceeding is not stayed under the automatic stay. Paragraph (5) makes clear that the exception extends to permit an injunction and enforcement of an injunction and to permit the entry of a money judgment, but does not extend to permit enforcement of a money judgment. Since the assets of the debtor are in the possession and control of the bankruptcy court, and since they constitute a fund out of which all creditors are entitled to share, enforcement by a governmental unit of a monetary judgment would give it preferential treatment to the detriment of all other creditors.
H.R.Rep. No. 595, 95th Cong., 1st Sess. 343 (1977) (the "House Report") reprinted in [1978] U.S.Code Cong. & Ad.News, pp. 5787, 5963 et seq., 6299. And the joint explanatory statement issued by the sponsors of the Code, and accordingly entitled to great weight, Pauley v. Spong, 661 F.2d 6, 10 (2d Cir.1981), explained the provision thusly:
Section 362(b)(4) indicates that the stay under section 362(a)(1) does not apply to affect the commencement or continuation of an action or proceeding by a governmental unit to enforce the governmental unit's police or regulatory power. This section is intended to be given a narrow construction in order to permit governmental units to pursue actions to protect the public health and safety and not to apply to actions by a governmental unit to protect a pecuniary interest in property of the debtor or property of the estate.
124 Cong.Rec. H11092 (daily ed. Sept. 28, 1978) (remarks of Rep. Edwards); id. at S17409 (daily ed. Oct. 6, 1978) (remarks of Sen. DeConcini).
[8] The Court has been forced to move expeditiously: first to protect the Trustee from a default and now so as to decide whether to maintain its injunction. Accordingly, the Court has been unable to examine into all the intricacies of this matter as deeply as it otherwise would have chosen.
[9] It should be noted, however, that the DOE is stayed by section 362 from collecting on any judgment it obtains such as by ordering the debtor to pay the proposed fine without leave of this Court. Ohio v. Kovacs, 681 F.2d 454, 456 (6th Cir.1982) (per curiam); Ohio v. Mansfield Tire and Rubber Company, 660 F.2d 1108 (6th Cir.1981). Furthermore, based on what has been presented to the Court, the granting of such leave would be inappropriate, inasmuch as it would apparently result in the DOE (or the public) receiving a preference. See 11 U.S.C. § 547; notes 4 & 7 supra.
[10] Although the DOE alleged that a long delay would prejudice it, it never explained how. Cf. notes 4 & 9 supra.
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25 B.R. 838 (1982)
In re Leonard D'AVIGNON d/b/a Leonard D'Avignon & Sons Trucking, Debtor.
Thomas GORSKY, Plaintiff,
v.
Leonard D'AVIGNON d/b/a Leonard D'Avignon & Sons Trucking, Defendant.
Bankruptcy No. 81-33, Adv. No. 82-0089.
United States Bankruptcy Court, D. Vermont.
November 24, 1982.
*839 Neal C. Vreeland, Buffalo, N.Y., for plaintiff.
John R. Barrera, Middlebury, Vt., for defendant.
MEMORANDUM AND ORDER REGARDING THE PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT
CHARLES J. MARRO, Bankruptcy Judge.
The plaintiff filed a motion for partial summary judgment as to three counts in his complaint to Determine Dischargeability as follows, viz.:
1. Failure to explain loss of assets.
2. Partnership liability i.e. the liability of a general partner is not dischargeable.
3. Concealment of assets.
This adversary action arises out of the Complaint to Determine Dischargeability and objecting to Discharge filed by Thomas Gorsky, on May 29, 1981. The gravamen of the plaintiff's complaint arises from a series of transactions among the Debtor, Leonard D'Avignon, Marcel Page and the Plaintiff, Thomas Gorsky. Subsequent actions were taken by the parties to effect discovery, and based upon the information made available, the plaintiff filed a Motion for Summary Judgment on June 11, 1982. The motion was accompanied by his memorandum and affidavit. The Debtor responded with a memorandum and affidavit on June 24, 1982, with the plaintiff's final reply memorandum being filed on June 30, 1982. It is at this posture that the case currently stands.
STATEMENT OF FACTS
In August of 1980 the Debtor and Marcel Page contacted the plaintiff in regards to setting up an arrangement for the purchase of high moisture corn as produced on the plaintiff's farm. The debtor sought to purchase corn for the purpose of transporting and selling it to farmers in the State of Vermont. (D'Avignon deposition p. 87-93, hereinafter cited as "D.D.").
The debtor was introduced to Gorsky by Marcel Page, who had previously dealt with Gorsky in a similar transaction during the harvest of 1979. (D.D., p. 90 and Gorsky affidavit, p. 1). In the course of making the arrangements on Gorsky's farm in Stillwater, New York, it was represented to Gorsky that the debtor and Page were "going to establish a joint checking account," and that they "were going to more or less form a partnership." (D.D. 93). These statements were made to assure the farmers that "they were going to be paid." (D.D. 93).
From September 21, 1980 through November 13, 1980, the debtor and Page in purchasing corn from various New York farmers had set out separate sales areas with Vermont highway Route 7 being the dividing line (D.D. 89). During the course of his business the debtor kept all of his corn purchases, with one exception, recorded in his Merchants Bank check register. (D.D. 14). He further kept all receipts from corn sales, again with one exception, recorded in the check register and deposited *840 such sale proceeds in the Merchants Bank. (D.D. 69).
On November 10, 1980 the debtor issued a check to Gorsky in the amount of $12,696.39 for corn purchases of October 31, 1980, November 1, 1980 and November 4, 1980. These purchases were transported by Pierre Page (Marcel Page's driver), Harold Manning and Tom Brown (D'Avignon's drivers). Subsequently, the November 10, 1980 check was dishonored and returned to Gorsky for non-sufficient funds. (D.D. 29, 56).
In the period of November 3, 1980 through November 13, 1980, twelve additional purchases were made from Gorsky. Of these twelve loads Pierre Page transported six: Harold Manning transported four: and the debtor transported one. (Exhibit A, Gorsky affidavit). Of the six loads transported by Pierre Page, only one was delivered to the debtor's customer, Leo Bean. The remaining deliveries in the transaction with Mr. Bean were made by Harold Manning and the debtor himself. (D.D. 106-107).
The debtor's final sale of corn was to Jim Minor of Brandon, Vermont. This sale involved 82.2 tons of corn delivered by Harold Manning. It resulted in the one exception in the debtor's Merchants Bank check register. (D.D. 45, 107).
The exception arose when Mr. D'Avignon cashed the check from the sale to Minor and obtained two cashier's checks. He applied the cashier's checks to a prior corn purchase debt, as well as, to a truck leasing debt. (D.D. 45, 46). This change in procedure stemmed from a levy placed upon Mr. D'Avignon's checking account by the Internal Revenue Service. (D.D. 44-48, 97-100, 103).
QUESTION PRESENTED
The plaintiff, Thomas Gorsky, has moved the Court pursuant to F.R.C.P. 56(a) for summary judgment denying the Defendant-Debtor a discharge and/or exempting the Plaintiff's debt from discharge. The plaintiff asserts three arguments in support of a judgment in his favor, i.e. (1) the Defendant-Debtor has failed to explain satisfactorily a substantial loss of assets under 11 U.S.C. § 727(a)(5); (2) the Defendant-Debtor, as a general partner of a partnership by estoppel, is not entitled to a discharge, since he is not an individual within U.S.C. § 727(a)(1); (3) that the Defendant-Debtor has transferred, removed, destroyed, or concealed his property within one year prior to the filing of the petition, with the intent to hinder, delay, or defraud a creditor under 11 U.S.C. § 727(a)(2).
I. WHETHER THE COURT SHOULD GRANT SUMMARY JUDGMENT IN FAVOR OF THE PLAINTIFF, THOMAS GORSKY.
The plaintiff, Thomas Gorsky, has moved the Court for summary judgment alleging that there is no genuine issue as to the material facts of the case. The determination of whether to find in favor of the movant can only be made after considering the general nature of summary judgment and each of the legal theories submitted by the plaintiff.
The primary purpose of a motion for summary judgment is to avoid a useless trial. Summary judgment is a procedural device for promptly disposing of actions in which there is no genuine issue of any material fact even though such issue might have been raised by formal pleadings. Mintz v. Mathers Fund, Inc., 463 F.2d 495 (7th Cir., 1972). Rule 56 of the Federal Rules of Civil Procedure was clearly intended to be used to pierce allegations of pleadings and allow the trial court to dispose of a case in advance of a hearing on the merits, when the pleadings, depositions, answers to interrogatories, admissions, and affidavits show there is no genuine issue as to any material fact. Bryant v. Kentucky, 490 F.2d 1273 (6th Cir., 1974).
In the instant case, the plaintiff has presented a thorough presentation of the factual basis in support of his theories for judgment through affidavits, deposition, and detailed documentary memoranda. It is at this point that Mr. D'Avignon's reply must be considered, especially in view of *841 the recent decision of the United States Court of Appeals for the Second Circuit in United States of America v. Potamkin Cadillac Corporation, 689 F.2d 379 (1982). In Potamkin, the Court stated:
Rule 56(e) of the Federal Rules of Civil Procedure states unequivocally that in order to defeat a motion for summary judgment, the opposing party must "set forth specific facts showing that there is a genuine issue for trial." Such issue is not created by a mere allegation in the pleadings, Applegate v. Top Associates, Inc., 425 F.2d 92, 96 (2d Cir.1970); Korinis v. Sealand Services, Inc., 490 F. Supp. 418, 422 (S.D.N.Y.1980), nor by surmise or conjecture on the part of the litigants, Nemo v. Allen, 466 F. Supp. 192, 195 (S.D.N.Y.1979). As this Court has more recently stated in Quinn v. Syracuse Model Neighborhood Corp., 613 F.2d 438, 445 (2d Cir.1980):
The mere possibility that a factual dispute may exist, without more, is not sufficient to overcome a convincing presentation by the moving party. See Gatling v. Atlantic Richfield Co., 577 F.2d 185, 187-188 (2d Cir.1978), cert. denied, 439 U.S. 861, 99 S. Ct. 181, 58 L. Ed. 2d 169 (1979). The litigant opposing summary judgment, therefore, `may not rest upon mere conclusory allegations or denials' as a vehicle for obtaining a trial. SEC v. Research Automation Corp., 585 F.2d 31, 33 (2d Cir.1978). Rather, he must bring to the district court's attention some affirmative indication that his version is not fanciful.
With this standard in mind, consideration is to be given to each theory of the plaintiff.
A. HAS THE DEBTOR-DEFENDANT FAILED TO EXPLAIN SATISFACTORILY A SUBSTANTIAL LOSS OF ASSETS UNDER 11 U.S.C. § 727(a)(5).
The plaintiff has alleged the Debtor has failed to explain satisfactorily a substantial loss of assets, and therefore, is not entitled to a discharge by reason of 11 U.S.C. § 727(a)(5). In order to prevail on this theory, the Plaintiff must prove the following: 1) that there are assets which should be there, but are missing; 2) that a request for an explanation of the disposition of the assets has been made, and; 3) the debtor has failed to give a satisfactory explanation.
In the instant case, the plaintiff has attempted to prove that the Debtor had additional assets which have not been accounted for through a review of the corn sales by the plaintiff to the Debtor, additional purchases of corn by Mr. D'Avignon, through his Merchants Bank check register, and the resales of such corn as recorded in the debtor's check register as deposits.
As determined by the plaintiff, the debtor, with Mr. Page, purchased from the plaintiff approximately 1,284.94 tons of high moisture corn. The plaintiff further determined from the check register that the debtor purchased 1,011.39 tons of corn from other farmers, making for total purchases of 2,296.33 tons. The plaintiff then reviewed the debtor's resales of corn, as reflected by the check register, and determined that the debtor had accounted for 2,033.11 tons of corn, leaving 263.22 tons of corn, or approximately 10 truckloads unaccounted for, the approximate value of ten truckloads of corn being $30,000.00 (Plaintiff Memorandum).
In arriving at its conclusions, the plaintiff has not only failed to consider the debtor's account of six truckloads of corn sold to Marcel Page directly, but has attempted to proverbally add apples and oranges together.
The debtor explained that at least six deliveries of corn were handled by Pierre Page for his father, Marcel Page, these purchases being respectfully on October 20, 1980, and during November 5, 1980 through November 11, 1980. (D.D. 77, 106-107), this explanation accounting for six of the ten truckloads found in the plaintiff's records (Plaintiff's affidavit, Appendix A), but not reflected in the debtor's check register.
A second weakness in the plaintiff's conclusions arises from the unrecorded resale *842 by the debtor to Jim Minor. The debtor stated that the transactions of November 12, 1980 and November 13, 1980, being the purchases of three truckloads of corn from the plaintiff, were to complete the resale to Jim Minor. (D.D. 106-107). These three purchases were reflected in the plaintiff's records, however, they were not recorded in the debtor's check register. It was further established that the proceeds from the resale to Jim Minor were not recorded in the debtor's check register. (D.D. 45). It is at this point the infirmities in the plaintiff's calculations become apparent.
The plaintiff determined a portion of the debtor's purchases from the plaintiff and other farmers by a review of the debtor's check register. The plaintiff then set out the remaining purchases through a review of his own records, combining the sums to arrive at the debtor's total purchases. Yet, when the plaintiff determined the total resales, he did so by only using the debtor's check register, thereby ignoring the resale to Jim Minor. The plaintiff then alleged that the unrecorded purchase and resale created "an accounting wash." That is totally inaccurate.
The use of the plaintiff's records resulted in the inclusion of the purchases by the debtor for the resale to Jim Minor, however, by failing to consider the proceeds from that resale in determining the total resales, the alleged substantial loss of assets was created. When the proceeds from the resale to Mr. Minor are applied against the plaintiff's records, less than one truckload of corn remains unaccounted for.
Therefore, not only does it instantly appear that the plaintiff has failed to meet its burden establishing the grounds to oppose the discharge under 11 U.S.C. § 727(a)(5), but any material fact concerning the loads transported by Pierre Page during the period of November 5, 1980 through November 11, 1980, is still a genuine issue. As such, the motion for summary judgment should not be granted upon the grounds of 11 U.S.C. § 727(a)(5).
B. DOES THE DEBTOR'S ALLEGED LIABILITY AS A GENERAL PARTNER, OF A PARTNERSHIP BY ESTOPPEL, SUFFICIENT GROUNDS TO OPPOSE A DISCHARGE IN THE DEBTOR'S INDIVIDUAL CASE?
The plaintiff has opposed the discharge of the debtor on the grounds that since a partnership is not entitled to a discharge under 11 U.S.C. § 727(a)(1), then the partners, as individuals, are not entitled to a discharge, the foundation of this argument being based on the language in section 727(a)(1) that: "The court shall grant the debtor a discharge, unless (1) the debtor is not an individual:"
The plaintiff in asserting these grounds has failed to realize that it is not the alleged D'Avignon/Page partnership which has filed a petition in bankruptcy, but rather it is the petition of Leonard D'Avignon, as an individual. This is an important distinction in that while a partnership entity is not entitled to a discharge under section 727(a)(1); there is nothing in the Code to prevent the individual partner from receiving one. Without this distinction, the "fresh start" concept would be effectively thwarted for anyone unlucky enough to be a member of a failing partnership.
Although the plaintiff has presented indicia of a partnership by estoppel under 11 V.S.A. 1208, through the plaintiff's own affidavit, and the deposition of the debtor, (D.D. 88-90); there has also been a sufficient presentation of evidence to reach a contrary result. This evidence being in the nature of the excerpts from the deposition of Marcel Page; the deposition and affidavit of the debtor; and the extent of corn purchases transported by Pierre Page. It is through this contrary evidence that the material facts concerning the alleged partnership continue to create a genuine issue for trial. The contrary evidence also seems to indicate that the debtor's allegation are not merely conjecture or fanciful.
Therefore, it appears the debtor has set forth specific facts in opposing the motion for summary judgment which would create *843 a genuine issue for trial, and as such the motion for summary judgment should not be granted.
C. WHETHER THE DEFENDANT-DEBTOR HAS TRANSFERRED, REMOVED, DESTROYED OR CONCEALED HIS PROPERTY WITHIN ONE YEAR PRIOR TO THE FILING OF THE PETITION, WITH THE INTENT TO HINDER, DELAY OR DEFRAUD A CREDITOR UNDER 11 U.S.C. § 727(a)(2).
The plaintiff has asserted the second ground for objection to the discharge of the Debtor, as set forth in 11 U.S.C. § 727(a)(2). As stated in section 727(a)(2):
(2) the debtor, with intent to hinder, delay or defraud a creditor ... has transferred, removed, destroyed, mutlilated, or concealed
(a) property of the debtor, within one year before the date of the filing of the petition; ...
The plaintiff's argument is based on the debtor's financial transactions with Jim Minor. In that transaction Mr. Minor presented the debtor a check in payment for the sale of corn. The debtor then cashed the check and applied the proceeds toward purchasing two cashier's checks, which were subsequently used to pay other creditors.
The plaintiff highlights this transaction on the basis that the debtor had cashed the check rather than deposited it in his Merchants Bank checking account, as was his procedure in the past. (D.D. 45-46). The debtor further indicated in his affidavit that he had done so in order to pay certain creditors, rather than depositing the proceeds into his account and having the Internal Revenue Service obtain them by levy. (Debtor's affidavit, p. 2). On the basis of those actions, the Plaintiff has asserted the debtor transferred or concealed the assets with the intent to hinder or defraud a creditor. In support of its position the plaintiff cited In re Leach, 1 B.R. 775 (Bkrtcy.1980).
In Leach, a creditor filed a complaint objecting to the discharge of the debtor based on Section 14(c)(4) of the Bankruptcy Act. The court in denying the discharge, held that where the debtor had previously paid his business expenses from his own checking account, and did not use a joint account of his wife and son until after a creditor attached the debtor's bank account, the circumstances warranted a finding that the property was transferred with the intent to hinder or delay a creditor. The court in reaching its decision noted that while a finding of fraud might not be required, the requisite intent to hinder or delay must exist. In finding this intent, the court cited In re Magenis, 6 C.B.C. 527 D.Or., (1975), and the court's language at 530:
Where a bankrupt makes transfers in order to place assets in other names, converts other assets to cash, and avoids deposits to his own account for the purpose of avoiding attachments, he hinders and delays and defrauds his creditors, even though he states that he wishes to pay his obligations. Elliot v. Herrera, 401 F.2d 174 (9th Cir.1968). The transfer of assets to relatives or to a spouse for the purpose of avoiding the collection efforts of certain creditors constitutes a violation of Section 14(c)(4), if the funds were used for personal use, even though the transferees may have had claims against the bankrupt. In re Gurney, 71 F.2d 144 (2d Cir.1934); In re Richter, 57 F.2d 159 (2d Cir.1932); Tibbs v. Caterinacci, 191 F.2d 957 (4th Cir.1951); Matter of Patrizzo, 105 F.2d 142 (2d Cir.1939). Even the withdrawal of cash from a bank account with the intent to avoid attachment in a bankruptcy action constitutes a violation of Section 14(c)(4) in spite of the fact that funds were paid to creditors Losner v. Union Bank, 374 F.2d 111 (9th Cir.1967).
In the instant case, the debtor did not transfer funds to a relative, nor did he withdraw cash from a bank account to avoid attachment, but instead he dealt with the proceeds from his sale to Jim Minor in the manner he best saw fit. Without more, the requisite intent to hinder or delay does not appear to exist. Further, questions of motive and intent are particularly inappropriate for summary adjudication. Welt v. Koehring Co., 482 F. Supp. 437 (N.D.Ill. *844 1979); and as a general proposition, summary judgment is more likely than not to be inappropriate when issues of intent and motive are material. Skouras Theaters Corp. v. Radio Keith-Orpheum Corp., 58 F.R.D. 357 (D.C.N.Y.1973).
It should also be remembered that the Leach court seemed to infer that if a debtor uses the allegedly concealed funds to pay his creditors, the requisite intent would exist. However, there is contrary authority to that position as noted in Collier's on Bankruptcy, par. 727.02, n. 12 (1979); and the cases cited therein.
As such, it appears that the question of the Debtor's intent to either hinder or delay his creditors cannot be definitely established from the pleadings as they currently stand. Therefore, a genuine issue of a material fact remains of which would prevent the granting of the Plaintiff's motion for summary judgment.
ORDER
Upon the foregoing the Plaintiff's Motion for Summary Judgment is DENIED.
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687 S.W.2d 345 (1985)
A.I. O'KEEFE, Jr., Appellant,
v.
The STATE of Texas, Appellee.
A.I. O'KEEFE, Sr., Appellant,
v.
The STATE of Texas, Appellee.
Nos. 67894, 67895.
Court of Criminal Appeals of Texas, En Banc.
March 27, 1985.
*346 Stu Stewart, Houston, for appellant.
Charles J. Sebesta, Jr., Dist. Atty., Caldwell (Gerald M. Brown, Temple, of counsel), Robert Huttash, State's Atty., Austin, for the State.
Before the court en banc.
OPINION
McCORMICK, Judge.
In a joint trial, appellants were convicted of arson and both were sentenced to ten years' confinement and a $10,000 fine, probated.
During the evening of July 7, 1979, appellants were seen driving away from their weekend home in Brenham around 8:00 p.m. Neighbors testified that appellants left the house in separate cars and drove at a normal rate of speed. Some five to ten minutes after appellants' departure, neighbors noticed smoke coming from the three story house. Within minutes flames could be seen in the northeast first floor section of the house. By the time the first fire-fighters reached the scene at approximately 8:20 p.m., the house was fully involved, with fire on all floors. One fireman testified that the most intense part of the fire was in the central part of the house while the Brenham fire marshall testified that when he arrived around 8:25 p.m., the most intense fire was on the northeast side of the bottom floor.
The State's expert testimony came from Don Hicks, the manager of the special investigations division of CGS Development Laboratories (a forensic engineering company) and from Dr. Andrew Armstrong, an associate professor of chemistry at the University of Texas at Arlington. Hicks testified that his company was hired to investigate the fire by the American General Insurance Company. He went to the fire scene on the afternoon of July 11, 1979, and made a fire scene examination. After walking around the house, he took three samples from areas with low burn patterns and heavy fire damage. He then went to the Brenham fire department and interviewed several individuals who were present at the fire, including the fire chief and the fire marshall. As a result of these interviews, Hicks went back to the fire scene and closely examined the northeast portion of the building. Hicks testified that this examination revealed a definite flammable pour pattern on the floor in the northeast corner of the house. Hicks took a sample from this corner and forwarded all four samples to Dr. Armstrong for chemical analysis. Hicks also testified that he found evidence of low burning and a trailer effect around the south porch and *347 kitchen doorway, indicating that an accelerant was poured in the area. Finally, Hicks testified that in his expert opinion the fire was the result of the deliberate act of an arsonist who used gasoline as an accelerant. On cross-examination, Hicks admitted that because of the large amount of debris covering the entire area of the house, he did not do a detailed examination of the house. He also admitted that three of the samples taken from areas where he saw burn patterns tested out negative as to the presence of an accelerant. Although he knew the house had wood floors and wood shingles on the roof, Hicks had no knowledge as to the type of interior wall coverings nor did he take into consideration in his investigation any of the furnishings of the house. Finally, he testified that he believed the fire began in the center portion of the house.
Dr. Andrew Armstrong testified that he specialized in arson investigation. On July 14, 1979, he received four samples taken from the fire scene by Don Hicks. After testing each sample with a gas chromatograph, Armstrong found that the first sample contained some components which could be associated with gasoline, but they were insufficient for absolute identification. Samples two and three were negative and he found that the fourth sample taken from the northeast portion of the building showed a positive residue of gasoline. Furthermore, the fact that this residue was thermally stressed showed that it had been put on the area before the fire.
William Thompson, an arson investigator with the State Fire Marshall's office testified that he executed a search warrant on the premises in December, 1979, some five months after the fire. He searched for and found three burn patterns, indicating that some type of liquid had been poured on those three locations.
Further evidence showed that the house was purchased by the O'Keefe family some fourteen years prior to the fire and in May of 1978, A.I. O'Keefe, Sr. and his wife transferred ownership of the property to Industrial Plant Services, Inc., the family business, although they still maintained the home as a residence. Furthermore, on January 22, 1979, a loan had been taken out on the house in the amount of $50,000.
Paul Peterson, the property claims supervisor for American General Insurance Company, testified that he was handling the insurance claims filed by the O'Keefe family. Two policies were outstanding on the house. The household contents or unscheduled personal property was insured for $95,500. This policy was in the name of A.I. O'Keefe, Sr. and his wife. The second policy was in the name of Industrial Plant Services and insured the dwelling for $228,000. Proofs of loss and claims were filed on both policies.
The defense presented evidence that during the fire at least one fireman saw a blue flame burning on the first floor. George Cordemeyer, the Brenham fire chief, testified that when he arrived at the fire around 8:15 p.m. the highest area of intensity was on the northeast third floor. Shortly after he arrived Cordemeyer assisted in turning the natural gas supply off where it entered the north side of the house.
The defense presented expert testimony showing that the cause of the fire was either due to a natural gas leak or a cigarette igniting papers and spreading to a plastic container of gasoline that had been left in the house. George Green, a forensic engineer, testified that he had been hired by the defense to investigate the fire and had spent December 7 and 8, 1979, examining the fire scene. He believed the fire started in the east side of the house, possibly in the dining room/parlor area. This was indicated by the fact that the area was burned heavily through the floor, thus showing the longest duration of burning. Green testified that it was possible the fire had originated under the floor. This was evidenced from the fact that there was heavy deep charring underneath the floor. Green testified that the house did not have any sheetrock and the walls in the dining room area had a burly pine wainscot paneling that had been heavily treated with linseed oil.
*348 Green presented two explanations for the quick spread of the fire. First, he found evidence of a gas leak in piping underneath the east side of the house. This would account for the blue flame which the firemen saw near the stairway. The natural path for the fire to travel upward to the second and third floors was through the empty area between the wall and chimney on the east side of the house. Green's second explanation took into account that A.I. O'Keefe, Sr. said he had been using gasoline to clean a piece of furniture in the dining room. O'Keefe, a heavy smoker, had the gasoline in a plastic gallon container and the container was sitting on a pile of papers. Green theorized that after the appellants left the house, an abandoned cigarette may have caught the papers on fire. The accompanying heat eventually ruptured the container of gasoline, throwing the gasoline throughout a large area. The burly pine paneling quickly caught fire and flames spread rapidly.
Green refuted Hick's testimony in several areas. First, he testified that he found no evidence of puddling or pouring on the steps or porch, nor was there any evidence of puddling or pouring in the kitchen. The kitchen floor was made of an epoxy resin material that was highly combustible and this might account for what Hicks thought were pour patterns. In addition, examination of the natural gas pipes close to the furnace showed that there was a gas leakage. Green also testified that the patterns Hicks identified as pour patterns in the center part of the house were caused by the rupture of the container of gasoline. Green found no evidence of puddling but did find an indication of a long-listed burn-through which would be caused by the burning of heavy pieces of furniture. Green attributed the rapid spread of the fire to the drift of the natural gas through the space between the walls of the dwelling. Finally, Green testified that during his examination of the fire scene, he found evidence that a large number of valuables and personal items had been consumed in the fire. He stated that in an arson case where the fire was started to collect insurance proceeds, it was highly unusual that such valuables would not have been removed from the building. He concluded his testimony by stating that he found no evidence that the fire was intentionally set.
The defense also introduced the testimony of Joe Perino, a fire protection consultant. Perino testified that he examined the fire scene in January, 1980, and concluded that the fire originated on the east wall of the dwelling between the fireplace and the outside heating and air conditioning unit. He testified that the fire started underneath the floor as a result of a natural gas leak. He found no evidence of any accelerant being poured on either the back porch or the steps. He found no evidence of any puddling, finger effects or trailer, all of which would have been present had an accelerant been used to intentionally set the fire.
Several witnesses testified that the appellants' reaction to the fire was one of shock and disbelief. A.I. O'Keefe, Jr. testified that he and his father left the house the night of the fire to go to the car wash. While they were at the car wash, they were informed that a house in their neighborhood was burning. They immediately returned home and found the house engulfed in flames. Immediately before they had left the house, his father had been using gasoline to clean a piece of furniture in the dining room. O'Keefe testified that although business for the family company, Industrial Plant Services, was slow at the time of the fire, the company was not at its lowest financial point and had from $60,000 to $65,000 cash available. He had $17,000 available to himself personally.
Finally, A.I. O'Keefe, Sr. took the stand and testified that he did not intentionally burn the house down.
Both appellants were indicted under V.T. C.A., Penal Code, Section 28.02(a)(2) (1974) which provided at the time:
"(a) A person commits an offense if he starts a fire or causes an explosion:
* * * * * *
*349 "(2) with intent to destroy or damage any building or habitation to collect insurance for the damage or destruction."
Cause No. 67,895
A.I. O'Keefe, Sr.
In his first ground of error, appellant contends the evidence is insufficient in that there was no evidence of his intent to collect insurance proceeds. In his third ground of error, he argues that the evidence is insufficient in that not every reasonable hypothesis except that of arson was negated. We find after reviewing the evidence that we must sustain both of appellant's contentions as to the sufficiency of the evidence. Viewing the evidence in the light most favorable to the verdict as we are required to do by Jackson v. Virginia, 443 U.S. 307, 99 S. Ct. 2781, 61 L. Ed. 2d 560 (1979), we find there is no evidence to show any intent to collect insurance. The evidence as to insurance produced by the State shows only that the house and its contents were covered by two insurance policiesone in the name of the appellant and his wife and the other in the name of Industrial Plant Services, Inc.and, that after the fire, claims were made on each policy.
The record fails to include any evidence which might suggest that the policies were taken out shortly before the fire or increased in value shortly before the fire so as to give support to an inference of some criminal intent on the part of the appellant. Compare Miller v. State, 566 S.W.2d 614 (Tex.Cr.App.1978) (where evidence showed an insurance policy had been renewed and coverage increased some two months prior to fire). In short, there is nothing in the record to support a finding by "a rational trier of fact" that appellant set the fire with the intent to collect insurance proceeds.
Likewise the evidence adduced by the State did not negate every reasonable hypothesis as to the cause of the fire. In Denby v. State, 654 S.W.2d 457, at 464 (Tex.Cr.App.1983) (Opinion on Rehearing), this Court noted that "if the evidence supports an inference other than the guilt of the appellant, a finding of guilt beyond a reasonable doubt is not a rational finding." Not only does the evidence in the instant case suggest at least two other reasonable hypotheses besides arson, there is nothing in the record connecting the appellant with the act of arson. The mere fact that it was appellant's residence and he was seen leaving the scene shortly before the fire was discovered is not sufficient to show that he set the fire.
The State relies on Miller v. State, 566 S.W.2d 614 (Tex.Cr.App.1978), in support of their argument that the evidence is sufficient. Although the instant case has many similarities to Miller, we find it to be distinguishable on one key point: the evidence showing that the defendant actually started the fire. In that case, the defendant was shown to have been present shortly before the fire was discovered. He was trying to notify potential customers and his employees that his restaurant would be closed that day. He was seen leaving the scene in a hurried manner and most importantly, he tried to cover up his prior presence on the day of the fire. In the instant case, although appellant was seen leaving the scene shortly before the fire was discovered, none of the other incriminating facts found in Miller are present. Compare Burrow v. State, 481 S.W.2d 895 (Tex. Cr.App.1972) (where evidence showed that the defendant was seen leaving the scene of the fire shortly after it had been set, after the fire the defendant was seen with singed hair and eyebrows, and prior to the fire defendant had threatened to either blow the house up or burn it down); Smith v. State, 450 S.W.2d 92 (Tex.Cr.App.1970) (where after natural gas explosion in the house, among other things, defendant was found lying on floor in house along with burned candle, matches, gas heater was turned on but not lighted, old clothes and paper had been soaked in a substance smelling like kerosene, and insurance policy covering house and contents was found lying on a table in the living room).
*350 We find the evidence insufficient to support the appellant's conviction in Cause No. 67,895.
Cause No. 67,894
A.I. O'Keefe, Jr.
In his first ground of error, appellant contends the evidence is insufficient to show that he started a fire with intent to collect insurance. A review of the evidence adduced at trial leads us to find that there is nothing in the record to show that appellant had the requisite intent regarding collecting insurance. Because there is no evidence to show that appellant had any right to the insurance proceeds or was in any way connected to the insurance policies, it was encumbent upon the State to show that he knew of the insurance and that he set the house on fire at the instigation of the owner. Moore v. State, 66 Tex. Crim. 169, 146 S.W. 183 (Tex.Cr.App.1912). Although it may be inferred that appellant knew of the insurance policies, we find no evidence whatsoever that he set the house on fire at the instigation of the owner. The mere fact that appellant was at the scene shortly before the fire was discovered does not support the State's burden.
Appellant also contests the sufficiency of the evidence in two more grounds of error. First, he maintains that the evidence is insufficient in that not every reasonable hypothesis except that of arson was negated and second, he argues that the evidence was insufficient to show that he was a party to the offense. As we noted above in his father's case, the evidence is insufficient to show that the fire was incendiary in origin. Furthermore, because we have found the evidence lacking in proving that appellant's father actually started the fire and there was nothing additional adduced at trial which incriminates appellant, we are compelled to also find that the evidence is insufficient to sustain appellant's conviction as a party to the offense.
Because of our finding in each cause that the evidence is insufficient to sustain the verdict of the jury, and because of Burks v. United States, 437 U.S. 1, 98 S. Ct. 2141, 57 L. Ed. 2d 1 (1978); Greene v. Massey, 437 U.S. 19, 98 S. Ct. 2151, 57 L. Ed. 2d 15 (1978), we must not only reverse the appellants' convictions, but must direct the trial court to enter a judgment of acquittal in each cause.
W.C. DAVIS, J., dissents.
TEAGUE, J., not participating.
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226 N.J. Super. 572 (1988)
545 A.2d 213
WILLIAM B. MILLISON, AND MARIE MILLISON, HIS WIFE; VERNON G. KRONMAIER AND DOROTHY KRONMAIER, HIS WIFE; SUSAN SCHWEBEL, INDIVIDUALLY AND AS EXECUTRIX OF THE ESTATE OF HAROLD SCHWEBEL; CLARENCE SCHWEBEL AND GERALDINE SCHWEBEL, HIS WIFE; FRANK BAPTISTE AND CATHERINE BAPTISTE, HIS WIFE, AND EDWARD B. AGAR AND EILEEN AGAR, HIS WIFE, PLAINTIFFS-RESPONDENTS,
v.
E.I. DU PONT DE NEMOURS AND COMPANY; WILLIAM E. NEELD, JR., M.D., AND G.F. REICHWEIN, M.D., DEFENDANTS-APPELLANTS, AND JOHNS-MANVILLE CORPORATION; OWENS-ILLINOIS, INC.; OWENS-CORNING FIBERGLAS CORPORATION; KEENE CORPORATION; CELOTEX CORPORATION; RAYBESTOSMANHATTAN CORPORATION; SEPCO CORPORATION; AMATEX CORPORATION; PHILIP CAREY COMPANY; UNITED ASBESTOS AND RUBBER COMPANY, A/K/A UNARCO; ARMSTRONG CONTRACTING AND SUPPLY CORPORATION; ACANDS INDUSTRIES, INC.; BIRD AND SONS, INC.; EAGLE-PICHER INDUSTRIES, INC.; FIBERBOARD CORPORATION; FIBERBOARD CORPORATION, PABCO DIV.; FORTY-EIGHT INSULATIONS, INC.; CHILDERS PRODUCTS COMPANY; GAF CORPORATION; PITTSBURGH CORNING CORP.; H.K. PORTER COMPANY; ROCK WOOL MANUFACTURING COMPANY; PHILADELPHIA ASBESTOS CORPORATION, D/B/A PACOR, INC.; SOUTHERN ASBESTOS COMPANY; DELAWARE INSULATION COMPANY; ARMSTRONG WORLD INDUSTRIES, INC.; GARLOCK, INC.; J.W. ROBERTS, LTD., A DIVISION OF TURNER & NEWALL, LTD.; JOHN DOE CORPORATIONS (1-47); ALBINAS SMULKSTYS, M.D.; JOHN DOE(S), M.D., AND RICHARD ROE, M.D., DEFENDANTS.
Superior Court of New Jersey, Appellate Division.
Argued May 31, 1988.
Decided July 22, 1988.
*576 Before Judges DREIER, BAIME and ASHBEY.
Thomas L. Morrissey argued the cause for appellants (Carpenter, Bennett & Morrissey, attorneys; Thomas L. Morrissey and Rosemary Alito, of counsel; Silvio J. DeCarli and Kevin P. Duffy, on the brief).
David Jacoby argued the cause for respondents (Tomar, Seliger, Simonoff, Adourian & O'Brien, attorneys; David Jacoby, Joshua M. Spielberg and Esther Berezofsky, on the brief).
The opinion of the court was delivered by ASHBEY, J.A.D.
This appeal arises out of a Law Division trial following a remand from the Supreme Court. See Millison v. E.I. du Pont de Nemours & Co., 101 N.J. 161 (1985). There the Court held that the New Jersey Workers' Compensation Act, N.J.S.A. 34:15-1 et seq, precluded plaintiffs from maintaining a separate tort action against their employer E.I. du Pont de Nemours and Co. (du Pont) and its physicians for failure to warn plaintiffs of the known risks of asbestos and their resulting asbestos-related medical conditions. The Court further held, however, that the exclusive remedy of N.J.S.A. 34:15-8 did not bar plaintiffs' tort claims for aggravation of those conditions, to the extent that such aggravation resulted from defendants' fraudulent concealment of them.
Following a five-week trial concerning those claims, a jury rendered verdicts in plaintiffs' favor;[1] the jury awarded compensatory damages for the following asserted periods of concealment as follows:
*577
Plaintiffs Amount Against Asserted period of
Defendants Concealment by defendants
as stipulated
William Millison $25,000 du Pont and 1974-1979
Marie Millison 6,250 Dr. Neeld
(per quod)
Edward Agar 20,000 " " 1975-1979
Eileen Agar 5,000
(per quod)
Vernon Kronmaier 60,000 du Pont and 1965-1977
Dr. Reichwein
Dorothy Kronmaier 15,000 " "
(per quod)
Susan Schwebel 20,000 " " 1971-1975
(as executrix of
the estate of
Harold Schwebel).
Clarence Schwebel 10,000 " " 1976-1978
Geraldine Schwebel 2,500
(per quod)
Frank Baptiste 15,000 " " XXXX-XXXX-XX
Catherine Baptiste 3,750
The jury awarded punitive damages of $200,000 respecting each plaintiff employee. Total damages awarded were $1,382,500.
Defendants' motions for judgment n.o.v. or, alternatively, for a new trial, were denied. Defendants appeal from the ensuing judgment and from the denial of their motions, contending that the verdicts were unsupported by the evidence, and were the product of improper evidentiary admissions.
Plaintiffs are all past or present employees at two du Pont New Jersey plants, Chambers Works and Repauno. Each plant contained extensive piping which was insulated with asbestos-containing material. Millison, Agar, C. Schwebel and H. Schwebel worked as pipecoverers or "laggers," installing and removing pipe and tank insulation. Kronmaier and Baptiste were pipefitters. They installed, repaired and removed the underlying pipes. In so doing, they removed old insulation from pipes. *578 Each plaintiff, therefore, worked with and around asbestos-containing material on a frequent basis during relevant time periods. Each plaintiff received annual or semi-annual physical examinations and chest x-rays from du Pont's doctors. Each received notices from these doctors describing the state of his health following these examinations. At relevant times defendant Dr. Neeld was the medical director at Chambers Works and defendant Dr. Reichwein was a plant doctor at Repauno.
Plaintiffs proffered three experts at trial. Dr. Joseph Wagoner, an expert in epidemiology and in the development of knowledge of asbestos-related diseases; Dr. Auerbach, an expert in asbestos-related disease, and Dr. Sokolowski, an expert in pulmonary medicine. Dr. Miller, an expert in radiology, and Dr. Epstein, an expert in pulmonology, were the only witnesses for defendants. All of the experts acknowledged that, judged by modern medical knowledge, plaintiffs' past x-rays demonstrated asbestos-related conditions. The most common symptom was thickening of the pleura, or membrane covering the surface of the lung. Plaintiffs' experts testified that evidence of pleural thickening (or pleural plaque if localized) in plaintiffs' x-rays at relevant times should have alerted defendant doctors to the presence of asbestos-related conditions and that continued exposure to asbestos aggravated the condition. Defendants' experts, on the other hand, said that evidence of pleural changes did not justify a diagnosis of an asbestos-related condition at relevant times. It was Miller's opinion that, although many radiologists knew in the 1950s that asbestos exposure caused interstitial lung disease, radiologists did not associate pleural plaque or thickening with asbestos exposure until 1977 and 1978. Defendant's experts further gave the opinion that, once an asbestos-related condition was incurred, deterioration was inevitable and not related to further exposure. That underlying difference of expert opinion was related to each plaintiff's particularized claim.
*579 William Millison
William Millison was employed almost continuously at du Pont's Chambers Works plant from 1953 to the time of trial. Millison's 1974 du Pont x-rays demonstrated to the experts asbestos-related changes if judged by 1987 medical knowledge. He worked under further asbestos exposure between 1974 and 1979. Following each du Pont physical examination, he, in accord with undisputed du Pont procedure (applicable to all plaintiffs), received written notice that he suffered from no relevant medical problem and was fit for continued asbestos-related work.
In 1979, du Pont sent Millison's x-ray history to be read by outside radiologist specialists.[2] Three months after these 1979 x-rays, du Pont scheduled Millison for additional x-rays at the request of the outside radiologist. Millison testified that this made him suspicious that du Pont was hiding something from him. He therefore consulted his own pulmonary specialist, Dr. Morowitz, who informed Millison that he had asbestosis and advised him not to work in any asbestos environment. At Neeld's request, Neeld and Millison met. When Millison told Neeld what Morowitz said, Neeld said that Millison did not have asbestosis because he did not have all the "symptoms." Neeld refused to recommend that Millison be removed from his work assignment so long as he used available protective equipment. Millison testified that when he asked for a transfer, Neeld said "If I do it for you, I've got to do it for everybody." Millison testified, "He told me that the company was going to take care of me. So when I asked him how they were going to take care of me, ... he said the company was going to pay my burial expenses." Neeld's August 13, 1979 letter identified Millison *580 as having "benign asymptomatic abnormalities" based upon pleural thickening "as identified in May 1979." He there described Millison as a "lifetime ... lagger [who] had the probability of exposure to asbestos." [emphasis added].[3]
Frank Baptiste
Baptiste worked at du Pont's Repauno plant from 1951 until his retirement in 1980, but was not exposed to asbestos after 1972 or 1973. In May 1951, du Pont's Dr. Zahn (not a defendant) noted several abnormalities in Baptiste's pre-employment x-ray (enlarged hilus shadows on both lungs and increased parenchyma markings). According to du Pont records, Zahn did not find any active pathology and approved Baptiste as an employee. In 1976, defendant Reichwein's records described these abnormalities as "unchanged for several years." According to plaintiffs' experts, Baptiste's 1970 x-rays revealed asbestos-related disease.
In April 1979, Baptiste pulled a chest muscle and his family doctor (Dr. Valecchi) referred Baptiste to a pulmonary specialist, Dr. Joseph Sokolowski, who, in May 1979, found a "restrictive ventilatory defect, consistent with asbestos exposure." Baptiste testified that when he asked his supervisor, John Davis, why he wasn't told of his condition, Davis stated, "What the hell good would it do you?"
Edward Agar
Agar worked at the Chambers Works plant from 1961 to his retirement in 1985, save for a period in 1965. Agar's February 1975 x-ray showed pleural plaque and pleural thickening. He continued to be exposed to asbestos between 1975 and 1979. On February 15, 1979, defendant Neeld, in response to a request concerning whether Agar's medical record demonstrated any pulmonary problems, noted in Agar's medical records, "He has none." According to Neeld's records, he recommended, *581 however, an updated physical, because the last one was received in July 1977. Following receipt of Agar's April 3, 1979 x-ray analysis from Drs. Allen and Oglesby, his records were sent to the outside specialist, Dr. Egoville. Following June of 1979 x-ray analysis identifying calcifications as "consistent with changes which could be due to previous exposure to asbestos or other irritant materials," Neeld wrote in Agar's medical record that he told Agar that "we do not identify any `abnormal physical findings.'" After receiving Dr. Egoville's report, however, du Pont characterized Agar's case as one of "asbestos-related benign symptomatic illness."
Agar testified that, when he attended a safety meeting in February 1979, he found the cigarette smoke unbearable, so he left. Neeld refused to excuse him. Neeld told the general foreman that he had no pulmonary problems and he was suspended for two and one half days without pay for leaving a meeting without permission. His April 1979 annual physical was followed by a card saying that "there was nothing wrong with me". He said he had complained of chest pains to du Pont beginning in 1970.
Clarence Schewebel
C. Schwebel worked almost continuously at the Repauno plant from 1951 to the trial date. Pleural thickening was evident in his 1973 x-ray; 1976 x-rays showed "quite apparent pleural changes" and the 1977 x-rays were "obviously not normal." C. Schwebel was further exposed to asbestos between 1976 and 1978. In 1978, C. Schwebel's daughter, a respiratory therapist, heard noises in his chest and advised him to see his family doctor, Dr. Brower, who took x-rays and informed C. Schwebel that he thought that he had asbestos-related disease. C. Schwebel was also referred to Dr. Egoville in May 1978. Dr. Egoville made a presumptive diagnosis of asbestosis. C. Schwebel then confronted defendant Reichwein with this information. C. Schwebel testified that Reichwein denied that he had visible asbestosis, but said, "you got it from *582 the coal mine or you got it from the rock quarry or you had pneumonia."[4] According to medical records, Reichwein advised C. Schwebel that, while the reports were consistent with asbestosis, they were not specifically diagnostic of asbestosis.
Vernon Kronmaier
Kronmaier worked at the Repauno plant from 1951 to October 1981, when he took a disability pension (for apparently unrelated reasons). He ceased working as a pipefitter in 1977, when he asked to be transferred to light duty. Kronmaier's 1965 x-rays showed pleural plaque and thickening in the left mid-lung field, a condition unchanged in the 1966 and 1968 x-rays. He was exposed to asbestos from 1965 to 1977.
Harold Schwebel
H. Schwebel worked at the Chambers Works plant from 1946 to 1948, again from 1950 to 1951, and then almost continuously at the Repauno plant from 1951 until he retired in 1976. He stopped working with asbestos, however, in 1975. H. Schwebel died on March 21, 1984, of cancer (not claimed in this litigation to be caused by defendants). Pulmonary changes were visible in H. Schwebel's 1965 x-rays, although there was evidence that the changes could be attributed to non-asbestos-related causes. His expert testified, however, that in H. Schwebel's 1971 x-rays, pleural changes appeared asbestos-related. H. Schwebel was exposed to asbestos between 1971 and 1975. Du Pont's 1966, 1967, 1968, 1969 and 1972 medical reports listed abnormalities in H. Schwebel's x-rays, but attributed them to "old inactive lung disease". At deposition H. Schwebel said that defendant Reichwein told him he had an asbestos-related condition before his retirement (not indicated in the record as asbestos-related). Miller testified that calcifications in H. Schwebel's lungs, visible in 1971, should be attributed to tuberculosis.
*583 We have earlier noted the nature of the expert testimony. In addition to the expert opinion concerning what defendants should have known, plaintiffs proffered considerable evidence of corporate knowledge from corporate records. In 1964, Dr. Gordon Stopps (then chief of physiology at du Pont's Haskell laboratory)[5] attended an international conference held by the New York Academy of Sciences on the biological effects of asbestos. Stopps prepared a report which he forwarded to Dr. J.A. Zapp, Director of the laboratory, and to Dr. C.A. D'Alonzo, du Pont's corporate Medical Director. Stopps recommended pulmonary function testing for "all workers exposed to a definite [asbestos] risk," including those installing and ripping out insulation, based on du Pont's use of "roughly 200,000 pounds of pipe insulation" of which "70 per cent" was asbestos.
A copy of Stopps' 1964 report went to each du Pont plant physician, and by further memo (dated November 12, 1964), Stopps informed D'Alonzo of his intention to examine the health records of insulation workers at the Chambers Works plant. There followed extensive correspondence between Stopps and du Pont plant medical personnel concerning the very long incubation period of asbestosis, the need to identify exposed workers and how to monitor their health. (In June of 1966 Stopps urged that all pipe insulation workers wear respirators.) There was correspondence between Stopps and D'Alonzo on the need for corporate funds to pursue the study of existing personnel health. His suggested sample review of Chambers Works employees was conducted by Haskell's Dr. Mary Maxfield *584 who made a report in August of 1966. She reviewed the physical examination cards and x-rays of 52 pipecoverers (presumably including Millison and Agar, in accord with Neeld's simultaneous analysis). Her analysis of the 1955-1966 x-rays at Chambers Works categorized the workers by observable conditions, including pleural thickening, fibrosis, emphysema, bronchiectasis, atelectasis, pneumoconiosis and tuberculoma. This report was sent to Neeld. Stopps wrote Neeld that, "While it would appear that there is no cause for concern as to an undue incidence of cancer among these workers, any other conclusion would be of doubtful validity until more data are obtained." Stopps recommended a corporate meeting to "work out a plan."
Maxfield's 1966 report to Stopps, among other medical literature, precipitated an October 25, 1966 meeting of medical executives of du Pont which Stopps arranged. Neeld attended that meeting. Stopps memorialized the October 25, 1966 meeting's purpose, which was to formulate an asbestos strategy with the corporation's medical officials, including a plan to compare the medical records of asbestos-related employees with non-asbestos-related employees, to develop a registry of all such workers and to develop pulmonary function tests to become part of the annual physical examination for targeted workers. Stopps also mentioned funding as a problem, although a small one, when compared with the risk to health and the risks of worker suits. In November 1966, D'Alonzo wrote to all plant physicians that a pilot study concerning pulmonary tests was being implemented at the Chambers Works plant under the guidance of a pulmonary specialist from the Ohio State University Medical Center. Plant physicians were advised not to buy expensive equipment or initiate "any definitive program until recommendations [were] received." In February 1967, however, Stopps wrote, "Certain of the proposals made at [the October 25] meeting are being carried out ..., but in general the medical recommendations have not been implemented." He noted that past incidence of cancer did not adequately reflect the current *585 problem to the exposed population because of the long incubation period of asbestos-related conditions. He urged that the "exposed population" be monitored. In May 1970, du Pont held a company-wide conference on the potential health hazards of asbestos, expressly excepting the question of compensation of employees. Stopps identified an August 1970 set of guidelines which spoke of informing employees who worked with insulation about potential health problems. Stopps left du Pont in 1971.
A second company-wide conference was held in June 1972, and a third in May 1974. On the 1972 agenda was the topic of medical surveillance of asbestos workers. (The 1974 conference was intended, in part, to educate management concerning compliance with the recently enacted Occupational Safety and Health Act and the recent standards on asbestos promulgated by the United States Department of Labor.)
It was undisputed that these conferences resulted in various company changes: the use of procedures for controlling dust and meetings with plant employees concerning the use of safety devices and practices. Millison testified that in 1977 he attended a meeting where employees were instructed on safety procedures and the use of safety equipment, but it was not until 1980 that he was informed of the dangers of asbestos. Millison further testified that employees installing or removing asbestos were not required to wear respirators until the "late 1970s" and prior to that time very few respirators were available for those who desired to wear them (two or three for approximately 100 employees). Kronmaier testified that he was never given a respirator nor any safety instructions (he stopped pipefitting in 1977). C. Schwebel testified that respirators were not required until the "later years" and only when one was in the "saw room" (a room sectioned off from the plant in later years for sawing asbestos blocks). Masks[6] were available *586 prior to this time, but they, as well as respirators, were ineffective because of the lack of a "good seal." C. Schwebel said he complained about this but nothing was done. Agar also testified that respirators were not required until the late 1970's. Agar further testified that in the mid-to-late 1970's, safety procedures were imposed, such as wearing certain clothing, wetting down a dusty area, etc. Baptiste (who was not exposed to asbestos after 1972) testified that he was never required to wear a respirator. He admitted attending safety meetings concerning dust exposure in 1973 or 1974.
The only evidence presented by defendants concerning their communications to plaintiffs about asbestos was a 1977 memo on removal of asbestos-containing insulation and a 1976 film on the use of respirators. No du Pont executive, medical or otherwise, testified.
Defendant Neeld, who was introduced to the jury at opening, but who did not testify, was Medical Director of the Chambers Works plant (where Millison and Agar were employees) at all relevant times. Plaintiffs conceded that, as Medical Director, Neeld was rarely personally involved in the individual medical exams of plant employees, but as Director, he reviewed the reports, received the 1964 and 1966 memos and attended the 1966 meeting. Prior to the October 1966 meeting, on August 19, 1966, Neeld responded to D'Alonzo's inquiry (initiated by Stopps) to review Chambers Works employees' records for possible exposure to asbestos. Neeld said he reviewed the medical files of the 56 pipecoverers, including Millison and Agar, and found only one man with pulmonary disease (not a plaintiff). His 1966 report reads as follows:
Presently, we have 56 employees whose job classification is pipecoverer or lagger (Addendum #2). Their medical classification is as follows:
Class I - 45 [Including Millison and Agar]
Class II - 10
Class III - 1
*587 Of these, only one, a Class II man ... has any pulmonary disease. He has no work restrictions. His diagnosis is pulmonary fibrosis with compensatory emphysema and it is known to be nonoccupational in origin. A review of the records of the remaining men show x-ray findings which describe `mild parenchymal changes consistent with early fibrosis.' Of course, this minor degree is often subjective and based on the feelings of the physician describing the x-ray.
On December 9, 1966, defendant Neeld responded to D'Alonzo's follow-up request for the numbers of any employees who had experienced asbestosis, mesothelioma or carcinoma. His reply was "0."[7] He said that his records showed only one pipefitter dying between 1950 and 1966, for pulmonary reasons.
In a June 12, 1972 memo, Neeld stated,
... In 1968 I undertook an indepth study of the problem [asbestos exposure] and of our experience on Chambers Works.
My conclusions then parallel my belief now and that is that Chambers Works has no health problem as it relates to asbestos.... [T]here were no deaths in any workers for lung reasons who had ever been laggers or construction employees whose work exposure might occasionally be around asbestos.
Of all the 85 cases of cancer of the lung there is not a single case of the cancer category mesothelioma which purportedly is caused by asbestos.[8]
Reichwein, who was also introduced to the jury, but who did not testify, was a physician at the Repauno plant at all relevant times, where C. Schwebel, Baptiste, Kronmaier and H. Schwebel worked. Reichwein personally reviewed x-rays of these four plaintiffs. He reviewed Kronmaier's annual and semi-annual x-rays from 1966 through 1978; he reviewed the annual and semi-annual x-rays of H. Schwebel from 1966 to 1975; he reviewed Baptiste's annual and semi-annual x-rays from 1966 to 1976, and he reviewed C. Schwebel's annual x-rays from 1967 to *588 1978, each time stamping the record, "there is no evidence of active cardiac or pulmonary pathology."
Between July 1978 and March 1979, OSHA investigated du Pont's Repauno plant, and cited du Pont for non-compliance with asbestos regulations.
Defendants first assert that the verdict was not supported by the evidence. Plaintiffs concede that they were required to prove "aggravation of [occupational-disease] illnesses resulting from defendants' fraudulent concealment of already-discovered disabilities" (Millison, supra, 101 N.J. at 166) and that, "[p]roofs that the doctors negligently misdiagnosed plaintiffs' x-rays or estimated poorly concerning the seriousness of plaintiffs' maladies [would] be insufficient to establish a cause of action outside the Compensation Act." Id. at 183. Plaintiffs acknowledge that they had the "unenviable burden of proving a deliberate corporate strategy to conceal plaintiffs' asbestos-related diseases that were discovered by defendants-doctors in corporate physical examinations." Id. at 183. This was the burden which was charged to the jury and against which the proofs must be measured.
The following proofs were virtually undisputed: (1) each plaintiff evidenced symptoms of an asbestos-related condition during his du Pont employment between 1965 and 1979; (2) none was informed of his symptoms until 1978 or 1979, after OSHA conducted its investigation (except H. Schwebel, retired); (3) du Pont management and physicians, including defendant doctors, knew of the dangers of prolonged asbestos exposure and its relationship to pulmonary disease as early as the 1960s, yet they gave targeted employees (known to them) minimal information concerning those risks beginning only in the mid to late 1970s; (4) defendant doctors either examined or reviewed the x-rays of each plaintiff, knowing each was vulnerable, after each evidenced an asbestos-related condition and after the symptoms shown were referred to in du Pont studies, including some of the same employees; (5) each plaintiff was continually *589 advised by defendants that he had no relevant health problems and returned to work for du Pont in the asbestos environment, and (6) no responsible corporate official or doctor denied individual or corporate knowledge respecting a medical understanding of the significance of plaintiffs' x-rays at relevant times. While du Pont did dispute that plaintiffs had established that their conditions worsened after defendant doctors assured them of their health and they continued to be exposed to asbestos, there was contrary evidence.
It is well settled that a conspiracy can be proved by circumstantial evidence alone, because rarely will there be direct evidence. See Interstate Circuit, Inc. v. United States, 306 U.S. 208, 221, 59 S.Ct. 467, 472, 83 L.Ed. 610, 617 (1939); U.S. v. Trotter, 529, F.2d 806 (3d Cir.1976); State v. General Restoration Co., 42 N.J. 366, 375 (1964); State v. Sherwin, 127 N.J. Super. 370 (App.Div. 1974), certif. den. 65 N.J. 569 (1974), petition dism. sub. nom., Loughran v. N.J., 419 U.S. 801, 95 S.Ct. 9, 42 L.Ed.2d 32 (1974). The evidence need not lead to certainty, as long as the inferences drawn are "grounded in a preponderance of the probabilities according to the common experience of mankind." Joseph v. Passaic Hospital Ass'n, 26 N.J. 557, 575 (1958). The inference cannot be mere guess or conjecture. It must be grounded in logic. Ibid. The line between the two is often difficult to draw and is, of course, a decision to be made by the trier of fact. Ibid. In the absence of any contrary testimony concerning defendants' asserted knowledge and concealment, the jury was free to treat silence as evidence. Baxter v. Palmigiano, 425 U.S. 308, 96 S.Ct. 1551, 47 L.Ed.2d 810 (1976); Mahne v. Mahne, 66 N.J. 53, 60 (1974).
Respecting the individual defendants, plaintiffs assert that defendant Neeld was responsible, if at all, under the doctrine of respondeat superior because he conducted no actual review of the x-rays. As noted, Neeld did not testify. The jury was instructed to find against him, however, only if he had *590 actual knowledge of plaintiffs' conditions and conspired to keep that information from them. We thus find Neeld's reliance upon Wirth v. Gabry, 122 N.J.L. 95 (E. & A. 1939) and Little v. Caterpillar Tractor Co., 169 So.2d 654 (La. App. 1964) misplaced.
In addition to challenging the sufficiency of evidence of individual and corporate knowledge, defendants contend that there was no evidence that plaintiffs' initially-contracted asbestos-related conditions were aggravated by workplace exposure during the period of alleged concealment. Alternatively, they urge that, if evidence of aggravation existed, it was insufficiently quantified. In support of that contention, defendants argue that plaintiffs' experts' testimony to that effect constituted "net opinions." See Buckelew v. Grossbard, 87 N.J. 512, 524 (1981). We disagree. We find defendants' reliance upon Ayers v. Jackson Tp., 106 N.J. 557 (1987) misplaced. In Ayers, the court refused to recognize a cause of action for the unquantified enhanced risk of a disease which had not occurred, and which might never occur. Id. at 597-598. In so holding, the court distinguished the problem of quantifying an injury for an intentional tort representing an injury that had occurred and could be proven at trial. Id. at 597.
The scope of review in a challenge to a jury verdict as being against the weight of the evidence is limited to a determination of whether the verdict resulted in a miscarriage of justice. R. 2:10-1; Carrino v. Novotny, 78 N.J. 355, 360-361 (1979); Baxter v. Fairmont Food Co., 74 N.J. 588, 599 (1977); Dolson v. Anastasia, 55 N.J. 2, 6-8 (1969); Pekter v. Price, 206 N.J. Super. 355, 357 (App.Div. 1985). While an appellate court must make its own determination whether there is a miscarriage of justice, and defer to the trial judge only with respect to those "intangible aspects" such as witness demeanor and the "feel of the case," Rivera v. Westinghouse Elevator Co., 209 N.J. Super. 543, 548 (App.Div. 1986), aff'd. as mod. 107 N.J. 256 (1987), "a jury verdict is impregnable, unless so distorted and *591 wrong, ... as to manifest with utmost certainty a plain miscarriage of justice." Carrino, supra, 78 N.J. at 360. Our careful review of the record persuades us that the verdict was supported by the evidence and we have no warrant to disturb it.[9]
We now turn to the real and troublesome issue in the case: the improper admission of the OSHA citations as substantive evidence. In August of 1978, OSHA investigators Vincent Gallagher and Myra Hess were sent to the Repauno plant (at the insistence of the employees' union) to investigate a complaint of chemical exposures to the employees. Gallagher testified that, while he was at the plant, Union President Watson told him of employee complaints of unsafe work conditions due to asbestos. Gallagher returned for a few more visits and said he observed "tons of asbestos insulation on miles of pipe as well as other heat generating equipment." Samples of insulation were tested by OSHA. At the request of OSHA, Repauno plant employees' x-rays and medical histories were reviewed by a doctor from the University of Pennsylvania, and Chambers Works plant employees' x-rays and medical histories were reviewed by Dr. Miller (who testified for defendants).
As a result of the information collected, Gallagher participated in the writing of a report which was submitted to his supervisors, and which, in turn, resulted in the issuance of OSHA citations against du Pont on April 13 and 16 of 1979. The citations charged that du Pont had "willfully" violated the law. One page read that:
(a) Employer [du Pont] failed to correlate the available medical data of the x-rays and pulmonary function tests. This data, concerning pulmonary and radiological changes, gives evidence of seven cases of pleural thickening and two cases of asbestosis. The nine insulators involved were not notified by employer of their medical conditions.
(b) The administration and organization, within employer's management hierarchy, did not insure that medical data was competently evaluated and reviewed, *592 and in addition, did not ensure that effective treatment or preventative action was taken when warranted.
Pursuant to 29 U.S.C.A. sec. 659(a), du Pont contested the citations with the Department of Labor, resulting in a settlement which eliminated the "willful" designation, and provided that the alleged violations had been abated. The stipulation further provided:
That the Citation and Notification of Penalty, Complaint, Answer, Stipulated Settlement, Respondent's Notice of Contest, Respondent's withdrawal of its Notice of Contest, Respondent's failure to continue to contest, Respondent's abatement of the alleged violations, Respondent's payment of any penalty and the Commission's Final Order entered herein shall not constitute any evidence or admission upon the part of Respondent, or be admitted into evidence, in whole or in part, in any proceeding or litigation in any court, agency or forum, except in proceedings brought directly under the Act by the Secretary, inasmuch as the contents of the Stipulated Settlement are for the exclusive benefit of the parties hereto; nor shall they constitute an admission upon the part of Respondent that any of the conditions alleged in the Citations or Complaint existed or were the cause, or a cause proximate or otherwise, of any accident, or damages, if any, resulting therefrom.
Plaintiffs-employees' union, represented by plaintiffs' attorneys, objected to this language. They petitioned the Occupational Safety and Health Review Commission (OSHRC) for a discretionary review.[10] On February 13, 1981, OSHRC affirmed the settlement as written. No appeal was filed.
Before trial, defendants moved to bar "(1) all documents and/or testimony regarding the administrative proceedings conducted by [OSHA] with respect to du Pont's Repauno ... and Chambers Works... plants and (2) the testimony ... and/or all reports authored by ... [OSHA investigators and/or agents]." The judge ruled that the texts of the citations, although hearsay, *593 were admissible as official documents under Evid.R. 63(15). He further said that the citations were tantamount to a "workplace survey" under the Worker and Community Right to Know Act, N.J.S.A. 34:5A-16. The judge ruled, however, that the terms of the settlement itself were inadmissible.
As a result of this ruling, many trial references were made to the fact that du Pont had been cited by OSHA. The citations themselves were admitted into evidence. No instruction limiting their use was requested by defendants nor given to the jury.
There can be no question that the OSHA citations were hearsay. Evid.R. 63; State v. Johnson, 216 N.J. Super. 588, 600 (App.Div. 1987), and were improperly admitted under Evid.R. 63(15), which provides:
... [A] statement is admissible if in the form of (a) a written statement of an act done, or an act, condition or event observed by a public official if it was within the scope of his duty either to perform the act reported or to observe the act, condition or event reported and to make the written statement, or (b) statistical findings made by a public official whose duty it was to investigate the facts concerning the act, condition or event and to make statistical findings.
The citations neither contained a report nor were they the finding of a public official. Although based on Gallagher's report (not in evidence), they were signed by OSHA Area Director Harry D. Allendorf, who observed nothing. Any relevant underlying medical reports were prepared by doctors who were consultants, not "public officials," see Evid.R. 62(3). Most important, the citations were unsubstantiated charges of law violation. Defendants correctly compared them to an arrest record.
The Occupational Safety and Health Act (The Act) of 1970 was designed to insure safe and healthful working conditions in employment (29 U.S.C.A. sec. 651(b)), in part by authorizing the Secretary of Labor to set safety standards and by creating a review commission to adjudicate disputes (29 U.S.C.A. sec. 651(b)(3)). See also Taylor Diving and Salvage Co., Inc. v. U.S. Dep't of Labor, 599 F.2d 622 (5th Cir.1979). Section 658(a) *594 of the Act mandates the Secretary of Labor to issue citations if upon inspection or investigation he believes that an employer has violated any standard, rule or order promulgated under the Act. If the employer doesn't contest the citation within 15 days of its issuance, it is deemed a final order of the Commission and not subject to review by any court or agency. 29 U.S.C.A. sec. 659(a).
It is well settled that the OSHA regulations were intended neither to create nor to destroy common law rights and liabilities of employers or employees arising out of employment. 29 U.S.C.A. sec. 653(b)(4); Frohlick Crane Serv. Inc. v. Occupational S. & H.R.C., 521 F.2d 628, 631 (10th Cir.1975); Annotation, OSHA Violation by Employer or Third Party as Providing Cause of Action for Employee, 35 A.L.R.Fed. 461 (1977). The Act was intended to be preventive, B & B Insulation, Inc. v. O.S.H.R.C., 583 F.2d 1364, 1371, 1371 n. 11 (5th Cir.1978), by creating employer compliance through sanctions. Johnson v. Koppers Co., Inc., 524 F. Supp. 1182, 1189 (N.D. Ohio 1981), app. dism. 705 F.2d 454 (1982). While OSHA regulations may be admissible to establish a standard of care, see Dixon v. International Harvester Co., 754 F.2d 573, 581, 581 n. 5 (5th Cir.1985); Annotation, Violation of OSHA Regulation as Affecting Tort Liability, 79 A.L.R.3d 962 (1977), OSHA citations are the opinions of investigators and ordinarily do not "carry with [them] the indicia of reliability that is inherent in government adopted safety standards." Dixon, supra, 754 F.2d at 581 n. 5.[11]
*595 In Phillips v. Erie Lackawanna R.R. Co., et al., 107 N.J. Super. 590, 594-601 (App.Div. 1969), certif. den. 55 N.J. 444 (1970), we noted that "conclusionary material resulting from official investigations embodied in statements or reports of the official or agency involved," are not evidentiary. Id. at 595. Plaintiffs' reliance on State v. Moore, 158 N.J. Super. 68 (App.Div. 1978) is misplaced. We there held that the report at issue would be admissible, if at all, as the best available secondary evidence under Evid.R. 70. Id. at 77-78. We expressly refused to rule on the admissibility of the report under Evid.R. 63(15).
Nor were the citations admissible as a business entry under Evid.R. 63(13). While "business" includes governmental activity, Evid.R. 62(5), a report is not admissible simply because it was made in the regular course of a business, government or otherwise. See Brown v. Mortimer, 100 N.J. Super. 395 (App. Div. 1968). The report must be otherwise reliable. See McCormick supra, sec. 308 at 877. As noted, this was not a report. Reasons for excluding factual conclusions derived from investigatory proceedings under Evid.R. 63(15), apply equally under Evid.R. 63(13) see Phillips, supra, 107 N.J. Super. at 594.[12]
The judge cited the Supreme Court's referral to the Worker and Community Right to Know Act, N.J.S.A. 34:5A-1 et seq. (see Millison v. E.I. du Pont de Neumours & Co., supra, 101 N.J. at 180).[13] Providing employees with rights to inspect their workplace surveys, however, did not authorize the use of such *596 surveys to prove the ultimate issue before the jury and we do not surmise that the Supreme Court intended otherwise.
Although the citations were improperly before the jury, we are nonetheless constrained to view the error as harmless. R. 2:10-2; State v. Macon, 57 N.J. 325, 338-340 (1971). In Meadoux v. Hall, 369 So.2d 240 (La. Ct. App. 1979), writ den. 369 So.2d 1366 (1979), plaintiffs' counsel referred to an OSHA investigation and the resulting citations, including a reference to a finding of guilt and payment of fine. The court held that the improper admission was harmless because the trial judge instructed the jury that the fine was paid based on an administrative decision that it would be cheaper to pay it than contest it. He further instructed that the fine was paid without admission of guilt. Id. at 245.
In Lenoir v. C.O. Porter Machinery Co., 672 F.2d 1240, 1247-1248 (5th Cir.1982), the court held that the admission of an OSHA citation as evidence of negligence was harmless error, as it merely tended to prove that a particular area of the plant was safe because it was not included. In Dixon v. Internat'l Harvester Co., supra, the court stated that if evidence of a violation of an OSHA regulation proffered against a defendant who was not the employer was error, it was harmless because of other overwhelming evidence. 754 F.2d at 582.[14]
There can be no question that Gallagher's relevant testimony concerning what he saw and what the employees complained to him about was admissible, because the evidence related to what du Pont knew, and when it first learned what it knew. Millison's 1979 du Pont employment record contained the words, "do *597 not enter on OSHA log," and OSHA advised plaintiffs of their asbestos-related conditions. Defendants' witness was one of the doctors requested by OSHA to review du Pont's medical records. Clearly, certain references to OSHA's involvement were inevitable and proper.
During the trial the judge told the jury:
Members of the jury, prior to the time that you were excused, Mr. Gallagher, the witness presently on the stand, incorporated into an answer the use of the term violations. It's the recollection of the court that this was at or about the time he said he put the data that he collected into a report and it was the impulse of the court at that time to interrupt and correct that term violations and it properly should read ["]alleged["] violations so that you are instructed to accept that phraseology and to put out of your mind the other terminology.
Thus the jury knew the charges outlined in the citation were unproved. Moreover, plaintiffs' counsel limited the use of the citation in his closing argument:
OSHA came on in 1978 and citations were issued, United States Department of Labor, Occupational Safety and Health Act.
Do you know what the real importance of that is, not the citation, not the language, this is evidence.
... [B]ut the importance of this is that this is what this is how these men came to know that they were sick in each and every case. Some guys, because of fortuitous events like breaking a rib or hearing noises, found out a little sooner.... In each and every case OSHA came on to Repauno in '78 and in Chambers Works in '79.
In the summer of '79 OSHA came on and said let's look at his records. And in July of '79 [Neeld] said I change my mind, you're sick now. What a coincidence.
While the wording of the citation was hearsay, the fact of OSHA's investigation and the timing of the citation was not hearsay. It was admissible for the purpose that plaintiffs asserted, to demonstrate that defendants, who claimed no prior knowledge of plaintiffs' asbestos-related conditions, developed new related policies of employee communication only after OSHA investigated.[15]
*598 The real error was a lack of limiting instruction to the jury under Evid.R. 6. In our view plaintiffs' presentation to the jury compensated for this lack, making the error harmless. R. 2:10-2; cf. Bowers v. Camden Fire Ins. Assoc., 51 N.J. 62 (1968).[16]
In view of the limiting circumstances of the proffer, the failure of defendants to request a limiting charge and the weight of the other evidence, we are persuaded that the admission of one erroneous document among over 5,000 exhibits[17] and 2,700 pages of testimony did not lead to a miscarriage of justice.
The judgment and order appealed from are accordingly affirmed.
NOTES
[1] Plaintiffs' complaints against defendant-manufacturers and suppliers of asbestos listed in the caption were not tried in the Law Division nor are they involved in this appeal. Complaints against du Pont doctor Smulkstys were dismissed at trial.
[2] This referral coincided with similar references in other cases. Du Pont claims this was done pursuant to a new policy. Plaintiffs claim that the new policy was instituted as a direct result of the Occupation Safety and Health Administration (OSHA) investigation of the Repauno plant (7/78 through 3/79).
[3] See infra for the record of Neeld's specific exposure to Millison's asbestos-related work history.
[4] H. Schwebel, not C. Schwebel, had previously worked in a coal mine, and had pneumonia.
[5] Du Pont had its own laboratory created in the 1930's, staffed with scientists, whose function was to study the effects of chemicals on people and animals and to provide support concerning the working environment on the working population. The laboratory was part of the medical department, which was part of the employee relations department. According to Stopps, the purpose of the Haskell laboratories was to "keep abreast of developments as they related to ... physical agents affecting human beings." Among the list of agents that would have been of such interest, "asbestos was reasonably high on the list." Haskell maintained a library of relevant industrial medical publications.
[6] Masks, unlike respirators appeared to have no filter.
[7] Defendant Reichwein made a similar analysis at Repauno.
[8] This 1968 study which is not in the record was probably in response to D'Alonzo's request for a list of employees exposed to asbestos in furtherance of a desire "to keep very close biostatistical studies and surveys on asbestos exposed company employees."
[9] Defendants do not challenge the jury instructions which followed the strict mandates of the Supreme Court.
[10] The question of enforcement of the settlement was left to the State courts. Plaintiffs, of course, were not bound. Subsequently it was ruled that the Commission was without jurisdiction to hear such objections. 29 U.S.C.A. sec. 659(c); Donovan v. International Union, Allied Indus. Workers, 722 F.2d 1415, 1419 (8th Cir.1983). See also Donovan v. Local 962, Intern. Chem. Workers Union, 748 F.2d 1470, 1472 (11th Cir.1984); Donovan v. Oil Chem. and Atomic Workers Intern., 718 F.2d 1341, 1353 (5th Cir.1983), cert. den. 466 U.S. 971, 104 S.Ct. 2344, 80 L.Ed.2d 818 (1984).
[11] As one commentary noted, the issuance of a citation meant little. During the first year after OSHA became effective, 23,230 citations were issued, with proposed penalties totalling $2,291,000, or approximately $98 per citation. Lynn, "The Occupational Safety and Health Act of 1970: Its Role in Civil Litigation," 28 Sw.L.J. 999, 1002 (1974). However, for the first six months, the average final assessments were only $18 per penalty. Ibid. The commentary notes that 95 percent of employers cited paid without protest to avoid a costly administrative battle. Id. at 1013.
[12] Defendants also argue that the citations are inadmissible under Evid.R. 55 which is inapplicable because the conduct referred to in the citations is not conduct on another occasion, but the conduct which is the subject matter of this lawsuit. Defendants' arguments respecting Evid.R. 4 go to the heart of the matter.
[13] The Supreme Court recognized that all applicable sections of that act were preempted by the Act of 1970. It nevertheless referred to it as an exposition of public policy. Millison v. E.I. du Pont de Neumours & Co., supra, 101 N.J. a 180 n. 3.
[14] In Dixon, 754 F.2d at 581, n. 5, the Lenoir rejection of OSHA citation admissibility was distinguished from the propriety of admitting OSHA regulations into evidence. In both cases the Fifth Circuit held the admission harmless error. The Dixon court also noted that the Lenoir court erroneously applied state evidence rules rather than federal rules. We note that under either our Evid.R. 63(15) or the more liberal Fed.Evid.R. 803(8)(C), the citation at issue was inadmissible.
[15] We note that, at trial, defendants did not acknowledge the possible admissibility for a limited purpose of any OSHA related documents or testimony. (When asked by the Court whether he objected to the first admission into evidence of the letter from OSHA to Millison, counsel said, "No. I made my objection to anything OSHA did. I was overruled on that. He [Millison] got this document in '80 or '81. It speaks for itself.")
[16] Cf. also Milton v. Wainwright, 407 U.S. 371, 377, 92 S.Ct. 2174, 2178, 33 L.Ed.2d 1, 6 (1972) (improperly admitted confession given to undercover officer posing as prisoner, harmless error); State v. Lair, 62 N.J. 388, 392 (1973) (failure to give limiting instruction, not requested, on use of evidence of defendant's prior convictions, was harmless error in light of overwhelming evidence); State v. Johnson, 216 N.J. Super. 588, 607 (App.Div. 1987) (failure to give limiting instruction, not requested, concerning use of good character evidence of victim who was the only testifying witness to the assault, harmless error). See also Bruton v. United States, 391 U.S. 123, 135, 88 S.Ct. 1620, 1627, 20 L.Ed. 476, 484 (1968); State v. Rajnai, 132 N.J. Super. 530, 537 (App.Div. 1975).
[17] This is the number of exhibits referred to in appellants' appendix before us. Although the citation included seven pages, only one refers specifically to defendants' willful failure to notify employees of pleural thickening and asbestosis.
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545 A.2d 631 (1988)
Clarence MEIGGS, et al., Appellants,
v.
ASSOCIATED BUILDERS, INC., and Pineda-Heller Electric Company, Inc., Appellees.
OMNI CONSTRUCTION, INC., Appellant,
v.
Sidney FEATHERSTONE, et ux., and Andrew S. Appling, et ux., Appellees.
KBR CORPORATION, Appellant,
v.
Harry HOBBS, et al., Appellees.
Terry FRAZIER, et al., Appellants,
v.
FAITH CONSTRUCTION COMPANY, et al., Appellees.
Nos. 85-577, 86-100, 86-125, 86-185 and 86-257.
District of Columbia Court of Appeals.
Argued August 19, 1986.
Decided July 18, 1988.
Patrick M. Regan and Marc Fiedler, with whom Joseph H. Koonz, Jr., Roger C. Johnson, and Mark J. Brice, Washington, D.C., were on the brief, for appellants Meiggs and Frazier.
Walter A. Smith, Jr., with whom Vincent H. Cohen, Robert B. Cave, and David F. Grady, Washington, D.C., were on the brief, for amicus curiae Washington Metropolitan Area Transit Authority.
Ronald G. Guziak and Keith M. Bonner, Washington, D.C., were on the brief, for appellant Omni Const., Inc.
Edwin A. Sheridan, Fairfax, Va., was on the brief, for amicus curiae KBR Corp.
James C. Gregg and Jack E. Rossotti, Washington, D.C., were on the brief, for appellee Associated Builders, Inc.
Geoffrey S. Gavett, Rockville, Md., was on the brief, for appellee Pineda-Heller Elec. Co., Inc.
Peter J. Vangsnes, Robert P. Enderle, and H. Vincent McKnight, Jr., Washington, D.C., were on the brief, for appellees Featherstone, Appling and Hobbs.
Joseph P. Dyer and John A. Sutherland, Jr., Fairfax, Va., were on the brief, for appellee Faith Const. Co.
Before MACK, ROGERS and STEADMAN, Associate Judges.[1]
*632 MACK, Associate Judge:
These five separate appeals, consolidated for our consideration, present an identical issue for resolution: do sections 5(a) and 5(b) of the District of Columbia Workers' Compensation Act of 1979, 27 D.C. Reg. 2503, 2507-08 (1980) (as codified at D.C. Code § 36-304 (1981) (hereinafter "1979 Act"), grant general contractors immunity from tort liability in suits brought by injured employees of subcontractors, where the subcontractors have secured payment of workers' compensation to the employees? The general contractors, in claiming immunity, cite to the Supreme Court's decision in Washington Metropolitan Area Transit Authority v. Johnson, 467 U.S. 925, 104 S. Ct. 2827, 81 L. Ed. 2d 768 (1984), as binding and persuasive precedent. The injured employees rely primarily upon the plain language of the statute and legislative history of the 1979 Act. We hold that general contractors, under these circumstances, are not entitled to statutory immunity under the District of Columbia Workers' Compensation Act.
Since the issue here is purely one of law, it is unnecessary to recite in detail the facts peculiar to each case. Rather, it suffices to say that the plaintiffs[2] were employed by various subcontractors when they each sustained a work-related injury on a construction job site. The subcontractors, who had procured workers' compensation insurance for their employees, then secured the payment of such compensation to the injured plaintiffs who had each filed claims for benefits pursuant to the provisions of the Workers' Compensation Act of 1979. The injured plaintiffs thereafter brought independent negligence actions against, among others, the respective general contractors on the construction projects where their injuries were sustained. In the Meiggs and Frazier negligence suits, Judges Holmes-Winfield and von Kann respectively, entered summary judgment in favor of the general contractors on the basis of statutory immunity and the employees appealed. In Hobbs, Appling and Featherstone, Judges Weisberg and Kessler, respectively, determined that the statute did not bar suit and denied the general contractors' motions for summary judgment.[3] This court subsequently granted their applications to appeal the denial of such motions.
I.
The issue in this case arises as a result of the language in Section 5(a) (b) of the 1979 Act:
(a) The liability of an employer prescribed in § 36-303 shall be exclusive and in place of all liability of such employer to the employee. . . .
(b) The compensation to which an employee is entitled under this chapter shall constitute the employee's exclusive remedy against the employer. . . . [Emphasis added.]
In arguing that "employer" should be interpreted to include "general contractor" when the underlying statute has not imposed an absolute duty on the contractor to secure payment of compensation, the contractors cite Washington Metropolitan Transit Authority v. Johnson, supra. The employees, on the other hand, look for support to this court's decision in DiNicola v. George Hyman Construction Co., 407 A.2d 670 (D.C.1979), where we held that a general contractor is not an "employer" immune from liability under the provisions of the District of Columbia Worker's Compensation Act where the subcontractor secures insurance and pays compensation to the employee.
Johnson, like DiNicola, involved injuries to non-maritime workers in the District of Columbia and therefore at issue in the case was the proper interpretation of the District of Columbia Workers' Compensation Act of 1928 (codified as amended at D.C. Code §§ 36-501 to -502 (1973) (hereinafter *633 "1928 Act")). In Johnson, however, the Supreme Court made only a passing reference to the 1928 Act and then proceeded to interpret the Longshore and Harbor Workers' Compensation Act of 1927, 44 Stat. 1424 (codified as amended at 33 U.S.C. § 901 to 950 (1982) (hereinafter "LHWCA")). The Court concluded that a general contractor is an employer for purposes of the LHWCA and therefore enjoys statutory immunity.
In our view, Johnson, is not binding precedent in the instant appeals. While there is room for argument as to what law was the subject of the Supreme Court's interpretation in Johnson,[4] one thing is undisputed: the Supreme Court did not interpret the District of Columbia Workers' Compensation Act of 1979. Equally clear is the fact that we are today called upon to interpret the 1979 Act. Since the principle of stare decisis has no application to a decision construing a different statute, this court is not bound by Johnson. On a question of purely local law, this court is undeniably the final arbiter. D.C.Code § 11-102 (1981) ("The highest court of the District of Columbia is the District of Columbia Court of Appeals."). See also Gillis v. United States, 400 A.2d 311, 313 (D.C.1979) (D.C.Court of Appeals is "the final expositer of the local law of the District of Columbia."); Reichman v. Franklin Simon Corp., 392 A.2d 9 (D.C.1978).
Johnson also has very little, if any, persuasive value in the context of these cases. Shortly after the Supreme Court's decision in 1984, Congress passed amendments to the LHWCA with the express purpose of divesting Johnson of any past or subsequent precedential effect. Congress concluded that Johnson did "not comport with the legislative intent of the [LHWCA] nor its interpretation from 1927 through 1983." H.R.CONF.REP. No. 1027, 98th Cong., 2nd Sess. 24 (1984), reprinted in 1984 U.S. CODE CONG. & ADMIN.NEWS 2734, 2771, 2774. This repudiation of the Johnson interpretation by the Congress is telling. Significantly, the reasoning underlying Johnson had been rejected by our own court in DiNicola, supra, just six months before the Council of the District of Columbia passed the 1979 legislation.
II.
Freed of the encumbrances flowing from contradictory judicial interpretations,[5] and strained reliances on Johnson, the issue is a simple one. Who is an employer immune from tort liability under the provisions of the District of Columbia Workers' Compensation Act of 1979?
The starting point for analysis is, of course, the language of the statute itself. The statute makes the meaning of "employer" abundantly clear. Under the Act:
"Employer" includes any individual, firm, association, or corporation, or receiver, or trustee of the same, or the legal representative of a deceased employer, using the service of another for pay within the District of Columbia.
D.C.Code § 36-301(10) (1981) (emphasis added).[6] A reasonable reading of the statute leads to the conclusion that the "service *634 of another" to which the definition refers is the service of an "employee." The Act defines employee:
"Employee" includes every person, including a minor, in the service of another under any contract of hire or apprenticeship, written or implied, in the District of Columbia. . . .
Id. § 36-301(9) (emphasis added). Thus, an employer and its employee enjoy a written or implied contractual relationship under which the services of the employee are exchanged for payment from the employer.
In the consolidated cases here, the general contractors and plaintiffs were not involved in an employer/employee relationship. For example, in Meiggs, Associated Builders did not hire Meiggs, did not pay Meiggs, and held no contract whatsoever with Meiggs. Likewise, Meiggs did not render service for Associated Builders. Rather Meiggs rendered service for Pineda-Heller, who hired Meiggs, paid Meiggs and exercised exclusive control over him. Pineda-Heller was Meiggs' employer. Under a literal interpretation of the immunity provision, no immunity ran to Associated Builders in regard to Meiggs.[7] Indeed, in some jurisdictions, the inquiry would be at an end and immunity would simply be rejected. Fiore v. Royal Painting Co., 398 So. 2d 863, 865 (Fla.Dist.Ct.App.1981); Sweezey v. Arc Electrical Construction Co., 295 N.Y. 306, 310-11, 67 N.E.2d 369, 370-71 (1946).
Questions regarding the literal interpretation of the meaning of the word "employer" in the immunity provision arise only out of the interplay between the immunity provision and the liability provision:
(b) Every employer subject to this chapter shall be liable for compensation for injury or death. . . .
(c) In the case of an employer who is a subcontractor, the contractor shall be liable for and shall secure the payment of such compensation to employees of the subcontractor unless the subcontractor has secured such payment.
Id. at § 36-303(b)-(c) (emphasis added). Under these provisions, a general contractor incurs a secondary liability to secure payment of workers' compensation when a subcontractor has not secured payment. Consequently, if a subcontractor defaults, a general contractor can argue that unless it is constructively deemed the "employer" of the subcontractor's employees for purposes of the immunity provision, it will incur double liability: workers' compensation and common law tort liability. The argument continues that in light of results unfair to the general contractor, the literal interpretation of the meaning of the word "employer" in the immunity provision (and all other provisions in the 1979 Act) must give way.
Such an argument, however, has force only when the general contractor is legally required to secure payment of compensation to a subcontractor's employees. Otherwise, double liability is not a possibility. Indeed, double liability to Associated Builders was not a possibility here. The subcontractor, Pineda-Heller, "secured" payment of compensation to its employee Meiggs and thus fulfilled its statutory obligation under § 36-303(b)v(c). Additionally, Associated Builders did not "secure" payment of compensation to Meiggs under its contingent § 3t6303(c) duty. Consequently, double liability was not possible, and no reason has been advanced nor exists for engaging in the legal fiction of constructively deeming Associated Builders Meiggs' "employer" when it is clear Pineda-Heller is Meiggs' actual employer. This is likewise true of the other subcontractors here since none defaulted on their statutory obligations.
Thus, even if it is sometimes appropriate to constructively deem a general contractor the "employer" of a person clearly not its employee, the most that follows is that such creative statutory interpretation is appropriate only when the actual employer the subcontractor defaults on its statutory obligation, and the general contractor steps in to secure payment. See Johnson, supra, 467 U.S. at 945, 104 S.Ct. at 2838 (Rehnquist, J., dissenting).
*635 This conclusion is buttressed by looking at the use of "employer" in the remainder of the 1979 Act. The word "employer" is used throughout the Act. Section 36-307 specifies the medical services the "employer" is required to furnish; § 36-313 requires employees to give their "employers" notice of injuries; and § 36-335(b) requires employees to assign their rights to third party damages to their "employers" if the employee accepts workers' compensation. If, regardless of subcontractor default, the general contractor were deemed the "employer" for all these purposes, notice would twice be required, "[b]oth the contractor and the subcontractor would be directed to make the payments required by [§ 36-307], and both would simultaneously be entitled to the assignment of the injured worker's right to recover damages from third parties under § [36-335 (b)]. Everything directed by the Act would be done in duplicate." Johnson, supra, 467 U.S. at 944-45, 104 S.Ct. at 2838 (Rehnquist, J., dissenting). If, however, the general contractor were deemed the "employer" of the subcontractor's employees only when the subcontractor defaulted, no duplication would occur. In the appeals before us, it is undisputed that Associated Builders, Faith Construction Co. and the other corporate defendants were "contractors" within the meaning of D.C.Code § 36-303(c) (1981).[8] It should likewise be clear that they are "third persons" not contractors within the meaning of that provision who can be equated with the status of immunized employers by virtue of the failure of the subcontractors to secure payment.
III.
A.
Not only is our conclusion consistent with the plain language and overall structure of the 1979 Act, it is also consistent with the intent of the Council of the District of Columbia when it enacted this legislation.
Just recently, this court reiterated the local adaptation of what is a universally recognized principle of statutory construction:
When a local provision is borrowed directly from a federal statute, the Council [of the District of Columbia] is presumed to have borrowed the judicial construction thereof as well.
Hughes v. District of Columbia Department of Employment Services, 498 A.2d 567, 571 n. 8 (D.C.1985) (citing Whitt v. District of Columbia, 413 A.2d 1301, 1303-04 (D.C.1980)). This "local" version takes its origin from the cardinal rule of statutory construction that when a legislature adopts a statute that is modeled after one in effect in another jurisdiction, the legislature is deemed to have adopted as well the judicial constructions of the statute in the jurisdiction in which it originated. Yates v. United States, 354 U.S. 298, 309, 77 S. Ct. 1064, 1071-72, 1 L. Ed. 2d 1356 (1957); Carolene Products Co. v. United States, 323 U.S. 18, 26, 65 S. Ct. 1, 5-6, 89 L. Ed. 15 (1944); see generally 2A SUTHERLAND, STATUTORY CONSTRUCTION § 51.02 (Sands 4th ed. 1984). It is particularly appropriate that this presumption be applied in this controversy, where the prior judicial constructions "adopted" are our own; that is, our interpretations of provisions of acts of Congress which are incorporated verbatim into the Council's new legislation.
Of course, as this court has emphasized, this rule applies only to such judicial constructions as have been placed on the "borrowed" statute prior to its enactment by the jurisdiction adopting it. Whitt, supra, 413 A.2d at 1303-04. Any subsequent interpretations by this court will be binding on us; any subsequent interpretations by another court carry no precedential value.
It is important, therefore, to review the legal landscape facing the Council when it debated and ultimately enacted the 1979 Act. At that time, three cases had explicitly interpreted the immunity provision of *636 the federal LHWCA as it applied to the District of Columbia through the 1928 incorporation. In Liberty Mutual Insurance Co. v. Goode Construction Co., 97 F. Supp. 316 (E.D.Va.1951), a federal court held that a general contractor was a "third person" under the 1928 Act and thus could be sued by the subcontractor's employee. In Liberty Mutual, the subcontractor carried workers' compensation insurance. The court observed that the employee.
made no contract of employment with the defendant [the general contractor], that his contract was with the subcontractor, that the terms of his contract did not foreclose his right against anyone save his employer, and that his agreement is not to be curtailed except by law or his consent and neither has done so.
Id. at 317 (emphasis added).
Subsequently, in Thomas v. George Hyman Construction Co., 173 F. Supp. 381 (D.D.C.1959), the federal District Court for the District of Columbia, which at the time had jurisdiction over local matters, denied immunity to a general contractor where both the general contractor and the subcontractor had secured workers' compensation insurance. The court eloquently set forth the rationale behind its decision to give the statute its plain language interpretation:
The law requires [the general contractor] to carry insurance only if the subcontractor fails to do so. In such a contingency, the general contractor may well be free of all other liability if he in fact carried such insurance. He may not, however, voluntarily take out insurance that the law does not require and thereby secure freedom from liability for negligence. . . . Release from common law liability is a benefit accruing from carrying compensation insurance only in case the law imposes a duty to do so. One may not escape from such liability by taking out insurance that the law does not require.
Id. at 383.
Finally, in DiNicola v. George Hyman Construction Co., supra, this court reaffirmed the principles enunciated in Liberty Mutual and Thomas v. George Hyman Construction Co. The DiNicola court held that a general contractor is not an "employer" immune from liability under the provisions of the Act where the subcontractor secures insurance and pays compensation to the employee. Id. at 672. The DiNicola court, not satisfied with simply supporting its interpretation by reference to prior interpretations of the 1928 Act, set forth the substantial body of federal and state cases supporting its plain language interpretation. Citing those cases, the DiNicola court found that "[t]he majority of courts interpreting statutes similar to the [LHWCA] have reached similar results" to the one the court reached. Id. at 674.[9]
Two other cases, not directly on point, give further evidence of the substantive body of law facing the Council when it engaged in the difficult task of drafting a workers' compensation statute for the District. In Lindler v. District of Columbia, 164 U.S.App.D.C. 35, 502 F.2d 495 (1974), the United States Court of Appeals for the District of Columbia Circuit held that the Workers' Compensation Act of 1928 did not bar suit against the District of Columbia by employees of independent contractors hired by the District for municipal projects. *637 Furthermore, in Martin v. George Hyman Construction Co., 395 A.2d 63 (D.C.1978), this court assumed, without discussion, that an injured employee of a subcontractor was permitted to maintain a negligence action against a general contractor.
Thus, on May 6, 1980, when the Council passed the 1979 Act, every cases interpreting the immunity provisions of the 1928 Act unambiguously rejected contractor immunity if the subcontractor fulfilled its obligation to secure payment of worker's compensation. Indeed, DiNicola was one of three identical judicial constructions of the immunity provision, two of which were on the books long before the 1979 bill was ever introduced.
B.
The intent of the Council of the District of Columbia can also be inferred from the affirmative legislative record surrounding the passage of the 1979 Act. When the Council drafted the 1979 Act, it explicitly reviewed the Maryland Workers' Compensation Act. See COMMITTEE ON HOUSING AND ECONOMIC DEVELOPMENT OF THE COUNCIL OF THE DISTRICT OF COLUMBIA, REPORT ON BILL No. 3-106: THE "DISTRICT OF COLUMBIA WORKERS' COMPENSATION ACT OF 1979" at 4, 6, 10, 13 (January 29, 1980). The Maryland Act includes a provision subjecting a principal contractor to an absolute duty to secure workers' compensation. MD.ANN.CODE art. 101, § 62 (1985). Moreover, it deems a principal contractor an employer for purposes of the Act: "[I]n the application of this article, reference to the principal contractor shall be substituted for reference to the employer." Id. Despite the fact that the Council modeled some of the 1979 Act provisions after those in the Maryland Act, compare D.C.Code § 36-308 to -311 (1981) with MD.ANN.CODE art. 101, § 36 (1981), it did not engraft onto our 1979 Act the provision explicitly substituting the words "principal contractor" for the word "employer." Rather, it chose to retain the language of the 1928 Act which granted immunity only to "employers."
IV.
Our conclusion is also consistent with the philosophy underlying workers' compensation schemes. That philosophy has commonly been described as a quid pro quo on both sides: in return for the purchase of insurance against job-related injuries, the employer receives tort immunity; in return for giving up the right to sue the employer, the employee receives swift and sure benefits. Interpretation of the 1979 Act to confer immunity on general contractors would transform the underlying philosophy of workers' compensation into a duo quidem pro sole unum quo. The employee would be required to give up at least two immunities one to the general contractor and one to the subcontractor for the price of one. The bargain becomes more unattractive with every "sub" prefixed to the word "contractor." Employees unfortunate enough to be employed by a sub-sub-sub-subcontractor find that, in addition to the employer, four possibly negligent actors are immune from liability. See Johnson, supra, 467 U.S. at 927 n. 3, 940 n. 14, 104 S.Ct. at 2829 n. 3, 2836 n. 14 (subcontractors and sub-subcontractors of voluntarily insured general contractors are also immune).
Principles of statutory construction further reinforce our conclusion. The first of these principles is that statutes are to be strictly construed against the abrogation of common law rights unless that intent is clearly expressed. Dell v. Department of Employment Services, 499 A.2d 102, 107 (D.C.1985) (citing Shaw v. Railroad Co., 101 U.S. (11 Otto) 557, 565, 25 L. Ed. 892 (1879)). The second is that workers' compensation statutes are to be construed liberally in favor of the worker in order for them to achieve their humane purpose. Ferreira v. Department of Employment Services, 531 A.2d 651, 655 (D.C.1987); J.V. Vozzolo, Inc. v. Britton, 126 U.S.App.D.C. 259, 262, 377 F.2d 144, 147 (1967).
V.
We would also point out that our analysis does not facilitate double recovery by an employee. The Council expressly wrote *638 protections against such "windfalls" into the 1979 Act.
Under § 36-335, if an employee believes his injury is the result of the negligence of a third person, the employee may engage in two courses of conduct after he accepts a workers' compensation award from his employer.[10] He may do nothing for six months, in which case his right to recovery against the third person is automatically assigned to his employer. Id. at § 36-335(b). The employer may then either institute proceedings for the recovery of damages or may compromise with the third person with or without instituting proceedings. Id. at § 36-335(d). In any case, if damages are recovered from a third person, the employer is entitled to retain such amount as covers all its costs in instituting the proceedings and all amounts paid and payable to the employee as workers' compensation. Id. at § 36-335(e)(1). The employer is also entitled to twenty percent of the excess of recovery over costs, thus leaving the employee with eighty percent of what his common law tort remedy would have netted. Id. at § 36-335(e)(2). Clearly, such a result is not a "windfall" to the employee.
The second course of conduct open to the employee is to commence proceedings against the "third person" within six months after acceptance of the workers' compensation award from the employer. Id. at § 36-335(b). If the employee recovers civil damages in the subsequent proceedings, the employer is "required to pay" to the employee only for the amount by which the workers' compensation award exceeds the civil damage award. Id. at § 36-335(f). In other words, if the civil damage award, the employer is not required to tender payment of any worker's compensation benefits. Here again, double recovery is not a possibility. The most an employee receives is the common law tort remedy from a third party who has been adjudicated negligent.
Section 36-335 of the Workers' Compensation Act of 1979 is not an accidental feature of the legislation. It reflects a conscious legislative policy to permit an employee to pursue his full common law remedy when the employee believes that the negligence of a third person caused his injury. Here again, the language of § 36-335 is clear and unambiguous. It speaks in terms of employers and employees. Furthermore, it specifically defines "third persons" as persons other than:
the employer, or any collective-bargaining agent of the employer's employees and any employee, officer, director, or agent of such employer, insurer, or collective-bargaining agent.
D.C.Code § 36-304(b) (incorporated by reference in § 36-335(a)). Clearly, "general contractor" is not included in this list of excluded "third persons."
Accordingly, the orders in Featherstone, Appling and Hobbs are affirmed and the judgments in Meiggs and Frazier are reversed.
So ordered.
STEADMAN, J., concurs in the result.
NOTES
[1] Associate Judge Steadman was selected as a member of the division to replace Senior Judge Nebeker, who withdrew from active judicial service on December 11, 1987.
[2] We use the terms plaintiff(s) and employee(s) synonymously throughout this opinion. We have not overlooked the fact that certain plaintiffs in these actions are actually spouses of the injured employees.
[3] Judge Kessler decided both Appling and Featherstone.
[4] It might be noted that the Supreme Court in Johnson never engaged in an analysis of what law governed the action nor did it consider whether the question raised was "local" or federal. Significantly, Johnson cites our decision in DiNicola v. George Hyman Construction Co., supra, without expressing any disapproval whatsoever of its reasoning or result. See Johnson, supra, 467 U.S. at 933-34, 104 S.Ct. at 2832-33. We reserve for another day a comprehensive development of this issue.
[5] In addition to the disagreement in the five present cases, there is a comparable division in the lower federal courts of the District of Columbia. In Ford v. United States, No. 84-3082 (D.D.C.1985) (memorandum order), and Stokes v. George Hyman Construction Co., No. 84-1418 (D.D.C.1985) (memorandum order), the district court for the District of Columbia held that a general contractor is entitled to immunity. In Allen v. United States, 625 F. Supp. 841 (D.D.C. 1986), the court concluded that a general contractor is not entitled to immunity.
[6] Justice Marshall, writing for the majority in Washington Metropolitan Area Transit Authority v. Johnson, supra, pointed out that the immunity provision of the LHWCA "speaks in terms of `an employer' and, at least as far as the employees of subcontractors are concerned, a general contractor does not act as an employer." Johnson, supra, 467 U.S. at 933, 104 S.Ct. at 2832.
[7] This reasoning applies with equal force to the other decisions on appeal.
[8] In Johnson, the Supreme Court relied on the lower courts' findings that WMATA was a "contractor" within the meaning of the liability provisions. Johnson, supra, 467 U.S. at 928 n. 5, 104 S.Ct. at 2829 n. 5. There "WMATA elected to assume responsibility for securing workers' compensation insurance for all Metro construction employees." Id. at 929, 104 S.Ct. at 2830.
[9] This comports with the Fifth Circuit's 1967 description of the general terrain:
The two main lines of decision (1) general contractor may be sued, (2) the general contractor may not be sued arise out of compensation statutes which, in turn, follow two principal divisions. In the first are those statutes which require the general employer or general contractor to see that any and all independent contractors or subcontractors carry compensation insurance or suffer statutory liability for compensation to the employees of the subcontractors. In the second category are those which directly impose liability on the general employer or the general contractor, as the case may be, for injuries to the employees of any independent contractors or subcontractors. . . . Under the first type of statute, the statute case law generally denies to the general contractor the employer's immunity and permits third party suit against him. Under statutes of the second kind imposing a direct liability, the cases with a good deal of good sense regard the general contractor as the vicarious employer and extend the employer's immunity to him.
Probst v. Southern Stevedoring Co., 379 F.2d 763, 765-66 (5th Cir.1967) (footnote omitted).
[10] The options available to the personal representative of a decedent are distinct. D.C.Code § 36-335(c). That provision is not relevant to these appeals, where injury, not death, occurred.
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687 S.W.2d 397 (1985)
Leticia Pollock BENAVIDES, Relator,
v.
Honorable Ruben GARCIA, Judge of the 49th Judicial District Court of Webb and Zapata Counties, State of Texas, Respondent.
No. 04-85-00018-CV.
Court of Appeals of Texas, San Antonio.
January 30, 1985.
*398 Donato Ramos, Person, Whitworth, Borchers & Morales, Julio A. Garcia, Laredo, for appellant.
Emilio "Chito" Davila, Laredo, for appellee.
Before BUTTS, REEVES and TIJERINA, JJ.
OPINION
REEVES, Justice.
This is an original mandamus action in which relator, Leticia Pollock Benavides, seeks an order directing Judge Ruben Garcia of the 49th District Court of Webb and Zapata Counties to dismiss a divorce suit presently pending in that court.
Relator filed suit for divorce on September 28, 1983. Respondent in the divorce action (defendant) filed an answer containing a general denial and a request that he be appointed managing conservator of the parties' son. Relator filed a motion to dismiss on April 11, 1984, and subsequently filed a motion to transfer the case, a motion for continuance, a jury demand, another motion for continuance, an amended original petition, and finally, a second motion to dismiss. Prior to her second motion to dismiss, the trial court entered an order appointing a guardian ad litem for the parties' three minor children. According to the trial court's docket sheet, the court, on its own motion, then set the case for hearing on the merits on January 11, 1985. We granted relator's motion for leave to file petition for writ of mandamus pursuant to our authority under TEX.REV.CIV.STAT. ANN. art. 1824 (Vernon Supp.1985) and issued a temporary restraining order requiring that respondent take no further judicial action in the cause pending our inquiry.
A writ of mandamus will issue to control the conduct of a public official when the duty to do the act commanded is clear and definite and involves no discretion, i.e., a ministerial act. Turner v. Pruitt, 161 Tex. 532, 342 S.W.2d 422, 423 (1961); Womack v. Berry, 156 Tex. 44, 291 S.W.2d 677, 682 (1956); Smith v. Rankin, 661 S.W.2d 152, 153 (Tex.App.Houston [1st Dist.] 1983, no writ).
On a timely motion, the plaintiff has an absolute unqualified right to take a non-suit before presentment of all plaintiff's evidence as long as the defendant has not already made a claim for affirmative relief. The granting of the non-suit is a purely ministerial act. Johnson v. Harless, 651 S.W.2d 259, 260 (Tex.1983); Greenberg v. Brookshire, 640 S.W.2d 870, 871, 872 (Tex.1982); TEX.R.CIV.P. 164. No specific procedures are required under TEX.R. CIV.P. 164. The mere filing of the motion with the clerk or an oral announcement in open court are sufficient. Greenberg v. Brookshire, supra at 872.
The defendant may defeat a plaintiff's right to discontinue the entire proceeding when the defendant seeks affirmative relief. However, he must do more than pray for affirmative relief. He must allege facts which show he has a cause of action, independent of the plaintiff's claim, on which he might recover even if the plaintiff abandons or fails to establish his cause of action. Greenberg v. Brookshire, supra; Lipsey v. Lipsey, 660 S.W.2d 149, 151 (Tex.App.Waco 1983, no writ); Newman Oil Company v. Alkek, 614 S.W.2d 653, 655 (Tex.Civ.App.Corpus Christi *399 1981, writ ref'd n.r.e.), on remand, 657 S.W.2d 915 (Tex.App.Corpus Christi 1983, no writ). The defendant filed a pleading entitled "Respondent and Cross-Petitioner's Original Answer" in which he asserts a general denial and requests that he be named managing conservator of the parties' son. This pleading fails to suffice as a counterclaim for affirmative relief. The defendant does not allege facts which show he has a cause of action independent of relator's claim. If the defendant does no more than resist the plaintiff's recovery, the plaintiff has the absolute right to a non-suit. Newman Oil Company v. Alkek, supra.
Mandamus will lie to direct a lower court to perform a purely ministerial function. Since the defendant alleged no facts to support a cause of action, the trial court had no choice but to grant relator's motion to dismiss as to the divorce action.
However, relator's non-suit does not divest the trial court's jurisdiction to enter temporary custody orders to serve the best interests and protect the welfare of the minor children of the parties. Ex parte Brown, 382 S.W.2d 97, 99 (Tex.1964); Strange v. Strange, 464 S.W.2d 216, 219 (Tex.Civ.App.Fort Worth 1970, writ dism'd); McClendon v. McClendon, 289 S.W.2d 640, 643 (Tex.Civ.App.Fort Worth 1956, no writ); TEX.CONST. art. V, § 8. The temporary orders entered upon the dismissal of the underlying divorce suit continue in full force and effect until set aside by the issuing court or modified by another court of competent jurisdiction. Ex parte Brown, supra.
Respondent argues that we have no authority to issue a writ of mandamus because neither the minor children nor their court appointed guardian ad litem were notified of the petition for writ of mandamus. All persons or parties whose rights would be injuriously affected by the issuance of the writ are necessary parties. Lanford v. Smith, 128 Tex. 373, 99 S.W.2d 593, 594 (1936). However, these adverse parties need not be made parties in a mandamus proceeding which involves only the ministerial and nondiscretionary duties of the trial court. The writ then runs only against the trial judge. State Bar of Texas v. Heard, 603 S.W.2d 829, 832-33 (Tex. 1980); Dick v. Kazen, 156 Tex. 122, 292 S.W.2d 913, 916-17 (1956). Further, the minor children involved in the case remain under the jurisdiction of the trial court until the temporary orders are set aside by that court or modified by another court of competent jurisdiction. Their rights are not injuriously affected.
We conditionally grant the writ of mandamus in part. If Judge Garcia fails to enter an order of dismissal without prejudice of relator's divorce action, the writ will issue as to the divorce action.
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25 B.R. 634 (1982)
In re FEATHERWORKS CORPORATION, Debtor.
Bankruptcy No. 181-10650-21.
United States Bankruptcy Court, E.D. New York.
December 20, 1982.
*635 *636 Finkel, Goldstein & Berzow, New York City, for debtor; Harold S. Berzow, New York City, of counsel.
Louis P. Rosenberg, Brooklyn, N.Y., for Far West Garments, Inc.; Alfred A. Rosenberg and Richard L. Koral, Brooklyn, N.Y., of counsel.
Kerwin & Elliott, pro se; Thomas J. Kerwin, Denver, Colo., of counsel.
Wachtell, Lipton, Rosen & Katz, New York City, for Walter E. Heller & Co. (Inc.); Theodore Gewertz, New York City, of counsel.
OPINION
CECELIA H. GOETZ, Bankruptcy Judge:
Pending before this Court are a number of motions relating to the voting on the debtor's plan of reorganization and to the confirmation of that plan. Other motions concern related matters. Because an appeal is pending with respect to one aspect of these interrelated matters, the Court has delayed decision on them. However, for reasons which shall become clear, the Court has belatedly concluded that in fairness to the parties and to the appellate court, all pending matters should now be resolved to the extent possible so as to avoid further piecemeal appeals.
*637 This proceeding, which this Court had assumed to be merely ancillary to the reorganization in bankruptcy of the debtor's parent, has taken on unexpected complexity, requiring a rather lengthy recapitulation of the background facts. To put the pending motions into context, some brief description of the parties involved and a brief summary of the proceedings to date are necessary.
I.
THE PARTIES
The debtor, Featherworks Corporation ("Featherworks"), is a Colorado corporation. Its business is the buying, selling, and processing of feathers and down. It conducts its business at premises it owns at 4410 Washington Street, Denver, Colorado. Featherworks is the wholly-owned subsidiary of Puro Down International of New Jersey Corp., which was formerly known as Hudson Feather & Down Products, Inc. (and which will be referred to hereinafter as "Hudson"), which is engaged in the same business as Featherworks.
Hudson is owned by Puro International, Ltd., a New York corporation, which, in turn, is owned by Windsor Trading Corporation ("Windsor"), which belongs to Arthur Puro's wife and daughter (Tr., 7/27/82, at 43). Arthur Puro is the president and chief operating officer of both Windsor and Hudson (Tr., 7/27/82, at 43), and since at least January, 1980, has been in control of the debtor, Featherworks.
Hudson and Windsor are the debtor's largest creditors. The debtor's schedules show a debt to Hudson of $1.4-million and to Windsor of over $5-million, of which $1-million is described as secured and the balance as unsecured. In addition, Windsor has a post-petition claim against the debtor for over $2-million (Tr., 5/26/82, at 83).
Far West Garments, Inc. ("Far West") is a former customer of Featherworks. It is a manufacturer of products employing feathers and down. On May 28, 1980, Far West was awarded a judgment against Featherworks for damages due to breach of warranty in the amount of $384,577. This Chapter 11 proceeding was precipitated by a sheriff's sale of Featherworks' real property scheduled to take place on March 3, 1981 in execution of that judgment. Far West is the debtor's second largest unsecured creditor, excluding companies affiliated with the debtor.
In the litigation with Far West, Featherworks was represented by the Denver law firm of Kerwin and Elliott, which served as general counsel to Featherworks from around 1976 until their retention was terminated by Arthur Puro around September, 1980. They have an unpaid claim against Featherworks for legal services in the amount of $33,287.44, making them one of the debtor's largest unsecured creditors.
Walter E. Heller & Co. (Inc.) ("Heller") was financing Featherworks up to the time it filed its petition for relief. At the time Featherworks filed, Heller was owed in excess of $5,000,000 secured by a lien on Featherworks' inventory and accounts receivable. Heller ceased all further financing when Featherworks filed. Its security has fallen short of paying off the amount owed it by approximately $1.5-million, making Heller an unsecured creditor in that amount. (Certification as to Balloting With Respect to Plan of Reorganization, at 3 (5/19/82)).
II.
THE PROCEEDINGS TO DATE
Featherworks filed a voluntary petition for relief under Chapter 11 of Title 11 of the United States Code on February 26, 1981, pursuant to 11 U.S.C. § 1102. Its schedules identified Arthur Puro as its president and described the debtor as a subsidiary of Hudson, which owned 100 percent of its common stock. At the time, Hudson was itself in reorganization in this Court. Although the debtor's schedules showed debts in excess of $12.5-million, most of these debts, with the exception of what was unpaid Heller, Hudson, Windsor, and Far West, were small. Half the creditors listed were owed less than $1,000 each. The *638 Court appointed a committee of creditors consisting of the seven largest unsecured claims, except that it did not include as a member of that committee Kerwin and Elliott, which would have qualified by reason of the size of its claim. Kerwin and Elliott is now applying to be added to that committee which so far has been inactive.
On March 27, 1981, the Court issued an order lifting the automatic stay so as to permit Heller (which had ceased financing Featherworks on the filing under Title 11) to collect on its security, consisting of the debtor's pre-petition inventory and accounts receivable. Heller was then owed over $5-million.
After Heller ceased financing Featherworks, its financing was taken over by Windsor. After notice and a hearing, the Court entered an order on September 25, 1981 giving Windsor a priority administration claim for any merchandise sold and delivered to the debtor-in-possession subsequent to the filing of the Chapter 11 petition, and a first lien and security interest upon the debtor's inventory and accounts receivable, subject to the prior lien of Heller, with respect to any indebtedness incurred subsequent to August 3, 1981.
On October 30, 1981, the debtor filed a proposed plan of reorganization. The plan is a very simple one, under which all general unsecured creditors, all of whom are placed in Class II, will share in a lump-sum distribution of $40,000 to be supplied by Windsor. Windsor, it was indicated, will waive participation on its $4-million unsecured claim so that creditors would receive 1.3 percent each on confirmation. Priority creditors, including unspecified administration creditors, are put in Class I and are to be paid 100 percent on confirmation. Their claims are approximated to be $21,000, and at the hearing on confirmation, Puro stated that they would be paid by Windsor (Tr., 5/26/82, at 83). The debtor's secured creditors are put into two classesClasses III and IV: Class III consists of the single pre-petition secured claim of Heller. Heller is to be given title, as well as possession, of all the debtor's inventory and accounts receivable in satisfaction of its secured claim. The debtor estimated that that would leave Heller with an unsecured claim of approximately $1-million, which will fall into the Class II category. (In fact, Heller's unsecured claim is closer to $1.5-million.) Class IV is composed of the debtor's unsecured creditors whose interests are unimpaired. In this class are put First American Mortgage Company, which holds a first Deed of Trust on the debtor's real estate on which there was a balance due at the time of filing of $157,851; Guy G. Joseph, who holds a second Deed of Trust in the face amount of $250,000; and Windsor, which has liens, both pre- and post-petition, on the debtor's machinery, equipment, inventory, and accounts receivable.
The Court fixed March 30, 1982 both as the date for a hearing on the acceptances of the plan of reorganization, and as the last day for the filing of written acceptances or rejections to that plan.
On March 30, 1982, it appeared that the debtor, although it had received 23 acceptances, lacked the votes to confirm the plan unless it was able to count the votes of Hudson and Windsor. The plan had been rejected by Heller, Far West, Kerwin and Elliott, and three other creditors.
Far West contended that the debtor's plan could not be confirmed because 11 U.S.C. § 1129(a)(10) requires that there must be a class of creditors, without including insiders, who have accepted the plan, and that the votes were lacking for confirmation if the acceptances of Hudson and Windsor were excluded. The Court put off determining that issue and proceeded with the hearing on confirmation.
When that hearing resumed on May 26, 1982, Heller moved for an order pursuant to § 1126(a) of the Bankruptcy Code to allow it to change its ballot and to vote to accept the amended plan of reorganization. Subsequently, Far West cross-moved for an order disqualifying that acceptance in accordance with 11 U.S.C. § 1126(e) and notifying the United States Attorney that an investigation should be had to determine whether a violation of 18 U.S.C. § 152 has taken *639 place. The alleged violation consisted of the receipt by Heller of $25,000 from Windsor coincidentally with the attempted change in its vote. The Court, without deciding whether or not Heller could change its vote, changed the cut-off date for voting for all creditors to June 15, 1982. During the extended period, no creditor changed its vote. This extension of the date for voting has been appealed, and that appeal is now pending.[1] Despite the appeal, the Court continued with the hearing on confirmation of the amended plan; that hearing was concluded on July 27, 1982.
The debtor is urging in support of confirmation that creditors are receiving as much as they would if the debtor were liquidated. Far West disputes this, and also opposes confirmation of the plan on the ground that it has not received the acceptance of a class of creditors as required by § 1129(a)(10).
On March 26, 1982, Kerwin and Elliott filed an objection to the claim of Windsor and asked that Windsor's claim be entirely disallowed or subordinated to those of all other creditors. Hearings on their objection were held on May 26, June 7, and July 27, 1982.
After these various hearings were concluded, Far West, following a number of false starts, moved, pursuant to Bankruptcy Rules 734 and 737, for an order directing the debtor to permit access to its premises at 4410 Washington Street, Denver, Colorado, for the purpose of inspecting and appraising the debtor's real property.
Accordingly, now pending before the Court are Kerwin and Elliott's motion to be added to the creditors' committee; the motion and cross-motion with respect to Heller's application to change its vote; Kerwin and Elliott's motion to disallow or subordinate Windsor's claim; Far West's motion to appraise the debtor's real estate; and, overarching all else, the question whether the debtor has demonstrated that its plan meets the requirements of 11 U.S.C. § 1129 for confirmation.
These various matters and the facts relevant to each will be examined separately.
III.
THE DEBTOR'S PLAN
11 U.S.C. § 1129 lays down the requirements for confirmation of a plan of reorganization. Among the requirements with respect to acceptance of a plan are those found in subsections (a)(10) and (a)(7)(A)(ii). Subsection (a)(10) reads as follows:
"At least one class of claims has accepted the plan, determined without including any acceptance of the plan by any insider holding a claim of such class."
11 U.S.C. § 1129(a)(7) requires that unless each member of a class has accepted the plan, each holder of a claim in that class "receive * * * under the plan * * * property of a value, as of the effective date of the plan, that is not less than the amount that such holder would so receive * * * if the debtor were liquidated under Chapter 7 * * on such date."
A. The Plan Does Not Satisfy § 1129(a)(10)
The debtor's plan lacks the necessary acceptances because the votes of Windsor and Hudson must be excluded and Heller will not be permitted to change its vote.
1. The Votes of Hudson and Windsor Do Not Count
Section 1129(a)(10) disenfranchises insiders and explicitly directs that in determining whether a class of claims has accepted a plan, there cannot be included "any acceptance of the plan by any insider." Section 101(25) defines an "insider" for purposes of Title 11 as including "if the debtor *640 is a corporation," the "person in control of the debtor."
There can be no question but that with regard to the debtor, both Hudson and Windsor are insiders. Featherworks is a wholly-owned subsidiary of a chain of corporations of which Hudson is a link and Windsor is the apex. The debtor, in its disclosure statement, describes Windsor as "an affiliated company of the debtor in that it has the same officers and directors and controls the debtor's equity interest." Amended Disclosure Statement, at 6 (2/26/82).
Windsor argues that the disqualification of an insider should be determined as of the time the claim came into existence, not as of the time of the vote. It is Windsor's position that its claim came into existence before it became an insider. Just when Puro and, therefore, Windsor was able to exert sufficient control over the debtor to qualify as an insider is a disputed issue of fact which it is not necessary to resolve at this time because this Court is persuaded that what determines the right to vote is the status of the creditor at the time the vote is taken, not at the time the debt arises.
The purpose of the vote is to secure an expression from the creditors of where they think their best interest lies. An insider, like Hudson and Windsor, does not have the same interest as the creditors. The creditors will benefit only to the extent of their distributive share in the $40,000 to be paid out by Featherworks; Hudson and Windsor will benefit by retaining effective ownership of a functioning company which has been freed of all outstanding debts in payment for that $40,000. Hudson and Windsor are influenced by totally different considerations from those motivating the other creditors of Featherworks. The policy considerations underlying the disqualification of insiders apply most strongly to them. Their votes cannot be counted for purposes of § 1129(a)(10).
This conclusion is reinforced by the facts peculiar to this case.
B. Windsor Is Not a True Member of the Class
In opposing Kerwin and Elliott's motion to equitably subordinate Windsor's claim, the debtor has taken the flat position that Windsor would not participate in the $40,000 to be distributed among general creditors (Tr., 5/28/82, at 18). Thus, when Windsor declares itself to be in favor of the acceptance of the plan, it is voting for what persons other than itself would be satisfied to receive. Windsor has taken itself out of Class II. To permit it to impose its will on the debtor's true general creditors by creating a false majority in favor of the plan is inconsistent with the proper operation of the Code.
C. Heller's Acceptance Is Ineffective
If the votes of Hudson and Windsor cannot count towards acceptance of the plan, then the plan lacks the necessary votes unless Heller's motion for leave to change its vote is allowed. (As already noted, should the District Court decide that the bankruptcy court lacked the power to extend the time for voting, Heller will necessarily be bound by its pre-March 30, 1982 rejection.) In support of its application for authority to change its vote, Heller has explained that it had been prepared to vote for the debtor's plan until sometime before March 30, 1982, when it took possession of and sold the debtor's remaining pre-petition inventory. It then discovered that the inventory was inferior in quality and weight to what it had been represented to be. Heller then decided both to reject the debtor's plan, and allegedly threatened to sue the debtor, Windsor, and Puro. Allegedly to avoid litigation, Puro paid Heller $25,000, receiving in return the assignment of certain accounts receivable and the exchange of general releases running to himself and Windsor. The attorneys for the parties drafted the necessary papers, and on May 19, 1982, the same date that the agreements were executed, Heller advised the debtor of its change of vote.
*641 11 U.S.C. § 1126, which lays down the rules governing acceptance of a plan, authorizes disqualification of a vote for lack of good faith. Subsection (e) of that section provides:
"On request of a party in interest, and after notice and a hearing, the court may designate any entity whose acceptance or rejection of such plan was not in good faith, or was not solicited or procured in good faith or in accordance with the provisions of this title."
Relevant to giving content to this section is 18 U.S.C. § 152, which makes it a criminal offense punishable by a fine or imprisonment for not more than five years, or both, to give or receive money for taking or forbearing to take any act in connection with a proceeding under Title 11 when done fraudulently and willfully.
Although Heller stoutly maintains that the change in its vote was not influenced by the contemporaneous receipt of $25,000 from Windsor, the timing and the surrounding circumstances are at least suspect. Until Heller received the $25,000, it was voting against the plan; afterwards, it changed position.
When Heller earlier indicated to Featherworks' counsel that it would accept the debtor's plan, it was expected, according to the disclosure statement, that it would have an unsecured claim of about $1-million which would share in the $40,000 made available to general unsecured creditors. According to the most recent figures available to the Court, Heller's unsecured claim is now $1.5-million. Thus, the discovery by Heller that the collateral was less valuable than it had believed, making its unsecured claim greater, bore directly on the acceptability of the total distribution to all unsecured creditors of $40,000. In these circumstances, to receive an additional $25,000 might have made the plan marginally more acceptable. Looking to the source of the $25,000, it is self-evident that Windsor and Puro had a strong interest in putting through a plan which leaves them in total ownership of Featherworks, free of all debts, in exchange for the relatively small sum of $40,000.
The bankruptcy laws extend extraordinary relief to insolvent debtors by permitting them to slough off their debts and continue in operation, provided their creditors agree to that course of action. The Code depends upon the self-interest of the creditors to act as a barrier against abuse of the bankruptcy laws. If a majority in number and amount of all creditors vote for a plan, there is good reason to believe that that plan is in the best interest of all creditors, since it would not receive such a vote otherwise. However, if any creditor receives some special consideration peculiar to him, his vote is no longer disinterested and unbiased and the Code's built-in controls are neutralized.
Bearing in mind all the circumstances, the Court will not permit Heller to change its vote on the plan from rejection to acceptance. The Court does not believe such acceptance to have been solicited, procured, or given in good faith when the total amount to be received by all unsecured creditors is only $40,000. A change in vote by the debtor's major unsecured creditor, coincidental with the receipt from the same source as the $40,000 funding the plan of an additional $25,000 over and above what other creditors are receiving, will not be allowed.
The Court does not know enough with respect to what occurred to find, as Far West requests, that there are reasonable grounds for believing that there has been a violation of 18 U.S.C. § 152 and to refer the matter to the United States Attorney pursuant to 18 U.S.C. § 3057.
Whatever either Heller or Puro did was apparently done with the advice and knowledge of their respective attorneys, who are among the most respected lawyers appearing in this Court. It has long been recognized with respect to other types of violations of 18 U.S.C. § 152 that acting on the advice of counsel negates the presence of the necessary fraudulent intent. E.g., Thompson v. Eck, 149 F.2d 631, 633 (2d Cir.1945).
*642 Since the debtor's plan has not been accepted by the requisite number of creditors, it cannot be confirmed even if it satisfied § 1129(a)(7)(A)(ii).
D. The Record Fails to Establish That Creditors Will Receive As Much As On Liquidation
Far West opposes the plan not simply because it has failed to gain acceptance from a class of creditors, as required by § 1129(a)(10), but also on the ground that creditors will not receive under the plan as much as they would in a Chapter 7 liquidation. Far West does not dispute that the debtor's pre-petition inventory and accounts receivable are covered by Heller's security interest, and that Heller is owed more than the value of this collateral. Far West, however, claims that the debtor's building has a value higher than the $275,000 which the debtor attributes to it, and it also suggests that the second Deed of Trust in the face amount of $250,000 could be satisfied on liquidation by the payment of $125,000. If Far West were right as to either, or both, the debtor would have a substantial equity, well in excess of $40,000, in its real estate which would be available to its creditors on liquidation.
Far West also believes that the post-petition operations of the debtor have generated assets which would be available to the creditors on liquidation. According to the debtor, its post-petition inventory and accounts receivable would, if liquidated, not realize enough to cover the administration claim of Windsor. Far West urges, however, that Windsor's administration claim is suspect because of the enormous jump it took between the date of the figures on the disclosure statement, August 31, 1981, and the date of the hearing on confirmation, March 30, 1982. It increased about $676,000, principally for the purchase of raw materials, but this increase was not matched by any corresponding increase in either the debtor's inventory or accounts receivable, which together rose only around $180,000. As Far West points out, if the inventory and accounts receivable failed to keep pace with purchases because of cash sales, there should have been a change in the debtor's indebtedness, whereas its operating statements show a break-even operation.
As the proponent of the plan, the debtor had the burden of establishing that it met the requirements of the Code. Critical to that issue is the present value of its building and the totality of encumbrances on it. The only evidence submitted by the debtor with respect to the value of the building was an appraisal made in September, 1980, i.e., more than two years ago, which put the value of the building at $275,000. It now develops that this appraisal was made in connection with the settlement of the litigation with Guy G. Joseph, which may affect its trustworthiness. In any event an appraisal two years old in the volatile real estate market this country has been experiencing over the past few years cannot be deemed probative of its present value.
The lack of reliable evidence in the record on this score is the more critical because of the substantial question which has been raised as to what would be left for creditors in the event of a forced liquidation of the debtor's building. Far West does not question the first Deed of Trust held by First American Mortgage Company, of which there was a balance due at the time of the filing of the Chapter 11 of approximately $157,851, a figure which now must be lower, but Far West does query the second Deed of Trust in the amount of $250,000 held by Guy G. Joseph. This lien came into being as the result of a stipulation entered into on September 9, 1980 settling an action brought by Guy G. Joseph against Featherworks and Morris Schachne. This stipulation has been supplied this Court by Far West. (Exhibit B to Memorandum of Far West in Opposition to Confirmation, filed August 4, 1982.) The parties to this stipulation were Guy G. Joseph, Featherworks, Windsor, and Arthur Puro. Pursuant to the stipulation, the complaint against Schachne was dismissed, and judgment was entered against Featherworks in the amount of $256,000 which was to be satisfied by the payment by Windsor or Puro *643 over a five-year period of $125,000 with interest at 10 percent, of which $50,000 was to be paid on September 4, 1980. Payment was to be secured by a judgment lien in the form of a second Deed of Trust in the sum of $256,000 in favor of the plaintiff on Featherworks' real property, which was to be assigned to Windsor on payment in full of the $125,000.
On the hearing on Kerwin and Elliott's motion to subordinate Windsor's liens and claims, Mr. Kerwin claimed that the settlement with Joseph was deliberately structured to take advantage of a pre-judgment attachment which Joseph had secured, so as to take precedence over the judgment Far West had obtained earlier that year in May, 1980 (Tr., 7/27/82, at 27). Whatever the bona fides of the second Deed of Trust, it would appear that there are strong grounds for believing that its true amount is $125,000, or less, so that in the event of liquidation, any value in the debtor's real estate in excess of $282,000 ($157,851 + $125,000) would be available to creditors. In these circumstances, that the property was worth no more than $275,000 two years ago cannot be deemed acceptable proof that creditors would receive nothing if the property were liquidated today.
Because it is clear that further proceedings will have to be had herein, nothing said herein with respect to the second Deed of Trust held by Guy G. Joseph should be deemed final or to result in law of the case. The full facts respecting that second Deed of Trust will have to be explored more fully in proceedings to which Guy G. Joseph may well have to be made a party.
Since the insufficiency of the record as to the current value of the debtor's building precludes a finding that the debtor has demonstrated that its plan satisfies § 1129(a)(7), it is unnecessary to evaluate the significance of the curious rise in the debtor's post-petition debt without any corresponding increase in its assets.
For the reasons stated, the debtor has failed to make a positive showing that the plan provides at least as much as liquidation would yield.
IV.
THE KERWIN AND ELLIOTT MOTIONS
Two motions by the debtor's former attorneys, Kerwin and Elliott, are pending. First, Kerwin and Elliott want to be added to the creditors' committee; second, they are seeking to disallow, or subordinate, Windsor's claims and liens.
These motions have brought into sharp focus the effect of the attorney-client privilege on the activities of a lawyer-creditor in a bankruptcy proceeding of his former client. Under what disabilities, if any, does a lawyer labor? May he become a member of the creditors' committee? May he use knowledge obtained as a lawyer to his client's disadvantage in support of a motion for equitable subordination?
That Kerwin and Elliott served as attorneys for the debtor is common ground; its claim arises out of services performed in that capacity. In 1976 or 1977, the firm was retained by Morris Schachne to advise and represent Featherworks and continued to do work for the debtor until sometime in 1980 (Tr., 7/27/82, at 23, 19-21). The change in the persons in control of the corporation, with Puro replacing Schachne, did not terminate the attorney-client privilege. That privilege belongs to the corporate client and not to the individual officers or directors, and passes by operation of law to the trustee in bankruptcy or, as here, to the debtor-in-possession. Citibank, N.A. v. Andros, 666 F.2d 1192 (8th Cir.1981); In re O.P.M. Leasing Services, Inc., 13 B.R. 64, 67-68 (Bkrtcy.S.D.N.Y.1981).
The debtor has not invoked the privilege in connection with Kerwin and Elliott's application to serve on the creditors' committee, but has raised it with respect to Mr. Kerwin's testimony in support of the firm's motion to subordinate Windsor's liens.
The governing principles are well-settled. Canon 4 of the American Bar Association's Code of Professional Responsibility states: "A lawyer should preserve the confidences *644 and secrets of a client." N.Y.Jud.Law app. § 15 Canon 4 (McKinney 1976 & Supp. 1982). The commentary notes: "The obligation of a lawyer to preserve the confidences and secrets of his client continues after the termination of his employment." Id., EC 4-6. It adds: "A lawyer should not use information acquired in the course of the representation of a client to the disadvantage of the client, and a lawyer should not use, except with the consent of his client after full disclosure, such information for his own purposes." Id., EC 4-5. An exception to this flat prohibition is where a lawyer goes unpaid: a lawyer may reveal confidences and secrets where it is necessary to do so in order to establish or collect his fee. Id., DR 4-101(C)(4).
A. The Creditors' Committee
Under the Code, as was not true under its predecessor, the Bankruptcy Act, the Court appoints the creditors' committee in a reorganization proceeding. 11 U.S.C. § 1102(a)(1) directs the Court to appoint a committee of creditors holding unsecured claims as soon as practicable after the order for relief is entered. Section 1102(b)(1) provides that the committee of creditors appointed by the Court:
"shall ordinarily consist of the persons, willing to serve that hold the seven largest claims against the debtor of the kinds represented on such committee, or of the members of a committee organized by creditors before the order for relief under this chapter, if such committee was fairly chosen and is representative of the different kinds of claims to be represented."
As is evident from the language of the section, the Court need not necessarily appoint the persons that hold the seven largest claims, since all the statute provides is that the committee shall "ordinarily consist" of such persons. The authoritative House Report describes the language in subsection (b) as "precatory." H.R.Rep. No. 95-595, 95th Cong., 1st Sess. 401 (1977), U.S.Code Cong. & Admin.News 1978, p. 5787. The exercise of discretion is necessary.
Because the Court was aware from the Hudson proceeding that Kerwin and Elliott had been the debtor's attorneys, the Court, in the exercise of its discretion, did not appoint that firm to the creditors' committee. To the Court it seemed that to include a debtor's former attorneys in the creditors' committee might result in a conflict of loyalties: on the one hand, the debtor's creditors would depend on the committee and its members for guidance in such matters as whether to "investigate the acts, conduct, assets, liabilities, and financial condition of the debtor, the operation of the debtor's business and the desirability of the continuance of such business, and any other matter relevant to the case or to the formulation of a plan" (11 U.S.C. § 1103(c)(2)); on the other hand, the attorney might be inhibited from giving such guidance by his obligation to preserve the confidences and secrets of his client. It seemed unfair to Kerwin and Elliott that to place them in a position where their duty to the debtor's creditors might conflict with the duty they owed their former client to preserve the confidences and secrets to which they became privy in their position as attorneys. Furthermore, the Court did not deem it necessary for Kerwin and Elliott to be members of the creditors committee in order to establish or collect their fee. Accordingly, the Court did not include Kerwin and Elliott on the creditors' committee.
Paragraph (c) of § 1102 authorizes the Court, on request of a party in interest and after notice and a hearing, to change the membership or size of a committee appointed under subsection (a) "if the membership of such committee is not representative of the different kinds of claims or interests to be represented."
Kerwin and Elliott have moved under this provision to be added to the committee. Featherworks has not opposed the request for the reasons which led the Court originally to exclude Kerwin and Elliott from the committee. It has not claimed that membership is inconsistent with the former attorneys' client relationship. Since the privilege is lost unless it is claimed, it *645 can now be deemed waived insofar as it bars Kerwin and Elliott from sitting on the committee. Featherworks puts its opposition on the grounds that the application is late; confirmation is imminent; adding Kerwin and Elliott to the committee would create an even-numbered membership, leading to deadlock; Kerwin and Elliott are not prejudiced by their exclusion; and their claim is disputed. The last ground appears no longer to be present, since Featherworks stated on the record that it is not disputing that claim (Tr., 7/27/82, at 6).
As for the other grounds, the Court finds them unpersuasive. Confirmation of that plan is no longer imminent, and while Kerwin and Elliott's motion may be tardy, they advised the Court informally, almost immediately following the filing of Featherworks' petition, of their wish to be included on the creditors' committee.
Since the committee is not functioning and seems unlikely ever to function because of the insignificant nature of the claims of most creditors, whether Kerwin and Elliott becomes a member appears to be of little practical significance, nevertheless Kerwin and Elliott will be added to the creditors' committee.
V.
EQUITABLE SUBORDINATION
Although Featherworks has not raised the attorney-client privilege in opposition to the application of Kerwin and Elliott to be made a member of the creditors' committee, Featherworks has invoked it with respect to the testimony Mr. Kerwin offered respecting what he had learned during his representation of Featherworks; in particular, in connection with the settlement of the Guy G. Joseph litigation.
Since it can be expected that the issue will recur in this case, and since both sides have advised the Court that whatever the outcome of the present motions, there will be an appeal, the Court wishes to set down what it believes the governing law to be so that if the Court is in error, it can be corrected.
While this Court originally took a different position, it has now concluded that the attorney-client privilege cannot be invoked by Featherworks to prevent Mr. Kerwin from giving any testimony he deems necessary to establish that any distribution to Windsor, and, likewise, any liens securing Windsor's claims, must be subordinated to the payment of the debtor's general creditors, including his own claim.
As has already been noted, the relevant canon releases an attorney from the obligation of respecting his client's confidences to the extent necessary to establish and collect his fee. While it may be true that the claim owed Kerwin and Elliott is no longer disputed, so that its establishment is not in question, the ability of Kerwin and Elliott to collect on that fee will depend upon what monies there are available for distribution, and who shares in that distribution. By disallowing, or subordinating, Windsor's claims and liens, Kerwin and Elliott enlarge the amount available for distribution to Featherworks' other creditors, including themselves.
Accordingly, the Court has concluded that all the evidence adduced by Kerwin and Elliott was admissible, despite Featherworks' invocation of the attorney-client privilege, because disallowance or subordination of Windsor's claims, or liens, would benefit the general unsecured creditors. The Court does not believe this conclusion to be affected by the fact that with respect to the only distribution presently in contemplation, the $40,000 to be distributed by Windsor, Windsor has declared its intention not to participate. The eligibility of that plan to confirmation depends on the validity of Windsor's liens. If those liens were invalid, not only would the plan not qualify for confirmation, but general creditors could be certain, in the event of a liquidation, of receiving more than the plan now offers. For these reasons, Kerwin and Elliott are not inhibited by the attorney-client privilege from offering whatever evidence was available to them that would enable them to collect the amount which Featherworks concedes to be owed them. As the *646 hearing of July 27, 1982 will show, the Court invited Mr. Kerwin to present whatever evidence was available, reserving the right to seal the record, if necessary (Tr., 7/27/82, at 20-21).
VI.
DISALLOWANCE OR SUBORDINATION OF WINDSOR'S CLAIMS AND LIENS
Windsor, in August, 1978, was given a lien by the debtor on all its machinery and equipment in connection with the debtor's guarantee of the debts of its parent, Hudson, to Windsor; Windsor has a pre-petition claim against the debtor for $5-million, of which $1-million is described as secured and the balance is unsecured; Windsor also has a post-petition administration claim which fluctuates, but which was in excess of $2-million at the confirmation hearing.
Kerwin and Elliott's objection to Windsor's claim appears to be directed solely against Windsor's pre-petition claim and its August, 1978 lien. Kerwin and Elliott seeks to have Windsor's pre-petition claims disallowed in their entirety, or to be equitably subordinated to all other claims. Objection to Allowance of Claim of Windsor Trading Corp., Or, Alternatively, Motion to Equitably Subordinate Said Claim, at 2.
When this motion was filed, the only distribution to general creditors which was contemplated was the $40,000 as to which Windsor had agreed to waive participation. Accordingly, Windsor urged that there was no need for this Court to subordinate Windsor's claim since Windsor has already agreed to such treatment. In addition, Windsor entered a general denial and pleaded affirmatively that its August, 1978 lien was created at a time when Windsor had no control over the debtor corporation.
Mr. Kerwin called himself and Morris Schachne as witnesses. Morris Schachne had owned Hudson and its subsidiary, Featherworks, until January, 1980. On November 8, 1978, when Hudson was indebted to Windsor for nearly $5.5-million, it filed for relief under Chapter XI of the Bankruptcy Act of 1898. What occurred next is reflected in an Opinion of this Court, dated March 16, 1981, in the Hudson proceeding:
"[T]he Chapter XI proceedings were dominated to a great extent by a dispute between Hudson and Windsor Trading Corporation ("Windsor"). Lawsuits involving claims of usurious transactions, preferential payments, and the validity of Windsor's security interests in Hudson's property were commenced between Windsor and Hudson in the bankruptcy court, the United States District Court, and the New York State Supreme Court.
"The dispute was ultimately settled in February, 1979 when the parties entered into an agreement whereby Arthur Puro, the controlling officer of Windsor, was given joint managerial control over Hudson with Mr. Schachne. This agreement remained in effect until January, 1980, when Mr. Schachne resigned as an officer and director of Hudson, and Mr. Puro became its president and assumed complete control over its operations." (Emphasis supplied.)
Kerwin and Elliott had begun representing the debtor in 1976 or 1977. Mr. Kerwin testified that sometime after he began that representation, he became aware that Puro was exercising a dominant role in the affairs of the debtor. According to him, Arthur Puro sought to avoid public knowledge of his involvement in Featherworks to the point of being introduced at a dinner meeting in 1979 by a name other than his own.
Mr. Kerwin also testified that Puro had threatened Schachne while the two men were working together. On a single occasion sometime in 1979, after Schachne and Puro were sharing the management of Hudson, Puro, in an expansive mood and in an after-hours conversation following a few drinks, had declared that if Schachne had not permitted him to participate in the management of Hudson, Puro would have had him killed (Tr., 7/27/82, at 84). Although Schachne claimed that he believed that Puro would have done this and felt threatened by the statement, he continued thereafter to work with Puro, and they are now on relatively amiable terms. The *647 Court, having had occasion to observe Puro over a period of years, finds it difficult to believe that Schachne could have honestly believed that his life was ever in danger.
Mr. Kerwin claimed that Puro misused his power over the debtor. Pressed for the particulars, he referred to the settlement with Guy G. Joseph. Kerwin charged that the settlement was arranged in order to give Windsor a preferred position in relation to Far West.
Mr. Kerwin also claimed that because Featherworks bought the bulk of its raw material from Windsor, it was unable to reduce its debt to that company. Schachne confirmed that the affairs of the three companies Windsor, Hudson, and Featherworks had been closely intertwined for some period and that during 1978, 1979, and 1980, Featherworks bought from 70-80 percent of its raw material from Hudson or Windsor. Schachne was unable to recall who sold to whom, saying: "I believe that some of the sales of Windsor went directly to Featherworks in 1978. Although at most times, Windsor sold directly to Hudson, and Hudson sold to Featherworks. But I believe that some of the sales in 1978 were directly to Featherworks." Hearing of July 22, 1982, at 56.
When Schachne was subsequently asked whether the debtor could have bought elsewhere more advantageously, he replied:
"What he asked me was, was whether he felt that Windsor Trading actually charged us more for the feathers then [sic] perhaps we could have bought it from other sources. And to the best of my recollection, and I believe the record shows, because I've made this claim before, on the record when I was involved in the Hudson Chapter 11. I did make the claim that I felt that Windsor was over charging at the time. Whether it was over charging Hudson or whether it was over charging Featherworks. I believe that that was my claim at the time, and the record shows that that's what I claimed.
"I certainly don't remember any specific prices any longer, and I certainly don't remember any specific purchases any longer." Id. at 61.
Section 510(c)[2] of the Bankruptcy Code codifies the law of equitable subordination as set forth in Pepper v. Litton, 308 U.S. 295, 60 S. Ct. 238, 84 L. Ed. 281 (1939), and Taylor v. Standard Gas & Electric, 306 U.S. 307, 59 S. Ct. 543, 83 L. Ed. 669 (1938):
"(c) Notwithstanding subsections (a) and (b) of this section, after notice and a hearing, the court may
"(1) under principles of equitable subordination, subordinate for purposes of distribution all or part of an allowed claim to all or part of another allowed claim or all or part of an allowed interest to all or part of another allowed interest; or
"(2) order that any lien securing such a subordinated claim be transferred to the estate."
The theory underlying the doctrine of equitable subordination received its classic exposition in Pepper v. Litton, supra, 308 U.S. 295, 60 S. Ct. 238, 84 L. Ed. 281 (1939). In that case, the Supreme Court held that the salary claims of the dominant and controlling stockholder of a bankrupt corporation were properly subordinated by the bankruptcy court to those of the corporation's other creditors because of the stockholder's fiduciary position:
"A director if a fiduciary. So is a dominant or controlling stockholder or group of stockholders. Their powers are powers in trust. Their dealings with the corporation are subjected to rigorous scrutiny *648 and where any of their contracts or engagements with the corporation is challenged the burden is on the director or stockholder not only to prove the good faith of the transaction but also to show its inherent fairness from the viewpoint of the corporation and those interested therein. The essence of the test is whether or not under all the circumstances the transaction carries the earmarks of an arm's length bargain. If it does not, equity will set it aside. While normally that fiduciary obligation is enforceable directly by the corporation, or through a stockholder's derivative action, it is, in the event of bankruptcy of the corporation, enforceable by the trustee." (Citations omitted.) 308 U.S. at 306, 60 S.Ct. at 245.
In reaching this conclusion, the Supreme Court relied on its earlier decision in Taylor v. Standard Gas & Electric Co., 306 U.S. 307, 323, 59 S. Ct. 543, 550, 83 L. Ed. 669 (1939), in which it subordinated the claims of a parent corporation, Standard Gas & Electric Co., "because of the abuses in management due to the paramount interest of interlocking officers and directors in the preservation of Standard's position, as at once proprietor and creditor of Deep Rock."
Following Taylor v. Standard Gas & Electric Co. and Pepper v. Litton, the transactions of fiduciaries with bankrupt corporations have been subjected to close scrutiny and the claims of such fiduciaries have been subordinated where abuse of the fiduciary relationship to the detriment of other creditors has been found. The doctrine has been applied to stockholders, officers, directors, parent corporations, and alter egos. Pepper v. Litton, 308 U.S. 295, 60 S. Ct. 238, 84 L. Ed. 281 (1939); Sampsell v. Imperial Paper & Color Corp., 313 U.S. 215, 61 S. Ct. 904, 85 L. Ed. 1293 (1941); Comstock v. Group of Institutional Investors, 335 U.S. 211, 68 S. Ct. 1454, 92 L. Ed. 1911 (1948); In re Mobile Steel Co., 563 F.2d 692 (5th Cir. 1977); In re Multiponics, Inc., 622 F.2d 709, 722 (5th Cir.1980); In re W.T. Grant Co., 4 B.R. 53, 74 (Bkrtcy.S.D.N.Y.1980); Herzog & Zweibel, "The Equitable Subordination of Claims in Bankruptcy," 15 Vanderbilt L.Rev. 83 (1961).
However, equitable considerations can only justify subordination of claims, not their total disallowance. In re Mobile Steel Co., supra, at 699. None of the evidence adduced by Kerwin justifies the disallowance of the claims of Windsor.
Furthermore, even total control of a debtor's affairs does not necessarily lead to equitable subordination; debts owed stockholders and directors are not automatically denied equality of distribution. In re Mid-Town Produce Terminal, Inc., 599 F.2d 389 (10th Cir.1979); In re Mobile Steel Co., supra, at 701. To invoke the doctrine it must be shown that the creditor whose claim is being subordinated engaged in some type of inequitable conduct which resulted in injury to the creditors of the bankrupt or conferred unfair advantage on the claimant. In re Mobile Steel Co., supra. In applying the doctrine, several principles must be kept in mind. One is that there should be subordination only to the extent necessary to offset the harm which the bankrupt and his creditors suffered on account of the inequitable conduct. Another is that "an objection resting on equitable grounds cannot be merely formal, but rather must contain some substantial factual basis to support its allegation of impropriety." Id., at 701. The objecting creditor must come forth with enough substantiation to overcome the initial presumption of validity which attaches to a claim established as required by the law.
The evidence adduced by Mr. Kerwin, together with the record in Hudson of which the Court takes judicial notice, is sufficient to establish the possession by Puro and Windsor of the type of control over the debtor that constitutes one essential condition for the application of the doctrine of equitable subordination. Certainly, such control existed from at least February, 1979, when Puro assumed joint control of Hudson with Schachne. But there is nothing either in the Hudson record, or Mr. Kerwin's testimony, to show its existence in August, 1978, when Windsor was given its first lien on the debtor's assets.
*649 Furthermore, while the record establishes control after February, 1979, it falls short of demonstrating the other ingredient necessary for equitable subordination, and that is, the extent to which the claims of Windsor are due to abuse of that control. The facts as to the Joseph settlement are provocative, but that lien is held by Joseph who is not a party to this proceeding.
The only evidence of any abuse by Windsor of its control over Featherworks is Schachne's vague statement that, on occasion, Featherworks paid higher prices for Windsor merchandise than it could have bought elsewhere. That statement lacks the specificity the courts have required for equitable subordination. Equitable subordination is a harsh remedy. Windsor and Arthur Puro, like Far West, were at one time simply creditors of Featherworks' parent. If they are now in a position of ownership, it is because that parent was unable otherwise to satisfy the debts owed them. To subordinate their claims to all other creditors in their entirety requires more than proof of the ability to control Featherworks' purchases and the use of that power to Windsor's advantage.
On this record, the application of Kerwin and Elliott to disallow or subordinate Windsor's claims is denied. If Kerwin and Elliott have any evidence that they were unable to offer because the Court erroneously believed the attorney-client privilege to be a bar, they may move to reopen for consideration of such evidence.
VII.
THE MOTION TO INSPECT AND APPRAISE THE DEBTOR'S REAL PROPERTY
Critical to the further development of this proceeding is the value of the debtor's property at 4410 Washington Street, Denver, Colorado. Far West, albeit belatedly, is now seeking leave to have an appraiser enter these premises to appraise their value and thereafter make himself available to the debtor for cross-examination. Far West indicates that it has been informally advised that the building may have a value at the present time as high as $530,000-$550,000. If that were the case, the debtor would have a substantial equity in the property of at least $130,000 which would be available to general creditors on liquidation.
The debtor objects to the requested appraisal on the ground that it is untimely, and that granting it would serve no useful purpose. The debtor observes that the request comes a year and a half after the case was first filed, and after the hearing on confirmation has been concluded. The debtor asserts "that the Court is without discretion to permit the submission of evidence which was clearly available to the party prior to the conclusion of the hearings." Debtor's Affidavit in Opposition, dated October 14, 1982, at 2.
The argument that the hearing on confirmation has been concluded, of course, loses much of its force in view of the fact that the Court is denying confirmation, requiring further proceedings in any event. But even if that were not the case, the Court does not believe that by closing or terminating the hearing with reference to confirmation after all sides have been heard, that it necessarily lost the power to reopen for the purpose of receiving significant and critical evidence. The Court has repeatedly deplored the absence of a current appraisal of the Denver property, and the value of that building is of great importance in this proceeding. That Far West has even belatedly undertaken to supply the gap in the record is a development of value to all the debtor's creditors.
When the Court originally contemplated permitting the requested appraisal, it intended to impose a timetable which would ensure that the appraisal did not further delay proceedings. But it has concluded since then, for the reasons set out in this Opinion, that the debtor's plan cannot be confirmed. Since both sides have indicated that an appeal will be taken whatever the decision on Heller's application to change its vote, it seems likely that the urgency of a speedy appraisal has disappeared. Therefore, the only condition the *650 Court will impose in granting Far West's motion is that any appraisal made be reduced to writing; that such writing must be made available to the debtor within ten days after it is made; and that the appraiser must make himself available for examination in New York by the debtor at a mutually convenient time no later than forty days after his written report is received by the debtor unless the debtor consents to a later time.
NOTES
[1] The issue on appeal is "did the bankruptcy court err in entering an order reopening and extending the time for voting on the plan which effectively cured the untimeliness of the last accepting vote." If the appellate court should decide that the bankruptcy court erred, the conclusion now reached by the bankruptcy court that Heller will not be permitted to change its vote becomes unnecessary. The vote change would be barred because subsequent to the original bar date, March 30, 1982.
[2] The legislative intent was explained in Senate Rep. No. 95-985, 95th Cong., 2d Sess. 74 (1978) as follows:
"To date, under existing law, a claim is generally subordinated only if holder of such claim is guilty of inequitable conduct, or the claim itself is of a status susceptible to subordination, such as a penalty, or a claim for damages arising from the purchase or sale of a security of one debtor. The fact that such a claim may be secured is of no consequence to the issue of subordination. However, it is inconceivable that the status of a claim as a secured claim could ever be grounds for justifying equitable subordination."
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687 S.W.2d 736 (1984)
Ex parte Randy Eli GROTHE.
No. 69275.
Court of Criminal Appeals of Texas, en banc.
July 3, 1984.
Rehearing Denied April 24, 1985.
*737 John H. McElhaney, Roark Reed, Dallas, for applicant; George R. Milner, Ronald L. Goranson, Dallas, of counsel.
Lawrence B. Mitchell, R.K. Weaver and Kerry Fitzgerald and Henry Wade, Dist. Atty. and Karen Chilton Beverly, Asst. Dist. Atty., Dallas, for Judge Moss.
Robert Huttash, State's Atty., Austin, for the State.
Before the court en banc.
OPINION
CAMPBELL, Judge.
This is an original application for writ of habeas corpus wherein applicant requests that this Court issue a writ of habeas corpus and relieve him from an order of contempt entered by respondent judge during the pendency of a criminal trial. See Art. V, Sec. 5, Tex.Const. and Ex Parte Sheppard, 548 S.W.2d 414 (Tex.Cr.App.1977). This application presents a very narrow question, to wit: whether the First Amendment to the United States Constitution or Art. I, Sec. 8 of the Texas Constitution create a privilege whereby photo journalists are excused from testifying and from producing photographs of alleged criminal activity witnessed in a public place. To this narrow question we answer in the negative and deny relief.
Applicant is and was at all relevant times employed as a photographer for the Dallas Morning News. On the morning of September 23, 1983, applicant was assigned to cover a protest demonstration occurring outside the offices of Dallas Power and Light on Commerce Street in downtown Dallas. Applicant proceeded to the above location and took photographs of the demonstration and the subsequent arrest and removal of certain demonstrators, including Mavis Belisle. The following day the Dallas Morning News ran a photograph taken by applicant of Belisle being physically removed from the site by arresting officers.
Subsequently Belisle and two co-defendants were charged by information with violation of V.T.C.A. Penal Code Sec. 42.03(a)(1), obstructing a public passageway. In so charging Belisle, the State specifically pled that the obstruction of the passageway was accomplished "by chaining himself to the said doorway of a public building."
At trial on the merits Belisle admitted participation in the demonstration but specifically denied she had at any time been chained to the building. The State called the arresting officer and a security guard for Dallas Power and Light, both of whom testified to having personally observed Belisle chained to the doorway. The defense called Belisle and one of the demonstrators (who was allegedly closest to Ms. Belisle), both of whom testified that Belisle was never at any time chained to the doorway. *738 Thus the central issue at trial was whether the defendant was chained to the doorway.
Belisle sought to subpoena applicant to present testimony as to his personal observations of the demonstration and Belisle's activities.
Applicant filed a motion to quash the subpoena alleging, inter alia, that the First Amendment created a privilege for newspaper reporters and that defendant Belisle had failed to make a substantial showing as to what applicant claimed was required by Branzburg v. Hayes, 408 U.S. 665, 92 S. Ct. 2646, 33 L. Ed. 2d 626 (1972). After an extensive hearing the respondent held that applicant would be required to testify as to his personal observations. Prior to testifying, applicant, by his attorney, acknowledged that, as to his personal observations of alleged criminal activity, he was on the same footing as a layperson and therefore he would testify. He nonetheless sought to limit his testimony just to personal observation and continued to invoke a privilege not to answer any questions which encroached upon his status as a reporter. Applicant testified as to his observations. He testified that he believed[1] that defendant Belisle was chained to the doorway; however, he admitted that he had, on a prior occasion, told his attorney that he did not remember whether defendant Belisle was chained. Significantly, he further testified that the photographs he took would probably show whether the defendant was in fact chained and would refresh his recollection. Subsequently, the defense requested that applicant be ordered to review his photographs. Respondent, after further argument by all parties, ordered applicant to review his photos and have the photos available for cross-examination. To this order applicant refused to comply and accordingly was held in contempt by respondent, and ordered jailed until he purged himself. This writ immediately followed.[2]
Applicant argues that the U.S. Constitution requires that courts recognize a qualified privilege for the press not to be required to testify. Applicant urges that by reading Justice Stewart's dissent with Justice Powell's concurrence in Branzburg, supra, a balancing test is required before a reporter will be ordered to divulge sources to courts or grand juries. We decline to adopt any combination of the dissenting and concurring opinions. The four justice plurality opinion in which Justice Powell concurred quite clearly found that no balancing was required. Branzburg, supra, at pp. 705-06, 92 S.Ct. at 2668-69. In a footnote in Zurcher v. Stanford Daily, 436 U.S. 547, 98 S. Ct. 1970, 56 L. Ed. 2d 525 (1978), Justice Powell clarified his position in Branzburg, observing that any press interests can be weighed in the regular subpoena process. Justice Powell specifically found no exception to the requirements of a subpoena for media personnel based upon the First Amendment. Zurcher, supra., concurring opinion, footnote 3 at 570, 98 S.Ct. footnote 3 at 1984.
Assuming arguendo, that the dissent in Branzburg did in fact recognize some sort of media privilege based upon the First Amendment, it is abundantly clear that the facts in Branzburg are much closer constitutionally than the limited facts in the case sub judice.
Branzburg involved three differing claims of privilege, basically centering on appearing before a grand jury and disclosing confidential sources. One of the reporters in Branzburg had, by virtue of a confidential informer relationship, witnessed and photographed the making of hashish. He was required to come forward and divulge "secret" information. We fail to discern any greater interest for applicant here, who allegedly witnessed a crime in a public place. If in fact any weighing of interests is required for requiring the press to divulge confidential informants, *739 that issue is not presented today and we do not decide it.
In Zurcher v. Stanford Daily, 436 U.S. 547, 98 S. Ct. 1970, 56 L. Ed. 2d 525 (1978) the Supreme Court held that nothing in the First Amendment exempted the press from being subject to a search for proof of criminal activity. We find the facts in Zurcher very similar to the instant case. Zurcher, supra, involved the search of a student newspaper office for photographs of a student demonstration wherein several police officers were injured. The State desired to identify possible defendants for criminal charges through the photographs. The Supreme Court upheld the search and stated:
"We finally note that if the evidence sought by warrant is sufficiently connected to the crime to satisfy the probable cause requirement, it will very likely be sufficiently relevant to justify a subpoena and to withstand a motion to quash."[3]Zurcher, supra at 566, 98 S.Ct. at 1982.
Thus implicitly, the Supreme Court has recognized that the press is not immune from subpoena. Although we find Zurcher factually less compelling than the case sub judice, we nevertheless believe that it is persuasive in its analysis of First Amendment privileges.
We are not unmindful of the important place of a free press in our society, see New York Times v. United States, 403 U.S. 713, 91 S. Ct. 2140, 29 L. Ed. 2d 822 (1971); Grosjean v. American Press, 297 U.S. 233, 56 S. Ct. 444, 80 L. Ed. 660 (1936); Estes v. Texas, 381 U.S. 532, 85 S. Ct. 1628, 14 L. Ed. 2d 543 (1965); Houston Chronicle Pub. Co. v. Shaver, 630 S.W.2d 927 (Tex. Cr.App.1982). Not to be forgotten, however, is the interest in protecting the integrity of the criminal justice system. See United States v. Nixon, 418 U.S. 683, 94 S. Ct. 3090, 41 L. Ed. 2d 1039 (1974).
In Nixon, supra, the Supreme Court was weighing the asserted right of presidential privilege versus the criminal justice system's need for relevant, material evidence. While the Court did recognize a constitutionally based presidential privilege, that privilege had to give way to the criminal defendant's rights and the integrity of the criminal justice system. The need to develop all facts in an adversarial system of criminal justice is fundamental and comprehensive. Nixon, supra.
Additionally, a citizen accused of crime has the right to confront and fully cross-examine all persons who have testimony relevant to criminal charges. See Davis v. Alaska, 415 U.S. 308, 311, 94 S. Ct. 1105, 1107, 39 L. Ed. 2d 347 (1974); Washington v. Texas, 388 U.S. 14, 87 S. Ct. 1920, 18 L. Ed. 2d 1019 (1967); Chambers v. Mississippi, 410 U.S. 284, 93 S. Ct. 1038, 35 L. Ed. 2d 297 (1973). As the Supreme Court noted in United States v. Nixon, supra:
"The right to production of all evidence at a criminal trial similarly has constitutional dimensions. The Sixth Amendment explicitly confers upon every defendant in a criminal trial the right `to be confronted with the witnesses against him and to have compulsory process for obtaining witnesses in his favor... It is the manifest duty of the courts to vindicate those guarantees and to accomplish that, it is essential that all relevant and admissible evidence be produced." United States v. Nixon, 418 U.S. at p. 711, 94 S.Ct. at p. 3109.
Applicant cites us to many authorities from other jurisdictions, urging that a balancing test be adopted and applied to the instant case. We note that most of the cases cited deal with disclosure in civil actions or disclosure of confidential sources; as such we find them to be unpersuasive and not controlling. Moreover, we fail to see a hypothetical case wherein a weighing process would result in suppression of highly relevant personal observation of public criminal activity.
*740 In light of the foregoing, we fail to see how applicant's rights will be in any way diminished in requiring production of photographs of an alleged criminal offense occurring in a public place.
The application for writ of habeas corpus is denied. It is so ordered.
TEAGUE and CLINTON, JJ., concur in this opinion.
W.C. DAVIS and TOM G. DAVIS, JJ., and ONION, P.J., not participating.
OPINION CONCURRING IN DENIAL OF LEAVE TO FILE APPELLANT'S MOTION FOR REHEARING
CLINTON, Judge.
Applicant complains the Court on original submission misread Branzburg v. Hayes, 408 U.S. 665, 92 S. Ct. 2646, 33 L. Ed. 2d 626 (1972) [hereafter Branzburg] in refusing to recognize the constitutional necessity for a balancing of First and Sixth Amendment interests in cases such as this; he argues that this refusal, in turn, results in adoption of an "absolutist position" which denies the existence of any First Amendment privilege of journalists to decline to reveal unpublished material.
I agree that our opinion on original submission may have been hasty in concluding that the Branzburg plurality "quite clearly found that no balancing was required;" however, the balancing test advocated by applicant today is virtually identical to that advanced by Justice Stewart in dissent in Branzburg, a position which was quite clearly rejected by five members of the Supreme Court.
As I read Branzburg, the "balancing" endorsed by the plurality and Justice Powell is more in the nature of weighing considerations relevant to a motion to quash a subpoena within the context of First vis-a-vis Sixth Amendment concerns: whether a grand jury investigation is instituted or conducted in good faith; whether subpoenas are issued, not for legitimate purposes of law enforcement, but to instead harass the press or disrupt a reporter's relationship with news sources; consideration of the propriety, purposes, scope of the judicial proceeding and the pertinence of the evidence sought; etc.
But applicant would read Branzburg to require this criminally accused, before seeking to exercise a Sixth Amendment right to compulsory process in order to prepare a defense to the accusation, to show (1) she has "exhausted alternative sources" for what is revealed in applicant's subpoenaed photographs; (2) she has "a compelling need for" them; and, (3) that the photos are "highly relevant to the defense."
I simply do not read into Branzburg any such test, much less any allotment of that burden on a party to a criminal prosecution. On the contrary, the concurring opinion observed that such a rule would,
"as a practical matter, defeat ... a fair balancing and the essential societal interest in the detection and prosecution of crime would be heavily subordinated."
408 U.S. at 710, 92 S.Ct. at 2671.
Moreover, in Branzburg, the Court's majority specifically refused to accord any privilege whatever to journalists to choose not to even appear when summoned by lawful subpoena.[1] Further, a majority of the Court was not persuaded that the litigants claiming a right to protect confidential sources had demonstrated any intolerable burden on news gathering or other clear First Amendment rights.[2] And the plurality discussed at some length the well *741 recognized limitations on the press demonstrating that the First Amendment is not absolute in its operation.[3]
While many of the issues advanced in applicant's motion for rehearing are provocative, important and deserving of serious consideration by this Court in a proper context, I do not perceive that they are presented by the facts of the instant case. As I understand those facts, the applicant was assigned by The Dallas Morning News to photograph a protest demonstration outside the Dallas Power and Light offices in downtown Dallas. Applicant took photographs of the demonstration as well as the arrest and removal of certain demonstrators, including Mavis Belisle. Belisle was subsequently charged with a penal offense, obstructing a public passageway, and sought applicant's testimony, and later, his photographs, for her trial. Applicant's refusal to make his photos available to Belisle for purposes of crossexamination forms the basis of this contempt proceeding.
In declining to recognize a newsman's unqualified right to refuse to reveal confidential sources under the three fact situations presented in Branzburg, the plurality stated:
"On the records now before us, we perceive no basis for holding that the public interest in law enforcement and in ensuring effective grand jury proceedings is insufficient to override the consequential, but uncertain, burden on news gathering that is said to result from insisting that reporters, like other citizens, respond to relevant questions put to them in the course of a valid grand jury investigation or criminal trial."
408 U.S. at 690-691, 92 S.Ct. at 2661-2662.
From this record one cannot perceive any certain burden on news gathering that might result from requiring the applicant here to turn over photographs which may exonerate a person criminally accused, and which applicant took in a public place apparently accessible to the public at large. Neither do I read applicant's motion for rehearing to argue that his evidence established any such realistic burden.
If the Court's opinion on original submission is limited, as it clearly states it is, to the "narrow question" presented by the facts, damage to the First Amendment cannot be seriously read into it. It is therefore appropriate to reiterate here the concluding paragraph of Justice Powell's concurring opinion in Branzburg:
"In short, the courts will be available to newsmen under circumstances where legitimate First Amendment interests require protection."
408 U.S. at 710, 92 S.Ct. at 2671.
Such legitimate interests are simply not presented today.
Therefore I concur in the Court's denial of leave to file.
NOTES
[1] All emphasis is supplied throughout by the writer of this opinion unless otherwise indicated.
[2] It is this Court's understanding that applicant was immediately released on bail and did not pursuant to this contempt order, actually spend any time jailed.
[3] We recognize that the Texas Legislature has adopted a search shield law which provides more protection than the Zurcher court did. Art. 18.01(e), V.A.C.C.P. However, to this date the Legislature had not adopted a newspaper testimonial privilege, a reporter's sources shield statute or excluded newspapers from subpoenas.
[1] As I understand the dissenting positions in Branzburg, the "balancing" criteria advocated by our applicant here would place the three burdens discussed ante on the State or accused before the journalist in question would be required to even appear pursuant to a subpoena.
[2] The Court observed that the facts of the cases did not implicate recognized First Amendment concerns such as intrusions upon speech or assembly, prior restraint or restriction on publication; express or implied command that the press publish what it prefers to withhold; exaction or tax for publishing privilege; penalty, civil or criminal, related to the content of published material; restriction on use of confidential sources; any requirement that the press publish its sources of information or indiscriminately disclose them on request.
[3] The plurality mentioned, for example, that the press may not circulate knowing or reckless falsehoods damaging to private reputation; the First Amendment does not guarantee the press a constitutional right of special access to information not available to the general public; the press is regularly excluded from grand jury proceedings, court conferences, meetings of official bodies and private organizations; newsmen have no constitutional right to access to the scenes of crime or disaster when the public is excluded and may be prohibited from attending or publishing information about criminal trials in order to assure the fairness of the proceeding.
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25 B.R. 905 (1982)
In re Wallace K. HOLLANDER, Debtor.
Jack E. BROWN, Trustee, Plaintiff,
v.
Lisa Ann BLACK, et al., Defendants.
Bankruptcy No. 81-03263-C-11, Adv. No. 81-2199-C.
United States Bankruptcy Court, W.D. Missouri, C.D.
December 21, 1982.
*906 Donald E. Bucher, Kansas City, Kan., Donald L. Crow, Kansas City, Mo., for defendants Lisa Ann Black, Patricia Jane Black and James Black.
Larry Wood, Columbia, Mo., for trustee.
Fred Dannov, Columbia, Mo., for debtor.
Jack E. Brown, trustee.
MEMORANDUM OPINION AND ORDER
FRANK P. BARKER, Chief Judge.
This matter is before the Court pursuant to an action brought by the Trustee to set aside two transactions between the debtor and the defendants as fraudulent conveyances under 11 U.S.C. § 548. One transaction was a transfer of some 450 acres of farm land; the other an "assignment" of farm machinery. Trial was held before me on September 23 and 24, 1982, all parties being represented in person and by counsel. Based on the evidence presented the Court makes the following findings of fact and conclusions of law.
FINDINGS OF FACT
The debtor, Wallace K. Hollander, is a farmer approximately 60 years of age. In 1979 the debtor and his wife, Ruth, were divorced. As a part of the property settlement pursuant to that divorce, Mrs. Hollander received 120 acres of farm land and a note while the debtor retained ownership of 450 acres of farm land adjacent to the land awarded to his ex-wife and substantial farm machinery. It is the transfer of this 450 acres and the farm machinery by the debtor to the defendants which the Trustee seeks to set aside.
In the two-year period following his divorce the debtor encountered a number of legal difficulties. On October 7, 1979 a criminal charge of stealing was filed against the debtor by Audrain County Prosecuting Attorney, Tom Osborne. The charge was based on allegations that the debtor had harvested, at night, a bean crop which was located on the land his ex-wife was awarded in the divorce. That crop had been planted and maintained by a tenant farmer who rented the land from the former Mrs. Hollander. Debtor was arrested *907 and placed in the Audrain County jail. He made bond and the charge was ultimately disposed of in some manner not entirely clear from the record. Mr. Osborne testified at the trial (TR. p. 91) that he had doubts about debtor's mental capacity at this time and suggested the possibility of a mental examination to the debtor's attorney. This suggestion went unheeded.
Debtor's next encounter with the law occurred in 1980 and ultimately resulted in the first contact between debtor and defendant, James Black. In April of 1980 Mr. Osborne again filed criminal charges against the debtor. On this occasion the charge was defrauding a secured creditor. The charge was based on allegations that the debtor sold cattle in which the Bank of Gerald had a security interest and had kept the proceeds. The Bank of Gerald (now known as the Missouri State Bank of Franklin County) held a security interest in debtor's property to the extent of some $20,000. As a result of this charge the debtor was once again arrested and placed in the Audrain County jail.
Defendant James Black worked, at this time, as a bondsman/agent for Surety Insurance Corporation of California (S.I.C.). There was some disagreement in the testimony as to how and by whom Mr. Black was contacted concerning the possibility of arranging bond for the debtor. No matter what originally brought about the contact between the parties, Mr. Black and the debtor ultimately met in the Audrain County jail and arrived at an agreement whereby S.I.C. would post a $5,000 bond to secure the debtor's release from jail and would, in turn, receive a $500 premium on that bond which was paid. The debtor also gave S.I.C. an assignment of his interest in certain farm machinery at a face value of $50,000. Defendant Black testified at trial that the actual agreement was intended to be for $5,000 and that the $50,000 figure was a mistake (TR. p. 255).
Debtor was released on bond and scheduled to appear for trial sometime in the Spring of 1981. He did not appear. In addition to causing his bond to be forfeited, this action caused an additional criminal charge based on bond-jumping to be filed against him. Black testified that although S.I.C. actually paid the $5,000 bond that under the terms of his contract with S.I.C., he became obligated to indemnify the company for its loss. No evidence was offered to confirm or deny this assertion on the part of Mr. Black.
It is not clear from the evidence where debtor was during the time in between his non-appearance on the defrauding charge and his ultimate appearance at the Audrain County courthouse. Apparently he was in Illinois at least part of the time. He also apparently maintained sporadic telephone contact with Mr. Black although there was no general agreement as to how often such contacts occurred. Mr. Black testified that these phone calls were generally about the possibility of the debtor giving himself up and returning to Audrain County to face the charges against him. They also discussed the possibility of the debtor obtaining bail through the services of the defendant upon his return to Audrain County if Hollander would deed over his farm. Although Mr. Black testified that these conversations were very erratic (TR. p. 229) he stated that at no time did he entertain any suspicions concerning the debtor's mental well-being.
The debtor reappeared in Audrain County on or about June 30, 1981, was arrested and, once again, placed in the county jail. The testimony is not clear as to whether he returned voluntarily or was transported to Audrain County by Illinois authorities but however he returned, an attempt was made to arraign him on the bond-jumping charge on June 30 and again on July 1, 1981. On both occasions the debtor would not stop talking long enough to allow the court to arraign him as is required under Missouri law. (TR. p. 95).
Mr. Osborne testified that he had previously filed a motion for mental examination of the debtor at the time the debtor first failed to appear on the defrauding a secured creditor charge. Debtor had been ordered to appear for such an examination *908 but had never appeared so that on July 1, 1981 the motion was still outstanding (TR. p. 97). On July 1, 1981 Associate Circuit Judge Heims entered an order to have Mr. Hollander sent to the State Mental Hospital at Fulton for a mental examination to determine his mental competence to face the criminal charges filed against him.
On July 1, 1981 James Black, either acting on his own or at the request of the debtor or the debtor's sister, attempted to see the debtor in the Audrain jail. On his first attempt he was denied the right to see the debtor by Sheriff James Barber. Sheriff Barber testified at trial that his refusal to allow Mr. Black to see the debtor was based on the outstanding court order requiring debtor to undergo a mental examination. The sheriff further testified that he informed defendant Black the reason for his refusal. (TR. p. 116) Mr. Black testified that he had not heard the sheriff give a reason for his initial denial of access to the debtor. (TR. p. 230).
James Black was then working as an agent for C & M Bail Bonds, Inc. Defendant Cody Ice was the president and sole shareholder of that company. Ice testified that Black called him in Macon, Missouri probably on July 1, 1981 and told him that Hollander was in jail and would deed over his 450 acre farm and farm machinery if they would put up his bond, arrange for an attorney and pay off the farm debts . . . that they could make some money as the debts were around $250,000 whereas the farm was worth $500,000.
In furtherance of this plan, Ice called attorney N.E. Brown in Huntsville and arranged with him to meet with Ice and Black at the jail. He told Brown to bring along some deed forms.
As was stated earlier, the defendants were rebuffed in their initial attempt to see the debtor. They then visited Judge Heims and were able to obtain a court order allowing them to see the debtor. That meeting took place in an empty Audrain County courtroom. The evidence presented indicates that only the debtor and Mr. and Mrs. Black were present throughout the entire meeting, although Mr. Brown and Mr. Ice were able to observe the participants and entered the room periodically. Mr. Brown testified and this Court finds that he questioned the debtor about his financial condition and advised him as to the availability of other types of bond arrangements than through the use of the services of a bail-bondman. As a result of the meeting in the courtroom the parties arrived at an agreement whereby C & M Bail Bonds would provide debtor's bond of $10,000 with no premium, pay off all of the debtor's outstanding debts and provide him with an attorney to assist in his defense to the criminal charges. In exchange the debtor was to deed the defendants his interest in the 450 acre farm and reinstate his assignment of his farm machinery. Apparently the basic agreement was orally arrived at while the parties were at the courthouse. The testimony indicated the parties believed debtor to have outstanding debts totaling somewhat in excess of $200,000-$250,000. Mr. Ice testified that he relied on Mr. Black's estimate that the farm land was worth approximately $500,000. (TR. p. 84). Although the estimate as to the amount of debt owed was essentially accurate, testimony at trial indicates that the value placed on the farm land was low.
After reaching an oral agreement at the courthouse, the defendants secured debtor's release on bond. The bond itself contained a special condition pertaining to debtor's continuing obligation under court order to appear at Fulton for a mental examination. Defendants Black and Ice testified they were unaware of this special condition on July 2 despite the fact that it was printed on the bond instrument. Attorney Brown denied seeing the bond.
One point all parties agreed on was that they left the Audrain County courthouse and traveled to the home of James and Patricia Black in Montgomery City, Missouri after securing the debtor's release on July 2, 1981. The purpose of this trip was to finalize the earlier oral agreement. This was accomplished by means of two quit claim deeds from the debtor of one-half *909 interest to Patricia and Lisa Black (daughter of James and Patricia Black) and to C & M Bail Bonds, Inc. The deeds were prepared in the debtor's presence by N.E. Brown at the Black home in Montgomery City. An agreement assigning all of the debtor's interest in certain farm machinery to Patricia and Lisa Black was also prepared. These instruments were properly notarized on the evening of July 2, 1981. The parties then went their separate ways with the debtor being driven to his sister's home by Cody Ice and N.E. Brown. The defendants testified that nothing in the debtor's manner throughout the entire episode caused them to have any concern about his mental condition. The debtor's conduct was generally described as somewhat elated at the prospect of completing the transaction and securing his release from jail.
Subsequent to July 2, the defendants engaged in several transactions. C & M Bail Bonds transferred its interest in the property to Missouri Enterprises, Inc., another company owned and operated by Cody Ice. Missouri Enterprises and Mdmes. Black then leased the farm property to James Black and his brother George Black for a 15-year period at an annual rent of $500 per year. Defendants testified they arranged a loan from Bell Investment Company presumably in order to pay off the debts against the property. The note owed to First Missouri Bank of Franklin County was paid by defendants. Arrangements were made with Ruth Hollander to prevent her from following through on an execution sale which had been scheduled for the following week on the farm property. Defendants also notified Prudential, which held a first lien against the property, to contact them as to all future payments.
Mr. Black entered into possession of the farm land and with the aid of a resident farm manager cleared some of the land and planted crops. Certain pieces of farm machinery were repaired, sold or traded by Mr. Black. Mr. Black never notified the debtor nor made any demand on the debtor prior to entering the transactions involving the farm machinery.
Debtor was also quite busy in the time after his release from custody on July 2nd. Pursuant to Judge Heim's Order he was committed to the Fulton State Hospital where he underwent a psychiatric evaluation over a period of several weeks. Although the entire staff participated in the diagnosis of the debtor, a Dr. C.J. Corales was primarily responsible for his care. Dr. Corales appeared at the trial and testified that Mr. Hollander had been diagnosed as a manic depressive, bi-polar mixed type (TR. p. 192). She further testified that this condition caused him to undergo wide mood swings between exuberant, almost giddy stages, to stages of deep depression. She testified that such mood changes could interfere with the debtor's judgment and cause him to make irrational decisions based on his own view of a situation. Finally, Dr. Corales testified that she was unable to say how the debtor's condition might have affected his actions on July 2, 1981 without observing him on that date. On cross examination, Dr. Corales testified that the debtor might often be in such a state that his mental condition might not be readily apparent to lay persons. (TR. p. 203)
As a result of the findings of Dr. Corales, the debtor successfully pled not guilty to the criminal charges facing him in Audrain County. He continued to undergo treatment at the Fulton State Hospital.
Debtor filed his voluntary petition in bankruptcy on October 21, 1981. Prior to that time he had filed a suit in the state court seeking to obtain the return of the property he had transferred to the defendants.
The testimony at trial established that the debtor's existing debts at the time of the transactions at issue here totaled no more than $250,000. The Trustee presented convincing evidence that as of July 2, 1981 the farm property was appraised at $562,500, but more importantly that an existing sales contract with a reputable buyer, Raymond Benne, for $675,000 was open for the debtor's consideration on July 2nd. This evidence established that defendants received *910 the farm land for from $275,000 to $450,000 less than its reasonably established value as of the date of the transactions between the parties. This figure does not include any value for the assignment of the farm machinery. This equipment included, among other items, two (2) combines, at least two (2) tractors and several plows of various sizes. While the condition of some of the equipment was disputed by the parties, it is apparent that it retained at least some value for which the defendants gave the debtor no additional consideration.
CONCLUSIONS OF LAW
Under Missouri law the party challenging the validity of a deed on grounds of mental incapacity bears the burden of showing by convincing evidence that the grantor lacks the mental capacity to understand the nature and effect of his act at the time of the execution of the deed. Martin v. Norton, 497 S.W.2d 164 (Mo.1973). Although the testimony of Dr. Corales and several of the other witnesses, including that of the debtor himself, supports the inference that debtor goes through periods where he is less than capable of handling his own affairs, the evidence presented does not establish that he was mentally incompetent on July 2, 1981.
The case of Storm v. Marsh, 418 S.W.2d 179 (Mo.1967) involves a fact situation somewhat similar to the present case in which the court allowed a deed to stand despite the testimony offered and the fact that the grantor was found to be legally incompetent both prior to and subsequent to the granting of the deed in question. Although this Court finds the testimony of defendants James Black and Cody Ice to the effect that they were unaware on July 2nd of any question concerning debtor's mental competence to be self-serving and totally lacking in credibility, particularly in light of Sheriff Barber's testimony and the existence of the special condition on the bond document itself, the Trustee still did not establish by convincing evidence that the debtor lacked the mental capacity to understand the nature and effect of his act on July 2, 1981.
The Trustee's claim to have the deeds set aside on the basis of an alleged violation of 11 U.S.C. § 548 are of a different nature and lead to a different legal conclusion than do the allegations involving mental incompetency. § 548 deals with fraudulent transfers and obligations and, in relevant part, states:
(a) The trustee may avoid any transfer of an interest of the debtor in property, or any obligation incurred by the debtor, that was made or incurred on or within one year before the date of the filing of the petition, if the debtor
(1) made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer occurred or such obligation was incurred, indebted; or
(2)(A) received less than a reasonably equivalent value in exchange for such transfer or obligation; and
(B)(i) was insolvent on the date that such transfer or such obligation was incurred, or became insolvent as a result of such transfer or obligation;
The Blacks, by way of post-trial brief and oral argument, take issue with the Trustee's claims as they relate to § 548(a)(1). They claim to have been, at all times since the contested transfer, ready, willing and able to satisfy the claims of the creditors of the debtor's bankruptcy estate. Toward this end they point out the purchase of the debt owed to First Missouri Bank of Franklin County, the agreement with and an interest payment to Ruth Hollander, the notification to Prudential that they would be responsible for future payments and finally, a loan commitment obtained from Bell Investment Company for $250,000, the proceeds of which were presumably to be used to satisfy the claims against the farm as well as the remaining claim owed to S.I.C. The Blacks espoused an intent to satisfy all of the debtor's creditors but claim to have been prevented from doing so by the Trustee's action in pursuing these claims.
*911 Defendants' actions to pay debtor's creditors involved exclusively those creditors with an interest in the farm property. This Court takes judicial notice of the fact that the Hollander bankruptcy estate includes several substantial claims by creditors with no interest in the farm other than in its status as an asset, in fact, the only real asset, of the estate. Despite the fact that the defendants now claim to have agreed to repay all of the debtor's creditors, the fact remains that only those debts concerning the farm property were acted upon between July 2, 1981 and October 21, 1981 when the petition was filed.
It is also worth noting the amount of loan funding that the defendants secured approximately equals the debts against the farm property with apparently no provision for the other existing debts. To the extent that the farm land and machinery represent value which could have been used to pay all of the debtor's creditors whether through a reorganization under Chapter 11 or a liquidation under Chapter 7, an argument could seemingly be made that there was an intent to defraud at least some of the debtor's creditors. This could cause the transaction to be set aside under § 548(a)(1); however, in light of the applicability of § 548(a)(2)(A), it is not necessary for this Court to decide the validity of that argument at this time.
Under § 548(a)(2)(A) the adequacy of the consideration given for the transfer of a debtor's asset(s) is basically a factual issue to be decided by considering the circumstances of each case. See Biggs v. U.S. Nat. Bank of Omaha, 11 B.R. 524 (D.Ct. Neb.1981). A general standard has been applied by the courts under which transactions which do not produce at least 70% of the property's fair market value are set aside as providing less than the required adequate consideration. See generally, In re Thompson, 18 B.R. 67 (Bkrtcy.Tenn. 1982).
In the present case the plaintiff established that at the time of the transactions between the debtor and the defendants, an outstanding land sale to purchase the debtor's property for a total price of $675,000 existed. This offer was made by Raymond Benne, a competent buyer and a farmer with years of practical experience in evaluating the worth of farm property. The plaintiff also offered the testimony of Fred Decker, an experienced real estate appraiser whose primary expertise was in farm property. His testimony was that the debtor's farm land was worth in the neighborhood of $562,500 on July 2, 1981. He further testified that he arrived at this figure by using the comparable sales method of appraisal. This is an accepted method of real estate appraisal. Defendant Cody Ice testified that James Black told him the property was worth at least $500,000.
Faced with this substantial evidence of the value of the debtor's farm land as of the date of the transactions with defendants, this Court has no difficulty finding the value of the farm land at least $562,500 and probably $675,000 on July 2, 1981. This figure does not include any value for the farm machinery the defendants also obtained control of as a result of the transactions contested herein. At either the greater or lesser figure the debtor could have paid off his existing debts and been left with money or property. Instead, as a result of this transfer, he is insolvent.
In exchange for this valuable farm land and the machinery the defendants agreed to assume a first lien in favor of Prudential Insurance Company in the approximate amount of $47,000, to assume the debt to Ruth Hollander of approximately $130,000 and to pay off the debt of some $19,000 to First Missouri Bank of Franklin County. These debts total approximately $196,000. Adding in the $5,000 owed to S.I.C., attorney fees for the debtor's criminal defense which were very liberally estimated by Attorney Brown to run as high as $10,000 and the $10,000 bond to release the debtor from jail, still only brings the expenses of the defendants to somewhere in the neighborhood of $220,000 to $225,000 figures which are far below the 70% of fair market value standard applicable in assessing adequate consideration.
*912 Defendants ask that the Court ascribe some value to the fact that the transactions with the defendants enabled the debtor to obtain his release from jail. While this could indeed have great value in certain situations, in the present case the actions of the defendants only further serve to show their willingness to take great advantage of a man in a less than rational state. Debtor could have easily provided for his own release by merely granting a security interest in his farm or in his machinery but instead of seeking security, the defendants sought to, in effect, purchase the farm land for considerably less than half of its fair market value.
It is true, as defendants suggest, that an execution sale was scheduled on debtor's farm land as a result of the debt owed to his ex-wife a few days after July 2nd. However, the testimony at trial indicates that the former Mrs. Hollander had cancelled two such previously scheduled sales prior to their completion. Mrs. Hollander indicated her willingness to have done so again on this occasion. Throughout her testimony Mrs. Hollander exhibited great sympathy toward her ex-husband and her desire to help him despite his less than considerate attitude toward her. She also indicated that she had offered to buy the farm from the debtor on several occasions. Although in debtor's mental state he may not have been able to fully realize their existence, he had several options available which would have allowed him to save the farm from the scheduled execution sale.
Because the farm land and the machinery were the only real assets of the debtor's estate, there can be no doubt that their sale in exchange for the repayment of some of his debts rendered the debtor insolvent as defined in 11 U.S.C. § 101(26)(A) thus satisfying § 548(a)(2)(B).
This case presents a somewhat unique application of § 548(a)(2)(A). In the usual case applying that section, the debtor, in collusion with the transferee, transfers some property to place it beyond the grasp of his creditors before he files his bankruptcy petition. See In re Roco Corp., 15 B.R. 813 (Bkrtcy.R.I.1981) and Matter of Commercial Candy, 20 B.R. 292 (Bkrtcy.Mo. 1982). The transferee gets the assets for less than its value to the detriment of all other creditors of the estate. In the present case, the debtor's confused state of mind makes it virtually impossible to assess his motivation in entering into this transaction. Whatever the debtor's motivation, the transfer of the farm land and of the machinery were for less than adequate consideration as defined by the courts and rendered the debtor insolvent. The transactions thus violate 11 U.S.C. § 548(a)(2)(A) and (B) and are void and without effect.
Defendants have suggested in their Trial Brief that the 70% test applied in Thompson, supra and other cases interpreting § 548(a)(2)(A) should not be applied in this case. As an alternative they propose a test adopted in In re Browning Tufters, Inc., 3 B.R. 487 (Bkrtcy.N.D.Ga.1980). That case was decided under § 67(d)(2)(a-c) of the old Bankruptcy Act and was obviously decided well before the present 70% rule of thumb standard. In any event the court in Browning Tufters did not have any evidence of the actual value of the collateral before it when the decision in that case was reached. Further the court still held that fair consideration was necessary to support a transfer of property. The standard that has evolved as to what constitutes fair consideration is 70% of the fair market value of the property transferred. The decision in Browning Tufters does not seem to be in conflict with that standard and does not provide the defendants any additional support in this case.
I further find that defendant Black's testimony regarding Hollander's eagerness to deed over his farm and machinery not worthy of belief. On at least ten (10) different occasions there was a contradiction between his testimony in court and his written deposition. Sheriff Barber testified that he told Black he couldn't see Hollander on July 2, 1981 because there was a court order to take him to Fulton for a mental exam. Black denied such a conversation on direct examination but on cross examination by his attorney stated that if the sheriff said that he didn't hear him.
*913 Black's testimony regarding the $50,000 note wherein at one point he stated that should have been $5,000 was not convincing just by his demeanor while testifying.
When questioned about the deeds being made out to his wife and daughter he said it was for tax reasons which he did not explain. The Trustee then obtained admissions from Black that there were outstanding judgment liens against Black which could be transcripted to Audrain County.
I find and conclude from all the evidence that somehow Black convinced Hollander to deed over his only assets if he wanted to get out of jail on bond.
The Court also notes that during the trial defendant Ice testified that he would have no objection "to our deed being set aside" and letting our expenses become a claim. (TR. p. 56).
As to the defendants' claims for a lien against the estate to the extent of their expenses in these transactions, that will depend upon their ability to establish proper proof of those expenses and to establish their position as a good faith transferee of a voidable transfer. Since this matter was not heard on September 23 and 24th, the defendants will be given the opportunity to establish their claims at a later date upon due notice.
Based upon the foregoing findings of fact and conclusions of law, it is
ORDERED, that the deeds from Wallace K. Hollander to Lisa Ann Black and Patricia Jane Black and from Wallace K. Hollander to C & M Bail Bonds, Inc. dated July 2, 1981 and the deed from C & M Bail Bonds, Inc. to Missouri Enterprises, Inc. dated July 16, 1981 are hereby declared to be null and void. It is
FURTHER ORDERED, that defendants forthwith turn over possession of the 450 acre farm to the Trustee as well as all farm machinery now located on the farm. It is
FURTHER ORDERED, that defendants are hereby restrained and enjoined from doing any act to interfere with the Trustee's possession of the farm and machinery. It is
FURTHER ORDERED, that any lease of the farm made by defendants or any of them is hereby declared null and void. It is
FURTHER ORDERED that defendants may have thirty (30) days from the date of this Order to file a proof of claim against the Hollander estate. It is
FURTHER ORDERED, that Ruth Hollander may have thirty (30) days from the date of this Order to file her proof of claim against the Hollander estate. It is
FURTHER ORDERED, that the $50,000 note secured by farm machinery of Hollander is hereby declared null and void.
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25 B.R. 371 (1982)
In re Ronald David DAUMIT, Debtor.
BRODSKY, GREENBLATT & RENEHAN, CHARTERED, Plaintiff,
v.
Ronald David DAUMIT, Defendant.
Bankruptcy No. 81-1-0541, Adv. No. 81-0274A.
United States Bankruptcy Court, D. Maryland, at Rockville.
October 5, 1982.
Robert Millard, Kensington, Md., John Topping, Riverdale, Md., for debtor/defendant.
*372 Barry Gordon, Rockville, Md., for plaintiff.
MEMORANDUM OPINION
PAUL MANNES, Bankruptcy Judge.
This matter was presented for hearing on the Complaint to Determine the Dischargeability of a Debt filed by Brodsky, Greenblatt & Renehan, Chartered (plaintiff) against Ronald Daumit (defendant). Plaintiff seeks to deny the discharge of a debt totalling $1,278.99 pursuant to 11 U.S.C. section 523(a)(5).[1] The debt was incurred as a result of plaintiff's representation of Joan Daumit in a divorce action instituted by defendant.
The undisputed facts are as follows. On September 25, 1980, the Circuit Court for Montgomery County, Maryland, passed a pendente lite order in a divorce action between Ronald Daumit and Joan Daumit providing, inter alia, that defendant pay to Joan Daumit the sum of $1,261.10, representing initial counsel fees and costs. Thereafter, Joan Daumit assigned her interest in the award of counsel fees directly to her counsel of record, the plaintiff herein. Defendant, Ronald Daumit, then consented to a judgment against him and in favor of plaintiff in the sum of $1,278.99 for the court ordered attorneys' fees and interest. Ten months later, on April 24, 1981, defendant filed for relief under Chapter 7 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Maryland.
The issue presented is whether defendant's obligation to pay attorneys' fees and court costs under the Montgomery County Circuit Court order of September 25, 1980, providing pendente lite relief is non-dischargeable pursuant to 11 U.S.C. § 523(a)(5), where the defendant's spouse has assigned that claim to her attorneys.
Congress, in enacting the Bankruptcy Code, noted that federal law, rather than state law, would determine what is within the definition of alimony, maintenance, and support for purposes of construing 11 U.S.C. § 523(a)(5). H.R.Rep. No. 95-595, 95th Cong. 1st Session 364 (1977) U.S.Code Cong. & Admin.News 1978, p. 5787; See, In Re Dorman, 3 C.B.C.2d 497 (Bkrtcy.D.N.J. 1981). At the same time, Congress did not intend for the law to be interpreted without reference "to the well-established law of the States." In Re Spong, 661 F.2d 6, 9 (2d Cir.1981). While the term "alimony" is not defined in the Code, the term has been construed by federal courts on repeated occasions. For example, the Supreme Court in Audubon v. Schufeldt, 181 U.S. 575, 577, 21 S. Ct. 735, 736, 45 L. Ed. 1009 (1901), states that alimony is founded upon the natural and legal duty of a husband to support his wife. Moreover, the Court in Wetmore v. Markoe, 196 U.S. 68, 76, 25 S. Ct. 172, 175, 49 L. Ed. 390 (1904), held that the obligation based upon this natural and legal duty is excepted from discharge. See also, In Re Knabe, 8 B.R. 53 (Bkrtcy.S.D. Ind.1980).[2]
In defining alimony, the courts have stated that alimony includes those needs or necessaries that are essential in maintaining a spouse in a manner commensurate with her former status as a wife. An award of counsel fees may be essential to a spouse's ability to sue or defend a matrimonial action and, thus, have been considered necessary under the law. In Re Spong, 661 F.2d 6, 8-9 (2d Cir.1981).
*373 Furthermore, while federal law provides the broad description of what is not dischargeable, it is often necessary to look to state law to determine whether a given award fits within that framework. In this respect, the relevant Maryland statute provides:
The court may from time to time, or after the granting of a divorce, after considering the financial resources of both parties, the respective needs, and whether there was substantial justification for instituting or defending the proceedings, order one party to pay to the other a reasonable amount for the reasonable and necessary expenses, including suit money, attorney's fees, and costs, of instituting or defending any proceeding, or any proceeding to enforce an award, under this title. The court may in its discretion award reimbursement for such expenses already paid. The Court may order that any amount awarded for attorney's fees be paid directly to the attorney and may enter judgment in favor of the attorney, who may then enforce the order in his own name in accordance with the Maryland Rules.
Md.Ann.Code, art. 16 § 3 (1981).
In the same vein, the Maryland Courts, while emphasizing the discretion given the trial judge, impliedly compare attorney fees awards to alimony, support, and maintenance since courts look to similar criteria in awarding each. Typical criteria include the need and realtive financial position of the parties. See, e.g., Hall v. Hall, 32 Md.App. 363, 362 A.2d 648 (1976); Wallace v. Wallace, 46 Md.App. 213, 416 A.2d 1317 (1980), aff'd, 290 Md. 265, 429 A.2d 232 (1981); Quinn v. Quinn, 11 Md.App. 638, 276 A.2d 425, 432 (1971).
In addition, the majority of bankruptcy courts have concluded that counsel fees are within the definition of alimony, maintenance, and support. See In Re Lang, 11 B.R. 428, 430-431 (Bkrtcy.W.D.N.Y.1981); In Re Brassard, 11 B.R. 90, at 92-93 (Bkrtcy.N.D.Ill.1981); In Re Lafleur, 11 B.R. 26, at 29 (Bkrtcy.D.Mass.1981); In Re Whitehurst, 10 B.R. 229, 229-30 (Bkrtcy.M. D.Fla.1981); In Re Dorman, 3 C.B.C.2d 497, 499-501 (D.N.J.1981); In Re French, 9 B.R. 464, 468 (Bkrtcy.S.D.Cal.1981); In Re Lineberry, 9 B.R. 700, 709-10 (Bkrtcy.W.D.Mo. 1981); In Re Wells, 8 B.R. 189, 193 (Bkrtcy. N.D.Ill.1981); In Re Knabe, supra, 8 B.R. at 56-57; In Re Bell, 5 B.R. 653, 655 (Bkrtcy. W.D.Okl.1980); In Re Pelikant, 5 B.R. 404, 407-08 (Bkrtcy.N.D.Ill.1980).
Given the aforementioned relevant federal and state law, the court concludes that the award of counsel fees and court costs to Joan Daumit is in the nature of alimony within the meaning of 11 U.S.C. § 523(a)(5).
Moreover, although the counsel fees awarded defendant's ex-wife have been assigned to plaintiff, they nevertheless remain non-dischargeable pursuant to 11 U.S.C. § 523(a)(5)(A). The court finds no merit in defendant's contention that plaintiff's enforcement of the assignment has altered it so as to remove it from the realm of alimony. The assignment clause under § 523(a)(5)(A) does not pertain to assignment of counsel fees by a spouse to his or her attorney. Congress' concern in formulation of § 523(a)(5)(A) was not to deter all assignments of payments, but only those made to state welfare agencies. In Re Knabe, 8 B.R. 53 (Bkrtcy.S.D.Ind.1980); See Hearings on H.R. 31 & H.R. 32 Before the Subcomm. on Civil and Constitutional Rights of the House Comm. on the Judiciary, 94th Cong., 1st & 2d Sess., ser. 27, part 2 at 942 (1975-76).
Accordingly, it is apparent that the award as counsel fees, although assigned and enforced by plaintiff, remains non-dischargeable under § 523(a)(5)(A). Matter of Gwinn II, 20 B.R. 233, 6 C.B.C.2d 1114, 1116 (9th Cir.B.A.P.1981); Cf. Hill v. Hill, 47 Md.App. 460, 424 A.2d 779, 784, aff'd 291 Md. 615, 436 A.2d 67 (1981).
In conclusion, the court finds that the counsel fees awarded to Joan Daumit are in the nature of alimony. Having concluded that this award is tantamount to alimony, notwithstanding the assignment to plaintiff, the debt of $1,278.99 is found to be non-dischargeable under 11 U.S.C. § 523(a)(5). The court will enter an order in accordance with these findings.
NOTES
[1] Section 523(a)(5) provides in pertinent part:
(a) A discharge under section 727, 1141, or 1328(b) of this title does not discharge an individual debtor from any debt
* * * * * *
(5) to a spouse, former spouse, or child of the debtor, for alimony to, maintenance for, or support of such spouse or child, in connection with a separation agreement, divorce decree, or property settlement agreement, but not to such extent that
(A) such debt is assigned to another entity, voluntarily, by operation of law or otherwise.
[2] Marital settlement agreements, as opposed to decrees, look to the intention of the parties. See Melichar v. Ost, 661 F.2d 300, 303 (4th Cir.1981).
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405 A.2d 682 (1979)
David SCHNEIDER, Defendant and Third-Party Plaintiff Below, Appellant,
v.
Dwight L. COE, Plaintiff and Third-Party Defendant Below, Appellee.
Supreme Court of Delaware.
Submitted April 19, 1979.
Decided August 6, 1979.
Wayne N. Elliott and Edward P. Welch, of Prickett, Ward, Burt & Sanders, Wilmington, for third-party plaintiff, appellant.
Dennis D. Ferri, of Becker, Ferri & Otlowski, P. A., Wilmington, for third-party defendant, appellee.
Before HERRMANN, C. J., DUFFY and QUILLEN, JJ.
HERRMANN, Chief Justice:
In this case, we must decide whether a parent who negligently supervises his unemancipated child can be liable for the resulting injury to his child.
*683 I.
Mr. and Mrs. Coe, who lived on the second floor of an apartment house, were preparing to take an automobile ride with their three year old son, Andrew. The child was impatient to leave, but the parents needed a few more minutes to finish preparations. Mr. Coe directed Andrew to wait for them at the top of the stairs leading from their apartment down to the landing and exit from the apartment house on the first floor. Although Andrew was not at the top of the steps when his parents checked on him, they assumed he was waiting for them on the landing downstairs. Because Andrew was not on the landing when Mr. Coe looked, he descended the stairs to see if his son was waiting outside. As he emerged from the apartment, Coe observed Andrew entering a field across the street, where a pony was tethered to a clump of bushes. Instead of stopping when his father called, Andrew proceeded directly to the pony. Although Coe ran after his son, before he could reach him, the pony kicked Andrew on the head, resulting in partial paralysis of Andrew's left side.
II.
Seeking damages for his son's injuries, Coe filed suit, on his own behalf and on behalf of his son, against Calvin E. Powell, the owner of the land where the pony was tethered, and David Schneider, the lessee of the land. Schneider filed a third-party action against Coe, seeking contribution on the ground of negligent parental supervision. The Superior Court granted Coe's motion for summary judgment as third-party defendant, concluding that Strahorn v. Sears, Roebuck & Co., Del.Super., 123 A.2d 107 (1956), required that disposition on the ground of parental immunity for "negligence involving parental authority and discretion."
Schneider appeals, contending that the parental immunity doctrine lacks the support of public policy when the tortfeasor has liability insurance and, therefore, the doctrine should be held inapplicable to the extent of such insurance coverage. Schneider argues that this conclusion is mandated by this Court's holding in Williams v. Williams, Del.Supr., 369 A.2d 669, 673 (1976), that "an absolute rule of parental immunity in tort has no rational basis under modern day conditions and circumstances, especially the prevalence of liability insurance." We find Schneider's contention unacceptable.
III.
In Williams, this Court confined its abrogation of the parental immunity doctrine to actions "for negligence arising from an automobile accident, brought on behalf of an unemancipated minor child against a parent." 369 A.2d at 673. We there emphasized:
"* * * we do not overrule Strahorn v. Sears, Roebuck & Co., * * *. That case is clearly distinguishable on its facts * * *. In Strahorn, the child was injured on a department store escalator after twisting free of his father's grip. Directly involved was the question of the exercise of parental discretion and control. Whether this Court will adopt the doctrine of parental immunity when such issues of parental authority and discretion are presented must await another case." (369 A.2d at 673.)
The instant appeal seems to be that other case. Accordingly, we must now decide whether the doctrine of parental immunity applies in an action for negligent supervision of a minor child involving issues of parental authority, discretion, and control.
As has been noted, Schneider contends that our decision in Williams to abrogate the rule of parental immunity because of the presence of compulsory automobile insurance, requires us to overrule Strahorn and hold the parents liable in the instant case to the extent of their liability insurance coverage. The argument goes that our conclusion in Williams, that "when liability insurance exists, the domestic tranquility argument is, at best, hollow", 369 A.2d at 672, undermines Strahorn because the Court's rationale in Strahorn was that parental immunity was necessary to preserve *684 domestic tranquility. But Schneider has failed to persuade us to extend the automobile-negligence-by-parent rule of Williams to a supervision-negligence-by-parent action such as is here involved.
Unlike driving an automobile, supervision of one's children involves issues of parental control, authority, and discretion that are uniquely matters of a very personal type of judgment. The freedom to exercise such judgment has constitutional underpinning[1] and contrasts sharply with the State's supervision and regulation of the judgment one must exercise while driving an automobile. Reciprocal rights and duties inhere in the parent-child relationship. Anything creating conflict between parent and child, or interfering with the authority, discretion, or control that a parent has the right to exercise in supervising his child is repugnant to the institution of the family, and therefore is against public policy. Parental immunity will not be abrogated where the duty arises from the family relationship, for to do so would manifestly tend to disturb domestic tranquility. It is for these reasons that we decline to extend Williams v. Williams, Del.Supr., 369 A.2d 669 (1976), to abrogate parental immunity in actions against parents for negligent supervision of their children.
In reaching this decision, we find persuasive support in Holodook v. Spencer, N.Y.App., 36 N.Y.2d 35, 364 N.Y.S.2d 859, 324 N.E.2d 338 (1974). In a 1969 case involving negligent automobile driving, the New York Court of Appeals abolished "the defense of intrafamily tort immunity for nonwillful torts." Gelbman v. Gelbman, N.Y.App., 23 N.Y.2d 434, 297 N.Y.S.2d 529, 532, 245 N.E.2d 192, 194 (1969). However, in 1974 in Holodook, the New York Court of Appeals was asked whether Gelbman allowed parents to be sued for negligent supervision of their children. The Court "concluded that a child does not have a legally cognizable claim for damages against his parent for negligent supervision." 364 N.Y. S.2d at 863, 324 N.E.2d at 340. The Court distinguished the abrogation of parental immunity in the automobile cases because negligent driving is an actionable tort between "parties absent the family relationship", whereas a "parent's negligent failure to supervise his child is not presently recognized in New York as a tort, actionable by the child." 364 N.Y.S.2d at 866, 324 N.E.2d at 342. The Court's holding flowed from its conclusion that "where the duty is ordinarily owed, apart from the family relation, the law will not withhold its sanctions merely because the parties are parent and child." 364 N.Y.S.2d at 871, 324 N.E.2d at 346. We subscribe to that rationale and that distinction.
Schneider contends that extending Williams to abrogate parental immunity for negligent supervision of a child will not interfere with the right of a parent to control and discipline his child, if the Court applies the traditional standard of "reasonableness,.... viewed in light of the parental role." Gibson v. Gibson, Cal.Super., 3 Cal. 3d 914, 92 Cal. Rptr. 288, 293, 479 P.2d 648, 653 (1971). We agree with the Holodook view that:
"[i]n the family relation between parent and child, ... we do not believe that application of this standardized norm is the wisest course. The result, we believe, would be to circumscribe the wide range of discretion a parent ought to have in permitting his child to undertake responsibility and gain independence...." Holodook v. Spencer, N.Y. App., 36 N.Y.2d 35, 364 N.Y.S.2d 859, 870-871, 324 N.E.2d 338, 346 (1974).
In summary, we conclude that where parental control, authority, or discretion is involved, the rule of parental immunity must be preserved. See, Annot., 41 A.L.R. 3d 904, 976-80 (1972).[2] Accordingly, there was no error in the grant of summary *685 judgment by the Superior Court in favor of the parent Coe.
* * * * * * *
Affirmed.
NOTES
[1] See, e. g., Wisconsin v. Yoder, 406 U.S. 205, 92 S. Ct. 1526, 32 L. Ed. 2d 15 (1972).
[2] The fact that contribution is sought rather than a direct action for damages by the son against the parent does not alter the disposition. Strahorn v. Sears, Roebuck & Co., Del. Super., 123 A.2d 107, 109 (1956).
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552 F. Supp. 662 (1982)
Edward J. BROWN, Plaintiff,
v.
UNITED STATES, Defendant.
No. 80 C 5620.
United States District Court, N.D. Illinois, E.D.
November 30, 1982.
*663 John J. Jiganti, Harris, Burman, Sinars & Jiganti, Chicago, Ill., for plaintiff.
James K. Wilkens, Dept. of Justice, Washington, D.C., Thomas P. Walsh, Asst. U.S. Atty., Chicago, Ill., for defendant.
MEMORANDUM OPINION AND ORDER
SHADUR, District Judge.
Edward J. Brown ("Brown") has sued the United States to recover taxes assessed and collected under Section 6672 of the Internal Revenue Code of 1954, 26 U.S.C. § 6672.[1] In response the United States filed a counterclaim against Brown and Wayne D. Ross ("Ross") for civil penalty assessments under Section 6672, and it now seeks summary judgment against Brown.[2] For the reasons stated in this memorandum opinion and order the United States' motion is granted in part and denied in part.
Facts[3]
From 1967 to 1972 Brown was president, a director and owner of one-third of the voting stock of Marx Industrial Maintenance, Inc. ("MIMI"). Ross became MIMI's comptroller in late 1969 and a director in April 1970, serving in both capacities until sometime in 1971.
In April 1970 MIMI paid over $90,000 in delinquent 1969 employee withholding and social security (FICA) taxes. MIMI failed to make required payments of such taxes due for the second and third quarters of 1970 and for all of 1972. MIMI ceased business operations sometime in 1972, when all its corporate assets were sold and the net proceeds used to pay some of its delinquent federal withholding taxes.
In March 1978 the Internal Revenue Service ("IRS") assessed Brown $188,836.89 ($151,038.59 for the two 1970 quarters, and $37,798.30 for 1972) plus interest under Section 6672.[4] Contemporaneously IRS assessed Ross for the 1970 amount plus interest.
In May 1980 Brown paid IRS $607.18, the withholding tax due on his own wages from MIMI in 1972. In May 1980 Brown filed a claim for refund of his $607.18 payment plus interest. In July 1980 the IRS disallowed Brown's claim, and in October 1980 Brown sued to recover his payment. In turn the United States counterclaimed against Brown for $188,229.71 (the IRS assessment less Brown's payment) and against Ross for $151,038.59, in each case plus interest.[5] On May 18, 1982 Ross consented to entry of judgment against him in the full amount sought by the United States.
Applicable Law
Section 6672 is obviously strong medicine. It was "designed to assure compliance *664 by the employer with its obligation to withhold and pay the sums withheld, by subjecting the employer's officials responsible for the employer's decisions regarding withholding and payment to civil ... penalties for the employer's delinquency." Slodov v. United States, 436 U.S. 238, 247, 98 S. Ct. 1778, 1785, 56 L. Ed. 2d 251 (1978). Imposition of personal liability on corporate officials is meant to counter the temptation to use the funds collected for corporate purposes. Id. at 243, 98 S.Ct. at 1783. Amounts withheld from employees' wages are, after all, taken from the employees' pockets to satisfy their taxes due the United States. When the United States automatically credits the employees' taxes with the withheld amount, the delinquent employer has converted government money.
Two avenues are potentially available for escape from Section 6672. They stem from its use of the terms "person" and "willfully."
First, Section 6671(b) provides a "person" subject to penalties under Section 6672 is a corporate officer or employee who "is under a duty to perform the act in respect of which the violation occurs." In other words, only a person who had the responsibility for collection and payment of the withheld taxes is liable under Section 6672. Slodov, 436 U.S. at 245, 98 S.Ct. at 1784; Feist v. United States, 607 F.2d 954, 957 (Ct.Cl.1979).
Second, a finding a corporate official acted "willfully" under Section 6672 requires a showing of personal fault. Slodov, 436 U.S. at 254, 98 S.Ct. at 1788; Feist, 607 F.2d at 962. Our Court of Appeals has held "willful" conduct denotes "intentional, knowing and voluntary acts" or "a reckless disregard for obvious or known risks." Monday v. United States, 421 F.2d 1210, 1215 (7th Cir.), cert. denied, 400 U.S. 821, 91 S. Ct. 38, 27 L. Ed. 2d 48 (1970); Garsky v. United States, 600 F.2d 86, 91 (7th Cir. 1979). Mere negligence is not sufficient to constitute "willfulness." Feist, 607 F.2d at 961. But at the same time the government need not show either (1) bad motive the specific intent to defraud it or deprive it of revenue or relatedly (2) the absence of reasonable cause or a justifiable excuse. Monday, 421 F.2d at 1216.
In opposing the summary judgment motion, Brown is entitled to all reasonable inferences in his favor from the facts of record, United States v. Diebold, Inc., 369 U.S. 654, 655, 82 S. Ct. 993, 994, 8 L. Ed. 2d 176 (1962), including facts contained in the United States' submissions, see Thornton v. Evans, 692 F.2d 1064 at 1074 (7th Cir.1982). Granting Brown all the favorable inferences due, this Court finds there is no genuine issue of fact material to Brown's liability for the two 1970 quarters, but there is such an issue as to the year 1972. Each will be discussed in turn.
Brown's Liability
Brown's own deposition (see references at United States Mem. 5-7) concedes the many facts that establish conclusively Brown was a "responsible person" for purposes of Section 6672 liability throughout the 1970 and 1972 periods. Those facts track the checklist of determinative factors endorsed by our Court of Appeals. Monday, 421 F.2d at 1214-15, citing Datlof v. United States, 252 F. Supp. 11, 32-33 (E.D.Pa.), aff'd, 370 F.2d 655 (3d Cir.1966), cert. denied, 387 U.S. 906, 87 S. Ct. 1688, 18 L. Ed. 2d 624 (1967).
Indeed Brown himself does not challenge his being a "responsible person" (Ans. Mem. 6). Brown's argument goes rather to his alleged lack of willfulness, and that argument takes different forms in relation to MIMI's 1970 and 1972 delinquencies.
1. 1970 Delinquencies
Brown argues his "lack of willfulness stems from his lack of knowledge that the taxes in question were not ultimately being paid" (Ans. Mem. 10, emphasis added; see also id. at 4-5) in 1970. Brown has to insert the qualifying adverb because he has admitted he knew the withheld taxes were being paid at least 30 days late throughout 1970. Dep. 67-70, 74, 85-86, 132, 142; Ans. Mem. 4.
*665 In other words, Brown contends he lacked knowledge of the extent or "seriousness" of MIMI's delinquency, and he argues now (Ans. Mem. 10) his "mistake" as to the extent of that liability shows he lacked the requisite willfulness under Section 6672. In Brown's view a four-week level of delinquency (scarcely chicken feed, for his own testimony refers to $73-83,000 owing the government, Dep. 74) "was acceptable," Dep. 68.
Even if Brown's version of the facts is simply taken as true, however, he clearly acted willfully for Section 6672 purposes. As already stated, in April 1970 MIMI had raised new capital to pay a $90,000 withholding tax delinquency for 1969, and Brown has confirmed he was fully aware of MIMI's history of not paying such federal taxes. Dep. 66, 92-93, 98. When that admitted awareness extended to the continuous delinquencies throughout 1970 confirmed by his review of monthly balance sheets (Dep. 70, 74, 86) it is clear Brown had the knowledge necessary as an ingredient of willfulness. Despite that knowledge Brown continued in 1970 to pay various MIMI creditors in preference to the United States. Statement of Uncontested Facts ¶ 11. On the facts Brown's case is thus indistinguishable from the situation described in Garsky, 600 F.2d at 91 (citations omitted):
The willfulness requirement of Section 6672 is satisfied if the responsible person acts with a reckless disregard of a known risk that the trust funds may not be remitted to the Government such as by failing to correct mismanagement after being notified that the withholding taxes have not been duly remitted ... A responsible person's use of funds, or his knowledge of the use of funds for payments to other creditors after he is aware of the failure to pay the withholding tax, is willful conduct within the scope of Section 6672 ... Taxpayer acknowledges that this is precisely the situation in which he finds himself.
In short, Brown had notice of MIMI's past delinquencies and at least of the monthly deficiencies throughout the two 1970 quarters at issue. It is entirely irrelevant that he may not have known just how large the deficiencies were. As an admittedly "responsible" corporate official he had a duty to assure withholding and FICA taxes were actually paid as required. Brown simply failed to discharge his duty.[6]See Garsky, 600 F.2d at 91. Brown's own version of the facts establishes his 1970 willfulness in Section 6672 terms. At a minimum he was reckless in his disregard of the known risk MIMI's taxes were not being paid as required.
2. 1972 Delinquencies
About April 1971 an outside audit revealed the full extent of MIMI's 1970 tax delinquencies. Statement of Uncontested Facts ¶ 13. Shocked at the amount involved far greater than the "about four weeks behind" he had thought Brown blew the whistle by going to the IRS to tell them of the debt due. Dep. 163.
From that time forward the IRS was literally on the inside of MIMI's operations, and literally so on a daily basis. One of its IRS Agents was given an office and a desk in MIMI's offices, "establishing a pattern of payment so that we could hopefully survive and pay off the debt we didn't know existed" (Brown Dep. 233). "We were living with an IRS agent" (id. at 173), and Brown understood the large payments of withholding taxes being made under the agent's scrutiny were covering all current quarters in full, as well as paying a small amount toward the old delinquent taxes (id. at 171-72, 174, 250-51).[7] That situation continued *666 for the rest of 1971 and all of 1972, until MIMI's assets were sold to American Airlines (also with IRS approval, id. at 35-36), with the net proceeds of sale being paid to the IRS (id.).
Brown argues (Ans. Mem. 12) those facts should estop the government from asserting his willfulness after April 1971. Estoppel against the government poses a terribly difficult burden, though,[8] and one it is unnecessary for Brown to shoulder.
With the requisite reasonable favorable inferences drawn in Brown's favor, there are at least genuine issues of material fact as to Brown's willfulness as to the 1972 quarters for which the government has asserted a claim. There has really been no showing at all that Brown knew of any non-payment of taxes for those quarters, or that his understanding they were being paid was "a reckless disregard for obvious or known risks."[9] In fact there is a serious question whether another requisite element of Section 6672 liability has been satisfied: a showing that other creditors were paid in preference to the United States.[10]
Indeed it is an understatement to characterize the record as posing genuine issues of fact to forestall summary judgment in the United States' favor. Its factual treatment of the 1972 "willfulness" issues has been almost nonexistent, and its legal treatment of those issues has been at most perfunctory (R. Mem. 6). This Court has made the point elsewhere that a party may not hold back on a motion for summary judgment, planning to give the matter its best shot afterward if it is unsuccessful.[11] Given the present procedural posture, however, this Court can only deny the 1972 aspect of the United States' motion.
Conclusion
There is no genuine issue of fact material to Brown's liability for the Section 6672 assessments covering the second and third quarters of 1970. Accordingly the United States is granted summary judgment in the amount of $151,038.59 plus interest as allowed by law. Summary judgment is denied as to the Section 6672 assessments made for 1972. This Court will await submissions from the parties before the next status date as to a possible Fed.R.Civ.P. 54(b) determination as to the 1970 judgment and the appropriate next step as to the 1972 dispute.
NOTES
[1] All subsequent citations to the Code will simply take the form "Section."
[2] In April 1982 the United States moved for summary judgment against both Brown and Ross. Because Ross later consented to entry of judgment against him, only Brown's claim and the counterclaim against him are in issue here.
[3] In substantial part this statement of facts is drawn from a "Statement of Uncontested Facts" filed by the parties as part of the Final Pretrial Order in the case (this Court's regular requirement before holding the final pretrial conference under Fed.R.Civ.P. ("Rule") 16). Other facts referred to in this section are drawn from the pleadings and from Brown's deposition. Statements of fact elsewhere in this opinion derive from the same sources.
[4] At all times relevant to this action Section 6672 provided:
Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over. No penalty shall be imposed under section 6653 for any offense to which this section is applicable.
Section 7202 provided for parallel criminal penalties, but that provision is not in issue here.
[5] This pattern of a small payment and suit for refund, followed by a counterclaim for the much larger amount previously assessed by the United States, is the conventional means for bringing withholding tax litigation into the district courts (rather than the Tax Court, which would have jurisdiction if suit were brought to challenge a proposed deficiency).
[6] Brown could not effectively delegate his duty as he contends (Ans. Mem. 4, 10-11) he could. Such a concept would gut Section 6672 by allowing admittedly responsible persons to escape liability by "mere delegation." See Mazo v. United States, 591 F.2d 1151, 1155, 1157 (5th Cir.), cert. denied, 444 U.S. 842, 100 S. Ct. 82, 62 L. Ed. 2d 54 (1979).
[7] Only a fragmented version of the 1972 picture has been provided the Court. It has to infer from questions put to Brown (Dep. 243-44) that the government chose to apply the payments differently, leaving Brown exposed to the claimed liability. That would pose a number of unanswered (rather entirely unaddressed) questions, which need not be dealt with in light of the government's failure on other grounds dealt with in the text.
[8] Cf. Pratte v. NLRB, 683 F.2d 1038, 1041-44 (7th Cir.1982), vacating this Court's judgment, 530 F. Supp. 461 (N.D.Ill.1981).
[9] In 1972 Brown had a cancer operation and other personal difficulties, so that a new MIMI president came in and was "reporting directly to" the IRS Agent ensconced in the MIMI offices (Dep. 101-02). That too (with or without favorable inferences) creates a fact question as to the extent of Brown's knowledge (and hence willfulness).
[10] As already indicated, the parties stipulated to that having been done in 1970 (Statement of Uncontested Facts ¶ 11), but they were wholly silent as to 1972. This Court's search of the record (the government not having done its job in its memoranda) disclosed nothing in this respect, other than an inference from one Brown deposition answer that after the sale of assets the entire proceeds "less the accounts payable" went to the IRS. And given the uncontroverted IRS approval of the sale and of the distribution of the proceeds, Brown's "willfulness" is scarcely a compelled inference (even apart from estoppel notions).
[11] See Kadish v. Commodity Futures Trading Commission, No. 82 C 3331, slip op. at 2 n. 1 (N.D.Ill. Nov. 15, 1982); W.H. Brady Co. v. Lem Products, Inc., 521 F. Supp. 676, 678 (N.D. Ill.1981).
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552 F. Supp. 1233 (1982)
BRINCO MINING LTD., Plaintiff,
v.
FEDERAL INSURANCE COMPANY, Defendant.
Civ. A. No. 82-1165.
United States District Court, District of Columbia.
December 2, 1982.
*1234 John D. Aldock, Nancy J. Bregstein, of Shea & Gardner, Washington, D.C., for plaintiff.
Herbert J. Miller, Jr., Stephen L. Nightingale, James E. Rocap, III, of Miller, Cassidy, Larroca & Lewin, Washington, D.C., for defendant.
MEMORANDUM AND ORDER
SIRICA, Senior District Judge.
This matter is before the Court on defendant's motion to dismiss and on a motion by plaintiff for summary judgment. The plaintiff is a Canadian corporation whose principal place of business is Vancouver, British Columbia. The defendant is an American insurance company which insured the plaintiff under two separate policies for the period from October, 1974 to October, 1975. The plaintiff corporation began its corporate existence in 1952 and obtained insurance coverage for its mining activities with four insurance companies from then until 1976 when insurance became unavailable for asbestos related businesses. The plaintiff has brought suit in this Court seeking a declaratory judgment to the effect that the defendant is jointly and severally liable with plaintiff's other insurers for both indemnification and legal defense costs associated with over 2,000 asbestosis suits currently in progress throughout the United States. In addition, plaintiff seeks a judgment in this Court that the defendant has breached its contractual obligation to pay claims and assume the defense of these hundreds of claims.
The Court must first address the defendant's motion to dismiss this cause of action in favor of a Canadian suit instituted by plaintiff in 1979, some three years prior to the present suit. The Canadian suit is currently pending before the Supreme Court of Ontario. In order to properly understand the position of the case before this Court a lengthy factual and legal discussion of both cases is necessary.
BACKGROUND
The plaintiff instituted suit in the Supreme Court of Ontario in 1979 against the four insurance companies with whom it had contracted for coverage over a twenty-four year period. Two of the companies, Commercial Union Assurance Company and the Royal Insurance Company, are Canadian domicilliaries and thus cannot be sued by Brinco under this Court's diversity jurisdiction. The third insurance company that has been joined in Brinco's consolidated Canadian lawsuit is the American Home Insurance Company. American Home Insurance is a domicilliary of the United States but, to the best of the Court's knowledge, has not been brought into the present action by either plaintiff or the defendant. The fourth defendant in the Canadian suit is Federal Insurance Company, the defendant in the case before this Court.
*1235 In fact, the Canadian lawsuit was originally initiated by the plaintiff in separate causes of action against its four insurers. The four separate cases were consolidated by the Ontario Supreme Court on October 20, 1981 upon the motion of the plaintiff. While the parties disagree as to the state of progress in the Canadian consolidated suit, at least three of the four insurance companies have filed a Statement of Defence, the Canadian equivalent to an answer under the Federal Rules of Civil Procedure, to Brinco's Consolidated Statement of Claim. Estimates on the likely date of disposition for the Canadian suit range from twelve months to two years from now. See Defendant's Affidavit of Barrister Dutton, July 8, 1982 ¶ 18; Plaintiff's Affidavit of Barrister Falby, June 28, 1982 ¶ 6.
The present suit was filed by the plaintiff on April 27, 1982, some eight weeks after the Supreme Court denied certiorari in the case of Keene Corp. v. Insurance Co. of North America, 667 F.2d 1034 (D.C.Cir. 1981), cert. denied, 455 U.S. 1007, 102 S. Ct. 1644, 71 L. Ed. 2d 875 (1982). The District of Columbia Circuit Court of Appeals in Keene adopted what has probably become the broadest viewpoint on insurer liability for suits by those afflicted with the insidious disease of asbestosis. The Canadian courts have yet to address the difficult issue raised in Keene and it is likely that the pending suit in Canada will force some final resolution of the Canadian law on the issue of insurer liability for asbestosis injuries. For the purposes of this case, however, it is sufficient to observe that the District of Columbia Circuit's position in the Keene case has not been adopted by any other federal or state court in the United States.[1] Instead, the other courts of the United States which have addressed the issue of what constitutes an "injury" triggering coverage pursuant to boilerplate insurance contracts in asbestosis litigation have reached more narrow interpretations. Of course, this is not to imply that the conclusion reached by the D.C. Circuit in Keene is in any sense erroneous. Rather, recognition of the fact that this Circuit, through the opinion of Judge Bazelon writing for the Keene court, arrived at a position directly opposite to that of Chief Judge Coffin writing for the First Circuit in Eagle-Picher Industries v. Liberty Mutual Insurance Co., 682 F.2d 12 (1st Cir.1982), can only serve to underscore the conclusion that reasonable minds can reasonably differ on the precise scope of coverage afforded by similar insurance policy language. Moreover, this observation is offered as more than simply a restatement of the obvious. While the Court need not rule at this time, the Court notes that because almost all aspects of the contract at issue took place in Canada there is a high likelihood that Canadian insurance law will govern the construction of the insurance contract in this case. See Steorts v. American Airlines, Inc., 647 F.2d 194 (D.C.Cir.1981); Mariner Water Renaturalizer, Inc. v. Aqua Purification Systems, Inc., 665 F.2d 1066, 1068 n. 3 (D.C.Cir.1981); Restatement 2d, Conflict of Laws, §§ 6, 188, 193 (1971). Should Canadian law control, this Court would be placed in the position of predicting what theory of asbestosis liability will be adopted by the pertinent Canadian court. While this may be a familiar task for a federal court sitting in diversity, resort to the "general principles" of insurance law, as urged by plaintiff and suggested by the Keene court, cannot provide guidance when the circuits of the United States federal courts have failed to agree on appropriate "general principles."
Attention to the significant effect that these different interpretations may have upon the parties to asbestosis litigation will be of assistance in understanding why Canadian litigants are now appearing in a District of Columbia forum. When Brinco first filed its action in Canada against its insurers in 1979 there were as yet no dispositive rulings in the United States on the issue of what constitutes an asbestosis "injury" under relevant insurance provisions which would trigger coverage by the boilerplate language found in insurance contracts. *1236 The plaintiff in this case may have been motivated to bring suit against its insurers in a Canadian forum for reasons of jurisdiction, ease of execution for any judgment, or possibly the hope of a more favorable judicial climate in favor of a significant economic industry native to Canada.[2] The motives of plaintiff in instituting suit in Canada, however, are not properly before this Court and the Court has no need to speculate on plaintiff's purposes in that regard. Reflection on legal developments in the United States since plaintiff invoked Canada jurisdiction, however, does shed light on why plaintiff is now seeking this Court's jurisdiction. It is this light that the Court cannot ignore.
Since 1980, the federal courts in the United States have struggled to define the operative event for determining what constitutes an asbestosis "injury." Medical evidence demonstrates that there are three discrete stages in the development of asbestosis in an asbestosis victim. The first stage is simply that of exposure to the asbestos fibers contained in asbestos dust which causes the inhalation of the fibers into the victim's lungs. The second stage occurs when these microscopic fibers continue to invade and scar lung tissue while they are lodged within the respiratory tract of the victim. Keene, 667 F.2d at 1042. The third stage, which may occur as late as fifteen to twenty years after the initial inhalation, begins when the physiological symptoms of the disease manifest themselves in such a way as to be susceptible to clinical diagnosis. See Keene, 667 F.2d at 1040. Which of these stages comports with the definition of an "injury" for purposes of triggering coverage under liability insurance contracts has been the source of litigation in at least four federal circuits since 1980. Not surprisingly, each stage of the disease has found its supporters. The narrowest position, that coverage is triggered only when the disease "manifests" itself while the insurer is on the risk, has been endorsed by the First Circuit. Eagle-Picher Industries v. Liberty Mutual Insurance Co., 682 F.2d 12 (1st Cir.1982). A middle ground position has been taken by the Sixth and Fifth Circuits. See Porter v. American Optical Corp., 641 F.2d 1128 (5th Cir.), cert. denied, 454 S. Ct. 1109, 102 S. Ct. 686, 70 L. Ed. 2d 650 (1981); Insurance Co. of North America v. Forty-Eight Insulations, 633 F.2d 1212 (6th Cir.1980), aff'd on rehearing, 657 F.2d 814 (6th Cir.), cert. denied, 454 U.S. 1109, 102 S. Ct. 686, 70 L. Ed. 2d 650 (1981). The position of these two circuits is that the "injury" which determines coverage is the initial inhalation of asbestos fiber by the asbestosis victim. As such, any insurer who was on the risk during a period of a victim's exposure to asbestos inhalation must assume the liability of defending and indemnifying the insured asbestos company. The third, and broadest, position is that taken by the D.C. Circuit in Keene. The D.C. Circuit has centered on the ongoing, internal assault on the integrity of lung tissue by the microscopic asbestos fibers as the critical factor for insurance coverage. As a logical corollary to this position, the D.C. Circuit has defined asbestos "injury" to include all three stages from initial inhalation through internal scarring to the point at which the disease becomes susceptible to medical diagnosis. Keene, 667 F.2d at 1044-45. See generally Note, The Calculus of Insurer Liability in Asbestos-Related Disease Litigation: Manifestation + Injurious Exposure = Continuous Trigger, 23 B.C.L.Rev. 1141 (1982).
The dramatic consequences of the position taken by the Keene court have been quickly drawn to the fore by the facts of the present case. Under the Keene holding, any insurance company can be held liable for indemnification and defense merely by extending coverage during any part of the disease's development. Thus, in the present case, the one year long insurance policies issued by the defendant to the plaintiff can serve as a basis for holding the defendant jointly and severally liable for asbestos injuries *1237 for the entire twenty-three years of mining operations which predate the term of that policy. Unlike the position of the Sixth and Fifth Circuits requiring apportionment of both defense and indemnity responsibilities in proportion to the respective periods of coverage under the different insurance policies, Porter v. American Optical Corp., 641 F.2d at 1145, application of the Keene holding to the present defendant would appear to force the defendant to stand and defend claims in numbers completely disproportionate to either parties' reasonable expectations at the time the one year contract was negotiated. Again, this Court does not intend to question the wisdom of the Keene decision. Rather, the Court simply doubts that the Keene court intended its decision to be a beacon for asbestosis litigants to divert pending litigation from other forums by offering a more attractive theory of liability in the District of Columbia.
THE MOTION TO DISMISS
The defendant has sought to have the present case dismissed in favor of the prosecution of the pending Canadian consolidated case. In the alternative, the defendant has urged this Court to exercise its inherent powers, Landis v. North America, 299 U.S. 248, 57 S. Ct. 163, 81 L. Ed. 153 (1936) (Cardozo, J.), to stay this action pending the outcome of the Canadian litigation. In support of its motion the defendant has put forward two reasons for dismissing the current case. These two arguments will be addressed separately.
Before discussing the defendant's grounds for dismissing this action the Court should clarify what it views as the gravamen of plaintiff's suit.
At oral argument on this motion, counsel for the plaintiff did not attempt to conceal the two advantages that plaintiff hoped to obtain by his action in this forum. Apparently, not only is plaintiff attempting to invoke the fruits of the Keene decision as to liability but also seeks to capitalize on the relatively swift summary judgment procedures available under the federal rules. According to the affidavits submitted by Canadian counsel for both parties the Canadian courts have not adopted procedures similar to those found in Rule 56 of the Federal Rules of Civil Procedure. An additional dissimilarity is the fact that declaratory judgments as they have come to be used in the federal courts of the United States have no precise correlate in Canadian jurisprudence. Although it appears that Canadian courts have only endorsed the use of declaratory relief subsequent to the filing of plaintiff's Canadian cause of action, there remains some dispute as to the prospective effect of a declaratory judgment in Canadian courts.[3]See Great West Steel Industries Ltd. v. Simco & Erie General Insurance Co. [1979] 27 O.R. (2d) 379, 382-83. This Court, having viewed the high quality of Brinco's legal representation before this Court, finds it difficult to credit plaintiff's claim that "Brinco [brought this suit in Canada to seek legal defense in the United States] at a time when it did not appreciate the significant legitimate practical benefits that could be derived from litigating in this [District of Columbia] jurisdiction in terms of the saving of both time and expense by both parties." Brinco's Memorandum of Points and Authorities in Opposition to Defendant's Motion to Dismiss, at 27. Instead, this Court believes that plaintiff has its eye on the costs and time associated with litigation not before this Court.
*1238 This Court is of the view that the defendant has more accurately portrayed the reason why the plaintiff seeks to invoke this Court's jurisdiction. The legal costs associated with the defense of over 2,000 asbestosis cases covering all twenty-four years of plaintiff corporation's insured existence must indeed weigh heavy on the plaintiff's resources. The earlier that plaintiff obtains a judgment requiring any of the four insurance companies to assume these increasing defense costs the more likely is the plaintiff to remain solvent during the pendency of the Canadian proceedings. As plaintiff's counsel stated at oral argument, "the declaratory relief that we seek here would give us everything we want. It would give us a declaration that they must defend. That's what we need." Hearing Transcript at 13.[4]
Defendant has based its motion to dismiss on two separate grounds. The first is dismissal for plaintiff's failure to join indispensable parties under Rule 19 of the Federal Rules of Civil Procedure. The second argument put forward by defendant is a more general assertion directed at the inherent power of this Court to dismiss duplicative, inconvenient, or inefficient litigation where more satisfactory relief can readily be obtained elsewhere. While defendant's first argument cannot withstand passing scrutiny, the defendant's second claim must be accorded more serious attention.
Defendant Federal asserts that the three other insurance companies which are also defendants in the Canadian action are necessary parties to this action under Federal Rule of Civil Procedure 19(a). Defendant bases this contention on the fact that the insurance contract between plaintiff and defendant contains an "other insurance" provision. See Evergreen Park N. & C. Home, Inc. v. American Eq. Assur. Co., 417 F.2d 1113 (7th Cir.1969). Under Rule 19(a), Federal must first show that these other insurers must be joined if feasible because either complete relief would not be available in their absence or these absent insurance companies possess an interest which may be prejudiced in their absence. Defendant, arguing that these other insurance companies should be joined in this action, claims that Rule 19(b) requires dismissal because two of the three other necessary insurance companies cannot be joined in this action for reasons of subject matter jurisdiction.[5] This Court, however, is in agreement with the plaintiff that the considerations required by Rule 19(b) are unnecessary because the defendant has not made out a sufficient showing of indispensability for invocation of Rule 19(a).
The presence of "other insurance" terms in the contested insurance contract does not automatically imply that a judgment by this Court will seriously impair or prejudice the interests of the absent insurance carriers. Each of Brinco's two insurance contracts with the defendant, one for primary and the other for excess liability, contains an "other insurance" clause. These clauses purport to restrict Federal's liability, both primarily and as an insurer of last resort, when Brinco has more than one policy covering a particular claim. Federal contends *1239 that these "other insurance" clauses give the absent insurance companies a cognizable "interest" in the outcome of the case before this Court and thus requires joinder of those companies. While defendant's argument has some force when applied to the excess liability insurance policy (the "umbrella" policy),[6] it is considerably less persuasive when applied to Brinco's primary liability policy. It is principally under the primary liability policy that Brinco seeks recovery for not only past and future judgments but, more importantly, past and future defense costs.[7] Moreover, this Court need not run the risk of construing all "other insurance" clauses as bestowing indispensability on absent insurance carriers. The D.C. Circuit Court of Appeals in Keene could not have been more clear in its finding that the "doctrine of joint and several tort liability in this context is an accepted means of vindicating the rights of the tort victims." 667 F.2d at 1051. See also Lawlor v. National Screen Service Corp., 349 U.S. 322, 330, 75 S. Ct. 865, 869, 99 L. Ed. 1122 (1955); Stabilisierunssfonds Fur Wein v. Kaiser Stuhl Wine Distributors Pty., Ltd., 647 F.2d 200, 207-08 (D.C.Cir.1981).
Under such a view, the plaintiff could select any one of the insurers to defend or indemnify the insured to the limits of their respective insurance contracts. Keene, 667 F.2d at 1051. The selected insurance company would have to seek contribution from other insurers in a subsequent suit. While this Court has not been directed to any Canadian law on this point, the Court is satisfied that the Keene court's finding of joint and several liability[8] governs this case for the limited purpose of determining the applicability of Rule 19(a) of the Federal Rules of Civil Procedure. While it is true that questions of joinder have been considered to be primarily procedural issues, see Provident Tradesmens Bank & Trust Co. v. Patterson, 390 U.S. 102, 125 n. 22, 88 S. Ct. 733, 746 n. 22, 19 L. Ed. 2d 936 (1968), and it is also true that issues of joinder involve a strong interest in maintaining an "independent system for administering justice," Byrd v. Blue Ridge Rural Electric Co. v. New York, 356 U.S. 525, 538, 78 S. Ct. 893, 901, 2 L. Ed. 2d 953 (1958), Canadian substantive law may be relevant to the joinder question before this Court. As Judge Wisdom has noted: "rules of joinder depend on the substantive rights and liabilities of the parties, present and absent. In diversity actions, these substantive rights and liabilities are creatures of state law." Kuchenig v. California Co., 350 F.2d 551, 555-56 (5th Cir.1965), cert. denied, 382 U.S. 985, 86 S. Ct. 561, 15 L. Ed. 2d 473 (1966). Although this Court can see little gain and conceivably some harm from applying foreign substantive law as a matter of governing state law to a joinder decision in a federal diversity case, foreign law may indeed determine the issue of "indispensability" in this case. For example, if Canadian law did not hold joint tortfeasors severally liable then as a matter of substantive "state" law the absent insurance companies would have a far greater interest in the outcome of this case. This Court, however, need not ascertain whether Canadian substantive law forces this Court to reach a conclusion different from that of the Keene court. The defendant has failed to bring any precedent to the Court's attention indicating that Canadian law would not hold the defendant severally liable in this case. See Fed.Rule Civ.P. 44.1. As such, the defendant has failed to meet his burden as the moving party to make out a claim of indispensability under Rule 19(a). Therefore, this Court finds that the other insurance carriers are not indispensable parties within the meaning of Rule 19(a).
*1240 The second contention raised by the defendant in his motion to dismiss is a more general appeal to the discretion of the Court to stay or dismiss this action in favor of the pending consolidated suit in Ontario. The Court has not been furnished with any precedent by the defendant which precisely states the standard for dismissing a diversity case in favor of a suit in a foreign forum which has yet to come to judgment. This Court has no doubt of its inherent authority over its own docket. See Landis v. North America Co., 299 U.S. 248, 57 S. Ct. 163, 81 L. Ed. 153 (1936) (Cardozo, J.). Nevertheless, the Court is also aware of its limited discretion to decline to assume "the virtually unflagging obligation of the federal courts to exercise the jurisdiction given them." Colorado River Water Construction Dist. v. United States, 424 U.S. 800, 817, 96 S. Ct. 1236, 1246, 47 L. Ed. 2d 483 (1976). The Supreme Court in Colorado River Water Construction District, however, did go on to list some factors which a court should weigh before dismissing a case because of a parallel suit in another forum. The Colorado Court offered factors such as the order in which jurisdiction was obtained in separate forums, the desirability of avoiding piecemeal litigation, and the inconvenience of the federal forum to the parties. Colorado, 424 U.S. 800, 818, 96 S. Ct. 1236, 1246, 47 L. Ed. 2d 483 (1976). More specifically, the Colorado Court stated: "No one factor is necessarily determinative; a careful considered judgment taking into account both the obligation to exercise jurisdiction and the combination of factors counselling against that exercise is required." Colorado, 424 U.S. at 818, 96 S.Ct. at 1246. In order to respond to the defendant's motion to dismiss this action in deference to the Canadian suit this Court has found it necessary to list and weigh the factors in the fashion suggested by the Colorado Court.
Before identifying the factors that this Court must consider in deciding to retain jurisdiction or not, a preliminary problem must be answered. Counsel for either party has not informed the Court of any decisions which clearly state the appropriate degree of deference a federal court owes to proceedings in another country which have yet to reach judgment. This Court is of the view that the standard should be the same as that between two federal courts. This conclusion is supported by two facts in this case. The first fact is simply that the alternate forum is that of Canada, a country that shares the same common law roots as our jurisprudence. Clarkson Co. Ltd. v. Shaheen, 544 F.2d 624, 630 (2d Cir.1976); Cornfield v. Investors Overseas, Ltd., 471 F. Supp. 1255 (E.D.N.Y. 1979); Fleeger v. Clarkson Co., Ltd., 86 F.R.D. 388, 392-93 (N.D.Texas 1980). As the Fleeger court aptly stated:
The rationale for comity dismissals is not based simply on lack of familiarity with the particular foreign law, but rather is in deference to the foreign country's legal, judicial, legislative and administrative system of handling disputes over which it has jurisdiction, in a spirit of international cooperation.... Certainly, if this Court cannot extend comity to Canada, the comity principle has little vitality in our jurisprudence.[9]
86 F.R.D. 388, 392-93. In this regard, the concerns that federalism normally presents for a diversity court are not implicated in this case.
The second fact which has persuaded the Court to apply the same deference to the Ontario proceedings as to another federal court is the fact that the plaintiff in this case is seeking to use this Court's jurisdiction to circumvent proceedings it instituted in its own country. The purpose behind the availability of alienage jurisdiction in diversity cases is not to shield foreign nationals from the law, either substantive or procedural, of their own country. Rather, the original purpose behind extending a federal forum to diverse foreign citizens was to protect foreign nationals from the possibility of unfair treatment in state tribunals when they confront state citizens. See 1 *1241 Moore's Federal Practice, ¶ 0.75[1.-1], at 709.4 (1982 ed.). Regardless of the current vitality of this view of state courts, see H. Friendly, Federal Jurisdiction: A General View 147-48 (1973); Friendly, The Historic Basis of Diversity Jurisdiction, 41 Harv.L. Rev. 483, 495-97 (1928), the purpose behind extending access to federal forums by foreign nationals is not served under the facts of this case.
Having determined that the Court owes the same deference to the pending Canadian case as it would offer a pending federal case this Court must comply with the "general principle" set forth by the Supreme Court. "As between federal district courts, however, though no precise rule has evolved, the general principle is to avoid duplicative litigation." Colorado River Water Construction District v. United States, 424 U.S. 800, 817, 96 S. Ct. 1236, 1246, 47 L. Ed. 2d 483 (1976) (citing Kerotest Mfg. Co. v. C-O-Two Fire Equipment Co., 342 U.S. 180, 183, 72 U.S. 219, 221, 96 L. Ed. 200 (1952); Steelman v. All Continent Corp., 301 U.S. 278, 57 S. Ct. 705, 81 L. Ed. 1085 (1937)). Although concerns about duplicative litigation may by themselves provide sufficient cause for a federal court to refrain from assuming jurisdiction, the facts of this case present additional grounds for deferring to the ongoing Canadian proceeding.
The Court has attempted to isolate the respective criteria which should guide the use of its discretion. One factor, already alluded to above, is that the plaintiff has already chosen a Canadian forum. Thus, whatever merit there is in a first-to-file rule, see Colorado River Water Construction District, 424 U.S. at 818, 96 S.Ct. at 1246, it would certainly apply in this case to the plaintiff's detriment. As explained above, this action was filed some three years after plaintiff's initial Canadian suit and almost five months after the consolidated Canadian complaint.
Another consideration that this Court has addressed is the fact that the plaintiff has already taken positive steps to make sure that relief in Canada would be as complete and comprehensive as possible. The Court should not lightly speculate on the effect of a less comprehensive judgment by this Court on either Canadian law or the judgment of the Ontario Supreme Court in the pending consolidated case. Moreover, this Court would be reluctant to in any way impair the benefits of the plaintiff's three year endeavour to create a forum for a comprehensive disposition of its grievances.
A third factor which the Court must consider is the current state of progress in the Canadian action. "Where foreign litigation is in its incipiency, motions to stay the domestic action are properly denied." I.J.A., Inc. v. Marine Holdings, 524 F. Supp. 197, 199 (E.D.PA.1981). Counsel for both parties, and their Canadian counterparts, have traded charges of footdragging in the Canadian action. For example, plaintiff argues that the defendant only filed an answer to the consolidated Canadian complaint after proceedings were initiated in this Court. Defendant responds with a flurry of correspondence indicating that plaintiff repeatedly requested that the defendant delay filing an answer until after the four actions were consolidated. After evaluating all of the allegations of delay and undue prejudice resulting therefrom, the Court cannot find any indicia of bad faith on either side. If there has been any delay in the Canadian proceedings this Court is inclined to attribute it to normal maneuvering between adverse parties.
Apparently, at least three of Brinco's four insurance carriers have filed answers to the consolidated Canadian complaint. The only carrier which has yet to file an answer in the Canadian action is Royal Insurance Company. Royal Insurance Company is similar to defendant Federal in that it only insured the plaintiff for one year. Whether the plaintiff ever successfully receives an answer from this last Canadian defendant or whether the Canadian case can proceed without the defaulting insurance company, cf. In Re Uranium Antitrust Litigation, 617 F.2d 1248, 1257-58 (7th Cir. 1980), this Court has concluded that the Canadian proceedings have progressed beyond *1242 "incipiency." The two major insurers, whose combined policy coverage extends from 1952 to 1976 have been joined in the Canadian case. The length of time necessary to complete the Canadian proceedings was a proper concern for the plaintiff in 1979, or, at the latest, in 1981 when plaintiff moved to consolidate its claims. The expected completion date of the Canadian action or the absence of summary judgment proceedings in plaintiff's first forum are considerations which plaintiff has already had to weigh. This Court cannot be concerned if, in hindsight, the plaintiff would now have made a different choice.
Another factor that the Court must weigh is the relative convenience of proceedings in this forum as opposed to the Canadian court. Cf. Gulf Oil Corp. v. Gilbert, 330 U.S. 501, 508-09, 67 S. Ct. 839, 843, 91 L. Ed. 1055 (1947); Pain v. United Technologies Corp., 637 F.2d 775, 782 (D.C.Cir. 1981), cert. denied 454 U.S. 1128, 102 S. Ct. 980, 71 L. Ed. 2d 116 (1981). There can be little dispute that the Canadian proceedings are more convenient to both parties. The primary witnesses, if necessary, and the requisite documentation can all be found in Canada.
Similarly, it should be more convenient for both parties to assert their claims and defenses in the same action with the other alleged defendants. Given the underlying reasons for this cause of action, however, the Court has attached little weight to defendant's claim of inconvenience stemming from the costs associated with proceedings on the same claim in two separate forums.
A further factor that this Court has considered is what prejudice may befall the plaintiff if this action is dismissed. Plaintiff can hardly argue that the Ontario Supreme Court, a court whose jurisdiction it invoked initially, will fail to afford substantial justice to plaintiff's claims. Indeed, there can be no doubt that the Canadian court is in a superior position to that of this Court to reach a just resolution of plaintiff's grievances. The defendant, on the other hand, faces the probability of inconsistent judgments, or, worse, an unenforceable judgment by this Court over a small piece in the Canadian case.
The only possible prejudice that may result to the plaintiff's detriment is the possibility, speculative to be sure, that relief would be more certain and more swift in this forum. This Court cannot label this hypothetical advantage as prejudice. In the Court's view, the plaintiff is engaging in forum shopping. Judicial adversity to forum shopping has been a guiding principle in the exercise of judicial discretion by federal courts sitting in diversity cases since at least 1938. See Hanna v. Plummer, 380 U.S. 460, 468, 85 S. Ct. 1136, 1142, 14 L. Ed. 2d 8 (1965); Erie Railroad Co. v. Tompkins, 304 U.S. 64, 58 S. Ct. 817, 82 L. Ed. 1188 (1938). As another court has said: "To bring an action in this district in the hope of obtaining a more favorable rule of law than now obtains in the district where the [plaintiff] first elected to sue is forum shopping with a vengeance." International Transportation Co., Inc. v. Sea-Land Services, Inc., 1969 A.M.C. 1676 (S.D.N.Y.) (quoted in Poseidon Schiffahrt v. M/S Netuno, 335 F. Supp. 684, 689 (S.D.Ga.1972), vacated, 474 F.2d 203 (5th Cir.1973)).
In conclusion, this Court has determined that it must dismiss this action in favor of the pending Canadian case. The reasons for this decision range from principles of international comity, Kenner Products v. Societe Fonciere Et Financiare, 532 F. Supp. 478, 479 (S.D.N.Y.1982), to a well-founded aversion to forum shopping on an international scale, cf. Poseidon Schiffahrt v. M/S Netuno, 335 F. Supp. 684, 687-89 (S.D.Ga. 1972), vacated, 474 F.2d 203 (5th Cir.1973). More importantly, this Court believes that a careful consideration of the factors which must guide the Court's discretion in determining whether to forge ahead in the face of the Canadian action can only lead to a dismissal of this action.
Despite this Court's decision that discretion requires dismissal of this case, the Court is genuinely concerned that the Canadian case be completed as expeditiously as possible. Although the Court does not doubt the good faith of the defendant in *1243 vigorously pressing his defenses in the Canadian action, the Court would like to be sure that a complete resolution of the underlying disputes will be timely reached. Therefore, the Court will order the defendant to file an affidavit with both courts essentially repeating the representations that defendant has made in this action that it will continue to vigorously assert its defenses in the Canadian action. Further, the Court will order the defendant to file a copy of this Memorandum and Order with the appropriate Canadian court where the consolidated Canadian action is currently pending.[10] The tender of this opinion and order to the Canadian court should be reflected in the affidavit which defendant files in this Court. Wherefore, it is hereby this 2nd day of December, 1982,
ORDERED that the defendant shall file within fifteen (15) days from the date of this Order a copy of this Memorandum and Order with the court of the Ontario Supreme Court before which the consolidated case is currently pending, and it is
FURTHER ORDERED that within fifteen (15) days from the date of this Order the defendant shall file appropriate affidavits with this Court and the Canadian court retaining jurisdiction of plaintiff's consolidated claim stating that the defendant will continue to assert its defenses in the Canadian action in a timely manner, and it is
FURTHER ORDERED that upon submission to this Court by the defendant of an affidavit stating that it has complied with the previous two orders the motion of the defendant for dismissal of this case shall be granted with prejudice.
NOTES
[1] Note, The Calculus of Insurer Liability in Asbestos-Related Disease Litigation: Manifestation + Injurious Exposure = Continuous Trigger, 23 B.C.L.Rev. 1141, 1145 (1982).
[2] In this regard the Court simply notes that the asbestos industry is confined to two countries, Canada and the Soviet Union.
[3] Counsel for both sides have addressed the issue of the prospective effect of a declaratory judgment issued by a Canadian court under Canadian law. Although this may relate to the adequacy of the remedies available to plaintiff in a Canadian forum this Court need only respond to this issue by noting that the precise effect of a declaratory judgment in the United States has not been conclusively resolved despite a considerably greater length of exposure to declaratory proceedings by United States courts. See Steffel v. Thompson, 415 U.S. 452, 470, 94 S. Ct. 1209, 1221, 39 L. Ed. 2d 505 (1974), (quoting opinion of Brennan, J., in Perez v. Ledesma, 401 U.S. 82 at 124-26, 91 S. Ct. 674 at 696-97, 27 L. Ed. 2d 701); id. 415 U.S. at 477, 94 S.Ct. at 1224 (White, J., concurring).
[4] In all likelihood, it would not be very long before, under any theory of asbestosis coverage, the ceiling of $1 million liability for indemnification contained in the primary insurance contract will be reached. After the liability coverage of the defendant has been exhausted the remaining duty of the defendant insurance company to defend the insured in the outstanding suits is subject to doubt. Compare Lumberman's Mutual Casualty Co. v. McCarthy, 90 N.H. 320, 8 A.2d 750 (1939) (no duty to defend after policy liability limits exhausted) with Prince v. Universal Underwriters Ins. Co., 143 N.W.2d 708 (ND.1966) (duty to defend survives exhaustion of policy limits). More importantly, to the extent that local law is to serve as a guide in fashioning "general principles," the District of Columbia has already adopted the view that the duty to defend does not survive the exhaustion of insurance policy limits where the policy promises to defend "with respect to such insurance as is afforded by this policy." National Union Ins. Co. v. Phoenix Assur. Co. of N.Y., 301 A.2d 222, 224 (D.C.App.1973).
[5] Joinder of two of the three absent carriers would defeat diversity jurisdiction. Defendant Federal has yet to explain why it has not sought to implead the third insurance company, American Home Insurance Company, a diverse litigant.
[6] But see Keene, 667 at 1051 ("The possibility of additional coverage can be determined consensually among insurers, or it can be adjudicated among insurers in a subsequent lawsuit.")
[7] But see National Union Insurance Company of Washington v. Phoenix Assurance Company of New York, 301 A.2d 222, 224 (D.C.1973) (liability for defense ends when liability limits reached under contract which provides for defense "for such insurance as is afforded by this policy").
[8] The Keene court also sat in diversity but found it unnecessary to choose any particular body of state law. 667 F.2d at 1041 n. 10.
[9] Indeed, this jurisdiction has enforced judgments of the Supreme Court of Ontario in the past. Cherun v. Frishman, 236 F. Supp. 292 (D.D.C.1964) (Tamm, J.).
[10] For the benefit of any Canadian court which may suffer the misfortune of reviewing this lengthy opinion, the Court would like to clarify the procedural posture of the present case. The decision of this Court constitutes a final decision within the meaning of 28 U.S.C. § 1291 (1976). Should plaintiff so desire, there are at least two possible stages of appellate review that plaintiff may seek should plaintiff appeal this Court's decision in a timely manner.
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552 F. Supp. 73 (1982)
April E. RICHARDSON, et al., Plaintiffs,
v.
VOLKSWAGENWERK, A.G., et al., Defendants and Third Party Plaintiffs,
v.
David R. STEPHENSON, Jr., et al., Third Party Defendants.
No. 77-0702-CV-W-1-S-4.
United States District Court, W.D. Missouri, S.D.
April 14, 1982.
*74 *75 Ronald J. Stites, Kansas City, Mo., for plaintiffs.
*76 John M. Kilroy, Shughart, Thomson & Kilroy, Kansas City, Mo., for defendants and third party plaintiffs.
MEMORANDUM OPINION AND ORDER
RUSSELL G. CLARK, Chief Judge.
Presently pending before this Court are the joint and separate motions of defendants Volkswagenwerk Aktiengesellschaft (VWAG) and Volkswagen of America, Inc. (VWOA) for judgment notwithstanding the verdict or, alternatively, for a new trial. Plaintiffs Terry Richardson and Carolyn Vienage, guardian of Terry's former spouse-April Richardson, brought this tort action seeking damages for injuries which Terry and April Richardson suffered during a two-car collision. Plaintiffs also brought a wrongful death action pursuant to Mo. Stat.Ann. § 537.080 (Vernon's 1953) for the fatal injuries suffered by the Richardsons' two-year old son, Colin, during the same accident. The defendant VWAG manufactures Volkswagen automobiles, and the defendant VWOA imports and distributes them. The defendants David Stephenson, Jr. and Linda Berkovich are the occupants of the other vehicle involved in the collision.
The tragic accident giving rise to this lawsuit occurred during the late evening of September 25, 1975 on State Highway 13 in Polk County, Missouri. This two-lane, concrete highway runs north and south. The rain was heavy that evening resulting in a slick highway and poor visibility. The defendants Stephenson and Berkovich's automobile, a Ford Mustang, was southbound at approximately 45-50 m.p.h. when the rear of the vehicle swerved sideways onto the muddy shoulder of the southbound lane. The Mustang then went into an uncontrolled, counterclockwise slide crossing the center line of the highway and entering the northbound lane. The right rear quarter panel of the Mustang collided essentially "head-on" with the left front of the plaintiffs' Volkswagen Type 18 "Thing" which, prior to the accident, had been traveling in the northbound lane at approximately 45-50 m.p.h. The force of the impact threw the Mustang approximately 30 feet east of the northbound lane where it landed on the embankment and erupted in flames. The Richardsons' Volkswagen remained on the highway. Since jurisdiction is based on diversity of citizenship, 28 U.S.C. § 1332, Missouri law is controlling. Erie R.R. v. Tompkins, 304 U.S. 64, 79, 58 S. Ct. 817, 822, 82 L. Ed. 1188 (1938).
Although all of the occupants in both vehicles were injured, the injuries most relevant to the defendants' motions were those sustained by April and Colin Richardson. April Richardson sustained fractures of the ankle, leg, pelvis and nose and suffered a severe head injury resulting in brain damage and paraplegia. She was subsequently adjudicated incompetent by the Probate Court of Greene County, Missouri, and she presently resides in a nursing home. Colin Richardson sustained a fatal blow to his head.
Following the commencement of this suit the plaintiffs' claims against the defendants Stephenson and Berkovich were settled for $100,000. Plaintiffs proceeded against the remaining defendants on a strict liability in tort theory charging that the seats, dash and assist grip installed in the Richardson vehicle were defectively designed, unreasonably dangerous and failed to give the plaintiffs proper protection against the collision described above. See generally, Polk v. Ford Motor Co., 529 F.2d 259 (8th Cir. banc 1976); Keener v. Dayton Electric Mfg. Co., 445 S.W.2d 362 (Mo.1969); Restatement (Second) of Torts § 402A (1965).
The trial commenced on November 16, 1981 and concluded on December 16, 1981 at which time the jury, upon completion of its deliberations, returned verdicts in favor of the plaintiffs and against defendants VWAG and VWOA in the following amounts: $750,000 on April Richardson's claim for personal injuries, $50,000 on Terry and April Richardsons' claim for the wrongful death of Colin Richardson, and $150,000 on Terry Richardson's claim for the loss of April Richardson's services. Pursuant to Rules 50 and 59, the defendants now request this Court to set aside those verdicts. Although the jury also returned a verdict in *77 favor of the defendants and against Terry Richardson on his claim for personal injuries, that finding will not be disturbed or discussed because neither party has challenged the verdict.
VWAG Insufficient Service of Process
Defendant VWAG has contended through the course of this lawsuit that this Court did not acquire personal jurisdiction over it by valid service of process under either Missouri or federal law. This Court agrees. Upon the filing of their complaint, plaintiffs directed service upon VWAG through the Missouri Secretary of State under Mo.Stat.Ann. § 351.633 (Vernon's 1966), which authorizes such service upon a foreign corporation committing a tort in Missouri. See Rule 4(e). Plaintiffs instructed the Secretary to obtain process over "Volkswagenwerk, A.G., Wolfsburg, Germany" by service upon "Volkswagen of America, Inc., Mr. G. Storbeck, 818 Sylvan Avenue, Englewood Cliffs, New Jersey" as VWAG's "Designated Agent for Service." The Secretary's affidavit reveals that a copy of plaintiffs' complaint was forwarded by registered mail, return receipt requested, on October 5, 1977 to VWOA as designated agent to receive service for the foreign corporation VWAG.
The above service of process on VWAG was insufficient under Missouri law. Section 351.633, under which jurisdiction is asserted against VWAG, prescribes the manner of service and notification to a defendant foreign corporation as follows:
2. In the event that any process, notice, or demand is served on the secretary of state, he shall immediately cause a copy thereof to be forwarded by registered mail, return receipt requested, addressed to the secretary of such corporation at its principal office as the same appears in the records of the secretary of state, or if there is no such address on file, then to the corporation at its office as shown in the official registry of the state of its incorporation and such an address shall be provided by the plaintiff or his attorney.
The Missouri courts have uniformly held that a court does not obtain the power to adjudicate absent literal compliance with all statutory provisions governing process. State ex rel. Northwest Ark. Produce v. Gaertner, 573 S.W.2d 391, 396 (Mo.App. 1978); Ponder v. Aamco Automatic Transmission, Inc., 536 S.W.2d 888, 890 (Mo.App. 1976); State ex rel. Craig v. Grimm, 542 S.W.2d 335, 337 (Mo.App.1976). For example, in Sipes v. American Honda Motor Co., Inc., 608 S.W.2d 125 (Mo.App.1980), the plaintiff requested the Secretary of State to forward summons under § 351.633 to "Cheng Shin Rubber Industrial Company Ltd. of Taiwan." Reversing a trial court judgment against the defendant, the Missouri Court of Appeals found jurisdiction over the defendant lacking and stated:
The purported service in this case did not comply with the requirements of Section 351.633-2. Contrary to the requirement that the plaintiff or his attorney provide to the secretary of state the address of the defendant corporation "at its office as shown in the official registry of the state of its incorporation," plaintiffs here gave no home office address for the defendant whatsoever. This failure to comply with the statutory requirement is fatal, even if in fact defendant did receive actual notice of the pendency of this suit....
608 S.W.2d at 127. This Court is bound by Missouri law, and since process was not served on VWAG as clearly mandated by Mo.Stat.Ann. § 351.633(2) (Vernon's 1966) and the applicable Missouri case law, plaintiffs purported service of process under that statute is also fatally defective.
As to federal law supporting service of process, plaintiffs rely on dicta contained in Bollard v. Volkswagenwerke, 313 F. Supp. 126 (W.D.Mo.1970), which states that service for the purpose of a common law tort action in Missouri can be obtained upon a foreign defendant's domestic agent designated pursuant to the National Traffic and Motor Vehicle Safety Act of 1966 (Act), 15 U.S.C. § 1399(e). The foregoing federal statute provides:
*78 It shall be the duty of every manufacturer offering a motor vehicle or item of motor vehicle equipment for importation into the United States to designate in writing an agent upon whom service of all administrative and judicial processes, notices, orders, decisions and requirements may be made for and on behalf of said manufacturer, and to file such designation with the Secretary [of Transportation] .... Service ... may be made upon said manufacturer by service upon such designated agent for service ... and in default of such designation of such agent, service of process, notice, order requirement or decision in any proceeding before the Secretary or in any judicial proceeding for enforcement of this subchapter or any standards prescribed pursuant to this subchapter may be made by posting such process, notice, order, requirement or decision in the Office of the Secretary [of Transportation].
Contrary to plaintiffs' argument, three reasons lead to the conclusion that VWAG's designation of VWOA as an agent under 15 U.S.C. § 1399(e) is limited to service of documents by, of and from the United States Secretary of Transportation. First, the express purpose of the Act is to allow the government to establish and enforce motor vehicle safety standards. 15 U.S.C. §§ 1381, 1392. The Secretary of Transportation can prohibit the importation of substandard vehicles or assess civil penalties for standard violations. 15 U.S.C. §§ 1397, 1398. Subpart (a) of section 1399, Title 15 U.S.C., grants United States district courts jurisdiction to use its injunctive powers to restrain violations of the Act and requires the Secretary of Transportation to "give notice to any person against whom an action for injunctive relief is contemplated and afford him an opportunity to present his views...." Subpart (d) of the same statute gives the district courts nationwide subpoena power, and subpart (e), in establishing a procedure for the Secretary to give the notice required in subpart (a), specifically refers to "service of process, notice, order, requirement or decision in any proceeding before the Secretary or in any judicial proceeding for enforcement of this subchapter...." 15 U.S.C. § 1399 (emphasis supplied). The Act's legislative history and the federal regulations promulgated thereunder coalesce with the plain meaning set forth in 15 U.S.C. § 1399 and convince this Court that the power of the agent appointed under the Act is limited by the scope of the Act itself. 49 C.F.R. § 551.45(c); Hamilton v. VWAG, Nos. 81-01-L, 80-594-D (D.N.H. June 10, 1981), Rubino v. Celeste Motors, Inc., No. 72-CV-350 (N.D.N.Y., Oct. 11, 1974) ("Upon reconsideration and after a careful study of the Safety Act and its legislative history, I am convinced ... that the appointment of an agent under § 1399(e) is solely for the purposes of expediting enforcement of the Safety Act and is not a general agency appointment which, in and of itself, would make the acts of VWOA attributable to VWAG"). See also 1966-2 U.S.Code Cong. & Adm.News, 89th Cong., 2d Sess., p. 2736.
Second, the record reveals that when VWAG filed its statutorily required designation with the administrator of the National Highway Traffic Safety Administration, it expressly limited VWOA's authority to accept service of process to only those documents relevant to the Act. See Fields v. Peyer, 75 Wisc.2d 644, 250 N.W.2d 311 (1977); Sipes v. American Honda Motor Co., Inc., 608 S.W.2d 125, 129 (Mo.App.1980).
Third, holding service upon VWAG valid under § 1399 for purposes of Missouri common law tort actions would violate an international treaty. See United States v. Pink, 315 U.S. 203, 230-34, 62 S. Ct. 552, 565-67, 86 L. Ed. 796 (1942). The United States became bound by the provisions of the multilateral international convention governing "Service Abroad of Judicial and Extrajudicial Documents" (the Hague Convention) on February 10, 1969. (20 U.S.T. 361-67, T.I.A.S. 6638); Shoei Kako Co. v. Superior Court, 33 Cal. App. 3d 808, 109 Cal. Rptr. 402 (1973). See Detenerio v. McGowan, 510 F.2d 92, 95 (5th Cir.1975); American Trust Company v. Smyth, 247 F.2d 149, 153 (9th Cir. 1957) (A convention enjoys the *79 status of a treaty as `the supreme Law of the Land'). In ratifying the Hague Convention on June 21, 1979, however, Germany opted, pursuant to Article 21, to reject the use of registered mail as a method of service of process. Instead, Germany required service of process to be performed through its designated "central authority." Since courts cannot interpret a statute so that it violates an international agreement, this Court cannot construe 15 U.S.C. § 1399(e) so as to allow service of process upon a German citizen by registered mail. Porsche A.G. v. Superior Court, 123 Cal. App. 3d 755, 177 Cal. Rptr. 155 (Cal.Ct.App. 1981).
Finally, this Court's decision that 15 U.S.C. § 1399(e) is not a proper method for service of process in common law actions is supported by the wisdom of other courts which have addressed the same issue. Utsey v. VWAG, No. 80-1620-9 (D.S.C.Sept. 18, 1981); Hamilton v. VWAG, Nos. 81-01-L, 80-594-D (D.N.H.June 10, 1981); Pasquale v. Genovese, 428 A.2d 1126 (Vt.1981); Sipes v. American Honda Motor Co., 608 S.W.2d 125 (Mo.App.1980); Fields v. Peyer, 75 Wis. 2d 644, 250 N.W.2d 311 (1977); VWAG v. McCurdy, 340 So. 2d 544 (Fla.App. 1976); Rubino v. Celeste Motors, Inc., No. 72-CV-350 (N.D.N.Y. Oct. 11, 1974).
The question remains whether VWOA is merely the alter-ego of VWAG so that service upon VWOA is effective as to VWAG. Plaintiffs have the burden of proving proper service of process once it is contested. As such, plaintiffs must establish the agency of the person or entity receiving process. Amen v. City of Dearborn, 532 F.2d 554, 557 (6th Cir.1976). The parent-subsidiary relation alone ordinarily does not establish the necessary agency for making service on one through the other. Jones v. VWOA, 82 F.R.D. 334, 335 (E.D. Tenn.1978); 4 Wright & Miller, Federal Practice and Procedure § 1104 (1969). The parties seeking to prove proper service must at least show that the parent exercises such a degree of control over the subsidiary that the activities of the subsidiary are the activities of the parent or show that the subsidiary's activities are controlled by the parent to the extent that the subsidiary is only a department of the parent. Professional Investors Life Insurance Company, Inc. v. Roussel, 445 F. Supp. 687, 698 (D.Kan.1978); Stoehr v. American Honda Motor Co., Inc., 429 F. Supp. 763, 765 (D.Neb.1977).
Defendant VWAG has submitted the affidavit of Robert Cameron showing that VWAG did not exercise such a degree of control over VWOA to make VWOA a department of VWAG or to make the activities of VWOA the activities of VWAG. Plaintiffs, on the other hand, have not submitted evidence showing facts to the contrary, either at trial or by affidavit, and therefore have not met their burden. Grantham v. Challenge-Cook Bros., Inc., 420 F.2d 1182, 1186 (7th Cir.1969). In fact, this Court's sister districts have reviewed this precise issue and found that VWOA is not VWAG's de facto agent for common law service of process. Utsey v. VWAG, No. 80-1620-9 (D.S.C. Sept. 18, 1981); Hamilton v. VWAG, No. 81-01-L, 80-594-D (D.N.H. June 10, 1981). Accordingly, the judgments rendered in this case against the defendant VWAG must be set aside because of this Court's lack of personal jurisdiction over VWAG.
The Second Collision Doctrine
Plaintiffs predicate their theory of recovery on the principle of strict liability in tort for the defective condition of the Volkswagen's seat, dash and assist grip as applied in the so called "second collision" or "crashworthiness" doctrine. See generally Annot. 9 A.L.R. 4th 494 (1981). In Cryts v. Ford Motor Co., 571 S.W.2d 683 (Mo.App. 1978), Missouri adopted the second collision doctrine which extends a manufacturer's scope of liability under the Restatement (Second) of Torts § 402A (1965) to situations where the design of its products has caused separate or enhanced injuries in the course of an initial accident brought about by an independent cause. The second collision doctrine differs from the typical strict liability case in that the defect would not have produced any injury in the absence of *80 a co-defendant's independent act which sets the injury producing cycle into motion. The source of the original independent act is irrelevant so long as the plaintiff's particular use of the product is reasonably foreseeable. Polk v. Ford Motor Co., 529 F.2d 259, 266 (8th Cir.banc 1976); Cryts v. Ford Motor Co., 571 S.W.2d 683, 687 (Mo.App. 1978). In this case, the second collision was the plaintiff's body striking the Volkswagen's alleged defective dash and assist grip following the first "head-on" collision between the Volkswagen and the Ford Mustang. See generally, Polk v. Ford Motor Co., 529 F.2d 259 (8th Cir.banc 1976); Larsen v. General Motors Corp., 391 F.2d 495 (8th Cir.1968).
To recover under the second collision doctrine, the plaintiff has the burden of proving that the product was defective in condition or design when it left the manufacturer. To establish that the product was defective, plaintiff must show that he was injured while using the product in its intended manner. Further, the plaintiff must prove that the product was unreasonably dangerous; i.e., the product must be dangerous to an extent beyond that which would be contemplated by the user with ordinary knowledge common to the community. Keener v. Dayton Electric Mfg. Co., 445 S.W.2d 362, 364 (Mo.1969); Cryts v. Ford Motor Co., 571 S.W.2d 683, 688 (Mo. App.1978).
The courts have uniformly held in second collision cases that the plaintiff also bears the burden of proving causation that the manufacturer's defective product enhanced the injuries sustained in the accident. However, the jurisdictions have split concerning the method of meeting this burden. One group of decisions, the most notable of which is Huddell v. Levin, 537 F.2d 726, 737-738 (3rd Cir.1976), requires a plaintiff to prove with specificity those injuries which were caused by the specific defects to make a submissible case. See Caiazzo v. Volkswagenwerk, A.G., 647 F.2d 241, 250-251 (2d Cir.1981); Stonehocker v. General Motors Corp., 587 F.2d 151, 158 (4th Cir. 1978) ("the burden is on the plaintiff either to establish that he would have suffered no injury or the extent of the injury he would have suffered, had the vehicle been properly designed"); Jeng v. Witters, 452 F. Supp. 1349, 1361 (M.D.Pa.1978), affirmed without opinion, 591 F.2d 1335 (3rd Cir.1979); Yetter v. Rajeski, 364 F. Supp. 105, 109 (D.N.J. 1973). This method ultimately requires a jury to find that the manufacturer's defective product was the sole cause of the plaintiff's additional injuries.
Other jurisdictions have followed orthodox tort principles set forth in Restatement (Second) of Torts §§ 433, 433A & 433B (1965) and hold that a plaintiff need not prove the nature and extent of the enhanced injuries but makes a submissible case by offering enough evidence of enhancement to present a jury issue. Defendants are deemed concurrent tortfeasors because their independent acts combine to cause a single injury. Under this theory, plaintiff has the burden of presenting sufficient evidence to prove to the jury that each defendant's act (the original tortfeasor's negligence and the manufacturer's defective product) was a substantial factor in producing the plaintiff's injuries. Should the plaintiff's injuries be indivisible, the defendants are held jointly and severably liable as concurrent tortfeasors for plaintiff's total damage. If reasonable minds could differ on whether the plaintiff's injuries are divisible, the trier of fact determines whether the injury can be reasonably apportioned among the defendants and the extent of each defendant's liability. Mitchell v. Volkswagenwerk, A.G., 669 F.2d 1199 (8th Cir.1982); Fietzer v. Ford Motor Co., 590 F.2d 215, 218 (7th Cir.1978); Fox v. Ford Motor Co., 575 F.2d 774, 787-788 (10th Cir.1978); Lahocki v. Contee Sand & Gravel Co., Inc., 41 Md.App. 579, 398 A.2d 490, 501 (1979).
Although numerous issues command attention, the central question in this case is which of the above methods of proof would the Missouri Supreme Court impose on a plaintiff to establish an automobile manufacturer's liability in the context of second collision litigation. Polk v. Ford Motor Co., *81 529 F.2d 259, 264 (8th Cir.banc 1976). Reduced to simplicity, the issue is whether a plaintiff must prove that the manufacturer's defective product was the sole factor or a substantial factor in producing the plaintiff's enhanced injuries. Defendant VWOA asserts that Missouri would adopt the Huddell burden of proof theory and urges this Court to grant judgment notwithstanding the verdict or a new trial because the plaintiffs did not prove what specific injuries were caused by the alleged design defects (i.e. that the defects were the sole factor causing the plaintiffs' additional injuries). Plaintiffs, on the other hand, contend that they met their burden by presenting evidence sufficient for the jury to find that the defective product was a substantial factor in producing the plaintiffs' enhanced injuries. Having extensively reviewed the Missouri law and the parties' briefs, this Court concludes that several Missouri Supreme Court decisions mandate that a strict liability defendant in a second collision case is to be held jointly and severally liable as a concurrent tortfeasor whenever the jury finds that the defendant's defective product was a substantial factor in producing an indivisible injury to the plaintiff.
The inquiry must begin with two controlling decisions wherein the Missouri Supreme Court conclusively determined the proper law to be applied in this case. In Glick v. Ballentine Produce Inc., 396 S.W.2d 609 (Mo.1965), plaintiffs brought wrongful death actions against the first defendant, whose truck negligently struck the decedent's vehicle causing the decedent to be thrown to the pavement of the highway, and the second defendant, whose vehicle ran over the decedent while he was on the roadway. The second defendant moved to dismiss arguing that it could not be held liable because the plaintiff did not allege that the decedent was alive when the second defendant ran over him. Finding that the plaintiff's petition stated a joint cause of action against both defendants, the Missouri Supreme Court reaffirmed traditional concurrent tortfeasor liability rules deeply engrained in prior Missouri law and embodied in Restatement (Second) of Torts §§ 433, 433A and 433B (1965):
The law recognizes that where "`the concurrent or successive negligence of two persons, combined together, results in an injury to a third person, he may recover damages of either or both and neither can interpose the defense that the prior or concurrent negligence of the other contributed to the injury.' 1 Thompson on Negligence, § 75." Berryman v. People's Motorbus Co. of St. Louis, 228 Mo.App. 1032, 54 S.W.2d 747, loc. cit. 749. See also: Willey v. Fyrogas Co., 363 Mo. 406, 251 S.W.2d 635; Layton v. Palmer, Mo., 309 S.W.2d 561, 66 A.L.R. 2d 1242; Domitz v. Springfield Bottlers, 359 Mo. 412, 221 S.W.2d 831; Brantley v. Couch, Mo.App., 383 S.W.2d 307. As stated in the last case at loc. cit. 310: "`... According to the great weight of authority, where the concurrent or successive negligent acts or omissions of two or more persons, although acting independently of each other, are, in combination, the direct and proximate cause of a single injury to a third person, and it is impossible to determine in what proportion each contributed to the injury, either is responsible for the whole injury, even though his act alone might not have caused the entire injury, or the same damage might have resulted from the act of the other tortfeasor, and the injured person may at his option or election institute suit for the resulting damages against any one or more of such tort-feasors separately, or against any number or all of them jointly. The injured person is not compelled to elect between the tort-feasors in invoking a remedy to obtain compensation....'" In Willey, supra, it is pointed out that liability is not defeated by the fact that the negligence of one defendant may precede or follow that of another in point of time. The facts of Berryman, supra, are particularly analogous here. See, also, generally, Thompson v. Louisville & N.R. Co., 91 Ala. 496, 8 So. 406; Micelli v. Hirsch, Ohio App., 83 N.E.2d 240.
396 S.W.2d at 612-613. Accord: Byars v. St. Louis Public Service Co., 334 Mo. 278, 66 *82 S.W.2d 894 (1933); Carr v. St. Louis Auto Supply, 293 Mo. 562, 239 S.W. 827 (1922); Scheurer v. Banner Rubber Co., 227 Mo. 347, 126 S.W. 1037 (1910).
Barlow v. Thornhill, 537 S.W.2d 412 (Mo. banc 1976) is equally dispositive of the issue at hand. There, plaintiff sought damages for singular injuries sustained when two different vehicles rear-ended the plaintiff's car within a period of approximately ten minutes. Plaintiff was unable to determine which accident caused his injuries although several experts testified that both accidents contributed to the injury. At trial, the plaintiff described the first collision as a "light impact" and the second collision as "more severe." 537 S.W.2d at 415. Following a jury verdict against both defendants, the trial court granted judgment notwithstanding the verdict as to the first defendant because the evidence failed to prove that the first defendant's conduct "directly caused or directly contributed to cause injury or damage to plaintiff...." 537 S.W.2d at 416. Reversing the trial court and reinstating the plaintiff's verdict, the Missouri Supreme Court, En Banc, held that the indivisible injury rule enunciated in Glick v. Ballentine Produce Inc., 396 S.W.2d 609 (Mo.1965), operated to render both defendants jointly and severally liable for "all of the injuries sustained in the combined events" and stated:
[W]hen two or more independently acting persons are consecutively negligent in a closely related period of time and cause injury which the fact trier determines cannot be reasonably apportioned among them, the tortfeasors are jointly and severally liable for all the damages directly and proximately resulting from such negligence.
537 S.W.2d at 415-416, 419-420, 423-424. Accord, Daniels v. Smith, 471 S.W.2d 508, 512 (Mo.App.1971); Daniels v. Dillinger, 445 S.W.2d 410, 413 (Mo.App.1969).
The facts of Glick and Barlow are not substantially different from those in the case sub judice. Defendant VWOA's defective product is deemed an independent act which operated concurrently and in a closely related period of time with the defendants Stephenson and Berkovich's negligent act to cause broken bones, brain damage and paraplegia to plaintiff April Richardson. See Carr v. St. Louis Auto Supply, 293 Mo. 562, 239 S.W. 827 (1922) (concurrent tortfeasor defined). As such, Missouri law requires the jury to find only that defendant VWOA's conduct directly caused or contributed to cause the plaintiff's injuries, and the well-established Missouri test of direct or proximate cause is whether the defendant's conduct was a substantial factor in producing the plaintiff's injuries. MAI 19.01, 25.04 (3d ed. 1981); Giles v. Moundridge Milling Co., 351 Mo. 568, 173 S.W.2d 745, 750 (1943) (When two forces independently operate to bring about harm to another, each defendant's wrongful conduct may be a substantial factor in bringing it about, and when the question is open to a reasonable difference of opinion, it is for the jury); Cryts v. Ford Motor Co., 571 S.W.2d 683, 689 n. 3 (Mo.App.1978). Contrary to the reasoning espoused in Huddell, the Missouri courts have expressly refused to require an injured plaintiff to prove, or a jury to find, that a concurrent tortfeasor's conduct was the sole cause of the plaintiff's injuries, indivisible or otherwise. Caldwell v. St. Louis Public Service Co., 275 S.W.2d 288, 293 (Mo.1955); Deskin v. Brewer, 590 S.W.2d 392, 399-400 (Mo.App. banc 1979) (Defendant is liable if his conduct is a contributing cause, rather than the sole cause, of the plaintiff's injury). Following the Huddell theory and requiring plaintiffs to prove that defendant VWOA's defective product was the sole cause of their additional injuries would also allow the defendants to escape liability by arguing that the injury would not have happened absent the co-defendant's wrongful act; such an argument has been explicitly disapproved by Missouri law. Neal v. Curtis & Co. Mfg. Co., 328 Mo. 389, 41 S.W.2d 543, 556-557 (1931); Bradley v. Becker, 321 Mo. 405, 11 S.W.2d 8, 11 (1928).
Several other considerations convince this Court that under Missouri law plaintiff April Richardson met her causation burden in this second collision case with evidence *83 sufficient for a jury to find that the defendant's defective product directly caused, or was a substantial factor in producing, the plaintiff's total injuries. First, the Missouri Court of Appeals implicitly accepted this theory through the jury instructions given in the second collision decision, Cryts v. Ford Motor Co., 571 S.W.2d 683 (Mo.App. 1978). There, the jury was properly instructed to find for the plaintiff if they believed that the defendant's defective product "directly caused or contributed to cause damage to plaintiff...." 571 S.W.2d at 689, n. 3. Not only is this phrase taken from the Missouri Approved Instruction for joint tortfeasors, but also the phrase "directly caused" is legally equivalent to the term "proximate cause" which the Missouri Supreme Court has defined as a substantial factor which brings about the injuries. Morrow v. Greyhound Lines, Inc., 541 F.2d 713, 718 (8th Cir.1976) (applying Missouri law); Ricketts v. Kansas City Stockyards Co., 484 S.W.2d 216, 221-222 (Mo. banc 1972); Giles v. Moundridge Milling Company, 351 Mo. 568, 173 S.W.2d 745, 750 (1943); Coates v. Dewoskin, 379 S.W.2d 146, 148 (Mo.App.1964); see MAI 19.01 (3d ed.1981). Also in Cryts, the court cited a Seventh Circuit decision, Nanda v. Ford Motor Co., 509 F.2d 213 (7th Cir.1974), for the following second collision causation rule:
If there is evidence from which a jury could find that an unreasonably dangerous condition existed and that the defect caused the injury, the evidence is sufficient to support a jury verdict against the manufacturer.
571 S.W.2d at 688. Missouri's reliance on this case gains persuasive significance from the fact that in a subsequent decision, Fietzer v. Ford Motor Co., 590 F.2d 215 (7th Cir.1978), the Seventh Circuit, applying Wisconsin law, held that the test of causation in a second collision case is whether the manufacturer's conduct was a substantial factor in producing the result and stated that "[i]t need not be the sole factor, the primary factor, only `a substantial factor.'" 590 F.2d at 218. Finally, it is the law of Missouri that a defendant, whose wrongful conduct has rendered difficult the ascertainment of the precise damages suffered by the plaintiff, is not entitled to complain that they cannot be measured with the same exactness and precision as would otherwise be possible. City of Kennett v. Katz Constr. Co., 273 Mo. 279, 202 S.W. 558 (1918); Haggard v. Mid-States Metal Lines, Inc., 591 S.W.2d 71, 77 (Mo. App.1979).
Based on the dispositive Missouri decisions discussed above, this Court concludes that a plaintiff's burden of proof in a second collision-strict liability case should be deemed satisfied against the manufacturer if it is shown that the defective product was a substantial factor, rather than the sole factor, in producing damages over and above those which were probably caused as a result of the original collision. Furthermore, the extent of the manufacturer's liability depends upon whether or not the injuries involved are divisible such that the injuries can be clearly separated and attributed either to the manufacturer or the original tortfeasor. If the manufacturer's conduct is found to be a substantial factor in causing an indivisible injury such as paraplegia, quadraplegia, death, etc., then absent a reasonable basis to determine which wrongdoer actually caused the harm, the defendants are jointly and severally liable for plaintiff's total injuries. Mitchell v. Volkswagenwerk, A.G., 669 F.2d 1199 (8th Cir.1982); Barlow v. Thornhill, 537 S.W.2d 412 (Mo. banc 1976); Glick v. Ballentine Produce Inc., 396 S.W.2d 609 (Mo.1965).
Also, "whether or not the harm to the plaintiff is capable of apportionment among two or more causes is a question of law." Mitchell v. Volkswagenwerk, A.G., 669 F.2d 1199, pp. 1208-1209 (8th Cir.1982). See Mathews v. Mills, 288 Minn. 16, 178 N.W.2d 841, 845 (1970). If the trial court determines that reasonable minds would not differ on the question of apportionment, the court may decide the issue and instruct the jury accordingly. Restatement (Second) of Torts § 434 (1965). Should the court believe that reasonable minds could differ, the question of apportionment of the *84 harm, as well as liability and damages, is to be determined by the trier of fact. Barlow v. Thornhill, 537 S.W.2d 412, 419 (Mo. banc 1976); Restatement (Second) of Torts, § 434 (1965). In the case sub judice, this Court is convinced that April Richardson's brain damage, broken bones and paraplegia were incapable of apportionment as all of these injuries are indivisible as a matter of law. Mitchell v. Volkswagenwerk, 669 F.2d 1199, pp. 1203, 1205, 1206 and 1209 (8th Cir.1982) ("If the manufacturer's negligence is found to be a substantial factor in causing an indivisible injury such as paraplegia, death, etc. then absent a reasonable basis to determine which wrongdoer actually caused the harm, the defendants should be treated as joint and several tortfeasors.").
Plaintiffs tried their entire case on the wrong theory, i.e., that the injuries were divisible. Evidently assuming that the Missouri courts would follow Huddell and require a plaintiff to prove that the defendant's defective products were the sole factor in producing the plaintiff's enhanced injuries, plaintiffs proceeded at trial on the theory that the defendants were only liable for those additional injuries caused by the defective products when, in fact, the injuries were not divisible as a matter of law. The jurors were misinformed during plaintiffs' opening statement, closing argument and in the instructions that "[t]he burden was upon the plaintiffs to prove by a preponderance of the evidence what portion of any injury was caused by the alleged design defect which injury would not have occurred from the collision absent any such defect" and the verdict directors were worded accordingly. (Emphasis supplied); see Instructions No. 4, 8, 9, 12 and 13. Taken as a whole, these instructions directed the jury to allow recovery for those specific injuries which would not have been sustained but for the defective product and, as such, they are sole cause instructions. Under Missouri law, plaintiff's burden was to prove, and the jury's duty was to find, that VWOA's defective product was a substantial factor, rather than the sole factor, in producing the plaintiff's indivisible injuries. The jury's verdict proves that the jury did, in fact, find that the vehicle was defective and that the defect caused some of the injuries. Even though the plaintiffs could have recovered their total damages from defendant VWOA had they argued and instructed on the correct law, plaintiffs have not appealed from the judgments entered in this case nor have they moved for a new trial. The plaintiffs, through their instructions, imposed on themselves a greater burden of proof than was necessary, and under Missouri law, the defendant is in no position to complain. Joly v. Wippler, 449 S.W.2d 565, 569 (Mo.1970); Stewart v. Small, 5 Mo. 525 (Mo.1839); Martin v. Oliver, 603 S.W.2d 674, 675 (Mo.App.1980); Steele v. St. Louis Mutual Life Ins. Co., 3 Mo.App. 207 (1876) (The giving of an instruction which only serves to cast an additional burden on the respondent is harmless error of which the appellant cannot complain.) Turning to the defendant's 124 alleged points of error, the Court will address only those which are not clearly without merit.
Sufficiency of Evidence
At the outset, defendant VWOA urges this Court to set aside the three jury verdicts in plaintiffs' favor because the plaintiffs did not make a submissible case as to causation. The standards for ruling a motion for judgment notwithstanding the verdict are well defined. In Cleverly v. Western Electric Company, 594 F.2d 638, 641 (8th Cir.1979), the Eighth Circuit held that, for purposes of such a motion, all evidence must be construed in the light most favorable to the nonmoving party; all conflicts in evidence must be resolved in a manner favoring the verdict; all facts which the opposing party's evidence tends to prove must be assumed; and the opposing party must be given the benefit of all reasonable inferences. In the final analysis, the motion may be granted only if reasonable minds could not differ as to the conclusion to be drawn. After careful evaluation in accordance with the Missouri indivisible injury rule outlined above, this Court believes the evidence presented by plaintiffs *85 sufficient for the jury to find that the defendant's defective products were a substantial factor in producing April Richardson's injuries. Plaintiffs, however, did not present evidence sufficient to establish that defendant VWOA's wrongful acts were a substantial factor in causing fatal injuries to Colin Richardson, and accordingly, the jury's wrongful death verdict against that defendant must be set aside.
Applying the Cleverly test, the Court finds the evidence sufficient to submit both April Richardson's claim for injuries and Terry Richardson's claim for loss of services to the jury. Experts testified regarding particular defects in the Volkswagen vehicle, the deformation and energy absorbing capabilities of the particular defects, the defects' role in producing additional injuries to April Richardson in the collision, the degree to which those defects increased the deceleration and the mechanical forces transmitted to the plaintiff's body, the movement of the plaintiff's body during the collision, the degree to which feasible alternative designs would have reduced those forces, and the medical consistency between April Richardson's injuries and her impacting the defective dash and assist grip. The evidence was also sufficient for the jury to find that April Richardson was physically incapable of performing any task normally associated with married life prior to the Richardson's dissolution of marriage which occurred some two years following the accident. Based on this evidence, the defendant's motions for judgment notwithstanding the verdict as to April Richardson's claim for personal injuries and Terry Richardson's claim for loss of April Richardson's services must be denied.
Under the Missouri Wrongful Death Statute, however, plaintiffs failed to meet their burden of showing the causal connection between the defendant's defective products and the death of Colin Richardson. Hawkins v. Whittenberg, 587 S.W.2d 358, 361 (Mo.App.1979); Shelton v. Bruner, 449 S.W.2d 673, 679-680 (Mo.App. 1969); see MAI 20.01 (3d ed. 1981). The test as to causal connection is whether the facts show that absent the alleged wrongful act the fatal injury would not have been sustained, and if the evidence leaves the element of causal connection "in the nebulous twilight of speculation, conjecture and surmise," plaintiffs have not met their burden. James v. Sunshine Biscuits, Inc., 402 S.W.2d 364, 375 (Mo.1966); Shelton v. Bruner, 449 S.W.2d at 680. Causation may be proved by circumstantial evidence, and it is sufficient if the facts proved are of such a nature and are so connected and related to each other that the existence of a causal connection may be reasonably inferred. George v. Howard Construction Co., 604 S.W.2d 685, 692 (Mo.App.1980). However, if the facts of the case are such that no lay person would be expected to know the cause of death or if the reasonable inference derived from the facts is that the fatal injuries were caused by something other than the defendant's alleged wrongful acts, "an expert is necessary and he must be reasonably certain or no substantial evidence is offered on the issue of causation." James v. Sunshine Biscuits, Inc., 402 S.W.2d at 371-372 (Mo.1966).
In the case at bar, the only reasonable inference which the jury could draw from the facts was that Colin Richardson's death was caused by the negligence of the defendants Stephenson and Berkovich since their acts caused a 50 m.p.h. "head-on" collision. See, Dreisonstok v. Volkswagenwerk, A.G., 489 F.2d 1066, 1076 (4th Cir.1974) (Any "head-on" collision at a speed of 40 m.p.h. or more will result in severe injuries to the occupants of a vehicle as the mean velocity for fatalities is only 33 m.p.h.); U.S. Dept. of Transportation, Passive Protection at 50 Miles Per Hour (1972). In this situation, it was incumbent on the plaintiffs to provide some form of evidence that defendant VWOA's defective products were a substantial factor in producing the fatal injuries in order for plaintiffs to make a submissible wrongful death case on the vital issue of causation. Fox v. Ford Motor Co., 575 F.2d 774, 787-788 (10th Cir.1978) (In wrongful death action premised on second collision doctrine, the jury must find that the manufacturer's *86 defect proximately caused the death in order for plaintiff to recover). In this regard, the plaintiffs failed. At trial, plaintiffs' expert, Dr. James H. McElhaney, testified, on direct examination by the plaintiffs, that he could not say whether the defendant's design defects "would make the difference between whether [Colin] lived or didn't live." (Tr. 2169). The record contains no evidence whatsoever from which the jury could find that the defective products, rather than the violent collision, were a substantial factor in producing the death. Since the plaintiffs did not meet their burden of proof under Missouri law concerning defendant VWOA's liability for the wrongful death of Colin Richardson, this Court must grant the defendant's motion for judgment notwithstanding the verdict as to that claim.
Defendant VWOA has also moved, in the alternative, for a new trial as to the three jury verdicts in accordance with Rule 50(c). A motion for new trial is addressed directly to the discretion of the trial court. In considering such a motion the Court is not limited to viewing the evidence in the light most favorable to the prevailing party but may weigh evidence, disbelieve witnesses, and may grant a new trial even when substantial evidence exists to sustain the verdict. Slatton v. Martin K. Eby Construction Co., Inc., 506 F.2d 505, 508 (8th Cir.1974). Having considered carefully all the facts in evidence presented in this case, including testimony that Colin Richardson was not belted and was sitting in April Richardson's lap in the right front passenger seat when the Ford Mustang crossed the center line and struck the Richardson's vehicle "head-on" at approximately 45-50 m.p.h., the Court finds the verdict rendered by the jury on plaintiffs' wrongful death claim to be against the weight of credible causation evidence presented. Furthermore, plaintiffs' verdict directing instruction number ten contained error prejudicial to the defendant by directing the jury to find that the defendant's defective products caused injuries which "resulted in the death of Colin Richardson" when, as stated above, there was no evidence presented to support a jury finding that the defendant's defective products were a substantial factor in producing the death. Gathright v. Pendegraft, 433 S.W.2d 299, 313 (Mo.1968) (An instruction should not be given unless based on substantial evidence). Accordingly, a new trial will be granted in the alternative as to the plaintiffs' claim for the wrongful death of Colin Richardson. Defendants' alternative motion for a new trial as to April Richardson's claim for personal injuries will be denied because the jury verdict is supported by the substantial and credible evidence described above.
Excessiveness
Defendant next argues that a new trial should be granted because the jury verdicts of $750,000 on April Richardson's claim for personal injuries and $150,000 on Terry Richardson's claim for the loss of services of his prior wife, April, are grossly excessive. In a diversity action, "the standard of review with respect to a motion for a new trial on the basis of excessive damages is determined by federal law." Nodak Oil Company v. Mobil Oil Corp., 533 F.2d 401, 410 (8th Cir.1976). Under federal law, "[i]f the verdict is to be overturned because of its size, it must be so large as to shock the judicial conscience." Flanigan v. Burlington Northern Inc., 632 F.2d 880, 884 (8th Cir.1980). And the decision whether a verdict is so excessive that a new trial, rather than a remittitur, should be granted is within the discretion of the trial court. DeWitt v. Brown, No. 80-1950 (8th Cir. Aug. 14, 1981); see 11 Wright & Miller, Federal Practice and Procedure: Civil, § 2818 (1973).
While the federal standard of review is applicable, under federal law this Court must also "look to the forum state's case law for guidance on the question of excessiveness." DeWitt v. Brown, No. 80-1950 (8th Cir. Aug. 14, 1981). The result that would be reached under the law of Missouri is one factor to be considered by this Court in determining whether the jury verdict is excessive. Nodak Oil Company v. Mobil Oil Corp., 533 F.2d at 411; Novak v. Gramm, *87 469 F.2d 430, 434-435 (8th Cir.1972). In Worley v. Tucker Nevils, Inc., 503 S.W.2d 417 (Mo. banc 1973), the Missouri Supreme Court set forth a two-prong test governing excessive verdicts:
There are two types of attacks that are made upon verdicts alleged to be excessive. One is that the verdict is so grossly excessive as to indicate bias and prejudice on the part of the jury. If such a contention is found to be meritorious the verdict cannot stand in any amount and a new trial must be ordered. The other type of attack is that the verdict is merely excessive. `A verdict which is excessive is one in which the jury made an honest mistake in weighing the evidence as to the nature and extent of the injury and in fixing the damages and awarded a sum disproportionate to the amounts usually awarded for comparable injuries under the rule of uniformity.'
503 S.W.2d at 423 (citations omitted).
The jury's verdict for $750,000 on April Richardson's action for injuries is not excessive. The evidence at trial was that April Richardson, approximately 28 years of age at the time of the accident, sustained fractures of the ankle, leg, pelvis and nose and suffered a severe head injury resulting in brain damage. Permanent partial paralysis of the left upper and lower extremities and spasticity remain. She has been adjudicated incompetent by the Probate Court of Greene County, Missouri, and she presently resides in a nursing home. As previously set forth, the case was submitted for damages for enhanced injuries only. Plaintiffs' expert, Dr. James H. McElhaney, testified that in his opinion the defects in the automobile increased or enhanced April Richardson's injuries 45-50 percent. Experts testified during the trial that her total economic loss was $1,046,167 (past medical expenses $66,676; future medical expensesnet present value $342,633; and future lost income-net present value $636,856). Assuming that the jury found that April Richardson's injuries were enhanced by 45-50 percent, their verdict would be surprisingly uniform with the amount approved in Morrow v. Greyhound Lines, Inc., 541 F.2d 713, 722 (8th Cir.1976) (applying Missouri law). In Morrow the court extensively reviewed cases from Missouri and other jurisdictions and held that a damage award of $1,813,000 for an individual who sustained severe brain damage, partial paralysis of the left side, spasticity, balance and speech problems, and who had a normal additional life expectancy of 56 years, was not excessive. Applying the Missouri rule of uniformity, and comparing the verdict in this case with that approved in Morrow the Court concludes that the damage award of $750,000 plus any portion of the $100,000 proceeds from the settlement with defendants Stephenson and Berkovich for April Richardson's extensive injuries is not excessive.
Under either the federal law or the law of Missouri, the evidence, viewed in the light most favorable to plaintiff Terry Richardson, is insufficient to support a loss of services jury verdict in the amount of $150,000. There was evidence at trial that April, due to the severity of her injuries, was physically incapable of performing any task normally associated with married life. There was also evidence, however, that during this period Terry Richardson was seeing another woman and would leave his incapacitated wife unattended on weekends. It is not disputed that April Richardson divorced Terry approximately two years following the accident, and Terry Richardson remarried approximately thirty days after the divorce became final.
Under Missouri law, a spouse's consortium action is for the loss of the injured spouse's support, companionship, society and felicity, all welded into a conceptualistic unity. Helming v. Dulle, 441 S.W.2d 350, 354 (Mo.1969). It is axiomatic, however, that the amount and extent of consortium damages are limited by the term of the marriage, and where the husband and wife have dissolved a marriage prior to trial, no damages can accrue following the date of dissolution; future consortium damages are simply not recoverable following a divorce. Hodges v. Johnson, 417 S.W.2d 685, 693 (Mo.App.1967) (There must *88 be some reasonable relationship between the size of the consortium verdict awarded and the extent of the spouse's injuries so that each will be congruent with particular facts and circumstances involved.) Prior to the jury's deliberation, the Court gave the following instruction on consortium damages:
If you find in favor of plaintiff Terry Richardson on his claim for injury to his wife April Richardson, then you must award plaintiff Terry Richardson such sum as you believe will fairly and justly compensate plaintiff for any damages you believe plaintiff sustained as a direct result of the enhanced injury to April Richardson.
Instruction No. 13 (emphasis supplied). This instruction did not limit the amount of damages suffered by Terry Richardson to the termination of the marriage following the accident. While this Court is of the opinion that the verdict in the amount of $150,000 is so excessive that it cannot be cured by remittitur, the Court is of the further opinion that it was not the result of bias and prejudice on the part of the jury. During this five-week trial, the Court closely observed the jury and each member was extremely attentive, diligent and dedicated. Being less than half the amount awarded in Morrow for almost identical injuries, the Court finds that the verdict returned in favor of April Richardson was reasonable and had the plaintiffs made a submissible case on their wrongful death claim for the death of Colin Richardson, the Court believes that the $50,000 verdict returned by the jury would have been reasonable. The verdicts returned for April Richardson and on the wrongful death claim of Colin Richardson lend further support for this Court to find that the verdict returned in favor of Terry Richardson for the loss of consortium of his wife April was not the result of bias and prejudice but was the result of a mistake, the mistake being the jury's failure to limit Terry Richardson's damages to the termination of the marriage. The Court is convinced that had the jury been properly instructed, their verdict on the claim for loss of consortium would have been substantially less than $150,000. For the reasons stated above, the defendant's motion for a new trial on Terry Richardson's claim for the loss of April Richardson's services will be granted on the issue of damages only.
Defendants Stephenson and Berkovich's Motion to Dismiss
Finally, defendants Stephenson and Berkovich have moved to dismiss defendant VWOA's third party complaint for contribution arguing that they are not liable for the additional injuries which plaintiffs prove were solely caused by defendant VWOA's defective products. As previously stated, there is no question that April Richardson's brain damage, paraplegia and broken bones are indivisible injuries as a matter of law. Mitchell v. Volkswagenwerk, A.G., 669 F.2d 1199, pp. 1203, 1205, 1206 and 1209 (8th Cir.1982). As such, defendants Stephenson and Berkovich's motion must be denied because, under Missouri law, all the defendants are jointly liable for the plaintiffs' total injuries, and since joint liability exists between the defendants, defendant VWOA has a right to relative fault contribution. Missouri Pacific Railroad Co. v. Whitehead & Kales Co., 566 S.W.2d 466 (Mo. banc 1978).
For the reasons stated in this memorandum opinion, it is hereby
ORDERED that the defendant VWAG's separate motions to dismiss and for judgment notwithstanding the verdicts for lack of personal jurisdiction are granted; and it is further
ORDERED that the defendant VWOA's motions for judgment notwithstanding the verdict and, in the alternative, for a new trial as to April Richardson's claim for personal injuries are denied; and it is further
ORDERED that the defendant VWOA's motion for judgment notwithstanding the verdict as to Terry and April Richardson's claim for the wrongful death of Colin Richardson is granted; and it is further
ORDERED that the defendant VWOA's alternative motion for a new trial as to *89 Terry and April Richardsons' claim for the wrongful death of Colin Richardson is granted; and it is further
ORDERED that the defendant VWOA's motion for judgment notwithstanding the verdict as to Terry Richardson's claim for the loss of April Richardson's services is denied; and it is further
ORDERED that the defendant VWOA's alternative motion for a new trial as to Terry Richardson's claim for the loss of April Richardson's services is granted on the issue of damages; and it is further
ORDERED that the defendants Stephenson and Berkovich's motion to dismiss defendant VWOA's third party complaint is denied.
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552 F. Supp. 711 (1982)
Dora Marie LILLARD and Nancy McKinnon, Plaintiffs,
v.
DELAWARE STATE HOSPITAL FOR the CHRONICALLY ILL, et al., Defendants.
Vernon L. GRICE, Plaintiff,
v.
SUSSEX COUNTY VOCATIONAL TECHNICAL SCHOOL DISTRICT, et al., Defendants.
Madelyn KOPEC, Plaintiff,
v.
STATE DEPARTMENT OF FINANCE; The State of Delaware; Colonial School District, Defendants.
Carol A. REED, Plaintiff,
v.
The STATE of Delaware, et al., Defendants.
Civ. A. Nos. 81-143, 81-327, 81-570 and 82-159.
United States District Court, D. Delaware.
December 7, 1982.
*712 *713 John J. Schmittinger and Philip Eric Herrmann, Schmittinger & Rodriguez, Dover, Del., for plaintiffs in Civ. A. No. 81-143.
Regina M. Mullen, State Sol., and Susan H. Kirk Ryan, Deputy Atty. Gen., Dept. of Justice, Wilmington, Del., for defendants in Civ. A. No. 81-143.
John J. Schmittinger, and Philip Eric Herrmann, Schmittinger & Rodriguez, Dover, Del., for plaintiff in Civ. A. No. 81-327.
James F. Waehler, Tunnell & Raysor, Georgetown, Del., for defendants in Civ. A. No. 81-327.
Harvey B. Rubenstein, Wilmington, Del., for plaintiff in Civ. A. No. 81-570.
Roger A. Brown, Deputy Atty. Gen., Dept. of Justice, Wilmington, Del., for defendants State Dept. of Finance and the State of Delaware in Civ. A. No. 81-570.
David H. Williams, Morris, James, Hitchens & Williams, Wilmington, Del., for defendant Colonial School Dist. in Civ. A. No. 81-570.
Hank R. Bernstein, Wilmington, Del., for plaintiff in Civ. A. No. 82-159.
Roger A. Brown, Deputy Atty. Gen., Dept. of Justice, Wilmington, Del., for defendants State of Delaware, The State Dept. of Finance, The State Dept. of Public Instruction, Dennis Sullivan, II and William B. Keene in Civ. A. No. 82-159.
David H. Williams, Morris, James, Hitchens & Williams, Wilmington, Del., for defendants Red Clay Consolidated School Dist. and Joseph E. Johnson in Civ. A. No. 82-159.
OPINION
MURRAY M. SCHWARTZ, District Judge.
Five plaintiffs, in four lawsuits involving 23 defendants,[1] desire this Court to proceed on their claims in these cases joined for argument. The defendants request that this Court abstain from deciding these four cases, or alternatively dismiss plaintiffs' suits to allow defendants an opportunity to obtain dispositive rulings from the Delaware Supreme Court on critical state law issues affecting plaintiffs' federal law claims. An examination of the relevant state law, as applied to the factual context giving rise to the claims of each of the five plaintiffs, is necessary to explicate fully the abstention problem these cases present.
*714 STATE LAW FRAMEWORK
Prior to 1975, when a state merit system employee was incapacitated by reason of disease or injury sustained by accident arising out of and in the course of employment, the employee continued to receive the equivalent of full pay. This was accomplished by complementing Workmen's Compensation payments with the employee's sick leave benefits in an amount equal to the difference between the Workmen's Compensation payment and full pay. The additional payments made from the employee's sick leave benefits, however, resulted in a corresponding reduction in the amount of sick leave available to the employee.
In 1975, the Delaware State Legislature concluded it was not "equitable or fair for a Merit System employee to be forced to use sick leave ... for a job related accident or illness"[2] not arising out of the employee's own negligence. Its response was to enact 29 Del.C. § 5933 covering all State of Delaware employees. That statute as passed in 1975 provided:
The rules shall provide for annual, sick and special leaves of absence, with pay or at reduced pay. No employee of the State, including those exempted under § 5903 of this title, shall be charged sick leave for any period of absence from work due to injury, personal injury or occupational disease sustained by accident arising out of and in the course of actual employment with the State, providing such injury or illness is not the direct result of the employee's misconduct, and occurs during a period of employment for which the employee is entitled to receive pay.
The 1975 statute was administratively interpreted to require the employing agency to make supplemental payments in an amount equal to the difference between Workmen's Compensation payments and full pay[3] for "as long as an individual receives workmen's compensation and[4] remains an employee of the state."[5]
This open ended obligation to pay supplemental benefits elicited a response from employing state agencies and the Delaware State Legislature. The former resorted to terminating employees receiving Workmen's Compensation in order to end their obligation to make supplemental wage payments. The Delaware General Assembly responded by amending 29 Del.C. § 5933 to limit the obligation of a state employer to make supplemental payments to a maximum period of three months. 29 Del.C. § 5933 as amended effective July 1, 1981 provides:
Whenever an officer or employee of the State, including those exempt from the classified service, qualifies for Workmen's Compensation benefits, such officer or employee, for a period not to exceed three months from the date such compensation begins, shall not be charged sick leave and shall receive from the State the difference, if any, between the total of: a) the amount of such compensation; b) any disability benefits received under the Federal Social Security Act; and c) any other employer supported disability program, and the amount of wages to which the officer or employee is entitled on the date such compensation begins, provided the injury or disease for which such compensation is paid is not the direct result of such officer or employee's misconduct and occurs during a period of employment for which the employee is entitled to receive wages.
C.A. No. 82-159, Doc. No. 10, A-4.
The four present suits all arise out of the cessation of the payment of supplementary salary benefits provided for by 29 Del.C. § 5933.
FACTUAL BACKGROUND
Civil Action No. 81-143 (Lillard and McKinnon)
Plaintiffs, Dora Marie Lillard ("Lillard") and Nancy McKinnon ("McKinnon"), were *715 employees of the Delaware Hospital for the Chronically Ill. Lillard, a food services worker, and McKinnon, an attendant, were both injured on the job in 1975. Both were awarded Workmen's Compensation and received supplemental pay benefits under 29 Del.C. § 5933 until April 1980, at which time they were terminated, presumably because they were unable to work. Because they were no longer employees of the State of Delaware, payment of supplemental benefits under 29 Del.C. § 5933 immediately ceased, although both plaintiffs continued to receive Workmen's Compensation.
The cessation of payment of supplemental benefits resulted in the filing of a complaint in this Court on March 30, 1981 against the Delaware State Hospital, and three state administrators in their official and individual capacities, alleging substantive due process and equal protection violations. Thereafter, on August 28, 1981, the matter was stayed upon the suggestion of the defendant, and without opposition by plaintiffs, because a case containing possible dispositive legal issues, Young v. Milford School District,[6] was wending its way to the Delaware Supreme Court.
No decision was reached by the Delaware Supreme Court in Young because that case was settled.[7] No defendant in the present cases, however, was a defendant in Young, and therefore was not in a position to insist upon a definitive statutory interpretation by the State's highest court.
Following dismissal of Young in December, 1981, the State of Delaware, et al., filed a Complaint for Declaratory Judgment on January 8, 1982[8] in the State Superior Court, and sought certification to the Delaware Supreme Court. In response to this action by the State of Delaware, plaintiffs in this case moved to dissolve the stay granted August 28, 1981. Plaintiffs contend that the stay is no longer warranted because the Young case has been finally resolved. The State has countered by urging the stay be continued in effect on abstention grounds. On April 28, 1982, the Superior Court refused the State's request to certify the issues involving 29 Del.C. § 5933 to the Delaware Supreme Court until this Court resolves the abstention question.[9]
Civil Action No. 81-327 (Grice)
Plaintiff, Vernon L. Grice ("Grice"), a non-merit tenured school teacher employed by the Sussex Vocational-Technical School District, was first injured in 1976. After collecting Workmen's Compensation, he returned to work in the fall of 1978, only to leave again in January, 1980. The parties agree that plaintiff could not work for medical reasons. They disagree, however, as to the underlying medical cause for his inability to work. Plaintiff asserts he suffered a recurrence of his 1976 injury, while the defendant school district contends the 1980 leave was caused by other medical reasons.
Irrespective of the cause of the incapacitating medical condition, the parties do agree Grice was terminated as of June 30, 1980, although they disagree as to cause of termination. Plaintiff claims he was terminated so that defendant could avoid paying supplemental benefits under 29 Del.C. § 5933. The defendant asserts that plaintiff's termination was a statutorily authorized reduction in force ("RIF").[10] While there is disagreement as to the reason for termination, there is no dispute that Grice was afforded a post-termination hearing on August 28, 1980. At that hearing, no challenge was made to the School Board's right *716 to terminate plaintiff in order to avoid the payment of supplemental benefits under 29 Del.C. § 5933. Further, plaintiff did not petition for judicial review of the termination decision under 14 Del.C. § 1414. Instead, he filed this action in federal court against the school district and eight other school district officials in their official and individual capacities.
The issues involved in the Grice case are further complicated by the fact that Grice did not receive an award of Workmen's Compensation benefits until February 11, 1981, retroactive to February 4, 1980. Thus, at the time of termination, Grice was not actually receiving Workmen's Compensation benefits, although he was entitled to them.[11]
As of the date of oral argument, no petition for declaratory judgment had been filed by the school district in state court, nor was there any indication that such a suit would be filed. Grice has requested that this Court dissolve the stay issued on August 28, 1981.[12] The defendant school district seeks a continuance of the stay based on abstention.
Civil Action No. 81-570 (Kopec)
Plaintiff, Madelyn Kopec ("Kopec"), instituted suit against the State of Delaware, the State Department of Finance, and the Colonial School District alleging a wrongful taking of vested property rights. Injured on April 8, 1980 while working as a school custodian for the New Castle County School District, she has never been terminated by either that District or its successor, the Colonial School District.[13] Instead, notwithstanding an alleged disability leave policy of the school district which would have resulted in her receiving full pay through June 30, 1982, the supplemental benefits to Workmen's Compensation which brought Kopec's payments up to full pay were terminated as of September 30, 1981. Full pay ceased as of November 11, 1981 with the exhaustion of accrued sick leave and vacation benefits. It is alleged and uncontested that the supplemental benefits were terminated under the authority of 29 Del.C. § 5933 as amended effective July 1, 1981.
The State of Delaware and Colonial School District, defendants in this action, filed declaratory judgment actions in the State Superior Court and thereafter petitioned for certification of the questions directly to the Supreme Court. As in C.A. No. 81-143 (Lillard and McKinnon), the State Superior Court judge declined to sign the certification request. The Superior Court pointed out that the abstention issue was pending in this (federal) Court, and in the event that this (federal) Court "declines to proceed ... counsel are free to seek certification or expedited disposition of State questions [sic] in [Superior] Court."[14] Subsequently, the defendants made a motion with this Court requesting that this Court abstain from hearing plaintiff's claims so that the State Court action can proceed.
Civil Action No. 82-159 (Reed)
Plaintiff, Carol Reed, is a non-terminated, non-merit, tenured teacher employed by defendant, Red Clay Consolidated School District, who was receiving Workmen's Compensation and supplemental benefits following an injury incurred in September, *717 1980. Like the plaintiff in C.A. No. 81-570 (Kopec), Reed asserts not only an unconstitutional deprivation of supplemental benefits for so long as she is disabled, but also a right to supplemental benefits through June, 1982 based upon an alleged school district "paid disability leave" policy. Like Kopec, Reed filed suit in this Court against her employer school district, the State of Delaware, and the State Department of Finance and Public Instruction. In addition, three officials were named as defendants in their official capacities only. Suit was brought after the school district ceased making supplemental benefit payments in accordance with the July 1, 1981 amendment to 29 Del.C. § 5933. Unlike Kopec, a declaratory judgment action has not been filed in the State Court system because of an anticipated in personam jurisdiction problem stemming from the fact that Reed is not a resident of the State of Delaware. Nonetheless, defendants have moved this Court to abstain from deciding plaintiff's claims.
In summary, all four cases were filed as a result of the cessation of supplemental benefit payments under 29 Del.C. § 5933. In two of the cases,[15] supplemental benefits were not paid after plaintiffs' employment was terminated. While the reason for termination of employment is disputed as to one of those plaintiffs,[16] the other plaintiffs were discharged so that they would no longer be an employee of the State, and thus allegedly no longer entitled to supplemental benefits under 29 Del.C. § 5933 prior to amendment. Plaintiffs in the remaining cases have not been terminated as employees.[17] Instead, supplemental benefits were withdrawn pursuant to 29 Del.C. § 5933 as amended, which defendants assert limited the alleged entitlement to supplemental benefits to three months. Finally, declaratory judgment actions have been filed in state court with respect to some plaintiffs whose employment has been terminated[18] and one plaintiff who has not been terminated.[19] Stated differently, legal issues arising from cessation of supplemental benefits under 29 Del.C. § 5933 both before and after amendment are the subject of state declaratory judgment actions necessarily filed after the filing of these federal court actions.
PROCEDURAL AND JURISDICTIONAL POSTURE
Plaintiffs have asserted claims based upon the equal protection and due process clauses of the United States Constitution and Section 1983 of the Civil Rights Act of 1871 (42 U.S.C. § 1983). The jurisdictional basis in all the cases is predicated upon 28 U.S.C. § 1343(3) and (4),[20] 28 U.S.C. §§ 2201 and 2202 (Declaratory Judgment Act), and pendent jurisdiction.
Answers have been filed in only two of the cases,[21] while motions to stay or dismiss have been filed in all cases. Included in the answers were, inter alia, defenses based upon the Eleventh Amendment. Concerned about the jurisdictional implications of these defenses, this Court sua sponte requested supplemental briefing on the issue of Eleventh Amendment immunity. The Court will first analyze the Eleventh Amendment immunity question, and then proceed to abstention.
I. ELEVENTH AMENDMENT IMMUNITY
The Eleventh Amendment restricts the right of any party to bring suit against a state in federal court. The Eleventh Amendment provides:
*718 The Judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by Citizens or Subjects of any Foreign State.
Notwithstanding the literal language of the Amendment, it is well established that a nonconsenting state is immune from suits brought in federal court by citizens of its own state, as well as by citizens of another state. Hans v. Louisiana, 134 U.S. 1, 10 S. Ct. 504, 33 L. Ed. 342 (1890).
There are exceptions, however, to the blanket immunity afforded to the states from suit in federal court. In Ex Parte Young, 209 U.S. 123, 28 S. Ct. 441, 52 L. Ed. 714 (1908), the Supreme Court held that the Eleventh Amendment does not bar injunctive relief having prospective application only against state officials acting in their official capacity. The Court stated:
The act to be enforced is alleged to be unconstitutional, and if it be so, the use of the name of the State to enforce an unconstitutional act to the injury of the complainants is a proceeding without the authority of, and one which does not affect, the State in its sovereign or governmental capacity. It is simply an illegal act upon the part of the state official in attempting to use the name of the State to enforce the legislative enactment which is void because unconstitutional. If the act which the state Attorney General seeks to enforce be a violation of the Federal Constitution, the officer in proceeding under such enactment comes into conflict with the superior authority of that Constitution, and he is in that case stripped of his official or representative character and is subject in his person to the consequences of his individual conduct.
Id. at 159-160, 28 S.Ct. at 453-454.
The doctrine of Ex Parte Young, however, does not allow suit for damages against an individual state officer in his official capacity when the action is in essence one for the recovery of money from the state. Ford Motor Company v. Department of Treasury of Indiana, 323 U.S. 459, 464, 65 S. Ct. 347, 350, 89 L. Ed. 389 (1945). In addition, the Supreme Court in Edelman v. Jordan, 415 U.S. 651, 94 S. Ct. 1347, 39 L. Ed. 2d 662 (1974), recognized that in certain situations even prospective injunctive relief might so burden the state treasury as to make the state the real party in interest and allow for an Eleventh Amendment bar.
In addition to the exception set forth in Ex Parte Young, it is also well-settled that the Eleventh Amendment does not bar suits for damages against state officials in their individual capacities. Scheuer v. Rhodes, 416 U.S. 232, 94 S. Ct. 1683, 40 L. Ed. 2d 90 (1974); West v. Keve, 571 F.2d 158 (3d Cir.1978). However, those individuals have available a qualified immunity and "are shielded from liability for civil damages insofar as their conduct does not violate clearly established statutory or constitutional rights of which a reasonable person would have known." Harlow v. Fitzgerald, ___ U.S. ___, 102 S. Ct. 2727, 2738, 73 L. Ed. 2d 396 (1982). Furthermore, the Eleventh Amendment only protects the state itself from suit in federal court, it does not protect a municipal corporation or a political subdivision of the state. Mt. Healthy School District v. Doyle, 429 U.S. 274, 280, 97 S. Ct. 568, 572, 50 L. Ed. 2d 471 (1977).
This Court has sua sponte raised the issue of the application of the Eleventh Amendment in each of the four cases.[22] The supplemental briefing by the parties indicates that the parties are generally in accord on the scope of the Eleventh Amendment immunities involved in these cases.
1. Civil Action No. 81-143 (Lillard and McKinnon)
In this case, plaintiffs seek the supplemental benefits allegedly wrongfully withheld under 29 Del.C. § 5933. Plaintiffs also request prospective injunctive relief requiring the payment of such benefits in the *719 future. Four defendants were named: Delaware Hospital for the Chronically Ill; Patricia C. Shramm; Roger N. Keister; and Floyd D. Dickey. The latter three defendants were named in both their official and individual capacities.
The Delaware Hospital for the Chronically Ill is a state agency. See generally 31 Del.C. Ch. 28. As such, the Hospital is an "arm of the state" and partakes in the state's Eleventh Amendment immunity. Mt. Healthy School District v. Doyle, supra, 429 U.S. at 280, 97 S.Ct. at 572. In addition, the claim for damages or unpaid benefits against the remaining three defendants in their official capacities is, in essence, a claim against the state treasury and is therefore proscribed by the Eleventh Amendment. Ford Motor Company v. Department of Treasury of Indiana, supra, 323 U.S. at 464, 65 S.Ct. at 350.
However, this Court does have jurisdiction to hear claims for prospective injunctive relief against the individual defendants in their official capacities.[23]Ex Parte Young, supra. Further, claims for damages against the individual defendants in their individual capacities are permissible. Scheuer v. Rhodes, supra.
2. Civil Action No. 81-327 (Grice)
In this case, plaintiff's claim is against the Sussex County Vocational-Technical School District and eight school district officials. The defendants' brief concedes that under the criteria set forth in Mt. Healthy School District v. Doyle, 429 U.S. 274, 280-81, 97 S. Ct. 568, 572-73, 50 L. Ed. 2d 471 (1977), the defendant school district in this case is not an arm of the state. Based on this concession, and without giving the matter independent consideration, it is held that neither the school district nor its employees are protected by the Eleventh Amendment from suit in federal court.
3. Civil Action No. 81-570 (Kopec)
In this case, plaintiff seeks the payment of benefits that are allegedly being wrongfully withheld under 29 Del.C. § 5933. Plaintiff also requests prospective injunctive relief requiring that such benefits be paid in the future. Three defendants were named: State of Delaware; State Department of Finance; Colonial School District.
Plaintiff's claims against the State of Delaware are barred under the Eleventh Amendment. Hans v. Louisiana, supra. The State Department of Finance is a state agency, see generally 29 Del.C. Ch. 83, and is therefore also protected from suit by the Eleventh Amendment. The defendant school district, however, does not dispute that it is not protected from suit by the Eleventh Amendment under the criteria set forth in Mt. Healthy School District v. Doyle, supra.
4. Civil Action No. 82-159 (Reed)
In this case, plaintiff also is seeking benefits under 29 Del.C. § 5933 that are allegedly being wrongfully withheld, and injunctive relief requiring such benefits to be paid in the future. Six defendants were named: State of Delaware; State Department of Finance; State Department of Public Instruction; Red Clay Consolidated School District; Joseph B. Johnson; T. Dennis Sullivan; and William B. Keene the latter three defendants being sued solely in their official capacities.
The Eleventh Amendment shields the State of Delaware, the State Department of Finance, and the State Department of Public Instruction in this action because they are all non-consenting State defendants. *720 In this context, both the State Department of Finance and the State Department of Public Instruction are clearly State agencies for purposes of the Eleventh Amendment, given their integral functions in the government of the State. See generally 29 Del.C. Ch. 83 and 14 Del.C. Ch. 1, respectively.
With regard to T. Dennis Sullivan, the Secretary of Finance, and William B. Keene, the Superintendent of Public Instruction for the State of Delaware, who have been sued in their official capacities only, the Court has no jurisdiction over the claims against them for unpaid benefits because the State is the real party in interest and the suit is, in essence, one for damages to be paid from the public funds in the State Treasury. Ford Motor Company v. Department of Treasury of Indiana, supra; Edelman v. Jordan, supra. However, it would appear that a suit for prospective injunctive relief against these defendants in their official capacities is not barred by the Eleventh Amendment. Ex Parte Young, supra; Edelman v. Jordan, supra. Finally, the defendant school district concedes that the Eleventh Amendment does not deprive the Court of jurisdiction over any claims against either the Red Clay Consolidated School District or Joseph E. Johnson in his official capacity as superintendent of such district. Mt. Healthy School District v. Doyle, supra.
In summary, the Court holds as a threshold matter that the Eleventh Amendment bars suit against the following defendants: (1) the State of Delaware; (2) the Delaware Department of Finance; (3) the State Department of Public Instruction; and (4) the Delaware Hospital for the Chronically Ill. Therefore, all claims brought against these defendants must be dismissed. In addition, claims against defendants T. Dennis Sullivan, William B. Keene, Patricia C. Schramm, Roger M. Keister, and Floyd D. Dickey in their official capacities for damages or unpaid benefits must also be dismissed because they are in essence claims against the state.
Nonetheless, even after the dismissal of some of the defendants and claims, the central issue of abstention raised by these cases is still not obviated. The claims against the defendant school districts are not proscribed by the Eleventh Amendment. Neither are the claims against the officers of the school districts. In addition, the claims against state officers for prospective injunctive relief are permissible. The claims against the state officers in their individual capacities are also cognizable. All claims against both state and school district officials are subject, however, to the personal immunity defenses available to the defendants. Harlow v. Fitzgerald, ___ U.S. ___, 102 S. Ct. 2727, 73 L. Ed. 2d 396 (1982).
The plaintiffs will be given an opportunity to amend their complaints in a manner that conforms to the above analysis. The defendants have no objection in this regard. The amended complaints should be structured so that only the school districts, and officials of the state and the school districts are named as defendants. In addition, claims against state officials in their official capacities must be fashioned to seek prospective relief only. All other claims may be for both damages and injunctive relief.
II. ABSTENTION
The more difficult problem is whether this Court should abstain from deciding the four cases. Since the Supreme Court decision in Railroad Commission of Texas v. Pullman, 312 U.S. 496, 61 S. Ct. 643, 85 L. Ed. 971 (1941), it has been recognized that in certain situations, a federal district court, in its discretion, may decline to proceed with a case even though it properly has jurisdiction. The cases in which this has been recognized are usually referred to as establishing an "abstention doctrine," but it is more precise to refer to "abstention doctrines" as there are at least four identified lines of cases providing a basis for a federal court to abstain. Wright, Law of Federal Courts, § 52 at 218 (1976). "Thus abstention is variously recognized: (1) to avoid a decision of a federal constitutional question where the case may be disposed of *721 on questions of state law; (2) to avoid needless conflict with the administration by the state of its own affairs; (3) to leave to the state the resolution of unsettled questions of state law; and (4) to ease the congestion of the federal court docket." Id.
In the four cases currently pending, the various defendants urge this Court to abstain from hearing plaintiffs' claims until the Delaware Supreme Court has given a definitive interpretation of 29 Del.C. § 5933, the state law underlying plaintiffs' federal law claims. Although the facts involved in each of these cases are different, and may have a bearing on each of the plaintiffs' ultimate ability to prevail in this matter, the unclear issue of state law is in essence the same in all four cases. Each plaintiff claims that 29 Del.C. § 5933, before its effective amendment on July 1, 1981, created vested property and contractual rights in each of the plaintiffs. Alternatively stated, plaintiffs claim an entitlement to the benefits authorized under section 5933 before its amendment. Plaintiffs further reason that, once this "entitlement" or vested interest is created by state law, such interest cannot be divested either by discharge or legislative amendment except in accordance with rights established under the United States Constitution and federal statutes. See Bishop v. Wood, 426 U.S. 341, 96 S. Ct. 2074, 48 L. Ed. 2d 684 (1976). See also Grant v. Nellius, 377 A.2d 354, 356 (Del.1977), quoting Pusey & Jones Co. v. Love, 20 Del. 80, 66 A. 1013, 1015 (1906).
The plaintiffs implicitly recognize that before this Court can reach their federal claims, it must determine whether 29 Del.C. § 5933, before amendment, created vested property rights in the plaintiffs. If section 5933 did not create a vested property interest, then plaintiffs' federal claims will fail. See Bishop v. Wood, 426 U.S. at 344, 96 S.Ct. at 2077. The dispute around which this abstention question revolves is whether this Court, or the Delaware Supreme Court, should determine the nature of the entitlement created by section 5933.
Plaintiffs assert that this Court can and must resolve the question of entitlement. Alternatively, plaintiffs argue that the issue of entitlement under section 5933 has already been decided in Young v. Milford School District, C.A. No. 80C-MY-5 (Del. Super. May 14, 1981) (unreported letter decision), and that this Court is bound by that Delaware Superior Court decision.
Defendants' position is that 29 Del.C. § 5933 before amendment did not create a vested interest in the plaintiffs, and that there is no federal claim. Bishop v. Wood, supra. Defendants urge this Court to abstain in order to allow the Delaware Supreme Court to determine whether section 5933 before amendment did create such vested property interests. If the Delaware Supreme Court holds that section 5933 did not create a vested interest, defendants correctly maintain that this Court would not have to reach plaintiffs' federal constitutional and federal statutory claims.
There are several general principles of abstention that are well established. The Supreme Court has indicated that abstention:
... is an extraordinary and narrow exception to the duty of a District Court to adjudicate a controversy before it. Abdication of the obligation to decide cases can be justified under this doctrine only in the exceptional circumstances where the order to the parties to repair to State court would clearly serve an important countervailing interest.
Colorado River Water Conservation District v. United States, 424 U.S. 800, 813, 96 S. Ct. 1236, 1244, 47 L. Ed. 2d 483 (1976), quoting County of Allegheny v. Frank Mashuda Co., 360 U.S. 185, 188-89, 79 S. Ct. 1060, 1062-63, 3 L. Ed. 2d 1163 (1959). The justification for this extraordinary exception is twofold. First, if a state law can be given a construction that will avoid the necessity of reaching a plaintiff's constitutional claim, abstention can be used to achieve the desirable result of avoiding the unnecessary adjudication of constitutional issues. McKnight v. SEPTA, 583 F.2d 1229, 1240 (3d Cir. 1978); see Ashwander v. Tennessee Valley Authority, 297 U.S. 288, 346-47, 56 S. Ct. 466, 482-83, 80 L. Ed. 688 (1936) (Brandeis, *722 J. concurring). Second, abstention also avoids needless federal court intrusion into legitimate and sensitive state programs. McKnight v. SEPTA, supra, at 1240; see Field, Abstention in Constitutional Cases: The Scope of the Pullman Abstention Doctrine, 122 U.Pa.L.Rev. 1071, 1093-1101 (1974).
On the other hand, abstention also gives rise to a number of adverse consequences:
Relegating the parties to the state courts often results in undue delay in the resolution of the controversy and greatly increases the cost of litigation, factors that heighten the danger that valuable federal rights might be lost.
McKnight v. SEPTA, supra, at 1241; see Wright, Law of Federal Courts, § 52 at 220 (3d Ed.1976) (price of abstention not cheap). Therefore a federal court must always be aware that abstention is an exception to federal court jurisdiction that must be exercised sparingly.
The most clearly established abstention doctrine comes in cases where a state law is challenged in federal court as being unconstitutional and there are unsettled questions of state law that may be dispositive of the case. Railroad Commission of Texas v. Pullman Co., supra. In the Third Circuit, three factors must be present before Pullman-type abstention can be invoked:
(1) There must be uncertain issues of state law underlying the federal constitutional claims brought in federal court.
(2) The state law issues must be amenable to an interpretation by the state courts that would obviate the need for or substantially narrow the scope of the adjudication of the constitutional claims.
(3) It must appear that an erroneous decision of state law by a federal court would be disruptive of important state policies.
D'Iorio v. County of Delaware, 592 F.2d 681, 685-686 (3d Cir.1978), overruled on other grounds, Kershner v. Mazurkiewicz, 670 F.2d 440 (3d Cir.1982) (en banc). Upon a determination that a particular case falls within these three criteria, the district court must then make a discretionary determination, based on all relevant factors, whether abstention is in fact appropriate. D'Iorio v. County of Delaware, 592 F.2d at 686.
(1) Uncertainty of State Law
The first criteria is whether there are unsettled questions of state law underlying the federal claims. The Supreme Court "has not defined with precision what degree of unclarity of state law is needed to justify Pullman-type abstention." 17 Wright, Miller, and Cooper, Federal Practice and Procedure, § 4242 at 459 (1978).
Probably the most common formulation is that abstention is required only if state law is fairly susceptible to an interpretation that would avoid the need for constitutional adjudication, but in some cases the Court has seemed to say that even a fair possibility that the state law can be so construed will do, while in other cases the Court has seemed to call for a very strong showing that the construction of the state law may avoid the constitutional question. Indeed the standard on when state law is sufficiently unclear to justify abstention is so amorphous that it has been suggested that decisions on whether to abstain may be shaped by the court's view of the substantive issues that the case presents.
Id. at 460 (citations omitted); see Field, The Abstention Doctrine Today, 125 U.Pa.L. Rev. 590, 602-603 (1977).
A federal court must take extreme care in evaluating whether state law is unclear. State law could be considered unclear every time a state Supreme Court has not definitively decided an issue, in which case abstention would be proper in nearly every case where a federal constitutional claim was dependent on the resolution of state law.[24] On the other hand, abstention *723 should not be limited to those cases in which the state law issue is totally unclear.[25] As is often the case, the question of state law involved in these cases falls between the two extremes in terms of clarity.
It is undisputed that there is no Delaware Supreme Court decision on the nature of the property interest created by section 5933.[26] Furthermore, there is not a large body of law in Delaware regarding statutory employment benefits. In In Re State Employees' Pension Plan, 364 A.2d 1228 (Del.1976), the Delaware Supreme Court determined that state employees had vested contract rights in the State Pension Fund which were constitutionally protected. Conversely, a more recent decision held that future salary increases could constitutionally be denied state employees if eliminated before the date the increases were to go into effect. Grant v. Nellius, 377 A.2d 354 (Del.1977). Neither of these decisions, however, are dispositive of the issues involved in this case. Therefore, in a certain sense the state law issues involved in this case can be considered unclear.
In other ways, however, the question of state law is not "unsettled" within the meaning that "amorphous" concept has sometimes been given in Pullman abstention cases. The fact that a district court may have difficulties in determining what a state court may later determine state law to be is an insufficient basis for abstention. See Meredith v. City of Winter Haven, 320 U.S. 228, 235, 64 S. Ct. 7, 11, 88 L. Ed. 9 (1943), cited with approval, Baltimore Bank for Cooperatives v. Farmers Cheese Cooperative, 583 F.2d 104, 111 n. 7 (3d Cir.1978).
The Tenth Circuit in Vineyard v. King, 655 F.2d 1016 (10th Cir.1981), considered the issue of abstention in a case similar to those currently before this Court. At issue in Vineyard was whether under Oklahoma law, plaintiff had a legitimate claim of entitlement to continued state employment, so as to create a property interest protected by the due process clause of the United States Constitution. Id. at 1018-1019. The district court invoked Pullman-type abstention because Oklahoma law was unclear.
In reversing the district court's decision to abstain, the Court of Appeals indicated that Pullman-type abstention is appropriate only when prior state law provides the federal court with "insufficient guidance" to resolve the unsettled state law issue. See 655 F.2d at 1019. The court then stated:
In short, the difficulty in determining whether plaintiff in the case before us has a property right exists not because of an unclear standard, but because the precise set of facts posed here have not been addressed by the Oklahoma Supreme Court. We do not in any way minimize how difficult it may be to apply the law to the facts, but abstention is inappropriate on this basis. Under such circumstances the district court may not abdicate its duty to adjudicate the matter.
655 F.2d at 1020.
Analyzed in this manner, the question is whether the entitlement issue posed by 29 Del.C. § 5933 is a novel issue of law or rather "the application of settled principles to a clear fact pattern." McKnight v. SEPTA, 583 F.2d 1229, 1241 (3d Cir.1978). While not clearly so, the instant cases appear to fall into this latter category. This Court has previously determined underlying state law questions of entitlement in order to reach federal claims. E.g. Hawkins v. Board of Public Education, 468 F. Supp. 201 (D.Del.1979); Hickey v. New Castle County, 428 F. Supp. 606 (D.Del.1977). Indeed in Hickey, the Court decided questions of entitlement *724 under certain provisions of the New Castle County Code, even though there was no Delaware Supreme Court decision interpreting the Code. 428 F.Supp. at 608-609. In addition, the Delaware Supreme Court decisions in In Re State Employees' Pension Plan, supra, and Grant v. Nellius, supra, will offer some guidance in resolving the state law issues in these cases.
In sum, the lack of precision in defining the term "unclear" or "unsettled" questions of state law in Pullman abstention cases makes it extremely difficult to decide whether the question of entitlement under 29 Del.C. § 5933 is an unclear issue of Delaware law. Weighing all the factors involved in these cases, it appears that the issue of state law is not sufficiently unclear to allow for Pullman-type abstention. See Vineyard v. King, supra; McKnight v. SEPTA, supra. Phrased differently, there is a marginally sufficient clarity in the state law which precludes Pullman abstention.
(2) Effect of State Law on Plaintiffs' Constitutional Claims
The second criteria for Pullman abstention is whether 29 Del.C. § 5933 can be construed in a manner that would obviate the need of the adjudication of plaintiffs' constitutional claims. "At least since 1970, the Fourteenth Amendment term of `property' has referred not simply to `actual ownership of real estate, chattels, or money,' but also to `interests that a person had already acquired in specific [governmental] benefits.'" Beitzell v. Jeffrey, 643 F.2d 870, 873 (1st Cir.1981), quoting Board of Regents v. Roth, 408 U.S. 564, 572, 92 S. Ct. 2701, 2706, 33 L. Ed. 2d 548 (1972).
As so interpreted, Fourteenth Amendment protections previously given land owners are provided as well to many others who depend heavily upon the continued availability of, for example, welfare, social security, or government employment.
The broadening of the term "property" to include this "new property," has required the courts to determine when a government benefit rises to the level of protected property.
Beitzell v. Jeffrey, 643 F.2d 870, 874 (1st Cir.1981) (citations omitted).
The Supreme Court has held that a state can create a protected "new property" interest either by statute or implied contract. Bishop v. Wood, 426 U.S. 341, 344, 96 S. Ct. 2074, 2077, 426 U.S. 341 (1976). The determination of whether such a property interest has been created, however, is determined by reference to state law. Id.; Skomorucha v. Wilmington Housing Authority, 504 F. Supp. 831, 834 (D.Del.1980). If the state law does not create a property interest, then there is no interest which is afforded constitutional protection. 426 U.S. at 345 n. 8, 96 S.Ct. at 2077 n. 8; Northern Pennsylvania Legal Services v. County of Lackawanna, 513 F. Supp. 678, 682 (M.D.Pa. 1981).
It is clear therefore that in cases such as the instant ones, the constitutional issues are completely controlled by the perimeters of state law. If the state has not created a property right, the plaintiff has no constitutional right which must be protected. Indeed, some commentators have criticized the development of the case law in this area because the Supreme Court has left the constitutional protections afforded by the Fourteenth Amendment overly dependent on the vagaries of state law.[27] Nonetheless, perhaps more than any other area of constitutional law, the resolution of state law issues in cases such as these can obviate the need to reach constitutional claims. Thus the second prong of the Pullman/D'Iorio abstention criteria is satisfied in these cases.
(3) The Effect of an Erroneous Federal Court Decision Concerning State Law
The third criteria is whether an erroneous interpretation of state law by this Court *725 would be disruptive of important state policies. The issues involved in these cases pertain to the relationship that the State of Delaware has with its employees. This relationship involves over 28,000 state employees,[28] some or many of whom may have claims pursuant to 29 Del.C. § 5933 which have not been brought to the attention of this Court.[29] Thus, a federal court determination on the right given to state employees under section 5933 will have an important impact on the state/employee relationship.
The Supreme Court has recognized that a state's relationship with its employees is an important aspect of state sovereignty. National League of Cities v. Usury, 426 U.S. 833, 96 S. Ct. 2465, 49 L. Ed. 2d 245 (1976). Indeed, in Usury, the Court held that Congress could not constitutionally set a minimum wage for state employees because, inter alia, it impermissibly interfered with the allocation of state resources. Id. at 847-848, 96 S.Ct. at 2472. In light of the Supreme Court admonitions in this area, it would seem clear that a federal court should not readily intrude upon a state's relationship with its employees that concerns any aspect of the employees' compensation. These considerations support the third criteria of Pullman abstention.
Nonetheless the factors considered by the Supreme Court in Usury do not appear to have been applied in the area of abstention. Many of the cases where abstention has been denied deal with the issue of property interests in employment of state employees. E.g., Vineyard v. King, supra; McKnight v. SEPTA. Those cases necessarily involved federal intrusion into the relationship between the state and its employees, but such intrusion was not considered a fortiori so great as to require abstention. See McKnight v. SEPTA, 583 F.2d at 1241. Such a rationale is in part based upon the belief that an erroneous federal court decision on state law can be corrected by the simple expedient of seeking a state court determination of the issue. See id. at 1241-1242.
In sum while it appears to this Court that an erroneous determination of state law would have serious consequences on an important interest of the state, i.e., its relationship with its employees, it would also appear that this consideration has not been of great consequence to courts evaluating the availability of Pullman abstention in a given case. Therefore, under the guidance of prior abstention case law, an erroneous decision by this Court of the entitlement rights created by section 5933 should not be deemed disruptive of important state policies as is required under the third criteria of Pullman/D'Iorio.
III. EQUITABLE CONSIDERATIONS
The application of the Pullman/D'Iorio standards yields a very close question on whether or not this Court should abstain. Given the overriding obligation that a federal court has to exercise its statutorily established jurisdiction,[30] this Court should not abstain when the established Pullman criteria yield such an extremely close result. Therefore, limited solely to the option of abstention, this Court would not abstain.[31]
*726 However, given the fact that the federal claims are so inextricably bound with the resolution of the issue of entitlement under state law, it seems prudent to give the Delaware Supreme Court an opportunity to definitively rule on the issues raised by 29 Del.C. § 5933. This is particularly true because there is an additional factor which favors state court resolution of these issues. The essence of plaintiffs' claims is that they want money to which they claim they are entitled to under 29 Del.C. § 5933. Plaintiffs also seek damages for the improper retention of such money. As discussed previously, some of plaintiffs' claims for money or damages are proscribed by the Eleventh Amendment in federal court. Such limitations do not exist in state court. Therefore, more complete relief may well be available in state court.
There are two potential avenues of review that promise a quick resolution of these state law issues by the Delaware Supreme Court. First, there are the present state declaratory judgment actions pending in Delaware Superior Court[32] pertaining to the issues involved in these cases. The state plaintiffs in those cases may seek certification to the Delaware Supreme Court of the 29 Del.C. § 5933 issues,[33] or expeditious treatment in the Superior Court with a right of direct appeal.
Second, this Court takes judicial notice of the fact that an amendment[34] to the Delaware Constitution was approved by the State Legislature in 1982.[35] The Legislature is expected to take up this amendment early in the next term which commences in January, 1982. That constitutional amendment provides, inter alia, for certification of questions of law to the Delaware Supreme Court from the Delaware federal district court, subject to acceptance of the certified question by the Delaware Supreme Court. If approved the amendment will create a procedural mechanism whereby controlling state law questions can be definitively determined by the state's highest court. The United States Supreme Court has strongly endorsed use of a certification procedure, when available, in cases such as those before this Court. See Lehman Brothers v. Schein, 416 U.S. 386, 94 S. Ct. 1741, 40 L. Ed. 2d 215 (1974).
The Court is thus confronted with a situation where, although it is clearly preferable to allow the state courts to resolve the state law issues, conventional abstention criteria narrowly indicates that this Court should not abstain. Given such a situation, it is prudent to exercise this Court's discretionary power to stay the *727 present actions until it becomes clear that there can be no timely resolution of the state law issues by the Delaware Supreme Court. It should be no later than mid-1983 before the litigants will know whether timely resolution by the Delaware Supreme Court will become a reality.[36]
The grant of a stay in this situation is not identical to abstention. In Will v. Calvert Fire Insurance Co., 437 U.S. 655, 98 S. Ct. 2552, 57 L. Ed. 2d 504 (1978), the federal district court stayed an action because of concurrent proceedings in state court. The Court of Appeals for the Seventh Circuit found that the stay was the equivalent to a dismissal, i.e., abstention, because once the state court judgment was final, the federal claims were res judicata. Calvert Fire Insurance Co. v. Will, 560 F.2d 792, 796 (7th Cir.1977). In reversing the Court of Appeals, a plurality of the Supreme Court reasoned that the stay was not the equivalent of dismissal because the federal judge was free to dissolve the stay based upon new information as to the progress of the state case. 437 U.S. at 665, 98 S.Ct. at 2558.
As in Will, this Court will at any time consider lifting the present stay upon information that reasonably prompt resolution in the state court is unlikely. Furthermore, this Court is not dismissing plaintiffs' claims as was arguably the case in Will. Here the stay is granted only to allow the state law issues to be resolved in state court. Once the state law is clarified, plaintiffs' constitutional claims will be reviewed by this Court according to the framework established in England v. Louisiana State Board of Medical Examiners, 375 U.S. 411, 84 S. Ct. 461, 11 L. Ed. 2d 440 (1964). Therefore unlike Will, plaintiffs' federal claims ultimately will be resolved in this Court if plaintiffs so desire.[37]
The Court is not unmindful that the issuance of a stay may yield the same result as Pullman-type abstention if there is a prompt resolution of the state law issues by the Delaware Supreme Court. Nonetheless, given the fact that many elements favoring abstention exist, along with other factors favoring state court resolution of the issues, any similarity between a stay and abstention is acceptable. It is pointless for this Court to rush to consider these cases when plaintiffs' federal claims will become moot if the Delaware Supreme Court construes 29 Del.C. § 5933 in such a way that plaintiffs' entitlement does not rise to a constitutional level. As previously rehearsed, it is well settled that state law determines whether a property interest exists. Bishop v. Wood, 426 U.S. 341, 344, 96 S. Ct. 2074, 2077, 48 L. Ed. 2d 684 (1976). If the state law does not create a constitutionally protectible property interest, then there is no Fourteenth Amendment violation when such "nonproperty" is taken away. See id. at 344-345 & n. 8, 96 S.Ct. at 2077-2078 & n. 8; Northern Pennsylvania Legal Services v. County of Lackawanna, 513 F. Supp. 678, 682-683 (M.D.Pa.1981). It would be an unnecessary waste of judicial resources to permit these cases to go forward at this time, because review of plaintiffs' federal claims will be necessary only if the Delaware Supreme Court construes 29 Del.C. § 5933 in such manner as to vest the plaintiffs with a property interest. In that case this Court will be compelled to decide if the property was confiscated in a constitutional manner. As stated earlier, this Court has the obligation and the power to review plaintiffs' federal claims,[38] if any exist after the Delaware Supreme Court has defined the property interests created by 29 Del.C. § 5933.
*728 In addition, the stay is not equivalent to abstention because this Court is not mandating a Delaware Supreme Court ruling before it will proceed. The stay is granted only to give the state court system time to resolve these issues. If, as indicated earlier, the parties bring to this Court's attention by motion that resolution in state court has become unlikely, this Court will dissolve the stay and resolve the disputed state law issues.
Plaintiffs' motions in C.A. No. 81-143 (Lillard and McKinnon) and C.A. No. 81-327 (Grice) to dissolve the August 28, 1981 stay will be denied. Defendants' motions in C.A. No. 81-571 (Kopec) and C.A. No. 82-159 (Reed) requesting a stay will be granted. An order will be entered lifting the existing stay in C.A. No. 81-143 and C.A. No. 81-327 for the limited purpose of permitting plaintiffs to file within 20 days amended complaints consistent with this opinion. Plaintiffs in C.A. No. 81-570 and C.A. No. 82-159 will also have twenty days to amend their complaints to conform with this opinion.
NOTES
[1] The State of Delaware and the State Department of Finance were named as defendants in two of the four complaints.
[2] C.A. No. 82-159, Doc. No. 10, App. -1.
[3] C.A. 81-143, Doc. No. 13A, p. 12-13.
[4] Emphasis added.
[5] C.A. No. 82-159, Doc. No. 10, App. -3.
[6] C.A. No. 80C-MY-8 (Del.Super. May 14, 1981) (unreported letter decision). The Young case was originally filed in the Delaware District Court. The matter found its way into the state court system when the matter was stayed on abstention grounds. Young v. Milford School District, et al., C.A. No. 79-301 (D.Del. April 16, 1980 J. Steel).
[7] Plaintiff had prevailed in Delaware Superior Court. C.A. No. 80C-MY-8 (Del.Super. May 14, 1981) (unreported letter decision).
[8] C.A. No. 81-143, Doc. No. 13A pp. A-10-11.
[9] C.A. No. 81-570, Doc. No. 19, p. A-1.
[10] See 14 Del.C. § 1411.
[11] Grice's entitlement to these benefits was unilaterally determined by a third party insurance carrier.
[12] A stay was never formally ordered in this case. Grice, however, is represented by the same counsel representing the plaintiffs in C.A. No. 81-143 (Lillard and McKinnon). A stay was ordered only in C.A. No. 81-143, but counsel has proceeded as if Grice was bound by that stay. The Court will proceed as if the stay entered in C.A. No. 81-143 applied to the Grice case as well. In the other two cases currently before the Court (C.A. No. 81-570 and C.A. No. 82-159), no stay was ever entered. The defendants in those cases have moved this Court to abstain.
[13] The Delaware State Legislature passed legislation permitting the division of the New Castle County School District into four districts, one of which is the Colonial District. Apparently, Kopec was injured while employed at a school within the geographical boundaries of that portion of the New Castle County School District which is now known as the Colonial District.
[14] C.A. No. 81-570, Doc. No. 19, p. A-1.
[15] C.A. No. 81-143 (Lillard and McKinnon) and C.A. No. 81-327 (Grice).
[16] C.A. No. 81-327 (Grice).
[17] C.A. No. 81-570 (Kopec) and C.A. No. 82-159 (Reed).
[18] C.A. No. 81-143 (Lillard and McKinnon).
[19] C.A. No. 81-570 (Kopec).
[20] Section 1343 is the jurisdictional counterpart to 42 U.S.C. § 1983.
[21] C.A. 81-143 (Lillard and McKinnon), and C.A. 81-327 (Grice).
[22] The issue of Eleventh Amendment Immunity may be raised at any point in the litigation. Edelman v. Jordan, 415 U.S. at 677-78, 94 S.Ct. at 1362-63.
[23] Prospective injunctive relief, if granted, will necessitate the payment of benefits to the plaintiff from the state treasury, proscribed in some circumstances under the Supreme Court's decision in Edelman v. Jordan, supra. The Court noted in Edelman, however, that a grant of prospective relief against state officials will in many cases force the officials to spend more money from the state treasury than had they been left free to pursue their previous course of conduct. Such an ancillary effect on the state treasury is permitted under Edelman, and indeed is almost inevitable under Ex Parte Young. Edelman v. Jordan, 415 U.S. at 668, 94 S.Ct. at 1358.
[24] See Field, Abstention in Constitutional Cases, supra, 122 U.Pa.L.Rev. 1071, 1088-1089.
[25] See id.
[26] The recent Superior Court decision in Young v. Milford School District, C.A. No. 80C-MY-8 (Del.Super. May 14, 1981) (unreported letter decision), deals with the issue of whether the payment of benefits under 29 Del.C. § 5933 could be stopped by termination of employment. In a very brief unreported letter memorandum, the Superior Court held that the obligation to pay benefits did not end upon termination of employment. That decision cited no precedent in support of its holding and, in any event, that decision is not binding upon this Court. See Blake v. Kline, 612 F.2d 718, 723 (3d Cir.1979), cert. denied, 447 U.S. 921, 100 S. Ct. 3011, 65 L. Ed. 2d 1112 (1980).
[27] See Monaghan, Of Liberty and Property, 62 Cornell L.Rev. 405, 439-444 (1977); Van Alstyne, Cracks on "The New Property": Adjudicative Due Process in the Administrative State, 62 Cornell L.Rev. 445, 467-470 (1977).
[28] Affidavit T. Dennis Sullivan, II at ¶ 2.
[29] There are 397 state employees currently receiving either Workmen's Compensation or total disability payments. Affidavit of Mark Ayers at ¶ 3. The costs for such compensation exceeded $229,000 for May 1982.
[30] E.g. Cohens v. Virginia, 6 Wheat. 264, 5 L. Ed. 257 (1821) (per Marshall, J.).
[31] The state defendants have also sought abstention on the rationale of Burford v. Sun Oil Co., 319 U.S. 315, 63 S. Ct. 1098, 87 L. Ed. 1424 (1943). In Burford, the State of Texas had developed a complex pattern of regulation because of the diverse ownership of a single East Texas field. This complex regulatory pattern was disrupted, however, by conflicting state and federal interpretations of the governing law. Initially, the state had concentrated all judicial review in a single state district court. Concurrent federal jurisdiction to review these orders, however, had resulted in considerable difficulties, including at one point the imposition of martial law. In light of these difficulties, the Supreme Court held:
The state provides a unified method for the formation of policy and determination of cases by the Commission and by the state courts. The judicial review of the Commission's decisions in the state court is expeditious and adequate. Conflicts in the interpretation of state law, dangerous to the success of state policies, are almost certain to result from the intervention of the lower federal courts. On the other hand, if the state procedure is followed from the Commission to the State Supreme Court, ultimate review is fully preserved here.... Under such circumstances, a sound respect for the independence of state action requires the federal equity to stay its hand.
319 U.S. at 333-334, 63 S.Ct. at 1107-1108.
Generally federal courts have compared the facts in a particular case to those in Burford to ascertain if Burford-type abstention is appropriate. "... Burford abstention, with its resulting dismissal of the action, may be limited to those cases, such as Burford itself, where the subject matter of the action is also highly complex and unique." Santa Fe Land Improvement Co. v. City of Chula Vista, 596 F.2d 838, 842 (9th Cir.1979). Examined in this light, the cases pending before this Court are clearly not appropriate for Burford-type abstention. In the instant case, there is no complex system of state law upon which federal court intervention will intrude. These cases involve a relatively discreet issue of Delaware law, which do not involve the factors that prompted abstention in Burford.
[32] C.A. No. 81-143, Doc. No. 13App. A-10-11.
[33] Delaware Superior Court Rule 75.
[34] Senate bill 272 as amended by Senate Amendment No. 1, 131st Delaware General Assembly (1982).
[35] In Delaware an amendment may be made to the constitution if it is approved by two-thirds of all members elected to each House of two successive General Assemblies. Del.Const. Art. XVI, § 1. See Opinion of the Justices, 264 A.2d 342, 343 (Del.1970). Therefore an amendment approved in 1982 must also receive two-thirds support in each House in 1983 before it becomes a part of the constitution.
[36] Of the two avenues available for Delaware Supreme Court review, the declaratory judgment actions are obviously preferable because they are clearly available and offer the potential for obtaining a faster determination. In addition, the declaratory judgment route offers the possible advantage of the development of a more complete record on which the Delaware Supreme Court can base its judgment.
[37] The Court has not, as indicated in the opinion, formally abstained in this matter. Nonetheless the Court feels compelled to preserve review of plaintiffs' federal claims in these cases in the same manner discussed by the Supreme Court in England.
[38] See England v. Louisiana State Board of Medical Examiners, supra.
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10-30-2013
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https://www.courtlistener.com/api/rest/v3/opinions/1525530/
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552 F. Supp. 367 (1982)
RED STAR TOWING & TRANSPORTATION COMPANY, INC., Plaintiff,
v.
The Cargo Ship "MING GIANT", Yangming Marine Transport Corp., Defendant.
In the matter of Complaint of RED STAR TOWING & TRANSPORTATION COMPANY, INC. as owner of the TUG OCEAN KING for exoneration from or Limitation of Liability.
Lorraine MOWEN as Administratrix of the Estate of Dennis Mowen, Plaintiff,
v.
YANGMING MARINE TRANSPORT CORP., and Red Star Towing & Transportation Company, Inc., Defendants.
Nos. 78 Civ. 2442, 78 Civ. 5448 and 78 Civ. 5537 (PNL).
United States District Court, S.D. New York.
December 3, 1982.
As Modified March 4, 1983.
*368 *369 Theodore Friedman, Jethro M. Eisenstein, Friedman & Eisenstein, New York City, for Lorraine Mowen.
Fred J. Cuccia, Cuccia & Oster, New York City, for Lorraine Mowen.
James M. Leonard, Stephen J. Buckley, McHugh, Leonard & O'Connor, New York City, for Red Star Towing & Transp. Co.
Richard H. Brown, Jr., Harry A. Gotimer, Kirlin, Campbell & Keating, New York City, for Yangming Marine Transport Corp.
OPINION
LEVAL, District Judge.
Red Star Towing and Transportation Co. and Yangming Marine Transportation Corp. move for post-verdict relief from an award of damages in favor of claimant Lorraine Mowen. The jury found damages in the amount of $1,964,000 for the death of Dennis Mowen, plaintiff's decedent, assessing 35% against Red Star, 60% against Yangming, and charging 5% responsibility to Mowen for his own death. Defendants[1] Red Star and Yangming renew their pre-trial motions to strike Mowen's demand for a jury trial; they also move for judgment notwithstanding the verdict, and to set aside or reduce the verdict.
The motions to set aside or reduce the verdict are granted by reason of the excessiveness of the jury's award and the willful misconduct of plaintiff's counsel in tampering with the evidence transmitted to the deliberating jury. Unless plaintiff agrees to remit $665,000, the verdict will be set aside.
The motions opposing jury trial are denied, as are the motions for judgment n.o.v.
Facts
The trial lasted over three and a half months and involved proof of over 40 separate contentions of fault on the part of the various actors. A brief sketch of the facts here suffices.
At about 04:44 hours on May 20, 1978, Red Star's tug, the Ocean King, under the command for that watch of the mate, Dennis Mowen, was towing a barge in an easterly direction across the shipping lanes leading toward New York harbor about 4 miles south of Ambrose Light. Yangming's steamship Ming Giant was sailing northward toward New York harbor. The two ships were in a crossing situation. Under *370 the International Regulations for Preventing Collisions at Sea (the Rules of the Road), 33 U.S.C. foll. § 1602 (1976), the Ocean King was the give-way vessel as she had the Ming Giant on her starboard side. Rule 15. It was the Ocean King's obligation to keep clear, Rule 16, ordinarily by making a timely starboard turn so that the vessels would pass each other port-to-port.
Mowen put the Ocean King into a starboard turn. There was some evidence that he was late in making the turn so that he crowded close to the Ming Giant's course.
As the standby vessel, the Ming Giant would ordinarily maintain her course and speed, leaving it to the give-way vessel to keep clear. Rule 17(a)(i). Ming Giant had the option under Rule 17(a)(ii), (c) to alter course to starboard to avoid close calls. She was also permitted, but only under the demands of an emergency, to turn to port. Rule 17(b), (c).
The captain of the Ming Giant mistakenly believed the Ocean King was crossing his bow. He testified he believed she was sufficiently far ahead that if he maintained course, he would collide with the tow, and if he turned right, he would hit the tug. He therefore chose the in extremis course of turning to port, which he did while the tug was making her turn to starboard. There was evidence that both vessels had failed to sound the required whistle signals until it was too late. The vessels collided. After the collision, Mowen was found to be missing. Two other seamen on the tug suffered minor injuries and both vessels were damaged. There was evidence of fault on the part of both vessels in their failure to take appropriate action to save Mowen.
Red Star first instituted an action in this court against Yangming for collision damages and indemnification for potential liability. Lorraine Mowen instituted an action in Supreme Court, New York County, for herself and her children, against both Red Star and Yangming. Red Star then petitioned in admiralty for exoneration from or limitation of liability. Mowen's state court action was removed to federal court. I issued the usual injunction under Fed.R. Civ.P. Supplemental Rule F(3) staying the prosecution of suits against Red Star outside the limitation proceeding until its resolution. Mowen, Yangming and the two other injured seamen filed claims against Red Star in the limitation proceeding. Mowen also filed a cross-claim against Yangming. The two injured seamen filed a separate action against Yangming. These seamen settled their claims against Yangming and Red Star before trial in this action.
Prior to trial, Red Star and Yangming moved to strike Mowen's demand for a jury trial. I reserved decision on the motion until after trial, empaneling a jury whose verdict could be treated as binding, advisory, or surplusage, depending on the eventual resolution of the issue.
In rendering its verdict the jury answered a number of interrogatories. It found total damages as follows:
loss of support $1,414,000
loss of nurture 550,000
pain and suffering 0
__________
Total 1,964,000
As noted above, the jury allocated responsibility to:
Yangming 60%
Red Star 35%
Mowen 5%
All of Red Star's liability and 20% of Yangming's share were attributed to the failure to rescue Dennis Mowen after the collision. The jury thus attributed 55% of responsibility for Mowen's death to the failure to rescue and 45% to the collision. Finally, the jury found Red Star management to have had privity or knowledge of the deficiencies on which it had based Red Star's liability.
Discussion
I. Motion to Strike Demand for Jury Trial
Yangming and Red Star, having preserved their position before trial, now move to strike the jury verdict in favor of a court-rendered decision. The motions are denied.
*371 A. Contentions Based on Red Star's Limitation Action
Defendants contend that, whatever Mowen's right to a jury trial might be if her claims were litigated apart from Red Star's limitation action, she is not entitled to a jury for this claim since it was tried as a part of a limitation petition in admiralty. They point out that the total claims made in the limitation proceeding far exceed the limitation fund of roughly $35,000. In such a situation, they contend, the issue of the petitioner's right to limitation is for the judge. If limitation is granted, the judge should go on to allocate liability and determine the claimants' pro rata shares of the fund. Red Star Memorandum of July 11, 1980 at 12; Yangming Memorandum of July 11, 1980 at 25. Defendants concede that if the judge determined Red Star was not entitled to limitation of liability, the court would have discretion to dissolve the injunction against other proceedings and permit claimants to pursue their claims outside the limitation proceedings, with jury trials where appropriate. Red Star Memorandum of July 11, 1980 at 12-13; Yangming Memorandum of July 11, 1980 at 26. Plaintiff argues that under Dairy Queen, Inc. v. Wood, 369 U.S. 469, 82 S. Ct. 894, 8 L. Ed. 2d 44 (1962), the right to a jury overrides competing interests in adjudication without a jury. See Doughty v. Nebel Towing Co., 270 F. Supp. 957 (E.D.La.1967).
Both sides, accordingly, contend that the court has no discretion in the matter but must, according to defendants' view, conduct the proceedings without a jury, and according to plaintiff's view, with a jury.
I cannot accept the defendants' contention. There is no right, as opposed to a likely expectation, to a non-jury trial in admiralty. Fitzgerald v. United States Lines Co., 374 U.S. 16, 83 S. Ct. 1646, 10 L. Ed. 2d 720 (1963), established that a litigant in admiralty is not entitled as a matter of right to a non-jury trial (admiralty action for maintenance and cure heard by jury when joined with Jones Act claim).
And I need not decide whether Dairy Queen establishes a right to jury trial in this case. Where claims with independent jurisdictional basis normally carrying a jury right, such as plaintiff's Jones Act claim, are joined with admiralty claims arising out of the same transaction or occurrence, all claims may be tried to a jury. See Bartholomew v. Universe Tankships, Inc., 263 F.2d 437, 443-47 (2d Cir.1959) (Jones Act claim), cert. denied, 359 U.S. 1000, 79 S. Ct. 1138, 3 L. Ed. 2d 1030 (1959); Best v. Honeywell, Inc., 491 F. Supp. 269 (D.Conn.1979) (D.O.H.S.A. and general maritime claims, diversity jurisdiction), aff'd without opinion sub nom. Sikorsky Aircraft Division, United Aircraft Corp. v. Honeywell, Inc., 679 F.2d 874 (2d Cir.1981); Mattes v. National Hellenic American Line, S.A., 427 F. Supp. 619, 628 (S.D.N.Y.1977) (Jones Act claim); Parsell v. Shell Oil Co., 421 F. Supp. 1275, 1276 (D.Conn.1976) (federal question jurisdiction), aff'd sub nom. East End Yacht Club v. Shell Oil Co., 573 F.2d 1289 (2d Cir.1977); Oroco Marine, Inc. v. National Marine Service, Inc., 71 F.R.D. 220 (S.D.Tex.1976) (diversity jurisdiction). I have concluded, assuming the trial judge has discretion in the matter, that the proper exercise of discretion favors jury trial.
It is beyond dispute and conceded here that, if limitation is denied, the judge is authorized to dissolve the injunction against outside proceedings, freeing the death claimant to pursue her action before a jury. In my view, the circumstances of this case make it more appropriate to exercise that discretion so as to give precedence to plaintiff's jury demand. This is for several reasons: first, the relative weight and importance of the death claim as compared to other claims at issue in the limitation proceeding; second, the fact that a jury was empanelled and its verdict taken in the consolidated limitation proceeding so that no waste or retrial is required to utilize the jury's findings;[2] third, both the jury and *372 the judge have concluded independently that limitation must be denied.[3] This third factor requires denial of Red Star's petition to limit liability and permits dissolution of the injunction barring plaintiff from pursuing her action in a separate proceeding before a jury. Since such a trial has already been conducted by the parties before a jury, it seems most appropriate, in service of the principles of Dairy Queen (if it is not required as a matter of law), to give effect to the jury trial that has been conducted.
B. Contentions Based on the Death on the High Seas Act
Plaintiff's claims against Yangming are pleaded under the Death on the High Seas Act, 46 U.S.C. §§ 761-768 (1976 & Supp. IV 1980) (hereinafter sometimes "DOHSA"), and the general maritime law. Plaintiff contends that she has a cause of action against Yangming under general maritime law, that this court has jurisdiction over that claim by virtue of both admiralty and diversity jurisdiction, that the "saving to suiters" clause of 28 U.S.C. § 1333 permits her to bring her general maritime claim as a civil suit in which she has a right to trial by jury, and that, because her admiralty claim and her civil claim arise out of the same transaction, she is entitled to a jury trial on both claims. Yangming contends that DOHSA, without a jury, is plaintiff's exclusive remedy for death on the high seas; it relies principally on Mobil Oil Corp. v. Higginbotham, 436 U.S. 618, 98 S. Ct. 2010, 56 L. Ed. 2d 581 (1978), contending that there is no alternative remedy to DOHSA to be saved by the "saving" clause.
Whether a general maritime remedy exists independent of DOHSA, carrying the right to jury trial for death in international waters, is a wide open question as to which the Supreme Court's eventual answer can only be guessed at from its arguably conflicting resolution of related questions. The pronouncement of the lower courts are in conflict.
In 1886, in The Harrisburg, 119 U.S. 199, 7 S. Ct. 140, 30 L. Ed. 358 (1886), the Supreme Court held that general maritime law afforded no remedy for wrongful death in the absence of an applicable state or federal statute. Thereafter, although state wrongful death statutes provided remedies for deaths in state territorial waters (and sometimes beyond), see, e.g., The Hamilton, 207 U.S. 398, 28 S. Ct. 133, 52 L. Ed. 264 (1907), no federal remedy existed for deaths on the high seas.
In 1920, Congress acted to fill this gap by passing the Death on the High Seas Act. DOHSA creates a remedy in admiralty for wrongful deaths more than three miles from shore, i.e., outside state territorial waters. 46 U.S.C. § 761. The act determines a number of details with respect to the cause of action it creates. It limits the class of beneficiaries, 46 U.S.C. § 761, allows suits filed by the victim of an accident to continue if the victim dies of his injuries while his suit is pending, 46 U.S.C. § 765, provides that contributory negligence will not bar recovery, 46 U.S.C. § 766, and limits recoverable damages to pecuniary loss, 46 U.S.C. § 762.
Prior to 1970, federal courts construing DOHSA held that suits under the Act could be maintained only in admiralty and without juries. In Higa v. Transocean Airlines, 230 F.2d 780 (9th Cir.), cert. dismissed, 352 U.S. 802, 77 S. Ct. 20, 1 L. Ed. 2d 37 (1956), the Ninth Circuit decided that the statutory phrase, "may maintain a suit for damages in the district courts of the United States, in admiralty ...," ruled out jury trial even if diversity of citizenship existed. In rejecting the contention that the "saving to suiters" clause preserved the right to sue *373 under diversity jurisdiction and thereby obtain a jury trial, the court noted "that the High Seas Act deprived no state or federal court of a then existing right." 230 F.2d at 782. The court relied also on a colloquy on the floor of the House in which it was said that "this proceeding will be in admiralty and that there will be no jury." 230 F.2d at 784 (quoting 59 Cong.Rec. at 4482).
Between 1920 and 1970, deaths on the high seas gave rise to suits under DOHSA, and those occurring in territorial waters were governed by the various states' wrongful death statutes. This structure resulted in a captious lack of uniformity.
Then the Supreme Court held in Moragne v. States Marine Lines, Inc., 398 U.S. 375, 90 S. Ct. 1772, 26 L. Ed. 2d 339 (1970), that a federal cause of action did exist under general maritime law for wrongful deaths occurring within territorial waters. Most of the reasoning in the opinion deals with anomalies resulting from the absence of a federal remedy within state territorial waters and has no necessary application to the question of existence of any general maritime remedy in international waters.[4] Justice Harlan stated in passing that he found in DOHSA "no expression of policy bearing on" any "desire to avoid the presentation of wrongful death claims to juries ...." Id. at 400 n. 14, 90 S.Ct. at 1787-88 n. 14. The opinion concluded "that the Death on the High Seas Act was not intended to preclude the availability of a remedy for wrongful death under the general maritime law in situations not covered by the Act." 398 U.S. at 402, 90 S.Ct. at 1788. (emphasis supplied)
Moragne left open a number of subsidiary questions concerning the nonstatutory death remedy that was held to survive DOHSA within territorial waters. One of those arose in Sea-Land Services, Inc. v. Gaudet, 414 U.S. 573, 94 S. Ct. 806, 39 L. Ed. 2d 9 (1974), which, like Moragne, involved a death inside territorial waters. The Court held that the appropriate measure of damages under the general maritime remedy included damages for loss of society, notwithstanding that these were excluded by DOHSA for deaths on the high seas.
Some lower courts read Moragne and Gaudet to create a general maritime cause of action for wrongful death surviving DOHSA in international, as well as territorial, waters. See, e.g., Law v. Sea Drilling Corp., 523 F.2d 793 (5th Cir.1975).
But so broad a reading of Moragne and Gaudet was, at least to some extent, repudiated in Mobil Oil Corp. v. Higginbotham, 436 U.S. 618, 98 S. Ct. 2010, 56 L. Ed. 2d 581 (1978), which considered whether damages for loss of society, expressly authorized in Gaudet for deaths occurring in territorial waters, could be recovered for deaths outside the three mile limit. The Court ruled that DOHSA established the exclusive measure of damages for wrongful death on the high seas; loss of society could not be recovered. The majority stated that:
[t]he Death on the High Seas Act ... announces Congress' considered judgment on such issues as the beneficiaries, the limitations period, contributory negligence, survival, and damages.... The Act does not address every issue of wrongful-death law, ... but when it does speak directly to a question, the courts are not free to "supplement" Congress' answer so thoroughly that the Act becomes meaningless.
Id. at 625, 98 S.Ct. at 2015.
The decision does not explicitly answer whether there is a general maritime remedy for death at sea, the question first answered in the negative by The Harrisburg, but later in the affirmative as to territorial waters by Moragne; whether the survival of any such remedy, if it exists for the high seas, has been pre-empted or cut-off by the express statutory remedy of DOHSA, which *374 it does answer in the affirmative as to aspects of any such general remedy that conflict with express provisions of DOHSA; and finally, if such a remedy exists and survives DOHSA for elements that are not in conflict with DOHSA's provisions, whether DOHSA should be construed to have rejected the availability of a jury trial for deaths on the high seas in diversity cases.
The decisions of the lower courts since Moragne are in irreconcilable conflict. Compare Best v. Honeywell, Inc., 491 F. Supp. 269 (D.Conn.1979), (DOHSA not the exclusive remedy; general maritime remedy exists) aff'd without opinion sub nom., Sikorsky Aircraft Division, United Aircraft Corp. v. Honeywell, Inc., 679 F.2d 874 (2d Cir.1981) and First & Merchants National Bank v. Adams, No. 79-365-N (E.D.Va. Oct. 22, 1979) (same) with Andersen v. Vought Corp., No. 79-1021 (M.D.Fla. May 14, 1980) (DOHSA is exclusive remedy). The Fifth Circuit has held that DOHSA is the exclusive remedy. Heyl v. Carnival Cruise Lines, 1981 A.M.C. 2393 (5th Cir.1981) (per curiam; opinion stamped "DO NOT PUBLISH"). The Second Circuit has discussed the issue in dicta. Public Administrator of the County of New York v. Angela Compania Naviera, S.A., 592 F.2d 58, 63 (2d Cir.), cert. dismissed, 443 U.S. 928, 100 S. Ct. 15, 61 L. Ed. 2d 897 (1979). ("The general maritime cause of action is, of course, available to plaintiffs" when the death at issue occurs outside state territorial waters.)
Because of the procedural posture of this case, these difficult questions need not be answered. For the DOHSA claims here asserted against Yangming do not arise in procedural isolation. They were joined for trial with Mowen's Jones Act and unseaworthiness claims against Red Star. It is surely preferable as a matter of rational procedure for the claims on each leg of the liability and contribution triangle to be tried by the same trier of fact. More is at stake than consistency or aesthetics. Each ruling as to percentage of responsibility is interdependent with the others, and if different triers of fact allocate responsibility differently as between the three parties, one party could end up paying a larger share than either factfinder found appropriate, unable to recover the appropriate share of contribution.
I have ruled, above, that it is at least preferable as a matter of discretion, and perhaps constitutionally required, that the Jones Act claims be tried by jury. We have therefore a DOHSA claim joined for trial with the same plaintiff's Jones Act claim, which is tried to a jury and involves the same issues of fact. The question is whether DOHSA or the general law of admiralty forbids the more rational procedure of using the Jones Act jury also to decide the DOHSA issues.
The Supreme Court's Fitzgerald decision seems fairly to imply that the general law of admiralty holds no obstacle and indeed encourages such a procedure. 374 U.S. at 20, 83 S.Ct. at 1650; see Blake v. Farrell Lines, 417 F.2d 264 (3d Cir.1969) (third-party claim for indemnity may be tried to jury along with longshoreman's diversity suit against defendant/third-party plaintiff); Simko v. C & C Marine Maintenance Co., 594 F.2d 960 (3d Cir.), cert. denied, 444 U.S. 833, 100 S. Ct. 64, 62 L. Ed. 2d 42 (1979) (admiralty claims may be left to be determined by jury after directed verdict granted in favor of defendant on plaintiff's Jones Act claim); Bergeria v. Marine Carriers, Inc., 341 F. Supp. 1153 (E.D.Pa.1972) (admiralty counterclaim may be tried to jury); Gvirtsman v. Western King Co., 263 F. Supp. 633 (C.D.Cal.1967) (DOHSA claim may be tried to jury when joined with Jones Act claim against same defendant).
I can find in DOHSA no command that trials must be without a jury. It does indeed provide that an appropriate plaintiff "may maintain a suit for damages in the district court ... in admiralty ...." Read literally, these words merely place such actions within the admiralty jurisdiction of the federal courts. They do not purport to nullify the saving to suitors clause where diversity of citizenship would confer another basis of jurisdiction. They do not purport *375 to prevent state courts from exercising jurisdiction over DOHSA claims.[5] And although juries were conventionally not employed in admiralty suits, the words of the statute express no intention to forbid the use of juries either in diversity cases or in the admiralty.
Although the reference to the admiralty jurisdiction most likely indicated an expectation that DOHSA cases would ordinarily be tried without juries, as noted above the Supreme Court in Moragne found no convincing "expression of policy" in the legislative history on this issue and in Fitzgerald ruled that an admiralty cause of action might properly be tried before a jury. I conclude that DOHSA should not be construed to forbid the employment of a jury, at least in a case that presents such valid reasons for its use. The motions to strike plaintiff's demand for a jury trial are accordingly denied.[6]
II. Motions for Judgment N.O.V.
In passing on a motion for judgment notwithstanding the verdict,
the trial court cannot assess the weight of conflicting evidence, pass on the credibility of the witnesses, or substitute its judgment for that of the jury. Rather, after viewing the evidence in a light most favorable to the non-moving party (giving the non-movant the benefit of all reasonable inferences), the trial court should grant a judgment n.o.v. only when (1) there is such a complete absence of evidence supporting the verdict that the jury's findings could only have been the result of sheer surmise and conjecture, or (2) there is such an overwhelming amount of evidence in favor of the movant that reasonable and fair minded men could not arrive at a verdict against him.
Mattivi v. South African Marine Corp., "Huguenot", 618 F.2d 163, 167-68 (2d Cir. 1980); See Howes v. Great Lakes Press Corp., 679 F.2d 1023, 1030 (2d Cir.1982) (quoting Mattivi and applying the standard on appeal).
As to Yangming, there was abundant evidence supporting a finding of liability. The best examples are the captain's misassessment of the situation, resulting in the catastrophic left turn, failure to blow a timely danger signal and failure to obey the stand-by statute, 33 U.S.C. § 367 (1976). The absence of a lookout, who had been sent off to prepare the ladder for the pilot, *376 is another.[7] Yangming's motion for judgment in its favor notwithstanding the verdict is completely without merit and must be denied.
Red Star's motion stands on at least arguable footing but also must be denied. Red Star was cleared by the jury of any responsibility for the collision. The sole basis of its liability was its failure to save Mowen after the collision. On this point, there was ample and convincing evidence of negligence in the failure to plan and properly organize a search. Red Star argues that this failure played no causative role because, it contends, there was no evidence that Mowen was alive and thus capable of being saved.
I heard extensive argument on this point during the trial, when Red Star sought to exclude the evidence of failure to rescue. I ruled against Red Star, and now after further consideration reaffirm that ruling. Although there is no direct evidence in the form of eyewitness testimony of what happened to Mowen, there is adequate circumstantial evidence supporting the inference that Mowen was not killed by the collision but went over the side safely. This is not a case like McMillan v. Marine Sulphur Shipping Corp., 607 F.2d 1034 (2d Cir.1979), cert. denied, 445 U.S. 905, 100 S. Ct. 1082, 63 L. Ed. 2d 321 (1980), in which different alternatives are equally plausible, some supporting liability, some not, leaving insufficient basis to overcome a burden of proof.
I find on the proven facts that the logical inferences supporting a safe entry into the water substantially outweigh the possibility that the crash killed Mowen. The evidence indicates that Dennis Mowen had about thirty seconds, ample time, after collision had become inevitable and he had blown his last whistle blasts from the wheelhouse to run from the wheelhouse to a safer position down on the starboard side of the main deck. There is every reason to believe that he hastened down the ladder to the main deck (just above the water line) and either jumped or was forced over the side when the tug heeled far over to starboard at the moment of the collision. Such conduct on Mowen's part is far more probable than that he remained inside the wheelhouse, the most dangerous place for him to be, for thirty seconds after his presence there ceased to have utility but subjected him to obvious and unnecessary risk. Nor is there any strong indication that he was killed by the shock of impact. No other members of the crew were seriously injured by the impact. He was the one who had the best opportunity to protect himself because he knew it was coming. It is most unlikely that he went to the port side where the impact was to take place. I conclude it is more likely than not that Mowen went over the side alive and remained afloat for at least a time. There was sufficient evidence to support plaintiff's burden of proof that Mowen was capable of being saved. The tug's failure to undertake proper rescue operations was a contributing cause of his death.[8] Red Star's motion for judgment n.o.v. must be denied.
III. Motions to Set Aside or Reduce the Verdict
The motions to set aside the jury's verdict, or in the alternative to reduce it, present serious questions. Such motions differ substantially from motions for judgment notwithstanding the verdict. As to the latter, the evidence must be *377 viewed in the light most favorable to the winner of the verdict; judgment n.o.v. may not be granted unless this view of the evidence cannot support the verdict. In contrast, a motion to set aside the verdict may be granted even though there is substantial evidence supporting the verdict if "it is quite clear that the jury ha[s] reached a seriously erroneous result." Bevevino v. M.S. Saydjari, 574 F.2d 676, 683-84 (2d Cir. 1978) (quoting 6A J. Moore, Moore's Federal Practice ¶ 59.08[5] (1973) at 160-61). The judge is free to weigh the evidence independently and need not view it, as in a motion testing the sufficiency of the evidence, in the light most favorable to the prevailing party. 574 F.2d at 684. When a jury is found to have erred in awarding excessive damages by reason of passion, prejudice or sympathy, the court may require the winner of the excessive verdict to choose between a new trial and acceptance of a reduced award. Lanfranconi v. Tidewater Oil Co., 376 F.2d 91 (2d Cir.), cert. denied, 389 U.S. 951, 88 S. Ct. 333, 19 L. Ed. 2d 360 (1967); (6A J. Moore, Moore's Federal Practice ¶ 59.05[3] (2d ed. 1979) at 47-48). I have decided that the excessiveness of the jury's award, coupled with the deliberate (and uncorrectable) misconduct of plaintiff's counsel, Theodore Friedman, Esq., in sending into the jury room a misleading exhibit on damages he knew not to have been in evidence, warrant setting aside the jury's verdict or, if the plaintiff accepts the remittitur, reduction of the jury's award.
A. Loss of Nurture
The jury awarded $550,000 in damages for loss of nurture to Dennis Mowen's two children. I find that this award was excessive, unwarranted by the evidence, attributable to sympathy and an improper summation by plaintiff's counsel, and must be set aside.
Dennis Mowen's children were seven and four years old at the time of his death. Lorraine Mowen testified[9] that her husband's work schedule at sea required that he work around the clock away from home every other week; he spent each intervening week at home. She testified that he took the children for walks in the woods, teaching them about nature, and permitted them to help him perform various household tasks. He taught his son about celestial navigation with a telescope. He played the guitar and sang songs with the children. She further testified that he was an attentive father who made an effort to spend time with his children.
An award for loss of nurture does not extend to compensation for grief resulting from the loss of the warm and loving parental relationship. It is a more limited and more measurable award for loss of valuable services in the nature of instruction, training and guidance.
In his summation, Mr. Friedman suggested to the jury $1 million as an appropriate figure. This number was wildly beyond what the evidence would support and was therefore an improper suggestion. The jury returned a verdict of $550,000, which also is sufficiently far beyond what the evidence supports as to justify setting it aside unless the plaintiff remits a substantial portion of it.
Although adult children can also suffer from loss of nurture, the vast majority of the loss established by the evidence here must be attributed to their early years. The evidence presented by the plaintiff involved activities that certainly would have become infrequent as the children became older.
*378 Counting the full time from their father's death until legal majority, 11 years would pass during which both children were minors, plus 3 more in which one child was a minor. Using the average of 12½ years, the award amounted to $44,000 per year.[10]
If one concentrates on the years prior to adolescence, those years during which psychologists generally agree that the influence of the parents is the greatest, the award values the loss at approximately $73,000 per year.
The jury's award is far out of line with the evidence and no doubt was the product of sympathy rather than a fair evaluation of the evidence. I note also that the children were brought into court with their mother for the plaintiff's opening statement. Counsel's speech to the jury was understandably designed to play on the heartstrings; the result was that a child had to be led from the courtroom in tears, in the presence of the jury. I do not criticize bringing the child into court. The courtroom is a public place, and parties-in-interest, above all others, have a perfect right to be there. However, if such an incident elicits the passion of the jury so as to undermine the fairness of the fact finding process and produce an unjustified, excessive verdict founded on sympathy, that verdict must be set aside or subjected to remittitur.
I find that the evidence of loss of nurture supports a verdict of $150,000.
B. Loss of Support
I have also concluded that the jury's award for loss of support must be set aside. This ruling is based on a combination of factors.
The first is the misconduct of the plaintiff's attorney, Mr. Friedman, in surreptitiously including among the exhibits to be sent to the jury an exhibit for identification that he well knew had not been received in evidence. This exhibit (PX 337B for id.), which purported to be a summary of computations, was inaccurate and misleading in that certain of the implied computations had not been performed, and had they been performed would necessarily have yielded results less favorable to the plaintiff.
To understand the significance of this unreceived exhibit, it is necessary to review the history of its evolution, which was characterized by error and evasion on the part of plaintiff's counsel and her economic expert, Dr. Conrad Berenson.
Dr. Berenson testified to establish the loss of annual support suffered by the plaintiffs as the result of Dennis Mowen's death and the size of a lump sum necessary to fund similar payments over the remaining years of Dennis Mowen's statistical life expectancy. In accordance with the Supreme Court's decision in Norfolk & W.R. v. Liepelt, 444 U.S. 490, 100 S. Ct. 755, 62 L. Ed. 2d 689 (1980), two new issues had become pertinent to the jury's consideration: first, the income taxes that would have been incurred by the deceased wage earner annually and that would therefore not have been available for his dependents' support; second, the amount of income taxes to be incurred by the plaintiff on the interest earned from the investment of her lump sum award. The first mentioned factor tends, of course, to decrease the award; the second tends to increase it, since the plaintiff needs an additional amount to offset her income taxes, without which her money will be exhausted before she has received the full stream of support payments to which she was found entitled. The amount to be added to a previously computed lump sum to offset the plaintiff's future taxes was referred to at trial as the "add-back".[11]
*379 Dr. Berenson testified that the way to arrive at the add-back was a trial and error method. One starts with the sum that would be sufficient, if plaintiff invested it at appropriate interest rates and paid no taxes, to give plaintiff the stream of support payments that the jury finds warranted. To this sum one adds an estimated "add-back." A set of calculations is then repeatedly performed: the interest for the first year from the investment of the sum is added to the original principal; the income taxes to be imposed on those earnings are subtracted; and the payments to be made for the support of the plaintiff in that year are subtracted, leaving a carryover balance for the subsequent year. One repeats the process for each successive year until the fund is depleted to zero. If the depletion to zero occurs before plaintiff has received all support payments to which she is entitled, the estimated addback was too small and needs to be increased. If the depletion to zero does not occur until beyond the year for the last support payment, the estimate was too large, and the process must be repeated with a smaller estimated addback.
Questioning of Dr. Berenson by the court (out of the jury's presence) brought out that concealed in his figures was a fundamental inconsistency and error that must have improperly increased the add-back and the final lump sum number. His computations were required to use the income tax rates over the next 28 years in two calculations: first, to calculate the taxes that would be deducted from Dennis Mowen's gross income; second, to calculate the taxes that would be deducted from the widow's earnings on her fund. Berenson testified that there would be an overall inflation during this period, in his estimation at the average rate of 8%. With respect to Dennis Mowen's taxes, Berenson assumed that, regardless of the rate of inflation in wages, the percentage of Mowen's earnings that would go in taxes would remain constant at 28%.[12] This assumption (of a constant percentage of tax bite) tacitly assumed that Congress would repeatedly reduce the tax rates to protect taxpayers against inflation-based "bracket-creep." T. 6989-7001.
When, on the other hand, Berenson estimated the widow's taxes over the same future period of 28 years, he used today's tax table rates, without such reduction. Id.
The inconsistent assumption obviously favored plaintiff. Either the taxes to come out of Dennis' income were estimated far too low (by the year 2007, if Dr. Berenson's inflation prediction was correct, Mowen's income as a tug captain would have been $474,485 and yet his taxes were computed at only 28%, T. 6994) or the tax rates used to calculate the widow's add-back were far too high, or both.
When questioned, Dr. Berenson at first denied that there was any such inconsistency in his calculations. T. 6998. Eventually, he acknowledged that different rates must have been used on the two sides of the calculation. T. 6989-7003, 7140-41. He argued, however, that it was of small importance because the largest part of the widow's tax bill would be incurred in the early years when the reduction in tax rates would be, as yet, relatively small. T. 7001-02.
After this questioning, plaintiff's counsel, Mr. Friedman, acknowledged the correctness of my observation of inconsistency, characterized the mistake as inadvertent, apologized for not having seen it himself and offered to stipulate to a correction. T. 7001-7003.[13] Dr. Berenson also characterized the inconsistency as "without intent." T. 7002-03.
The following day, I questioned Dr. Berenson further, again out of the jury's presence. Although he had initially denied the inconsistency and both he and Mr. Friedman *380 upon acknowledging it had previously described the error as unintentional, now Dr. Berenson suggested that he had deliberately used the inconsistent tax rates, apparently because he argued its unjustified benefit to the plaintiff was not large and the amount of work necessary to construct comparable models would have been great.
In an effort to determine the size and importance of the consequences of the inconsistency, I asked Dr. Berenson whether the widow's tax rates might be brought into the same basis as that used for Dennis Mowen's taxes by applying today's tax rates to the present value of her future stream of earnings. T. 7142, 7147-48. Berenson said he was not sure. I then directed him to submit a demonstration of these calculations and added that if he disagreed with this approach, he could submit anything else he believed would correctly bring Lorraine Mowen's tax rates into line with those used for Dennis. T. 7141-7158.
Notwithstanding my direction on January 5, 1982 that these relatively simple calculations be provided within a few days, nothing had been submitted by January 14, just a short time before the defendants' expert on damages was scheduled to take the stand. T. 8329-8342. I directed that the calculations be provided by mid-day the following day, a Friday, during which the trial was in recess. T. 8330. Mr. Friedman said at that time that I might not be satisfied with what he was going to submit. T. 8339-41. The following day, he delivered two documents to my chambers (later designated as part of PX 385). One document was a handwritten sheet with three columns: The first column was headed "Years" and listed the numbers 1 through 28; the second column was headed "Taxable Earnings" and merely restated the taxable earnings that Berenson had already testified to as those he projected on Lorraine Mowen's lump sum award; the third column was headed "Discounted Taxable Earnings 8% Discount." The numbers in this column reflected the present value at 8% discount of the numbers in the second column. See T. 8346-47 (describing the document for the record). Mr. Friedman also delivered a two-page memorandum from Dr. Berenson to him dated January 14, 1982. See T. 8348. The memo basically argued that the inconsistency in tax treatment that I had observed had little practical importance and was in any event justified to offset other unrelated assumptions Berenson had used that he argued were overly favorable to defendants. (Dr. Berenson had previously told the jury that these other assumptions favored the defendants, presenting them as indications of the fair and conservative nature of his calculations.)
The two documents did not even pretend to perform the tax computations I had directed and were a clear attempt to evade the issue and stall. They were also apparently not delivered to counsel for the defendants. Yangming Memorandum of August 4, 1982 at 5. The explanation offered for the lateness of this submission was insufficient time. But the submitted computations that were a part of what I had directed (the bringing to present value of the projected future earnings) would have taken Dr. Berenson less than an hour, as he frequently demonstrated on the stand. See T. 7150. The greater and more time consuming effort had gone into the preparation the rebuttal materials, which included two substantially more complex calculations designed to show that the assumptions and calculations to which Berenson had testified were overly favorable to the defendants. It appears that a part of the reason for the delay and avoidance was plaintiff's counsel's wish to avoid providing material that could help defendants' economist to undermine Berenson.
My still unsatisfied direction for the calculations was again discussed on January 18. Mr. Friedman at this point produced the two documents previously delivered to my chambers, supplemented now by a third document. This last document was a typewritten, two-page submission with a heading that read "re: Mowen, Total Tax: *381 $655,240," with figures for each of 28 years, adding up to the sum stated. T. 8347.[13a]
On January 28, toward the end of the defendants' expert's testimony, Mr. Friedman offered these documents, now labelled PX 385, for admission into evidence. He argued that the figure labelled "total tax" ($655,240) on PX 385 should replace the figure labelled "add-back" ($804,608) on PX 337A, a chart that summarized Berenson's jury testimony and included the results of the inconsistent tax treatment. T. 9832. Mr. Friedman argued that the substitution of this "total tax" figure for the add-back on the old chart (PX 337A) would neutralize the error that resulted from the inconsistent tax treatment. T. 9926-32. (Mr. Friedman thus placed a value of approximately $150,000 on the error he and Dr. Berenson had previously argued was too small to bother calculating.) I later ruled that the receipt of Exhibit 385 (the "total tax") would depend on what Dr. Berenson would have to say about it if produced for cross-examination by the defendants. T. 9985-88.
Dr. Berenson returned on February 2 and answered questions out of the presence of the jury. He stated that the figure labelled "total tax" on Exhibit 385 was intended to replace the figure labelled "add-back" on Exhibit 337A, T. 10022, and that he had prepared another exhibit, marked PX 337B for identification, as a replacement for PX 337A. T. 10021-23.
Questioning by the court at this point brought out another fundamental flaw favoring plaintiff in Dr. Berenson's new testimony. The figure labelled "total tax" was necessarily too large as a replacement for the addback figure on PX 337A. Berenson's initial addback on PX 337A was arrived at by a cumulative series of computations; a change in any one number would necessarily change the numbers for each subsequent year. The new PX 385 used the same annual income numbers unchanged from PX 337A,[14] despite the annual reduction in tax rates. For each year, Dr. Berenson applied lower taxes but left the amounts of annual income unchanged. His only adjustment to the bottom line was a reduction by the sum of the reductions in the tax figures.
This approach failed to reflect the fact that each change must affect each subsequent year's figures. The reduction of tax in year 2 would have left a larger principal in year 3, which would in turn have produced a larger income in year 3 and a still larger principal in year 4, etc. The additional principal realized in year 2 would remain present for 26 years, producing larger income and larger carryover principal year after year. It therefore follows necessarily that the fund remained too large and would not have been exhausted by the 28th year.
On questioning by the court Dr. Berenson explicitly acknowledged the flaw in the contention that the figures in PX 385 could serve as addback in 337B. Once again he sought to minimize the consequences of his error in plaintiff's favor. In answer to a leading question by Mr. Friedman, and without explanation or substantiation, he testified that the error would probably not exceed 5% in plaintiff's favor. T. 10030-34.
In addition to the fundamental errors explained above, PX 385 and the testimony about it contained other errors. In the first place it is captioned "D. Mowen," which is inaccurate, as it pertains to Lorraine Mowen's income, not that of Dennis. Second, it is captioned "total tax," and Dr. Berenson, when asked by Mr. Friedman whether the figure represented "total taxes on the stream of income that would flow to Lorraine Mowen from the lump sum there involved," answered "Sure." T. 10014. Further questioning by the court, however, revealed *382 that the label "total tax" and the corresponding testimony of Dr. Berenson were inaccurate. The number did not represent total tax on the stream of income, but a total based on the application of current tax rates to the present value of the future income of the 337A fund. T. 10015.
The pertinence of these new figures was in fact never made clear. I had asked some three weeks earlier whether such a calculation would help me judge the size of the error resulting from Berenson's use of different tax rates for Lorraine's and Dennis' incomes in the same years. Dr. Berenson had replied at the time, "It might be; I'm not sure. I really don't know." T. 7147, 7150 ("But I am not so sure that it is the right approach....").
PX 385 was eventually received upon the defendant's stipulation that it represented a correct application of today's tax tables to certain present value figures. This stipulation, however, did nothing to qualify the figure as either the total tax on Lorraine Mowen's income or as addback.
Mr. Friedman later renewed his request for the receipt in evidence of PX 337B. I ruled it would not be received in evidence but permitted Mr. Friedman to use it argumentatively in his summation. T. 10039-40. He did in fact refer frequently to PX 337B id. in his summation, arguing that the revised figures therein were consistent with an interpretation of the testimony of the defendants' economic expert. T. 10529-10532.
The jury began its deliberations at 10:17 a.m. on Friday, February 5. T. 10759. At 10:22 a.m., the jury sent a note requesting all exhibits in the case. T. 10761. When I informed counsel of the note, I cautioned that "[t]here also are exhibits that contain items which are not in evidence which the jury has been instructed to disregard. I am thinking of anything that has Berenson's calculations that have been stricken." T. 10762-63. Mr. Friedman replied, "Yes." Id. Later that morning, the evidence, consisting of hundreds of exhibits, was delivered by counsel to the clerk for transmission to the jury.
When the jury deliberations had finished, at about 5:00 p.m. on Saturday, and the trial was over, it was discovered that PX 337B id. was in the jury room, together with the exhibits that had been received in evidence.
After considering all the circumstances and taking the testimony of counsel and court personnel, I find beyond reasonable doubt that it was Mr. Friedman who caused PX 337B to be included among the evidence sent to the jury, and that this was done by him intentionally and with full awareness that it was in violation of the court's orders and rulings as to the receipt of the exhibit.
In response to the defendants' motions for new trial, Mr. Friedman submitted his affidavit on this issue. The affidavit said nothing one way or the other on the subject of his own knowledge or complicity but offered the explanation that his co-counsel, Mr. Cuccia, had sent the exhibit into the jury room in good faith in the mistaken belief that it was part of the evidence received. Friedman Affidavit of March 8, 1982 at 23. ("Mr. Cuccia acted in good faith.... Mr. Cuccia believed that since he had taken out the original uncorrected exhibits, the exhibit containing the corrected, record figures was to be included in the trial exhibits.") This affidavit was in curious form in that it said nothing about the affiant, but spoke for Mr. Cuccia without any affidavit from him.
This irregularity became more serious at the subsequent hearing, when Mr. Cuccia testified in contradiction to what the Friedman affidavit said about him. Mr. Cuccia testified that he had not caused PX 337B to be sent to the jury and, furthermore, that he was well aware at the time that it was not in evidence. He added that he had not participated in the preparation of Mr. Friedman's affidavit laying the blame on him, having been out of the country at the time of its preparation, and had only recently become aware of its contents. Supplementary Transcript, 40-43 (hereinafter "ST.").
*383 It became still more serious upon Mr. Friedman's own testimony that he and Mr. Cuccia had had a conversation adverting to the fact that 337B was not to go to the jury. ST. 31, 33. Accordingly, even if Mr. Friedman believed that Mr. Cuccia had sent in the exhibit, he could not have believed what he set forth in his affidavit: that Mr. Cuccia had done this in "good faith" in the belief that it "was to be included in the trial exhibits."
The further testimony at the hearing was as follows:
Mr. Friedman testified that shortly after his conversation with Mr. Cuccia to the effect that PX 337A and B should not be sent to the jury, Mr. Friedman left the courthouse for a luncheon engagement, leaving the marshalling of the plaintiff's exhibits in Mr. Cuccia's hands, and did not return until sometime after all the exhibits had gone into the jury room. ST. 32-36, 75-78.
The falsity of Mr. Friedman's testimony is indisputably established by the testimony of virtually all the other participants and the trial transcript.
Mr. Cuccia confirmed that Mr. Friedman had been absent from the courtroom for a time during preparation of the exhibits, but did not confirm that Mr. Friedman was absent when they were sent to the jury. He said that he had placed exhibits that were to go to the jury against the jury rail at the side of the courtroom and exhibits not received at the back rail. He believed PX 337B id. was placed against the back rail. He testified explicitly that he did not place it among the received exhibits at the side. ST. 39-45.
Richard Brown, counsel for Yangming, testified that Mr. Friedman was in the courtroom while the exhibits were being collected and participated in certain conversations on the subject. ST. 7, 79. Harry Gotimer, also counsel for Yangming, testified that Mr. Friedman was in the courtroom when he (Mr. Gotimer) learned that the plaintiff's exhibits had been sent in without his having had an opportunity to examine them. ST. 13-14. James Leonard, counsel for Red Star, testified that Mr. Friedman informed him that the plaintiff's exhibits were ready and was in the courtroom shortly before the exhibits went into the jury. ST. 17-18, 21-23, 27, 79.
The deputy clerk, Mr. Patrick Bowes, testified that he remembered Mr. Friedman being present in the courtroom when he took the exhibits for the jury. ST. 55-59. He testified that Mr. Friedman approved every pile of exhibits before Mr. Bowes picked them up to be taken into the jury. Id. He further testified that the exhibits he took into the jury room were in the vicinity of the jury rail and that he took nothing from against the back rail. Id. He said that Mr. Friedman appeared to take charge of the collection of exhibits for the jury. Id.
The trial transcript directly contradicts Mr. Friedman's contentions that he was not present during the collection of the exhibits and when they were sent into the jury room. As noted above, the jury sent the note requesting the exhibits at 10:22 a.m. T. 10761. Another note was received at 10:45 a.m. T. 10764. At that time, I asked, "Have you gotten the exhibits ready?" Id. Mr. Friedman replied, "The exhibits, yes. I understand there was another message since then." Id. I asked, "Are there any disputes about the exhibits." Id. Mr. Gotimer said that "[t]here may be two or three that are missing," Id., and I directed the attorneys to "[s]end in now all exhibits on which you have agreement, as to which there is no dispute. They should be sent to the jury. I will direct they be delivered to the marshal to be delivered to the jury." Id. Thereafter, Mr. Friedman appears on eight of the next ten pages of the transcript. T. 10765-66, 10769-74. The jury came into the courtroom at 12:05 p.m., T. 10774, and returned to the jury room at 12:10 p.m. T. 10776. Mr. Friedman was present. T. 10777. Immediately thereafter, Mr. Friedman answered my question as to whether certain exhibits had been sent into the jury room, and participated in further colloquy, indicating that the exhibits had already gone in and that Mr. Friedman *384 had knowledge of what went in. T. 10777-79. Shortly thereafter came the luncheon recess. T. 10781-84. If Mr. Friedman left for a luncheon engagement as he testified, it is clear this did not occur until after the delivery of the exhibits to the jury.
My law clerk, Mr. Mark Drooks, testified as follows to what occurred after the end of the jury deliberations: On Saturday, February 6, 1982, as soon as the jury left the courtroom, Mr. Friedman stood up and said that he wanted to remove all of his exhibits from the jury room. ST. 62. Mr. Leonard suggested that the task could be postponed until the following Monday but Mr. Friedman insisted it should be done immediately. Mr. Drooks asked Mr. Bowes not to permit anyone into the jury room until it was checked. After the jurors left the room, he entered and found PX 337B id. with other placards. He then asked me to come into the jury room before dismissing the lawyers. He testified that after he showed me PX 337B, I brought it into the courtroom and told the lawyers that I was surprised to find it in the jury room after I had so clearly ruled it not in evidence. Mr. Friedman, Mr. Leonard, Mr. Brown and Mr. Cuccia were all present. Counsel for the defendants stated that they would like an opportunity to place the matter on the record. It was impossible to do so at the time because the court reporter had gone. Mr. Friedman said nothing. ST. 62-65.
After the above described testimony, Mr. Friedman took the stand again, in part to refute the possible inference from Mr. Drooks' testimony that his impatience to enter the jury room resulted from a desire to remove the incriminating exhibit. He stated that it was his uniform practice to secure all exhibits as rapidly as possible after trial so as to insure their preservation for appeal. ST. 72-76. This position was, however, significantly weakened by the testimony of Yangming counsel, Mr. Gotimer, that on Saturday evening after the end of the trial, Mr. Friedman did not remove the remaining exhibits. They remained in the courtroom over the weekend, and Mr. Friedman relied on defense counsel to pick up his exhibits for him. Defense counsel collected all the exhibits and forwarded plaintiff's exhibits to Mr. Friedman under covering letter nearly two weeks later. ST. 49-51. It appears that Mr. Friedman's sense of urgency to take possession of his exhibits diminished substantially after the court's discovery of PX 337B.
I conclude on overwhelming evidence that, through willful misconduct of plaintiff's counsel, the jury was sent an exhibit that had been excluded from the evidence because of its unsubstantiated, inaccurate and misleading nature.[15]
Plaintiff makes several arguments to the effect that this incident was harmless, or properly chargeable to the defendants for their misplaced trust. These arguments are imaginative but frivolous.
It is contended first that each of the numbers appearing on PX 337B was in evidence and that the exhibit as a whole could therefore not be prejudicial. This argument skirts the issue. PX 337B id. presents the number $655,240 as "ADDBACK FOR TAXES ON INCOME OF LUMP SUM." Although it is true that the number $655,240 was in evidence, it was not in evidence as the addback. It was received in PX 385 labelled as "total tax" on a series of numbers, determined by using current tax rates *385 in connection with the present value of certain hypothetical future earnings figures. Although Dr. Berenson began by testifying out of the jury's presence that it was addback, he then acknowledged that it could not be accurate as addback but was necessarily too large. See supra p. 381. When presented as the addback, this number was not only outside the evidence but was incorrect and prejudicially misleading to the detriment of the defendants.
Furthermore, it is hardly convincing for plaintiff to now argue the small importance of the exhibit when all of Mr. Friedman's conduct toward this exhibit made clear that he considered it enormously important. PX 337A, which summarized Berenson's initial testimony, had been struck because of his improper use of inconsistent tax rates. Mr. Friedman clearly did not want to swallow the bitter pill of calling Berenson back before the jury to acknowledge his significant mistake in plaintiff's favor. Mr. Friedman's offer of 337B as a substitute for 337A consumed an enormous amount of his energy and he argued vigorously that it should be received in evidence. He relied heavily on it in his summation. Even without reaching the further fact of surreptitiously sending it into the jury room, counsel's conduct makes clear that plaintiff considered the exhibit very important.
And, of course, it was important. It was designed to be accepted by the jury as the summary of Berenson's expert analysis. It tended to rehabilitate Berenson as against the contention that his testimony had contained errors. And Mr. Friedman's summation pointed to similarities between 337B and aspects of the testimony of defendants' economic expert as further support for Berenson's reliability.
I reject completely plaintiff's argument that the wayward exhibit was harmless and find to the contrary that it was important in the dynamics of the trial and carried a serious risk of prejudice when transmitted to the jury room.[16]
Next, Mowen contends that, since the exhibits were "made available to defense counsel for their review before the Clerk brought them into the jury room," Friedman Affidavit of March 8, 1982 at 23, the defendants must take responsibility for this exhibit having gone into the jury room. Whatever value their argument might have if the exhibit had gone in by plaintiff's accidental mistake, it has none where the conduct was intentional and surreptitious. That defense counsel trusted their adversary more than they should have does not bar them from complaining if that trust was abused.
Finally, Mowen argues that I should overlook this incident on the ground that the defendants also sent material not in evidence into the jury room. The allegation is utterly unsubstantiated.
In addition to my findings on counsel's misconduct, and the prejudicial potential of the exhibit, I also note that the jury's finding for loss of support, like the verdict for loss of nurture, was excessive, motivated by sympathy and not a realistic appraisal of the loss. The jury's award of $1,414,000 amounted to 87% of the highest figure for which plaintiff argued.[17] The latter figure was based on the assumption that Dennis Mowen would have been licensed, promoted to and hired as captain within four years of his promotion to mate (despite his sharing of fault in a major collision) with a lifetime of full employment and overtime as a captain, as well as assumptions concerning the widow's investment of her fund that unrealistically *386 maximized her tax liability and thus unrealistically maximized the addback factor and the award.
For all the reasons stated, I conclude that remittitur must be granted as to the award for loss of support in the amount of $300,000, or alternatively the verdict set aside.
C. Allocation of Fault
Defendants also argue that the verdict should be set aside by reason of an allocation of fault overly favorable to the plaintiff. Mowen, of course, bore no responsibility for the failure to save him. I have already discussed and rejected the contention that there should be no award for failure to rescue because of insufficient proof that Mowen remained alive in the water. The allocation of fault as between the two ships for failure to rescue was reasonable.
Yangming contends the division of responsibility for the collision between it and Mowen on an 8 to 1 basis was against the weight of the evidence and requires setting aside. There was without question evidence that could have warranted placing a heavier share on Mowen, particularly the evidence that Mowen was late in making his required starboard turn and failed to signal in time. I cannot say, however, that the evidence required placing a heavier share of responsibility on Mowen. There can be no doubt that the captain of the Ming Giant made a catastrophic misassessment of the situation. I cannot rule that the jury's finding warrants setting aside the verdict.[18] The motion to set aside the verdict, to the extent it rests on the allocation of fault, is denied.[19]
D. Remittitur
I have concluded that a reduction of the jury's findings on damages by $700,000 is appropriate as a remittitur. I find that the evidence of loss of nurture supports a finding of $150,000, a reduction by $400,000 from the jury's award. The finding for loss of support is appropriately reduced by $300,000 to $1,114,000. This would reduce the verdict by 95% of $700,000, or $665,000, as 5% was charged against the plaintiff. The defendants' aggregate share would be reduced to $1,200,800. If plaintiff accepts this reduction, the defendants' motions to set aside the verdict will be denied. If not, they will be granted.
E. Possible Further Proceedings
1. Scope and Nature
In the event the plaintiff elects not to remit, an argument can be made that further proceedings should be limited to the issue of damages with the jury's verdict as to allocation of liability left undisturbed. I do not agree. The trial was flawed by plaintiff's overreaching in several respects already described. In addition, as Yangming bitterly complains, Mr. Friedman threw in a new theory on practically the last day of this 3½ month trial, and, summing up last, concentrated heavily on this theory. I cannot agree with Yangming's contention that there was no evidentiary support for this theory, although I readily agree that the theory was brought into the case in an unfair and surprising fashion. These circumstances leave an unpleasant taste on the tongue and argue persuasively against leaving the liability as determined by the first jury if the remittitur is rejected. See Cosentino v. Royal Netherland S.S. Co., 389 F.2d 726 (2d Cir.), cert. denied, 393 U.S. 977, 89 S. Ct. 441, 21 L. Ed. 2d 438 (1968).
On the other hand, I see no reason why the issue of Red Star's right to limit liability should not be deemed determined. As noted above, the jury's findings on this *387 issue agreed with those of the trial court and are properly warranted by the evidence.
The possibility also exists that no new trial will be appropriate even if the verdict is set aside. Perhaps, on the peculiar facts of this case, the misconduct of plaintiff's counsel in contriving to influence the jury by sending non-evidentiary material into the jury room should constitute a forfeiture of the plaintiff's right to jury trial. I have given extensive consideration to this question and have found no controlling authorities. If a party can be held to have forfeited the right to jury trial for nothing more than counsel's negligent failure to file a timely jury demand, Fed.R.Civ.P. 38(d); General Tire & Rubber Co. v. Watkins, 331 F.2d 192, 195-196, 197 (4th Cir.) (right to jury trial waived by failure to file timely demand; "There can be no doubt that the waiver provisions of rule 38 are constitutional"; trial judge did not abuse his discretion in refusing to grant jury trial based on practical difficulties jury would have understanding complex issues and savings of time afforded by not using a jury), cert. denied, 377 U.S. 952, 84 S. Ct. 1629, 12 L. Ed. 2d 498 (1964), the deliberate misconduct found here certainly seems sufficient to justify the same result. The enormous cost to the defendants of having to relitigate by reason of plaintiff's misconduct toward the jury may also be a factor to be considered. Because no motion was made on this theory and no argument or briefing was directed to it, and because I have determined that a remittitur is an adequate and more conventional response to the misconduct, at least at this stage of the litigation, I do not consider it necessary to pursue the issue of forfeiture at this point. If plaintiff declines to remit, so that the jury verdict is set aside, and defendants so move, I will direct that briefs be submitted on the question whether a new trial should be held before a jury or whether the misconduct discussed above should be ruled a forfeiture of the right to jury trial so that the court would proceed to enter its findings of fact based on the record of the trial that has already occurred.
2. Costs and Conflicts of Interest
If a new trial is conducted, it will result in large part from the intentional misconduct of plaintiff's attorney in surreptitiously slipping an unreceived exhibit into the evidence destined for the jury room.
Section 1927 of Title 28 provides:
Any attorney or other person admitted to conduct cases in any court of the United States or any Territory thereof who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys' fees reasonably incurred because of such conduct.
Antitrust Procedural Improvements Act of 1980, § 3, 28 U.S.C.A. § 1927 (West Supp. 1982).[20]
*388 Wholly apart from § 1927, a federal court appears to possess inherent power to assess attorneys' fees against counsel in certain circumstances.[21]
There would appear to be a substantial basis in law, whether under § 1927 or under the inherent power of the court to control litigation in its presence, to award against Mr. Friedman all or a portion of the costs and attorneys' fees incurred by defendants in any retrial of this action, since it was his misconduct that, in large part, made the retrial necessary.
The foregoing mention of costs does not constitute a ruling, which would be premature as the matter has not been raised or argued and may, in any event, become moot. The possibility is raised now because it gives rise to a serious potential for conflict of interest. If counsel risks being held responsible for the adversary's attorney's fees in the event of retrial, the question must be faced whether he can act disinterestedly in advising his client on the acceptance or rejection of the remittitur, not to mention the conduct of a retrial. The matter is raised now to insure that the possibility of conflict receives the attention it deserves before plaintiff considers her choice with respect to the remittitur.
Conclusion
Red Star's motion to strike Mowen's jury demand is denied. Yangming's motion to strike Mowen's jury demand is denied.
Red Star's and Yangming's motions for judgment n.o.v. are denied.
Red Star's and Yangming's motions for a new trial are denied on the condition that Mowen remit 95% of $700,000, or $665,000, of the jury's verdict. Plaintiff Mowen is directed to inform the court in writing of her decision with respect to the remittitur.[22]
SO ORDERED.
NOTES
[1] For convenience, Red Star and Yangming are referred to as "defendants" and Lorraine Mowen as "plaintiff," although this does not accurately designate their procedural roles, which are explained below.
[2] Defendants argued prior to trial that the limitation hearing should not be consolidated with trial but should be held separately without a jury. Such a procedure might have required the repetition of months of trial, which alone seems sufficient reason not to adopt it, without even reaching the question of the proper application of Dairy Queen principles.
[3] I find independently on convincing evidence, that the crew of the Ocean King was negligent in its failure to attempt meaningful rescue operations and that, for reasons set forth infra pp. 375-377, this failure is properly considered a cause of Dennis Mowen's death. I find that the owner was responsible for and in privity with this failure by reason of failure of the owner to provide proper training.
[4] Language can be found that, read in isolation, seems to endorse the survival of a general maritime remedy, regardless of location. It is questionable how much can be read into this language as to international waters. The statements were clearly intended to refer to the question under consideration, which was the survival of a general maritime remedy in waters not covered by DOHSA.
[5] Although some courts have found the federal jurisdiction of DOHSA claims to be exclusive, the Supreme Court suggested in Moragne, id., 398 U.S. at 400 n. 14, 90 S.Ct. at 1787-88 n. 14, that these decisions were incorrect.
[6] Defendants also contend that Mowen's action must be tried in admiralty without a jury by reason of Fed.R.Civ.P. 9(h), which allows a party to identify specifically as an admiralty claim any claim within the admiralty jurisdiction of the district court and also within the court's jurisdiction on some other ground. A pleader is thereby permitted to "claim the special benefits of admiralty procedures and remedies, including a nonjury trial ...." Romero v. Bethlehem Steel Corp., 515 F.2d 1249 (5th Cir.1975). It has been held that a Rule 9(h) identification made in a maritime tort case defeats or destroys the right to jury trial, even if diversity jurisdiction over the same claim exists. Best v. Honeywell, Inc., 491 F. Supp. 269 (D.Conn.1979); aff'd without opinion sub nom. Sikorsky Aircraft Division, United Aircraft Corp. v. Honeywell, Inc., 679 F.2d 874 (2d Cir. 1981); Gilmore v. Witschorek, 411 F. Supp. 491, 496 (E.D.Ill.1976). See also Haskins v. Point Towing Co., 395 F.2d 737, 743 (3d Cir.1968); Peace v. Fidalgo Island Packing Co., 419 F.2d 371 (9th Cir.1969); Fed.R.Civ.P. 9(h), Advisory Committee Note, 39 F.R.D. 69, 75-76 (1966).
Defendants' contention that Mowen's claims have in fact been identified as admiralty claims under Rule 9(h) is based on the fact that Red Star's complaint in the limitation action designated the claims therein as being within the admiralty jurisdiction. The contention that Red Star's designation undermines Mowen's right to a jury trial is based on a misreading of Rule 9(h). The rule provides that "[a] pleading or count setting forth a claim for relief ... may contain a statement identifying the claim as an admiralty or maritime claim for the purposes of" Rule 38(e). It is not the whole action but the claim that may be designated as being within the admiralty jurisdiction of the court. Red Star's complaint designated Red Star's claim as being in admiralty. Whether or not Mowen designated her claims as being in admiralty depends on the pleading in which her claims were set forth, i.e., her answer. In fact, Mowen's answer makes no such designation with respect to her counterclaims and cross-claims; diversity jurisdiction is alleged. Answer at 3.
[7] As to the absence of a lookout, the issue of causation is debatable because the captain had the Ocean King under observation. Particularly when considered in the light of the Pennsylvania rule, The Pennsylvania, 86 U.S. 125, 22 L. Ed. 148 (1874), I find adequate evidence that the absence of a lookout contributed to the cause of the collision. Had the lookout been assigned to watch the surrounding waters, the captain might have been able to concentrate more effectively (and with better results) on the Ocean King. Also, the lookout might have watched the Ocean King and offered observations to correct the captain's erroneous perception.
[8] It is also worth noting, although unnecessary to carry the point, that under the Jones Act even a slight causal connection is sufficient to satisfy the requirement. Milos v. Sea-Land Service, 622 F.2d 574 (2d Cir.), cert. denied, 449 U.S. 954, 101 S. Ct. 360, 66 L. Ed. 2d 219 (1980).
[9] Lorraine Mowen testified via videotaped deposition at her own choice in order to conceal from the jury the fact that she was pregnant. Plaintiff's counsel apparently contends that the inadequacy of the evidentiary record in support of this element of damages is at least in part attributable to holding the trial while Mowen was pregnant. This contention is incomprehensible and frivolous. The fact that plaintiff chose for her own tactical reasons to present her testimony to the jury by videotape on a television screen, rather than sit in the witness box, detracted not at all from her opportunity to testify on any issue she chose. Whatever the relevance, she also attended several sessions of the trial, remaining seated behind the spectator rail so only her head and shoulders would be visible to the jury. As to the scheduling of trial, see Memorandum Opinion dated October 23, 1981.
[10] This figure is an approximation of the real value of the award in each subsequent year. Its accuracy depends on the relationship between the earning power of the lump sum awarded and the rate of inflation. See infra n. 12.
[11] Consideration for the taxes imposed on income from the plaintiff's lump sum award is specifically recognized and authorized in Norfolk & W.R. v. Liepelt, 444 U.S. 490, 495, 100 S. Ct. 755, 758, 62 L. Ed. 2d 689 (1980).
[12] Dr. Berenson testified it was unnecessary for his calculations to increase Mowen's earnings over time to account for inflation because of an equal offset for the inflation-based portion of the discount to present value of the widow's future payments. See Doca v. Marina Mercante Nicaraguense, S.A., 634 F.2d 30 (2d Cir.1980), cert. denied, 451 U.S. 971, 101 S. Ct. 2049, 68 L. Ed. 2d 351 (1981).
[13] A part of Mr. Friedman's comments expressing agreement do not appear in the transcript.
[13a] The description of this document is based on the trial transcript, confirmed by my recollection, as plaintiff's counsel was unable to locate the document when asked to deliver it to chambers.
[14] The annual figures that are summarized in PX 337A were set forth in a computer printout identified as PX 349. These annual income figures were carried forth unchanged to PX 385.
[15] Plaintiff contends it would be unfair to reach an unfavorable conclusion concerning a lawyer "with [a] longstanding, unblemished record[] in the profession." Plaintiff's Reply Memorandum dated August 27, 1982 at 23.
The making of this argument requires some comment that would not otherwise have been made. Mr. Friedman's behavior during 3½ months of trial given no support to plaintiff's argument of the unprobability of such conduct. Concerning his conduct as to the scheduling of trial, see Memorandum Opinion dated October 23, 1981. For examples during trial, see, T. 6143-45; 8873-76; 6146-50. See also the discussion in the text at pp. 32-37 concerning Mr. Friedman's affidavit and his testimony. As to this characterization of prior record, see In the Matter of Theodore H. Friedman, No. 71-4044 (S.D.N.Y. November 4, 1977) (Pollack, J.). I cannot accept plaintiff's argument that Mr. Friedman's prior conduct requires a different conclusion in evaluating the evidence as to PX 337B id.
[16] I also reject plaintiff's suggestion that the jurors be examined as to the effect of this exhibit on their deliberations. When the transmission of the exhibit to the jury is a deliberate attempt to influence the verdict, the opposing parties should not be required to run the risk of the jurors' faulty memory or characterization of their deliberations. In such a situation, a court is not required to go to such extraordinary lengths to protect a verdict that the plaintiff has sought to subvert.
[17] On summation, plaintiff abandoned contentions based on further promotion to "docking master." Such a contention was not supported by the evidence. Plaintiff was on notice that a verdict incorporating docking master earnings would be subject to reduction.
[18] If setting aside the verdict on this ground were appropriate, the recent decision of the Court of Appeals in Akermanis v. Sea-Land Service, Inc., 688 F.2d 898 (2d Cir.1982) would bar a remittitur based on failure of the jury to allocate sufficient fault to plaintiff.
[19] Red Star and Yangming also contend that a number of decisions I made at trial with respect to liability and evidentiary matters constituted legal error sufficient to warrant a new trial. I have reconsidered these matters and see no reason to change the views I expressed at trial.
[20] Prior to the amendment passed on September 12, 1980, the costs assessable under section 1927 were limited to those costs assessable against parties under 28 U.S.C. § 1920. Roadway Express, Inc. v. Piper, 447 U.S. 752, 100 S. Ct. 2455, 65 L. Ed. 2d 488 (1980) (decided on June 23, 1980). Thus, section 1927 was interpreted by many courts as nothing more than a mechanism for shifting costs from a party to his attorney, see, e.g., 1507 Corp. v. Henderson, 447 F.2d 540 (7th Cir.1971), rather than an independent basis for the assessment of costs. The legislative history of the 1980 amendment clearly indicates Congress' intent to decouple section 1927 from section 1920 and strongly implies that section 1927 as amended constitutes an independent ground for the imposition of sanctions on an attorney.
Section 1927 currently refers to "excess costs", a phrase construed to cover only the narrow category of taxable costs, such as filing fees. The amendment ... expands the category of expenses the judge might require an attorney to satisfy personally to include "excess costs, expenses, and attorneys' fees reasonably incurred because of such [dilatory] conduct." ... [I]f an attorney does violate the existing standard covering dilatory conduct, and by such conduct causes the other parties to incur expenses and fees that otherwise would not have [been] incurred, the attorney should be required to satisfy personally this full range of excess costs attributable to such conduct.
1980 U.S.Code Cong. & Adm.News at 2782. It appears that section 1927 as amended constitutes an independent ground for the imposition of costs, expenses and attorneys' fees on counsel.
[21] The Supreme Court recognized this power and discussed it at length in Roadway Express, the very case in which the court adopted a narrow interpretation of the old section 1927. In that case, the court recognized the inherent power of the court to dismiss an action and reasoned that, since assessment of counsel fees is a less severe sanction than dismissal, there was strong support for the power to assess such costs. Roadway Express, Inc. v. Piper, 447 U.S. at 765, 100 S.Ct. at 2463-64. The Supreme Court has recognized the authority to assess attorneys' fees as an exception to the general rule that each side bears its own costs in litigation. In Alyeska Pipeline Service Co. v. Wilderness Society, 421 U.S. 240, 258-59, 95 S. Ct. 1612, 1622, 44 L. Ed. 2d 141 (1975), the court acknowledged the "inherent power" of courts to
assess attorneys' fees for the "willful disobedience of a court order ... as part of the fine to be levied on the defendant[,] Toledo Scale Co. v. Computing Scale Co., 261 U.S. 399, 426-428 [43 S. Ct. 458, 465-66, 67 L. Ed. 719] (1923)," Fleischman Distilling Corp. v. Maier Brewing Co., supra, [386 U.S. 714] at 718 [87 S. Ct. 1404, 1407, 18 L. Ed. 2d 475]; or when the losing party has "acted in bad faith, vexatiously, wantonly, or for oppressive reasons ...." F.D. Rich Co. [v. United States ex rel. Industrial Lumber Co.], 417 U.S. [116] at 129 [94 S. Ct. 2157, 2165, 40 L. Ed. 2d 703 [(1974)] (citing Vaughan v. Atkinson, 369 U.S. 527, 82 S. Ct. 997, 8 L. Ed. 2d 88 (1962)).
421 U.S. at 258-59, 95 S.Ct. at 1622 (as quoted in Roadway Express). "Bad faith" may be found in the conduct of litigation as well as the filing of the action. Roadway Express, Inc. v. Piper, 447 U.S. at 766, 100 S.Ct. at 2464 (cases cited). The Court in Roadway went on to observe that
[t]he power of a court over members of its bar is at least as great as its authority over litigants. If a court may tax counsel fees against a party who has litigated in bad faith, it certainly may assess those expenses against counsel who willfully abuse judicial processes.
Id. (footnote omitted).
[22] Since plaintiff may need or wish to engage new counsel to advise her on this question, she shall be allowed two months to submit her decision.
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952 A.2d 1193 (2008)
Town of McCANDLESS
v.
McCANDLESS POLICE OFFICERS ASSOCIATION, Appellant.
No. 1795 C.D. 2007.
Commonwealth Court of Pennsylvania.
Argued February 11, 2008.
Decided June 18, 2008.
*1194 Eric C. Stoltenberg, Pittsburgh, for appellant.
Shon K. Worner, Pittsburgh, for appellee.
BEFORE: McGINLEY, Judge, SIMPSON, Judge, LEAVITT, Judge.
OPINION[*] BY Judge LEAVITT.
The McCandless Police Officers Association (Association) appeals an order of the Court of Common Pleas of Allegheny County (trial court) vacating an arbitration award issued against the Town of McCandless (the Town). The trial court held that the arbitrator lacked jurisdiction to hear the grievance filed by the Association or the power to order the Town to schedule all police officers to one set shift per month, without deviation, regardless of manpower needs in a given week. Concluding that an adjustment to one officer's schedule, which was necessitated by another officer's unexpected military obligation, is the exercise of management prerogative not subject to mandatory bargaining, we affirm.
The facts, as found by the arbitrator, are as follows. The Town and the Association entered into a collective bargaining agreement (CBA) for the period between January 1, 2000, and December 31, 2003. The CBA governed, inter alia, system-wide shift assignments. Generally, police officers are scheduled to work in four-week blocks on one of three possible shifts: the day shift, 7:00 a.m. to 3:00 p.m.; the swing shift, 3:00 p.m. to 11:00 p.m.; and the night shift, 11:00 p.m. to 7:00 a.m. In accordance with Article V of the CBA, the Chief of Police posts shift assignments for each officer four weeks in advance of their effective date.[1] Each officer is assigned to one *1195 of three platoons, and all members of a platoon rotate through the shifts together. However, where necessary, a particular officer will be moved from the night shift to the swing shift, and this has been done by the Town on occasion since 1997.
The schedule for August 5, 2001, through September 1, 2001, assigned Officer Franceschina to work the day shift for the first two weeks and the swing shift for the second two weeks. This was done to accommodate another officer's military leave of absence.[2] Officer Franceschina voiced no objection to his split schedule. Nevertheless, the Association filed a grievance asserting that split shift assignments violated several provisions of the CBA. Specifically, the Association contended that it was past practice of management to assign officers to one shift for an entire four-week period. In its grievance, the Association sought the following relief:
It is requested that all Uniform Patrol Officers' shift assignments be consistent for the entire scheduling period, in that only one shift is scheduled for a(28) twenty-eight day period. Excepted would be a split schedule that occurs as a consequence of an officer entering into a mutually agreed to switch with another officer.
R.R. at 60a.
A hearing was conducted on the Association's grievance by Arbitrator Phillip W. Parkinson. At the hearing, it was established that Officer Franceschina was the only officer directly affected by the split schedule and that he did not object to it. It was further established that there were four prior incidents, between July 1987 and May 2001, where the Town scheduled officers to split schedules where necessary to meet unusual manpower needs.[3] The arbitrator found that there was a past practice of scheduling patrol officers to one shift for each twenty-eight day period. Because past practices had been incorporated into the CBA by Article XXXV,[4] the Arbitrator found the Town in violation of this provision of the CBA. He entered the following award:
The Employer is directed to abide by the parties' established past practice of scheduling non-probationary Patrol Officers to one shift per month in accordance with other members of the assigned platoon.
R.R. at 83a.[5]
*1196 The Town petitioned to vacate the arbitration award. The Town argued that the arbitrator lacked jurisdiction to hear the grievance and did not have the power to issue his award. The Town asserted that the scheduling of Officer Franceschina was a managerial prerogative not subject to mandatory bargaining. The trial court agreed and vacated the award. The trial court found that the scheduling of Officer Franceschina did not affect the system of monthly scheduling as a whole; was done for the benefit of the public; and had a minimal impact on an employee interest. The trial court concluded that past practice was irrelevant because the Town was exercising its managerial prerogative. The Association's appeal followed.[6]
On appeal, the Association raises one issue for this Court's review, i.e., that the arbitrator had jurisdiction over the Association's grievance and the power to enter its award. The Association argues that this case concerns a unilateral implementation of a system-wide change in scheduling, which violated the Town's established past practice of assigning officers to one shift for any four-week period. The Association contends that fixed assignments for a four-week period is a mandatory subject of bargaining and, therefore, not a managerial prerogative.
An arbitrator exceeds his powers when he orders an illegal act or when his award goes beyond the terms and conditions of employment governed by Act 111. Fraternal Order of Police Lodge No.19 v. City of Chester, 845 A.2d 230, 233 (Pa. Cmwlth.2004). Although an arbitrator may not order a public employer to perform any act that violates the law, an arbitrator's mere error of law is not enough to allow a court to vacate an Act 111 arbitration award. Id. An arbitrator exceeds his jurisdiction when he addresses issues not properly submitted to him in accordance with Section 1 of Act 111.[7]*1197 Pennsylvania State Police v. Pennsylvania State Troopers Association, 840 A.2d 1059, 1064 (Pa.Cmwlth.2004).
Here, the trial court found that the arbitrator lacked jurisdiction over the grievance and exceeded his authority in fashioning his award. Evidence of a past practice can be used to prove a condition of employment that cannot be derived from the express language of the collective bargaining agreement. Ellwood City Police Wage and Policy Unit v. Pennsylvania Labor Relations Board, 731 A.2d 670, 672 (Pa.Cmwlth.1999). However, as this Court explained in South Park Township Police Association v. Pennsylvania Labor Relations Board, 789 A.2d 874, 879 (Pa. Cmwlth.2002), if the past practice in question is not a subject of mandatory bargaining, then it is irrelevant. Stated otherwise, a managerial prerogative cannot be abridged by a past practice.
It is well settled that a municipality decides the extent to which it will provide police coverage and services and that such decisions fall within the municipality's managerial prerogative. City of Jeannette v. Pennsylvania Labor Relations Board, 890 A.2d 1154, 1160 (Pa.Cmwlth.2006). On the other hand, implementation of a system-wide change in officer scheduling is a subject of mandatory bargaining. Township of Upper Saucon v. Pennsylvania Labor Relations Board, 152 Pa.Cmwlth. 530, 620 A.2d 71, 75 (1993).
In Upper Saucon, the township switched all its police officers from a system of rotating shift schedules to a steady shift schedule. It did so unilaterally without negotiating with the police officers' bargaining unit. We affirmed the holding of the Pennsylvania Labor Relations Board that a unilateral change in a unit-wide scheduling system constituted an unfair labor practice. Stated otherwise, the issue of scheduling for the entire bargaining unit is subject to mandatory bargaining under Section 1 of Act 111.
This case is unlike Upper Saucon. The Town did not unilaterally impose a system-wide change in scheduling its police officers. The purpose of assigning Officer Franceschina to a split schedule was done on an ad hoc, singular basis to accommodate another officer's absence caused by that officer's military obligation. It was done to insure police coverage notwithstanding that officer's military leave and, as such, was not a subject of mandatory bargaining. This Court has held that Act 111 does not divest a municipality of the prerogative to make any decision "essential for the proper and efficient functioning of a police force." Plumstead Township v. Pennsylvania Labor Relations Board, 713 A.2d 730, 733 (Pa. *1198 Cmwlth.1998). As this Court has explained:
Unlike private sector employers, public employers are ultimately responsible for the health, safety, and welfare of our communities. Due to their unique nature and role, public employers must be able to perform the functions they are charged to carry out by the citizenry. Consistent with this status, our Court has recognized that public employers cannot be compelled in arbitration to relinquish powers that are essential to the proper discharge of their functions.
Allegheny County Airport Authority v. Construction General Laborers and Material Handlers Union, 874 A.2d 1250, 1255-1256 (Pa.Cmwlth.2005). An arbitrator cannot interpret a collective bargaining agreement in a way to deprive the public employer of its ability to discharge its essential function as a public enterprise.
The decision to assign Officer Franceschina to a split schedule did not effect a system-wide change in scheduling. The Town exercised its managerial prerogative to "perform the functions" required to carry out its responsibility "for the health, safety, and welfare" of the Town. Id. The arbitrator exceeded his authority by looking at the Town's past practice of scheduling officers to one shift per month. It was irrelevant where, as here, the Town faced an exigency caused by an officer's military leave.[8] The Town's action was the exercise of its managerial prerogative and beyond mandatory bargaining.
For these reasons, we affirm the trial court.
ORDER
AND NOW, this 18th day of June, 2008, the order of the Court of Common Pleas of Allegheny County, dated August 22, 2007, in the above-captioned matter is hereby AFFIRMED in accordance with this opinion.
DISSENTING OPINION BY Judge McGINLEY.
I respectfully dissent to the majority's conclusion that the arbitrator lacked jurisdiction over the grievance and exceeded his authority in fashioning the award, although this is truly a tempest in a teapot.
The majority concludes that the decision to schedule split shift assignments was a managerial prerogative and beyond mandatory bargaining. I disagree. I further disagree with the majority's conclusion that Township of Upper Saucon v. Pennsylvania Labor Relations Board, 152 Pa. Cmwlth. 530, 620 A.2d 71 (1993) is inapplicable to the present controversy. In Upper Saucon, this Court determined that a shift system change was a mandatory subject of bargaining under Act 111. Here, the Town of McCandless changed the shift assignment of an officer from a four week block to two blocks of two weeks. I believe this change was subject to mandatory bargaining under the CBA.
Second, the majority states that past practice is inapplicable if the past practice in question is not a subject of mandatory bargaining. See South Park Township Police Association v. Pennsylvania Labor Relations Board, 789 A.2d 874 (Pa. Cmwlth.2002). Because I believe the shift assignment is a mandatory subject of bargaining, I do not believe the arbitrator exceeded his authority in fashioning the award by looking at past practice.
*1199 The arbitrator did not order an illegal act or issue an award that went beyond the terms and conditions of employment governed by Act 111. See Fraternal Order of Police Lodge No. 19 v. City of Chester, 845 A.2d 230 (Pa.Cmwlth.2004). The arbitrator did not exceed his jurisdiction because the provision of scheduling is a mandatory subject of bargaining and was contained in the CBA.
Accordingly, I would reverse the order of the common pleas court and reinstate the decision of the arbitrator.
NOTES
[*] This opinion is filed in accordance with Section 256(b) of the Internal Operating Procedures of the Commonwealth Court, 210 Pa. Code § 67.29(b).
[1] Article V of the CBA provides:
(a) Shift assignments for each month or four (4) week period shall be posted on the first day of the previous schedule or for an eight week period. Once posted, the Town will not change shift assignments except as follows:
(1) In case of serious emergency;
(2) by mutual consent of two Police Patrol Officers involved in the exchange of their respective shift assignments with the prior knowledge and approval of the Chief of Police or his designate;
(3) to accommodate holiday passes; and
(4) to accommodate schooling.
Reproduced Record at 18 (R.R. ___). Article V is silent on split shifts, i.e., dividing an officer's schedule between two shifts within a four-week period.
[2] After the posting, the officers requested and were granted a voluntary switch for weeks three and four and, thus, the officers worked the same shift for the entire period at issue. This voluntary change was not the subject of the underlying grievance.
[3] In its defense, the Town submitted approximately twenty work schedules from July 1987 through May 2001, demonstrating that officers had been scheduled to split shifts during the four-week scheduling periods. However, the arbitrator concluded that only four of the cited swing shifts were assigned to non-probationary patrol officers with the remainder being assigned to sergeants and probationary patrol officers. The arbitrator found that the grievance only pertained to non-probationary patrol officers and, therefore, concluded that only the four cited incidents were relevant to the determination of past practice.
[4] Article XXXV of the CBA provides:
All existing past policies and practices not specifically abrogated herein shall continue with full force and effect as though fully set forth herein.
R.R. at 54a.
[5] The Association also alleged a violation of Article XXXVI of the CBA, which prohibits preferential or discriminatory treatment. The arbitrator found that the Town was merely attempting to accommodate the department's scheduling needs and, therefore, the Town's actions did not violate Article XXXVI of the CBA.
[6] Judicial review of an arbitration award arising under what is commonly referred to as Act 111, Act of June 24, 1968, P.L. 237, as amended, 43 P.S. §§ 217.1-217.10, is in the nature of narrow certiorari. Under this standard, a review in court is limited to questions regarding: (1) the jurisdiction of the arbitrator; (2) the regularity of the proceeding; (3) an excess of the arbitrator's powers; and (4) the deprivation of constitutional rights. City of Philadelphia v. Fraternal Order of Police Lodge No.5 (Jason Breary), 932 A.2d 274, 278 n. 6 (Pa.Cmwlth.2007). The standard of review to be applied is two-fold. A court's review is a plenary, non-deferential standard where the resolution of the issues turns on a question of law or application of law to undisputed facts. Id. However, where the question depends on fact-finding or upon interpretation of the collective bargaining agreement, the court is bound by the arbitrator's determination even if the arbitrator is wrong. Id.
[7] Section 1 of Act 111 provides, in pertinent part, as follows:
Police or firemen employed by a political subdivision of the Commonwealth or by the Commonwealth shall ... have the right to bargain collectively with their public employers concerning the terms and conditions of their employment, including compensation, hours, working conditions, retirement, pensions and other benefits, and shall have the right to an adjustment or settlement of their grievances or disputes in accordance with the terms of this Act.
43 P.S. § 217.1. In South Park Township Police Association v. Pennsylvania Labor Relations Board, 789 A.2d 874, 878 (Pa.Cmwlth. 2002), we held that requiring officers to return to their shift after completing a work-related court appearance was a managerial prerogative not subject to collective bargaining. On the other hand, an issue is bargainable if it bears a rational relationship to the employee's duties. Plumstead Township v. Pennsylvania Labor Relations Board, 713 A.2d 730, 733 (Pa.Cmwlth.1998).
The rational relationship test under Act 111 is similar to the balancing test in cases dealing with the Public Employee Relations Act, Act of July 23, 1970, P.L. 563, as amended, 43 P.S. §§ 1101.1010-1101.2301, as set forth in Pennsylvania Labor Relations Board v. State College Area School District, 461 Pa. 494, 507, 337 A.2d 262, 268 (1975) (a matter is bargainable if "the impact of the issue on the interest of the employee in wages, hours and terms and conditions of employment outweighs its probable effect on the basic policy of the system as a whole."). Indiana Borough v. Pennsylvania Labor Relations Board, 695 A.2d 470, 474 (Pa.Cmwlth. 1997). However, where a managerial policy concern substantially outweighs any impact the issue will have on employees, the issue will be deemed a managerial prerogative and, thus, not bargainable. Id. See also Frackville Borough Police Department v. Pennsylvania Labor Relations Board, 701 A.2d 632, 634 (Pa.Cmwlth. 1997) (a subject may be a managerial prerogative which need not be bargained, even though it may affect employee wages, hours, or working conditions.)
[8] Indeed, to the extent past practice is relevant, it supports the Town's position. The evidence showed that deviations from the paradigm of one shift per month were done by the Town to adjust to exigent circumstances.
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552 F. Supp. 528 (1982)
James CLOUD, et al., Plaintiffs,
v.
OLIN CORPORATION, a Virginia corporation, Defendant.
Marvelene T. FREEMAN, et al., Plaintiffs,
v.
OLIN CORPORATION, Defendant.
Erskin PARCUS, et al., Plaintiffs,
v.
OLIN CORPORATION, et al., Defendants.
Civ. A. Nos. CV79-PT-5128-NE, CV80-PT-5057-NE and CV80-PT-5098-NE.
United States District Court, N. D. Alabama, Northeastern Division.
September 13, 1982.
William L. Chenault, III, Stephen V. Hammond, Chenault, Chenault & Hammond, Decatur, Ala., for Cloud, et al.
A. Stephens Clay, Robert E. Shields, Deborah A. Brian, Kilpatrick & Cody, Atlanta, Ga., for Freeman and Parcus, et al.
Charles E. Watkins, Jr., G. Lee Garrett, Jr., Trammell E. Vickery, Hansell, Post, Brandon & Dorsey, Atlanta, Ga., Donald F. Pierce, W. Alexander Moseley, Hand, Arendall, Bedsole, Greaves & Johnston, Mobile, Ala., for Olin Corp.
MEMORANDUM OPINION
PROPST, District Judge.
The court now considers defendant's first motion for summary judgment. Defendant's first motion asks that the court dismiss or strike the individual plaintiffs' claims for damages based on nuisance, negligence, and willful and wanton misconduct resulting from alleged injuries suffered prior to the date which is one year before their respective suits were filed. The complaint(s) *529 charges that the defendant allowed DDT to seep from a drainage ditch into Huntsville Spring Branch and Indian Creek and subsequently, via fish eaten by plaintiffs, into their bodies, resulting in physical and emotional injury. The complaint(s) also charge injury to land. The claims are couched in the form of various common law actions.
Defendant also requests that the court dismiss or strike any claims for damages based on trespass resulting from alleged injuries suffered prior to the date which is six years before the date their respective suits were filed.[1]
A threshold question which must be addressed is what is the statute of limitations with regard to these claims? The parties do not dispute the statute of limitations which should be applied to the negligence and nuisance claims. Both of these claims are unquestionably actions of trespass on the case and are governed by the statute of limitations for one year. Sasser v. Dixon, 290 Ala. 17, 273 So. 2d 182 (1973); Borland v. Sanders Lead Co., 369 So. 2d 523 (Ala. 1979).[2] It is also undisputed that a pure trespass claim is governed by the six year statute of limitations. Sasser, supra.
The parties do dispute the statute of limitations which should be applied to the willful and wanton claims. Although, at one time, an attempt to synthesize Alabama law on this point would have required the services of a master of legal chemistry, recent developments have served largely to eliminate prior questions. This court will not undertake a turgid, academic analysis of the problem, but will focus primarily on cases of more recent vintage. For one interested in a history of the development, attention is called to Justice Jones' dissent in Strozier v. Marchich, 380 So. 2d 804 (Ala. 1980). Also see Doucet v. Middleton, 328 F.2d 97 (5th Cir.1964).
In Strozier, Justice Jones recites a history of Alabama law which reflects a vacillation of earlier Alabama courts in distinguishing between trespass and case actions on the basis of (1) direct and indirect force, or (2) culpability or intent; although recognizing that Sasser v. Dixon, supra, restored "[t]he old common law causal terminology distinguishing between trespass and trespass on the case..." 380 So.2d at 808, Justice Jones further states, "Whatever vestige of outmoded direct/indirect distinction between trespass and trespass on the case still exists in Alabama, I would now abandon and adopt instead the more modern tort concept of measuring the cause of action in terms of the degree of culpability of the alleged wrongful conduct." 380 So.2d at 804.
The majority's per curiam opinion in Strozier affirmed on the authority of Sasser v. Dixon, supra. Since the majority in Strozier wrote no opinion, it is not apparent whether the claim was based on an intentional act of the defendant.[3] Notwithstanding the majority opinion, the Alabama Supreme Court, in a case predating Strozier by one year, had already gone far toward emasculating the direct/indirect test of Sasser. Without distinguishing Sasser,[4] the court in Borland v. Sanders Lead Co., Inc., 369 So. 2d 523 (1979), Justice Jones, this time writing for the majority, stated:
In Rushing v. Hooper-McDonald, Inc., 293 Ala. 56, 300 So. 2d 94 (1974), this Court held, in a case of first impression, that a trespass need not be inflicted directly on another's realty, but may be committed by discharging foreign polluting matter at a point beyond the boundary of such realty. Rushing specifically held that a trespass is committed by one *530 who knowingly discharges asphalt in such a manner that it will in due course invade a neighbor's realty and cause harm.
In Rushing, this Court cited with approval Restatement, Second, Torts, § 158, and particularly emphasized a portion of the Comments under this section, which recites:
"`In order that there may be a treapass under the rule stated in this Section, it is not necessary that the foreign matter should be thrown directly and immediately upon the other's land. It is enough that an act is done with knowledge that it will to a substantial certainty result in entry of foreign matters.'"
369 So.2d at 527.
The court in Borland cited with approval the case of Martin v. Reynolds Metals Co., 221 Or. 86, 342 P.2d 790, cert. denied, 362 U.S. 918, 80 S. Ct. 672, 4 L. Ed. 2d 739 (1959), and quoted it as saying:
The force is just as real if it is chemical in nature and must be awakened by the intervention of another agency before it does harm.
"If, then, we must look to the character of the instrumentality which is used in making an intrusion upon another's land we prefer to emphasize the object's energy or force rather than its size. Viewed in this way we may define trespass as an intrusion which invades the possessor's protected interest in exclusive possession, whether that intrusion is by visible or invisible pieces of matter or by energy which can be measured only by the mathematical language of the physicist.
"We are of the opinion, therefore, that the intrusion of the fluoride particulates in the present case constituted a trespass."
369 So.2d at 528. The Borland court further stated that:
Whether an invasion of a property interest is a trespass or a nuisance does not depend upon whether the intruding agent is "tangible" or "intangible." Instead, an analysis must be made to determine the interest interfered with. If the intrusion interferes with the right to exclusive possession of property, the law of trespass applies. If the intrusion is to the interest in use and enjoyment of property, the law of nuisance applies. As previously observed, however, the remedies of trespass and nuisance are not necessarily mutually exclusive.
. . . . .
In order to recover in trespass for this type of invasion [i.e., the asphalt piled in such a way as to run onto plaintiff's property, or the pollution emitting from a defendant's smoke stack, such as in the present case], a plaintiff must show 1) an invasion affecting an interest in the exclusive possession of his property; 2) an intentional doing of the act which results in the invasion; 3) reasonable foreseeability that the act done could result in an invasion of plaintiff's possessory interest; and 4) substantial damages to the res.
. . . . .
For an indirect invasion to amount to an actionable trespass, there must be an interference with plaintiff's exclusive possessory interest; that is, through the defendant's intentional conduct, and with reasonable foreseeability, some substance has entered upon the land itself, affecting its nature and character, and causing substantial actual damage to the res.
369 So.2d at 529-530 (footnotes omitted).
Any doubt as to whether Sasser via Strozier might prevail over Borland was eliminated in W.T. Ratliff Company, Inc. v. Henley, supra. In Ratliff the court stated:
If we were to apply the strict historical distinctions, the facts of the case at bar would show an action for trespass on the case, rather than trespass. The record clearly states that sand and gravel flowed from Ratliff's operations onto Henley's property whenever it rained. Thus, the consequential damages to the property was occasioned by an intervening agency, the rain. No direct act of force on the part of Ratliff caused the damage. The strict common law distinctions between the two remedies, however, have been modified during the past decade. *531 405 So.2d at 145. The Court recognized that Borland "[w]ent a step beyond Rushing," saying:
Our analysis in Rushing could not be interpreted as totally overruling the direct/indirect distinction between trespass and case that had always been adhered to in cases preceding Rushing. See, e.g., Sasser v. Dixon, 290 Ala. 17, 273 So. 2d 182 (1973). Instead, Rushing merely pointed out that a direct injury may be found even though the trespassing matter was not placed directly on plaintiff's land, as long as the flow to plaintiff's land was direct. In Borland v. Sanders Lead Co., Inc., Ala., 369 So. 2d 523 (1979), however, we went a step beyond Rushing and clearly stated that "the law presently allows an action to be maintained in trespass for invasions that, at one time, were considered indirect." Id. at 529. Borland established four elements which a plaintiff must prove in order to recover for an indirect trespass:
1) an invasion affecting an interest in the exclusive possession of his property; 2) an intentional doing of the act which results in the invasion; 3) reasonable foreseeability that the act done could result in an invasion of plaintiff's possessory interest; and 4) substantial damages to the res. [Id. at 529].
405 So.2d at 145.
The Court amplified the "intentional doing of the act which results in the invasion" by saying:
That is, the intent to do the act which leads to the trespass is the requirement, not the intent to actually trespass. Thus, when Ratliff placed the sand and gravel on its own leased property with knowledge to a substantial certainty that such action could lead to trespass when it rained, the element of intent was satisfied.
. . . . .
Although Ratliff contends that the trial court erred in refusing to grant a directed verdict in favor of it on the wantonness count, the evidence in the record reveals otherwise. All that need be shown to prove wantonness in a trespass action is knowledge on the part of the defendant of his invasion of the plaintiff's rights. Calvert and Marsh Coal Co., Inc. v. Pass, Ala., 393 So. 2d 955, 956 (1980).
405 So. 2d 146 (emphasis in original).
However tortured the history may have been, this court is satisfied that the strict direct/indirect approach has been unquestionably modified by Ratliff and its predecessors and that the four Ratliff elements represent the present concise statement on the point.[5] Under the circumstances of this case, this court cannot determine, as a matter of law, that the one year statute applies to the willful and wanton claims in this case.[6] If the evidence shows that the defendant intentionally did acts which it could have reasonably foreseen would result in the invasion of plaintiffs' property or person, the six year statute would likely apply, assuming substantial damage.
Defendant argues that the Ratliff principles apply only to trespass to land and not to person. There is no indication that the Supreme Court of Alabama has ever made such a distinction. The fact that Ratliff, Borland, and Rushing involved only claims for injury to land, does not indicate that the principles are so restricted. In Doucet v. Middleton, supra, Judge Rives said:
It would seem incongruous for the Legislature of Alabama to allow six years for the commencement of an action for trespass to property and only one year for *532 trespass to person. As applied to Doucet's complaint, it would be anomalous to hold that his action for personal injuries is barred by limitations but that he may prosecute his action for damages to his automobile.
328 F.2d at 103. This court agrees.[7]
The more difficult question remains as to the period for which damages are recoverable. The leading case which addresses this point is Garrett v. Raytheon, 368 So. 2d 516 (Ala.1979). The point is also discussed in Tutwiler Coal, Coke & Iron Co. v. Nichols, 145 Ala. 666, 39 So. 762 (1905); Howell v. City of Dothan, 234 Ala. 158, 174 So. 624 (1937); and Garren v. Commercial Union Ins. Co., 340 So. 2d 764 (Ala.1976).
Garrett, being a recent case and not yet overruled, is controlling on this court. Its true meaning and its ultimate application in this case are more difficult to discern. The key language of Garrett is the following:
When does the statute of limitations begin to run for injuries suffered as a result of radiation exposure?[8] We conclude that it begins to run when the plaintiff is exposed to radiation and an injury occurs.
368 So.2d at 517 (emphasis added), and,
The very basic and long settled rule of construction of our courts is that a statute of limitations begins to run in favor of the party liable from the time the cause of action accrues. The cause of action "accrues" as soon as the party in whose favor it arises is entitled to maintain an action thereon.
"We have held that the statute begins to run whether or not the full amount of damages is apparent at the time of the first legal injury. In Kelly v. Shropshire, 199 Ala. 602, 75 So. 291, 292 (1971), the rule was stated as follows:
"`If the act of which the injury is the natural sequence is of itself a legal injury to plaintiff, a completed wrong, the cause of action accrues and the statute begins to run from the time the act is committed, be the actual damage [then apparent] however slight, and the statute will operate to bar a recovery not only for the present damages but for damages developing subsequently and not actionable at the time of the wrong done; for in such a case the subsequent increase in the damages resulting gives no new cause of action. Nor does plaintiff's ignorance of the tort of injury, at least if there is no fraudulent concealment by defendant, postpone the running of the statute until the tort or injury is discovered.'
"Nor do the cases cited to us by appellant Home modify this rule. Corona Coal Co. v. Hendon, 213 Ala. 323, 104 So. 799 (1925) (flooding of basement causing rusting of heating plant) and West Pratt Coal Co. v. Dorman, 161 Ala. 389, 49 So. 849 (1909) (underground mining causing subsidence of surface land) merely state the well established rule that the statute will not begin to run until some injury occurs which gives rise to a maintainable cause of action.
. . . . .
Thus, there are cases where the act complained of does not itself constitute a legal injury at the time, but plaintiff's injury only comes as a result of, and in furtherance and subsequent development of, the act defendant has done. In such cases, the cause of action "accrues," and the statute of limitation begins to run, "when, and only when the damages are sustained." Over sixty years ago, Justice Sayre so expressed it in his opinion for the Court in Kelly, et al. v. Shropshire, 199 Ala. 602, 75 So. 291 (1917). (Emphasis added.)
. . . . .
*533 The same rule has long been followed in this state with reference to medical malpractice. In Hudson v. Moore, 239 Ala. 130, 194 So. 147 (1940), this Court held, in an opinion authored by Justice Bouldin, that neither difficulty of ascertainment nor ignorance of the cause of action will toll the statute of limitations unless superinduced by fraud. In Hudson v. Moore, plaintiff sought damages in 1938 for an alleged negligent act in 1923 of leaving a gauze sponge in a patient's body after a gall bladder operation. The court held the statute had run.
. . . . .
Thus, in Alabama the so-called "Discovery Rule" has been specifically rejected by this Court in medical and professional malpractice suits.
. . . . .
In Garren v. Commercial Union Insurance Co., 340 So. 2d 764 (Ala.1976), we defined "date of injury" for statute of limitations purposes to be the day on which the plaintiff was last exposed to the damages which injured her. Justice Faulkner points out that this definition was derived from the workmen's compensation act. It is incorrect, however, to assume that this ipso facto changes the definition of "date of injury" for non-workmen's compensation cases.
. . . . .
The injury in this case occurred on the date or dates of exposure. This is not a case where an injury did not occur until it made itself manifest by its symptoms. Among our cases, continuous tort cases are significant in the limitation of actions context. It was thus that in American Mutual Liability Insurance Co. v. Agricola Furnace Co., 236 Ala. 535, 183 So. 677 (1938), this Court held that recovery for a continuous tort could be had only for those damages which occurred within the period of limitations. See also Howell v. City of Dothan, 234 Ala. 158, 174 So. 624 (1937). The cause of action was, therefore, not barred by the statute of limitations until one year after the last day on which the plaintiff was exposed to the dangerous conditions which caused the injury. Minyard v. Woodward Iron Co., 81 F. Supp. 414 (N.D.Ala.), aff'd, 170 F.2d 508 (5th Cir.1948). This was, and is, the rule in all cases concerning continuous torts in Alabama.
368 So.2d at 518-521 (emphasis in original).
The Garrett majority, while acknowledging that an action does not "accrue" until the first legal injury,[9] assumed that the injury "[o]ccurred on the date or dates of exposure."[10]
Based on the principles espoused by the majority, Garrett did not present a difficult case for decision in that the last date of exposure was outside the limitations period.[11] This, plus the assumption of injury concomitant with exposure, left no open question.
The court cited Howell, supra, as holding "[t]hat recovery for a continuous tort could be had only for those damages which occurred within the period of limitations." 368 So.2d at 521. The court did not discuss whether a portion of such later occurring damages could be mental anguish. The Alabama Supreme Court has recognized that punitive damages may be recoverable if only nominal compensatory damages are recoverable. Rushing v. Hooper McDonald, 293 Ala. 56, 61, 300 So. 2d 94 (1974).
Notwithstanding the possible confusion created by the majority in Garren, supra, by ascribing a workmen's compensation statute to a common law action,[12] this court gleans the following legal principles from Tutwiler, Howell, Garren, and Garrett which are applicable to this case.
*534 (1) That any damages which "accrued" prior to the beginning date of the applicable statute of limitations are barred.[13]
(2) The applicable limitations period would begin to run on the date of exposure which resulted in more than a de minimis[14] injury, whether known or unknown or discoverable by a plaintiff.
(3) Much latitude and discretion are allowed to the juries in the separation of the barred damages and the non-barred damages.
Defendant's first motion for summary judgment could well be considered a motion for an advisory opinion. In view of the factual questions which pervade the issues discussed above, summary judgment is not appropriate. However, the court does deem it appropriate that it use this occasion to consider the problems which will face the court at the time of trial in assessing the testimony, instructing the jury and framing special interrogatories. To the extent that the motion for summary judgment asks for an advisory ruling that damages accruing outside the applicable limitations period beginning with the "accrual" of the cause of action will be barred, it will be granted. However, this should not be construed as resolving factual questions relating to what the appropriate limitations period is or when the cause begins to accrue.[15]
The court does not deem it appropriate to address, at this stage, the question of fraudulent concealment. The issue was not clearly framed in the first motion for summary judgment.
Defendant argues that although the statute of limitations may be tolled until the minor plaintiffs reach majority, their claims for damages which accrued prior to the beginning date of the applicable statute of limitations are barred. No authority is cited for this proposition and the court finds it to be unpersuasive.
Within one week after entry of this memorandum opinion, defendant should suggest an appropriate order consistent with this opinion. Plaintiffs will have one week to respond. Thereafter, the court will enter an order.
NOTES
[1] Defendant asks, in the alternative, that the court hold as a matter of law that such damages cannot be recovered. The ultimate effect, of course, would be the same.
[2] The remedies of trespass and nuisance are not necessarily mutually exclusive. Borland, supra, 369 So.2d at 527.
[3] As late as 1981, the Alabama Supreme Court recognized that the direct/indirect distinction between trespass and case had not been "totally" overruled. W.T. Ratliff Company, Inc. v. Henley, 405 So. 2d 141, 145 (Ala.1981).
[4] Sasser was not cited in the case.
[5] It may still be the law of Alabama that a wanton omission of a duty to act resulting in indirect injury would support only an action in case. See Sasser, supra, and City of Fairhope v. Raddcliffe, 48 Ala.App. 224, 263 So. 2d 682 (Civ.App.1972). Whether the complained of act in this case is one of commission or omission is a question of fact.
[6] Wantonness is the legal equivalent of willful and intentional. See Doucet v. Middleton, 328 F.2d 97, 102, 103 n. 12. For a discussion of the general principles, see Prosser, Torts, §§ 7-8 (4th ed. 1971).
[7] See Restatement (Second) of Torts, § 500.
[8] Without regard to the relative known effects of radiation and DDT, the court is satisfied that the same principles would apply in the case of exposure to radiation and ingestion of DDT. However, the court is of the opinion that any such exposure must result in more than a de minimis injury since the cause of action does not accrue until there has been substantial injury.
[9] 368 So.2d at 519.
[10] 368 So.2d at 520. Justice Shores, in dissent, questioned this assumption. 368 So.2d at 525.
[11] Garrett assumed a one year statute of limitations. Although plaintiff alleged a willful and wanton injury in Count Two, the Court did not discuss the possibility of a six year limitations period.
[12] Discussed at length by Justice Jones in his Garrett dissent.
[13] As indicated above, the applicable statute for the nuisance and negligence claims is one year, and for the trespass claim is six years. The limitations period with regard to the willful and wanton claims (either one year or six years) depends on jury findings as to intent, foreseeability, etc.
[14] See Borland and Ratliff. In addition, this is consistent with the holding in Garren that "[t]he statute of limitations begins to run from the date of injury which is defined in § 313(42) as date of the last exposure to the hazards of the disease which gave rise to the injury." 340 So.2d at 765 (emphasis added.) The Alabama Supreme Court has held that in order for a cause of action to "accrue" there must be substantial damage. Borland, supra, 369 So.2d at 529. Ratliff, supra, 405 So.2d at 145. Also see Garrett where the Court held that "[t]he statute will not begin to run until some injury occurs which gives rise to a maintainable cause of action." 368 So.2d at 519 (emphasis added). See Tutwiler, supra, 39 So. at 764. Presumably, this could include separable mental anguish, if any. Howell, supra, indicates that such damages must be reasonably separable. The burden will be on plaintiff, at the trial, to establish such reasonable separation. See Howell, supra, and Minyard v. Woodward Iron Co., 81 F. Supp. 414 (N.D.Ala.), aff'd, 170 F.2d 508 (5th Cir.1948). Punitive damages may be recoverable if only nominal damages are proved within the applicable period. It may be that the date of last exposure is the date of injury, and "accrual," whether or not substantial injury has occurred. Commercial Union Assurance Co. v. Zurich American Ins. Co., 471 F. Supp. 1011 (S.D.Ala.1979).
[15] The burden at trial will be on plaintiffs to establish the "accrual" date. Cities Service Oil Co. v. Griffin, 357 So. 2d 333, 341 (Ala.1978). However, this court cannot decide, as a matter of law as was done in Garrett, supra, that injury and exposure occurred at the same time.
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25 B.R. 210 (1982)
In the Matter of NORTHWOOD INDUSTRIES, INC., Debtor.
Bankruptcy No. MM7-82-00127.
United States Bankruptcy Court, W.D. Wisconsin.
December 3, 1982.
Charles D. Koehler, Herrling, Clark, Hartzheim & Siddall, Ltd., Appleton, Wis., *211 Christopher H. Evenson, Rhode Law Office, Portage, Wis., for creditor.
William Rameker, Murphy, Stolper, Brewster & Desmond, S.C., Madison, Wis., for trustee.
Julia J. Groeschel, Bennet & Bennet, Portage, Wis., for debtor.
MEMORANDUM DECISION
ROBERT D. MARTIN, Bankruptcy Judge.
This case is now before the court on the debtor's motion to exercise its option to purchase and thereafter to sell the subject real estate, and also upon the application of William Glover for relief from the automatic stay under 11 U.S.C. § 362 so that he may continue his state court action to recover the subject real estate. Both motions arise out of a common set of facts and circumstances.
Northwood Industries, the debtor ("Northwood"), initially leased a metal building built to its specifications for plastic manufacturing and sales on April 12, 1972. The lease was for 10 years beginning July 1, 1972 with a 5-year renewal option, and included an option to purchase the building for $35,000 at the end of the 10-year period. The stated rent was $600 per month. The landlord, Glover, reserved the right to reenter the premises upon notice if the rent became more than 10 days in arrears or if the tenant otherwise breached the lease. The landlord's written consent was required to assign the lease or any rights under it.
Pursuant to an additional lease provision, a second building was constructed for the tenant in 1976. The lease was modified to require a monthly rental of $880 and an option price of $55,000 at the end of the original 10-year term. The modification specified that the term expired April 8, 1982, a fact not immediately apparent from the original lease.
When Northwood ceased business in winter or spring, 1981, the option was of considerable value; the market value of the building had risen to approximately $130,000. Sometime that spring, Douglas Kammer, Northwood's attorney, proposed to prepay 15 months rent and assume the lease. Glover refused to accept this proposal. In August, 1981, Northwood attempted to assign the lease to John Bowman, a former officer and shareholder then under contract to Northwood as a consultant. Glover also rejected the proposed assignment. While the building stood vacant, Northwood continued to pay monthly rent; borrowing from corporate principals and associates by means of a series of promissory notes. The group of creditors, including officers and employees who had loaned money to Northwood, had apparently decided to carry the rent payments until the end of the lease term and then exercise the purchase option. The rent for August and September 1981 was paid by checks drawn on the trust account of the Rhode Law Office. Both checks bore notes that they were Northwood's rent. The August rent check identifies its source as the "Lindstrom loan." Glover accepted and cashed those checks without question.
On October 10, 1981, the last date for payment of the October rent, John Bowman's wife Marcia personally delivered a check drawn on her personal account to Glover's home as payment of the rent. Like the checks tendered by the Rhode Law Office, the check was noted as Northwood's rent. Marcia Bowman was later reimbursed by Lindstrom. On October 21, 1981, Glover's attorney notified Northwood that its tenancy was terminated for untimely payment of rent, and that he would reenter the building. On October 26, 1981, Glover returned the check to Marcia Bowman, refusing the tender of rent for the stated reason that she was neither the lessee nor an assignee. Glover subsequently filed a circuit court action for reentry. No rent was tendered by or on behalf of Northwood after October 10, 1981.
The propriety of Glover's refusal of the October 1981 rent and the necessity of tendering rental payments thereafter must be determined before it is possible to assess the vitality of the purchase option. Glover contends that he was not required to accept *212 rent from a third party to the lease and that such acceptance would have operated to assign the lease. Northwood argues that this tender served only to satisfy the corporation's obligations under the lease, and when refused, made further tenders of rent unnecessary. For the reasons set out below, the court concludes that Glover had no legal basis for rejecting the October 1981 tender of rent, that further tenders were not required, and that the lease was illegally terminated.
Under Wis.Stat. § 704.03, an assignment of a remaining period of a lease in excess of 1 year must be in writing. At the time Marcia Bowman tendered her check, approximately 6 months of the original lease remained. Although the statute did not, therefore, require written assignment of the remaining leasehold interest, the terms of the lease specified that no assignment could be made without written consent of the landlord. Glover refused to give his consent, so no effective assignment was nor could have been accomplished. The risk Glover contends that he was protecting himself against was completely illusory.
Glover cited Katz v. Miller, 148 Wis. 63, 133 N.W. 1091 (1912) in support of the proposition that acceptance of rent from a third party operates to effect an assignment. However, in Katz, the trustee who brought an action for breach of lease by its assignment had been aware for years that the building had been sublet. He also knew that the predecessor trustees had orally consented to the sublease and had allowed the subtenant to alter the building at great cost for the purpose of further subletting the premises to a number of small businesses. The court held the trustee was bound by the consent of his predecessors notwithstanding the terms of the lease since the subtenant had greatly changed his position in reliance on the predecessors' apparent consent. Similarly, in Galvin v. Lovell, 257 Wis. 82, 42 N.W.2d 456 (1950), the court stated in dicta that the lessor had waived any possible violation by the plaintiff of its grocery store lease where the lessor was aware of the sublease, assisted in alterations to facilitate the sublease, voiced no objections to the lessee's plan, and accepted rent.
In Baker v. McDel Corp., 53 Wis. 2d 71, 191 N.W.2d 846 (1971), the defendant sought to avoid complying with an indemnity clause in a lease by arguing that the original lessee sublet to McDel in contravention of a clause prohibiting a sublease without lessor's permission. The lessor had leased its filling station to an individual who subsequently incorporated his business. Amoco did not contest the lower court's finding that it had waived any objections to the assignment, because it had known at all times that the individual had transferred his business to a corporation. None of these cases may be said to stand for the proposition that acceptance of rent from someone other than the named tenant is effective, standing alone, as recognition of an assignment in violation of the express terms of a lease.
In a case more similar to the present case, a lessor accepted rent from a third party without knowledge of an assignment and the court allowed the lessor to take action on the anti-assignment clause. Plotkin v. Milwaukee Metal Working Co., 255 Wis. 456, 39 N.W.2d 439 (1949). Milwaukee Metal Working, tenant under a three-year lease with renewal option, initiated corporate dissolution and assigned its assets to the defendants, partners who owned all its stock. They in turn assigned the assets to Wisconsin Metal Working Co., which continued to operate Milwaukee Metal's business in the leased premises and paid rent with Milwaukee Metal Co. checks. The lessors only became aware of the assignment when Wisconsin Metal attempted to exercise the renewal option at the end of the lease term. The lessors then brought an equitable action for termination of the lease. The court stated that the lessor cannot waive a restriction against assignment or subletting by accepting rent and allowing the sublessee to remain in possession when he has no knowledge of the breach. 255 Wis. at 459, 39 N.W.2d 439. The court reiterated the policy against forfeitures in the following language:
*213 While covenants against assignments or subletting are not favorably regarded by the courts and are liberally construed in favor of a lessee `this means only that the scope of an assignment in a lease will not be enlarged by the courts, and that the covenant will not be considered as violated by any technical transfer that is not fairly and substantially an assignment.'
Id. at 460, quoting Chesnut v. Master Laboratories, 148 Neb. 378, 27 N.W.2d 541 (1947).
Furthermore, Glover's prior acceptance of rent checks drawn on the Rhode Law Office trust account weakens his position regarding Marcia Bowman's check. American courts generally hold that a landlord may not predicate a forfeiture of the lease on tenant behavior that technically breaches the condition of the lease if, by his prior conduct, the landlord has lulled the tenant into believing the breach was acceptable behavior. This policy prevents a landlord from using previously acceptable tenant behavior to improve his position beyond that of the original bargain. The Seventh Circuit Court of Appeals has found waiver when the landlord has collected rent despite knowledge of a prohibited sublease. American Dairy Queen Corp. v. Brown-Port Company, 621 F.2d 255 (7th Cir.1980). The court stated: "waiver occurs when an obligor manifests an intent not to require an obligee to strictly comply with a contractual duty." Id. at 257, n. 1, quoting Saverslak v. Davis-Cleaver Produce Company, 606 F.2d 208, 213 (7th Cir.1979), cert. denied 444 U.S. 1078, 100 S. Ct. 1029, 62 L. Ed. 2d 762 (1980). Prior to his refusal of the October rent check Glover had accepted checks drawn on the Rhode Law Office trust account. He had not notified Northwood that future checks must be drawn on their own checking account. Thus, Glover did not have the right to declare Northwood in default on October 21, 1981 because his earlier conduct had reasonably led Northwood to believe that checks drawn on other accounts would be acceptable.
Had Northwood been advised in writing of Glover's requirement of strict compliance with the lease terms it could have easily met the formal requirements by having the principals deposit the loaned funds to Northwood's account and drawing checks thereon. The fact that the situation could have been remedied simply by changing the form in which the money was tendered, indicates how unjust it would be to permit a forfeiture.
A lessor may waive the clause prohibiting sublease by accepting rent from a party to whom the premises have actually been sublet. However, no case has been found which recognizes a de facto subleasing in the absence of any activities beyond the tender of rent. Nor has a case been found holding that the landlord waives a lease prohibition against assignment if he accepts rent without knowledge that the premises have been sublet. In the present case no activity other than the tender of the October rent has been alleged or proved which would give notice of or in fact demonstrate an assignment or sublease. No evidence was introduced to prove that Northwood had assigned the premises to another party. Although John Bowman had offered to sublease the building, he had neither altered the building nor occupied it. Lease payments were always tendered in Northwood's name and there is no evidence that Northwood surrendered possession to anyone.
As long as Northwood Industries satisfied its other lease obligations, the landlord could not declare default for the sole reason that the building was not in continuous use. See Dougan v. H.J. Grell Co., 174 Wis. 17, 182 N.W. 350 (1921). In the absence of an express convenant of continuous operation, a lessor cannot deny the lessee's right to sublet and then declare an abandonment where the lessee has ceased operation of its business but continued to satisfy its rental obligations and sought permission to sublease the premises. Rapids Associates v. Shopko Store, Inc., 96 Wis. 2d 516, 292 N.W.2d 668 (Ct.App.1980).
Glover's action left Northwood no alternative. By accepting neither the offer to pay the balance due on the lease nor the *214 proposed assignment to Bowman, Northwood had no choice but to continue monthly payments to retain the value of the lease. A similar situation arose in Pelikan v. Spheeris, 252 Wis. 562, 32 N.W.2d 220 (1948). Pelikan held the premises under a lease restricting their use to a tavern. After his own tavern license was revoked, Pelikan, who had a substantial investment in the fixtures, sublet to another party who held a valid tavern license. At the end of the lease term, the lessors denied Pelikan his option to renew, and leased directly to the current tavern operator. The court reversed the lower court's judgment and ordered specific performance of Pelikan's option, saying:
Appellant was placed in a position where he was comparatively helpless by the acts of respondent Realty Corporation. Forfeitures of leaseholds for condition broken and restrictions upon the right to sublet are both looked upon with disfavor and a construction of a contract which leads to either of these results will be avoided, if reasonably possible.
252 Wis. at 566, 32 N.W.2d 220.
It would be unjust to let Glover have the benefit of the disfavored provision of the lease by virtue of difficulties created by his own acts which have rendered Northwood helpless.
Finally, courts must carefully scrutinize the lessor's motives in forfeiture actions. Humphrey v. Humphrey, 254 Ala. 395, 48 So. 2d 424 (1950), American Dairy Queen Corp. v. Brown-Port Company, 621 F.2d 255 (7th Cir.1980). To allow a forfeiture would overrule the bargain made nearly 10 years before. At the time of the alleged breach, Glover was aware that Northwood had gone out of business but intended to exercise the option. He also knew of the option's increased value. A forfeiture would allow Glover to avoid the consequences of his bargain with Northwood and to seize the appreciated value of the property for his own use.
Glover finally argues that failure to tender rent after October 1981 results in a failure of consideration and precludes the exercise of the option, relying on Helbig v. Bonsness, 227 Wis. 52, 277 N.W. 634 (1938),[1] and Last v. Puehler, 19 Wis. 2d 291, 120 N.W.2d 120 (1963). Those cases must be distinguished from the present case because in each the lessor was clearly in default. For the reasons already set out herein, Northwood was not in default. Although Wisconsin courts have not addressed the question directly, other jurisdictions have held with unanimity that a tenant is not required to tender rent after the landlord refuses a tender and brings a forfeiture action. A clear statement of the rationale is provided by the Texas Court of Civil Appeals:
Miller was not required to do a useless thing, and having been notified by Fant that the lease had been forfeited and that suit was to be filed to regain possession of the rented premises, it was unnecessary on the part of Miller to make further tenders of the rent until the legal rights of himself and of Fant had been established.
Fant v. Miller, 218 S.W.2d 901, 903 (Tex. Civ.App.1949).
The Nebraska court adopted the same position in Hogan v. Pelton, 210 Neb. 530, 315 N.W.2d 644 (1982). After finding that the landlord had refused tender of the rent and had declared the lease breached and forfeited, the court stated:
The law does not require a useless formality. A formal tender is not necessary where a party has shown by act or word that it would not be accepted if made.
315 N.W.2d at 647.
In the present case, Glover refused Marcia Bowman's tender of Northwood's rent and declared the lease in default for nonpayment. *215 Northwood had no obligation to tender additional rent owed until Glover's suit for forfeiture and reentry was decided.
Having concluded that the option had not expired at the time relief was ordered in this case on March 31, 1982, we must now determine whether that option has been preserved during the administration of the case and whether it can now be exercised by the trustee. 11 U.S.C. § 365(d)(1), provides:
In a case under chapter 7 of this title, if the trustee does not assume or reject an executory contract or unexpired lease of the debtor within 60 days after the order for relief, or within such additional time as the court, for cause, within such 60-day period, fixes, then such contract or lease is deemed rejected.
See In Re Genesis Corp., MM7-79-01466 (Bankr.W.D.Wis. April 3, 1981); In Re Price Chopper Supermarkets, Inc., 19 B.R. 462, 8 B.C.D. 1263, 6 C.B.C.2d 557 (Bkrtcy.S.C.Cal. 1982).
In the present case, the trustee took no action to assume the lease or to extend the time period within the 60 days following the order for relief dated March 31, 1982. The debtor in this involuntary liquidation has not cooperated with the trustee's attempts to discover the financial affairs of the business. The debtor failed to appear at the first meeting of creditors on April 19, 1982, and the trustee filed a no-asset report on that date. It is amazing that creditors who went to the extreme measure of filing the involuntary petition to preserve the value of the option did not follow through by promptly informing the trustee of the history and value of that option, but there is no indication any special effort was made to educate the normally conscientious and diligent trustee appointed in this case. The trustee testified that he first learned of the value of the option in early June of 1982, from the attorney for the petitioning creditors. On August 3, 1982, the trustee applied for and was granted an ex parte extension of 30 days in which to assume or reject the unexpired lease. Within that 30-day period, the trustee sought the court's approval for assumption of the lease.
Since the trustee's only action to assume came within the extension granted on August 3, 1982, the question arises whether the court had the authority to grant the extension after the 60 days from the order for relief had passed. The trustee contends that the court has the power under 11 U.S.C. § 105 to extend the 60-day time period. No case authority has been cited for this proposition, nor has any been found. Collier states (without citing authority): "If the sixty day period expires the court will be without power to extend it thereafter." 2 Collier on Bankruptcy ¶ 365.03 at 365-19 (15th ed. 1979).
The trustee would have had a stronger argument if the option had not appeared on the debtor's schedule of assets filed on March 29, 1982. In Texas Western Financial Corp. v. McCraw Candies, Inc., 347 F. Supp. 445 (N.D.Tex.1972) the court concluded that a trustee would not be deemed to have rejected a contract under Bankruptcy Act § 110 where the claim was not listed as an asset on the debtor's schedule. In the present case, however, the option to purchase the two buildings was listed on schedule B-1, as an asset worth $45,000.
Despite the generally recognized scope of the all writs statute (11 U.S.C. § 105) there was, in the absence of diligent but fruitless inquiry within the 60 days or any proper extension thereof, no legal or equitable right of the trustee to protect when the extension order was entered on August 3, 1982. Lacking an equitable basis for doing so, the court lacked the power to extend the period for assuming contracts. That extension must therefore be voided.
The contract having not been properly assumed by the trustee must be deemed rejected. Rejection of the contract terminates the right to exercise the option. The option and the lease would therefore pass out of the debtor's estate and the stay against any action by Glover to foreclose upon or recover the real estate would be terminated.
Judgment may be entered accordingly.
NOTES
[1] Helbig actually provides a powerful argument for Northwood. In that case, the court ruled that the rent was a necessary consideration after the lessee attempted to exercise the option without having made any rent payments. In contrast, Northwood faithfully paid its rent for nearly 10 years, tendering it through interested third parties as the lease period came to a close.
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952 A.2d 713 (2008)
Kathleen McDONALD and Edward William Kleeman, Appellants
v.
REDEVELOPMENT AUTHORITY OF ALLEGHENY COUNTY.
No. 1228 C.D. 2007.
Commonwealth Court of Pennsylvania.
Argued May 6, 2008.
Decided June 6, 2008.
Reargument Denied August 7, 2008.
*714 Thomas J. Dempsey, Pittsburgh, for appellants.
Hilary W. Taylor, Monroeville, for appellee.
*715 BEFORE: FRIEDMAN, Judge, COHN JUBELIRER, Judge, and COLINS, Senior Judge.
Reargument Denied En Banc August 7, 2008.
OPINION BY Judge FRIEDMAN.
Kathleen McDonald and Edward William Kleeman (together, Condemnees) appeal from the May 31, 2007, order of the Court of Common Pleas of Allegheny County (trial court), which sustained the preliminary objections (POs) filed by the Redevelopment Authority of Allegheny County (Authority). We affirm.
Condemnees own property (Property) in a certified redevelopment area located in Findlay Township (Township), Allegheny County (County). (R.R. at 9a.) On April 8, 2002, the Authority issued a Declaration of Taking (Declaration) for the Property.[1] On the same day, the Authority offered to purchase the Property from Condemnees for $26,207 and warned Condemnees that, if they refused the offer, the Authority would proceed to take the Property through eminent domain. When Condemnees did not accept the offer, the Authority proceeded with the taking, and Condemnees did not file POs or otherwise challenge the Declaration. On June 25, 2002, the Authority sent Condemnees a check for $3,000, the amount the Authority estimated as just compensation for the Property. Condemnees cashed the Authority's check on August 9, 2002.
By the Act of October 2, 2002, P.L. 796 (Act of 2002), the General Assembly amended the Urban Redevelopment Law (URL) by, inter alia, adding section 19.2 (the Amendment or section 19.2).[2] Prior to the Amendment, the applicable statute of limitations for filing a Petition for Appointment of Viewers under the URL was five years after the payment of the estimated just compensation.[3] However, that limitations period was altered in section 19.2, which states:
Notwithstanding the provisions of 42 Pa. C.S. § 5526(4) (relating to five year limitation) or any other provision of law to the contrary, a proceeding to challenge just compensation or other damages if a redevelopment authority has exercised [its] power of condemnation pursuant to this act and made payment in accordance with . . . [the former] "Eminent Domain Code,"[[4]] is subject to a one-year statute of limitations.
35 P.S. § 1719.2. Section 19.2 became effective on December 1, 2002.
On April 7, 2006, Condemnees filed a Petition for Appointment of Viewers (Petition), challenging the amount of estimated just compensation paid for the Property. The Authority responded by filing POs, asserting that, pursuant to section 19.2, the Petition was untimely. Condemnees filed an Answer and New Matter, and the Authority timely filed its reply to the New Matter. The trial court held a hearing and heard argument on the Authority's POs.
Condemnees argued that, because the Property was taken prior to the effective date of the Amendment, the five-year statute *716 of limitations governed, and the Petition, which was filed within that period, was timely. The Authority countered that, because the Amendment's effect was procedural rather than substantive, the Amendment's one-year statute of limitations should be applied retroactively, making the Petition untimely.
The trial court agreed with the Authority. In doing so, the trial court relied on Ferki v. Frantz's Transfer Company, 152 Pa.Super. 267, 31 A.2d 586 (1943), and Kennedy v. Holmes Construction Company, 147 Pa.Super. 348, 24 A.2d 451 (1942), for the propositions that a legislature may shorten a statute of limitations and that the new, shorter statute of limitations may be applied retroactively as long as a party litigant enjoys a reasonable amount of time to pursue her rights. The trial court concluded that, because Condemnees had sufficient time after the effective date of the Amendment to pursue their rights under the URL, they were subject to the one-year statute of limitations, and, thus, the Petition was not timely filed. Accordingly, the trial court granted the Authority's POs and dismissed the Petition with prejudice. Condemnees now appeal to this court.[5]
Condemnees' first argue that the trial court erred in applying the one-year statute of limitations to the Petition here. According to Condemnees, the word "act" in the Amendment's phrase "pursuant to this act" refers only to the Act of 2002, which added section 19.2 to the URL and also amended URL sections 11 and 12.1, 35 P.S. §§ 1711 and 1712.1. Therefore, Condemnees maintain that the only challenges subject to the one-year statute of limitations are those based on these sections of the URL. We disagree.
Whenever the word "act" is used in the URL, it clearly refers to the URL as a whole. For example, section 1 of the URL provides that "[t]his act shall be known . . . as the `Urban Redevelopment Law.'" 35 P.S. § 1701 (emphasis added). Similarly, section 3 of the URL states, "[t]he following terms where used in this act, shall have the following meanings . . .," 35 P.S. § 1703 (emphasis added). Accordingly, we conclude that the word "act" in section 19.2 likewise refers to the entire URL, and, thus, the one-year statute of limitations governs all challenges to just compensation or other damages from condemnations made pursuant to the authority of the URL.
Next, relying on provisions of the Statutory Construction Act of 1972, specifically sections 1926 (stating that no statute shall be construed to be retroactive unless clearly and manifestly so intended by the General Assembly) and 1928(b)(4) (providing that provisions conferring the power of eminent domain shall be strictly construed), 1 Pa.C.S. §§ 1926, 1928(b)(4), Condemnees argue that the trial court erred in retroactively applying section 19.2 to their Petition. Again we disagree.
Our supreme court has held that, for the purposes of retroactivity, there is a distinction between statutes affecting procedural matters and those altering substantive rights. Bell v. Koppers Company, Inc., 481 Pa. 454, 392 A.2d 1380 (1978). Where a statute is related to a party's substantive right, courts must apply the law that was in effect at the time the cause of action arose; however, statutes relating to procedural matters, such as statutes of *717 limitation,[6] are applicable to cases filed after the effective date of the statute.[7]Id. Because Condemnees filed their Petition after the Amendment's effective date, it is subject to the one-year statute of limitations. In re Condemnation of Real Estate by Carmichaels, 88 Pa.Cmwlth. 541, 490 A.2d 30 (1985); Crisante v. J.H. Beers, Inc., 297 Pa.Super. 337, 443 A.2d 1150 (1982).
Alternatively, Condemnees assert that, even if section 19.2 has retroactive effect, they should not be bound by it because they did not have a reasonable amount of time between the Amendment's effective date and the expiration of the one-year statute of limitations to file their Petition. Philadelphia, Baltimore & Washington R.R. v. Quaker City Flour Mills Company, 282 Pa. 362, 127 A. 845 (1925); Crisante; Ferki (all holding that while the legislature may shorten the time in which suits to enforce existing rights of action may be commenced, a reasonable time must be given by the new law for the commencement of the suit before the bar takes effect). However, we agree with the trial court that the eight months remaining to Condemnees (two-thirds of the statutory period) after the Amendment became effective afforded them a reasonable amount of time in which to file their Petition. Moreover, even were we to hold that Condemnees should be afforded the entire limitations period, we still would conclude that the Petition was untimely where it was not filed until April 2006, two years and eight months after the expiration of the statute of limitations in August 2003.[8]
Condemnees next argue that they have a fundamental right to just compensation under the Pennsylvania Constitution and that the trial court's retroactive application of section 19.2 deprived them of that right without due process. We disagree.
As a matter of constitutional law, a statute of limitations goes to matters of remedy, not to the destruction or impairment *718 of a fundamental right, so long as the aggrieved party has a reasonable time to sue. Pennock v. Lenzi, 882 A.2d 1057 (Pa.Cmwlth.2005), appeal denied, 587 Pa. 703, 897 A.2d 462 (2006), cert. denied, ___ U.S. ___, 127 S. Ct. 227, 166 L. Ed. 2d 146 (2006). Similarly, no one has a vested right in a statute of limitations or other procedural matters, and the legislature may at any time alter, amend or repeal such provision without offending constitutional restraints, as long as there is no omission of a remedy for the enforcement of a right for which a remedy existed when the right accrued. Id.
As previously discussed, after the Amendment became effective, Condemnees still had a reasonable period of time to file their Petition and have their complaints heard by a board of view. Moreover, the Amendment did not eliminate Condemnees' right to this remedy, it merely shortened the period in which to seek it. Because Condemnees retained the right to challenge the just compensation received and because they had a reasonable amount of time in which to do so, the change in the statute of limitations did not destroy or impair Condemnees' fundamental right to just compensation. Id.
Finally, Condemnees argue that, if the trial court's interpretation of the Amendment as governing all condemnations under the URL is correct, then the Amendment violates the equal protection clauses of the United States and Pennsylvania Constitutions because it treats takings pursuant to the URL differently than all other governmental takings without a compelling reason and, thus, must be stricken as void. However, this argument attacks the constitutionality of the Amendment on its face, and, therefore, it was incumbent of Condemnees to notify the Attorney General of their constitutional challenge. Pa. R.C.P. No. 235; Pa. R.A.P. 521; Kepple v. Fairman Drilling Company, 532 Pa. 304, 615 A.2d 1298 (1992). Because Condmenees have failed to do so, this argument is waived. Id.
Accordingly, we affirm.
ORDER
AND NOW, this 6th day of June, 2008, the order of the Court of Common Pleas of Allegheny County, dated May 31, 2007, is hereby affirmed.
Senior Judge COLINS dissents.
NOTES
[1] The Authority has the power to condemn property by eminent domain under section 12 of the Urban Redevelopment Law (URL), Act of May 24, 1945, P.L. 991, 35 P.S. § 1712.
[2] Added by section 3 of the Act of 2002, 35 P.S. § 1719.2.
[3] Section 5526(4) of the Judicial Code, 42 Pa.C.S. § 5526(4). Subsection (4) of section 5526 of the Judicial Code was deleted, effective September 1, 2006, by section 3 of the Act of May 4, 2006, P.L. 112.
[4] The former Eminent Domain Code, Act of June 22, 1964, Special Sess., P.L. 84, as amended, formerly 26 P.S. §§ 1-101-1-903, was repealed by section 5 of the Act of May 4, 2006, P.L. 112.
[5] Our scope of review when assessing a trial court's grant of preliminary objections to a petition for appointment of a board of viewers is limited to determining whether the trial court committed an error of law or abused its discretion. Harrington v. Commonwealth, 792 A.2d 669 (Pa.Cmwlth.2002).
[6] In re Condemnation of Real Estate by Carmichaels, 88 Pa.Cmwlth. 541, 490 A.2d 30 (1985) (holding that statutes of limitations relate solely to procedural matters and do not affect substantive rights); Upper Montgomery Joint Authority v. Yerk, 1 Pa.Cmwlth. 269, 274 A.2d 212 (1971) (same).
[7] Condemnees argue that Misitis v. Steel City Piping Company, 441 Pa. 339, 272 A.2d 883 (1971) and Elder v. Elder, 256 Pa. 139, 100 A. 581 (1917), support the conclusion that the trial court erred in applying the Amendment retroactively. However, these cases are distinguishable because both involved substantive rights. In Misitis, the statute involved was not a statute of limitations but a statute of repose, which is substantive in nature, Vargo v. Koppers Company, Inc., Engineering and Construction Division, 552 Pa. 371, 715 A.2d 423 (1998), and, therefore, could not be applied retroactively. See Moyer v. Berks County Board of Assessment Appeals, 803 A.2d 833 (Pa.Cmwlth.) (stating that substantive laws are those that establish rights and that substantive laws may not be applied retroactively), appeal denied, 571 Pa. 711, 812 A.2d 1232 (2002). In Elder, the statute, which the General Assembly intended to have retroactive effect, created a legal right in property for an individual who previously had no legal right to the property and, thus, was substantive and could not be applied retroactively. Moyer.
[8] For this reason, we need not consider Condemnees' argument that the one-year statute of limitations should not begin to run until the Amendment's December 1, 2002, effective date. Philadelphia B. & W.R. Company (holding that a change to a statute of limitations should start to run as to all causes of action, whether accrued at the effective date of the act or thereafter, as of the effective date of the new statute). Clearly, this argument does not save Condemnees' Petition because, under the holding in Philadelphia B & W.R. Company, Condemnees would have had one year from the effective date of the Amendment, or until December 1, 2003, to file their Petition, and they did not file the Petition until April 7, 2006.
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952 A.2d 181 (2008)
Darryl O. MARTIN, Appellant,
v.
UNITED STATES, Appellee.
No. 06-CM-1001.
District of Columbia Court of Appeals.
Argued December 14, 2007.
Decided July 10, 2008.
*182 Joel R. Davidson for appellant.
Heather A. Hill, Assistant United States Attorney, for appellee. Jeffrey A. Taylor, United States Attorney, and Roy W. McLeese III, Lisa H. Schertler, Anne Y. Park, and Stephanie L. Brooker, Assistant United States Attorneys, were on the brief, for appellee.
Before WASHINGTON, Chief Judge, BLACKBURNE-RIGSBY, Associate Judge, and FARRELL, Associate Judge, Retired.[*]
WASHINGTON, Chief Judge:
Appellant Darryl Martin was charged with carrying a dangerous weapon[1] and possession of an unregistered firearm.[2] Before trial, appellant moved to suppress the admission of physical evidence (a firearm) recovered from his home. Following the trial court's denial of the motion, appellant entered a conditional guilty plea to the charge of possession of an unregistered firearm, reserving his right to appeal the trial court's denial of his motion to suppress. Super. Ct.Crim. R. 11(a)(2). On appeal, appellant contends that the trial court erred in concluding that the police did not conduct a search. We agree and reverse.
I.
Factual Background
On April 20, 2006, Metropolitan Police Department (MPD) Officer Lenox Antoine *183 responded to a radio assignment for a burglary at 312 Quackenbos Street, N.E. While en route, he received an update that shots had been reported fired. Upon arriving, Officer Antoine spoke with appellant, who stood outside the home. Appellant informed the officer that while he was standing in his mother's kitchen, he witnessed a man trying to break into an abandoned house across the street. Then, he heard a noise coming from the basement of his house. Appellant went to inspect the basement, when a man with a sledgehammer opened an exterior door to the basement. Upon seeing appellant, the man fled. Appellant chased him.
After hearing this information, Officer Antoine called detectives to the scene. Detective Collis Timlick arrived and learned from other officers on the scene that witnesses had seen appellant fire a shotgun outside the house before running back inside. Detective Timlick questioned appellant about this allegation, but appellant denied it. The detective then asked appellant for consent to search his house. Appellant refused. Detective Timlick then informed appellant that they would have to secure the premises until they received a search warrant. Then, either appellant or MPD called his mother, Eula Martin. Within fifteen to twenty minutes, Ms. Martin arrived at the scene. Detective Timlick informed Ms. Martin that witnesses reported seeing appellant fire the gun in the air. She then invited the officers to come inside.
Once inside the home, Detective Timlick informed Ms. Martin that the police would either have to get a search warrant to search her home, which would permit them to search the entire house for the shotgun, or she could assist them "by doing a consent to search and sign a form."[3] Appellant was present for this conversation and did not interject or object. Ms. Martin signed the authorization form.[4] Then, either Ms. Martin told her son to go get the gun or appellant went of his own accord; regardless, appellant went to a coat closet and retrieved the gun. It is undisputed that the police did not order him to do so. MPD officers arrested appellant.
Motion to Suppress Hearing
Appellant moved pretrial to suppress the shotgun, asserting that "[t]he police entered the defendants' [sic] home without a warrant," and that although the mother consented to a search, "the defendant was present denying the authority."[5] At the hearing, the government presented testimony from Officer Antoine, Detective Timlick, and a crime scene technician. On cross-examination, Detective Timlick admitted that appellant denied "consent to search the house." The defense called Ms. *184 Martin. Ms. Martin confirmed that she invited the police into her home, that she signed the consent form, that appellant retrieved the gun from the closet, and that MPD did not order him to do so. She did not recall, however, the police ever mentioning a warrant. Ms. Martin acknowledged that she read the consent form and signed it.
The trial court considered Detective Timlick's testimony more persuasive than Ms. Martin's, as she had difficulty explaining what she thought when she signed the form. The court, however, noted that regardless of whose testimony it credited, it found that no search had occurred: "They didn't search the house. There's no search of this house. There wasn't a single search conducted."
II.
Appellant contends that the trial court erred in concluding that the police officers did not conduct a search of his home by mistakenly relying on his mother's consent as well as his assistance to the police in conducting the search once they were already inside the home. We agree.
The Fourth Amendment protects against "unreasonable searches and seizures." U.S. CONST. amend. IV. "A `search' occurs when an expectation of privacy that society is prepared to consider reasonable is infringed." United States v. Jacobsen, 466 U.S. 109, 113, 104 S. Ct. 1652, 80 L. Ed. 2d 85 (1984).[6] An individual has a clear expectation of privacy in the home. Indeed, "`[i]t is axiomatic that the physical entry of the home is the chief evil against which the wording of the Fourth Amendment is directed.'" Oliver v. United States, 656 A.2d 1159, 1164 (D.C.1995) (quoting Welsh v. Wisconsin, 466 U.S. 740, 748, 104 S. Ct. 2091, 80 L. Ed. 2d 732 (1984)) (internal quotation omitted).
The Fourth Amendment draws a line at the threshold to the home, beyond which the police or government agents may not cross absent a warrant, subject only to a few well-prescribed exceptions. See Payton v. New York, 445 U.S. 573, 590, 100 S. Ct. 1371, 63 L. Ed. 2d 639 (1980). In Payton, the Supreme Court clarified that this protection is violated even in cases where the police have probable cause to arrest an individual they know (or have reason to believe) is inside his home. Id. Payton involved two separate incidents; yet, in both, police made warrantless entries into the dwellings of the subjects to arrest them. 445 U.S. at 576-78, 100 S. Ct. 1371. The Court concluded that neither consent nor exigent circumstances excused the warrantless entries. 445 U.S. at 590, 100 S. Ct. 1371. The New York Court of Appeals had upheld the entries, however, by distinguishing between warrantless entries for the purpose of arresting a felon and warrantless entries to search for evidence. 445 U.S. at 589, 100 S. Ct. 1371. The New York appellate court viewed the former as being less intrusive, as the latter would likely include a broader search area. Id. The Supreme Court, however, rejected this distinction and reaffirmed the sanctity of the home: "[T]he critical point is that any differences in the intrusiveness of entries to search and entries to arrest are merely ones of degree rather than kind. The two intrusions share this fundamental *185 characteristic: the breach of the entrance to an individual's home." 445 U.S. at 589, 100 S. Ct. 1371 (emphasis added). Noting that the "zone of privacy [is no] more clearly defined than when bounded by the unambiguous physical dimensions of an individual's home," the Court concluded that "[i]n terms that apply equally to seizures of property and to seizures of persons, the Fourth Amendment has drawn a firm line at the entrance to the house." 445 U.S. at 589-90, 100 S. Ct. 1371. "Absent exigent circumstances, that threshold may not reasonably be crossed without a warrant." 445 U.S. at 590, 100 S. Ct. 1371; see also Welsh, supra, 466 U.S. at 754, 104 S. Ct. 2091,(holding that the Fourth Amendment clearly prohibited the police from a warrantless entry into petitioner's home to arrest him, based in part on the assumption that no valid consent to enter was given).
Our decisions also make it clear that the threshold of one's home may not be crossed without a warrant unless an exception to the warrant requirement applies. One such exception occurs when parties voluntarily consent to such an intrusion. See Robertson v. United States, 429 A.2d 192, 194 (D.C.1981). In Robertson, police officers arrived at appellant's home, entered, and arrested him in connection with a robbery. Id. While the officers had probable cause to arrest Robertson for the robbery, they did not have a warrant to enter his home to effectuate the arrest. Id. at 193-94. Robertson argued, citing Payton, that his constitutional rights had been violated by the police because they entered his home and arrested him without a warrant. Id. at 194. This court agreed with Robertson that unless some exception to the warrant requirement was applicable, his arrest was improper because the police entered his home without a warrant. Ultimately, the court upheld the conviction, however, because it concluded that Robertson had invited the police inside his home:
[I]t is clear from the record that when the officers approached the door to appellant's house[,] they were invited in by appellant. There is no indication that appellant's invitation was the result of police coercion or undue influence. Thus the officers' entry into the dwelling was on the basis of appellant's consent voluntarily given. . . . [W]e hold that the officer's entry into the dwelling of appellant was not in violation of the Fourth Amendment.
Id. These cases set out clear Fourth Amendment guidelines the police may not enter an individual's home without a warrant unless they can meet one of the well-defined exceptions to the warrant requirement, such as consent or exigent circumstances.[7]
*186 According to the record in this case, when Detective Timlick asked appellant for consent to search the house prior to appellant's mother's arrival and while they were outside the home, appellant said no. Appellant's unequivocal refusal to consent was a clear invocation of his Fourth Amendment right to privacy. Because the Fourth Amendment was implicated as soon as the police entered appellant's home, the trial court erred in concluding that no search took place in this case. See 1 WAYNE R. LAFAVE, SEARCH AND SEIZURE § 2.3(b) (2004) ("It is beyond question, therefore, that an unconsented police entry into a residential unit, be it a house or an apartment or a hotel or motel room, constitutes a search within the meaning of Katz v. United States [389 U.S. 347, 88 S. Ct. 507, 19 L. Ed. 2d 576 (1967)]."); see also Payton, supra, ("[T]he Fourth Amendment has drawn a firm line at the entrance to the house."); Johnson v. United States, 333 U.S. 10, 13, 68 S. Ct. 367, 92 L. Ed. 436 (1948) (characterizing "entry to defendant's living quarters" as "the beginning of the search").[8]
III.
Because the police entry into the home constituted a search in this case, we must next consider whether any exceptions to the warrant requirement apply in this case. "A search conducted without a warrant is `per se unreasonable' under the Fourth Amendment unless it falls within a few specific and well-established exceptions." Basnueva v. United States, 874 A.2d 363, 369 (D.C.2005) (citing Schneckloth v. Bustamonte, 412 U.S. 218, 219, 93 S. Ct. 2041, 36 L. Ed. 2d 854 (1973)). Consent is such an exception. See id. "To justify a search under the consent exception, the government must prove by a preponderance of the evidence that consent was, in fact, freely and voluntarily given." Id.
Before the trial court, Martin argued not only that he refused to consent to a search of the home, but also that his mother's later consent was ineffective, according to the Supreme Court's recent opinion in Georgia v. Randolph, 547 U.S. 103, 126 S. Ct. 1515, 164 L. Ed. 2d 208 (2006). In Randolph, a woman requested that police come into her home to find evidence of drug use by her husband; however, her husband, who was present when the police arrived, refused to consent. 547 U.S. at 107, 126 S. Ct. 1515. Despite Mr. Randolph's refusal, Mrs. Randolph led the police into the home and to the contraband. Id. The Supreme Court held this search to be unconstitutional despite the consent of Mrs. Randolph, a physically present resident of the home. 547 U.S. at 120, 126 S. Ct. 1515.
The Court reached this conclusion after reviewing its prior consent cases. It first acknowledged that voluntary consent excuses a warrantless search-even where the consenting individual merely shares common authority over the area. 547 U.S. at 109, 126 S. Ct. 1515. Indeed, the police may act upon the consent of one who they reasonably believe to share common authority, *187 even if the person really does not. See id. (citing Illinois v. Rodriguez, 497 U.S. 177, 186, 110 S. Ct. 2793, 111 L. Ed. 2d 148 (1990)). The Court explained that this rationale derives not from property law, but rather from a societal understanding of the mutual use of property: tenants essentially assume the risk that co-tenants may affect their rights. 547 U.S. at 110, 126 S. Ct. 1515. But just as the Court has held that those with common authority may consent to searches, so it has also expanded the right to deny consent to those with a reasonable expectation of privacy in the premises. 547 U.S. at 113, 126 S. Ct. 1515. For example, the Court has held that an overnight guest has a reasonable expectation of privacy because "it is unlikely that [the host] will admit someone who wants to see or meet with the guest over the objection of the guest." Id. (citing Minnesota v. Olson, 495 U.S. 91, 110 S. Ct. 1684, 109 L. Ed. 2d 85 (1990)). Having reaffirmed the ability of those reasonably perceived as having common authority to give consent, and the ability of those with reasonable expectations of privacy to deny consent, the Court turned to a situation where two individuals who both possess common authority conflict over whether to consent. In this situation, the Court concluded that the one denying consent controls: "[A] warrantless search of a shared dwelling for evidence over the express refusal of consent by a physically present resident cannot be justified as reasonable as to him on the basis of consent given to the police by another resident." 547 U.S. at 120, 126 S. Ct. 1515.[9]
Thus, following Randolph, appellant's mother's later consent in this case did not vitiate her son's earlier denial of consent. After his initial refusal, the police could have obtained valid consent to the search only from appellant. See United States v. Murphy, 516 F.3d 1117, 1125 (9th Cir. 2008) (holding that the refusal of a tenant renders a co-tenant's later consent invalid, even if the co-tenant was not physically present for the refusal). Yet there is no evidence that appellant unambiguously repudiated that lack of consent prior to the police entering the home. Appellant's mother not appellant let the police enter the home.[10]
The government, however, disputes the applicability of Randolph here, arguing that the Court carved out an exception for living arrangements that reflect a recognizable hierarchy, such as parent-child. Indeed, the Court said:
Unless the people living together fall within some recognized hierarchy, like a household of parent and child or barracks housing military personnel of different grades, there is no societal understanding of superior and inferior. . . .
Randolph, supra, 547 U.S. at 114, 126 S. Ct. 1515. Thus, by implication, a parent and child household reflects a socially understood hierarchy. Because this case involves a mother and son, the government asserts that Martin's refusal to consent was inferior to and thus, was superceded *188 by his mother's subsequent consent. Although the Randolph Court discussed recognizable hierarchies, it did so to explain the difficulty of discerning whether one resident's authority to consent was superior to another's. Indeed, the Court recognized that the common-authority and apparent-authority to consent exceptions, which permit law enforcement officers to rely upon the consent of a person they reasonably believe has authority to consent, were predicated upon the impossibility of determining the hierarchy of consent. See Rodriguez, supra, 497 U.S. at 186, 110 S. Ct. 2793. Given this difficulty, we do not read the cited passage as meaning that a resident's offspring can never have equal authority over a shared residence. Such a reading could lead to absurd results, such as where an adult owns a home, but has decided to care for his or her ageing parents. The parent would certainly have a right to privacy in the residence, but it would be far from clear that the parent would have superior authority over the homeowner. Rather, it is more likely that by "child," the Court meant a minor. See BLACK'S LAW DICTIONARY 254 (8th ed.2004) (defining "child" as "[a] person under the age of majority.").
While the record is sparse, it is clear on two significant facts: Martin was twenty-six-years old at the time he refused consent and Detective Timlick believed Martin had common authority over the home, which is why Timlick asked Martin to consent to the search. If Martin had the authority to consent to a search of his mother's home such that he could implicate her privacy rights in her absence, then he had the common authority to deny it. And once he refused consent, that refusal bound the police. Randolph, supra, 547 U.S. at 120, 126 S. Ct. 1515; Murphy, supra, 516 F.3d at 1125. Absent any clear revocation of Martin's earlier denial of consent, the police's subsequent entry was unlawful. See Murphy, supra, 516 F.3d at 1125 (stating that the tenant's objection "remains effective barring some objective manifestation that he has changed his position and no longer objects").
When wholly removed from the events outside the home, what happened inside may indeed not have amounted to a search since Martin apparently retrieved the weapon either at his mother's or his own behest. But we cannot view this later act in a vacuum. Martin invoked his right to privacy; the police ignored him. Thus, he had no assurance that a repeated objection would have been met with a different result.[11] The police entry without a warrant constituted an unlawful search and the shotgun must be suppressed as the fruits of that unlawful search. See Oliver v. United States, 656 A.2d 1159, 1172 (D.C. 1995).
IV.
We must finally consider whether Martin waived his argument that the police unlawfully entered his home in violation of the Fourth Amendment. The government asserts that Martin failed to raise this argument before either the trial court or this court. We believe, however, that the trial court faced the relevant inquiry. In moving to suppress the shotgun, appellant's trial counsel asserted that "[t]he police entered the defendants' [sic] home without a warrant," and that although the mother consented to a search, "the defendant *189 was present denying the authority." Further, in response to the court's inquiry during the motion hearing as to the basis for suppression, defense counsel replied, "[the police] had no probable cause to enter and search the house."
In addition, defense counsel cited Georgia v. Randolph as supporting his argument that the police conducted an unlawful search: "the case of Georgia v. Randolph examines this problem exactly." Appellant's trial counsel's reference to Randolph as "exactly" examining his client's problem further apprised the trial court of the relevant objection: warrantless entry. While both Randolph and the instant case involve a subsequent discovery of evidence (the drugs in Randolph; the shotgun here), it is the initial breach of the sanctity of the home that requires the consent in the first instance.
Despite these early protests to a warrantless entry, the trial court and the parties shifted focus to conduct occurring inside the home. This change in focus does not, however, negate the fact that appellant's trial counsel had presented the court with the issue of warrantless entry. Given counsel's initial framing of the issue for the court, the facts adduced at the hearing, and the citation and discussion of Georgia v. Randolph, we are satisfied that the trial court was sufficiently apprised of the issue on review.
We agree with the government that Martin's appellate counsel failed to argue that the entry itself constituted an unlawful search either in his principal brief or at oral argument. Counsel even conceded that he was not making an unlawful entry claim at oral argument. However, both parties have now had an opportunity to brief the issue, and we therefore believe that it is appropriate for us to decide the issue. See Outlaw v. United States, 632 A.2d 408, 410, 410 n. 7 (D.C.1993) (reversing a conviction based on an argument first raised by this court at oral argument, but after this court invited supplemental briefing); see also United States Nat'l Bank v. Independent Ins. Agents of Am., 508 U.S. 439, 447, 113 S. Ct. 2173, 124 L. Ed. 2d 402 (1993) ("[A] court may consider an issue antecedent to . . . and ultimately dispositive of the dispute before it, even an issue the parties fail to identify and brief.") (internal quotations omitted.).
The trial court found that "[t]here wasn't a single search conducted." But a search occurs the moment the home's threshold is crossed. Here, because the police crossed that threshold without a warrant and over Martin's protest, they violated Georgia v. Randolph and conducted an unlawful search. Accordingly, the trial court's denial of the motion to suppress is
Reversed.
FARRELL, Associate Judge, Retired, concurring:
When, following the suppression hearing testimony, the trial judge asked appellant's counsel "what's the search," counsel said that it was the retrieval of the gun from the closet by appellant, something he had done under "threat" by the police that otherwise they would obtain a warrant and search the entire house, if necessary. The judge ruled that appellant's own actions were not a search that merely by giving him a choice that included avoiding a search, the police had not made him an agent of the government.
We now reverse, however, on the different ground that the warrantless entry of the house, undeniably a "search," was unlawful because effected over appellant's refusal to consent to the entry. Apparently uncertain himself whether that issue had been preserved, appellant's counsel did not *190 raise it either in his brief or at oral argument in this court.
I nonetheless agree that we should not consider the point forfeited. At trial, appellant's counsel directed the court to Georgia v. Randolph, 547 U.S. 103, 126 S. Ct. 1515, 164 L. Ed. 2d 208 (2006), and his written motion to suppress contained enough language though barely so to inform the court that appellant was challenging the unconsented entry as part of the "search of the house." As for appellant's omissions on appeal, the government concedes that our decisions are not uniform in imposing strict forfeiture of issues not raised by a defendant until prompted by the court in supplemental briefing, as in this case. Compare, e.g., Anthony v. United States, 935 A.2d 275, 282-83 n. 10 (D.C. 2007), with Rose v. United States, 629 A.2d 526, 535-36 (D.C.1993). The entry and consent issues have now been briefed, and the government does not argue that the trial record is too undeveloped to permit a decision on the applicability of Randolph to this case.
On the merits, I agree that Randolph requires suppression, although I confess to uncertainty about the reach of that decision. Appellant was a mature adult residing in the home "an inhabitant of shared premises" and thus not a dependent within "some recognized hierarchy, like a household of parent and child," 547 U.S. at 114, 126 S. Ct. 1515, such that the police could ignore his refusal to consent in favor of the mother's permission.[1] The government points to his admission (in the motion to suppress) that his mother owned the house, and seeks to limit Randolph to situations involving "parties with equal authority" in the property sense, such as "co-tenants." But the Court there used words such as "co-tenant," "co-inhabitant," and "fellow occupant" or "resident" more or less interchangeably; and its precise holding was that "a warrantless search of a shared dwelling for evidence over the express refusal of consent by a physically present resident cannot be justified as reasonable as to him on the basis of consent given . . . by another resident." Id. at 120, 126 S. Ct. 1515. As appellant shared residency of the home with his mother, yet was not a "child" in any sense connoting a "societal understanding of superior and inferior," id. at 114, Randolph did not allow the police to disregard his refusal to consent. A contrary rule would encourage police to ignore refusal by a person with apparent authority to deny entry and to look instead for another, more compliant resident with a "superior" right to consent, when Randolph implies that the incentives should run the other way toward obtaining a search warrant if no exigent circumstances exist.
NOTES
[*] Judge Farrell was an Associate Judge of the court at the time of argument. His status changed to Associate Judge, Retired, on July 1, 2008.
[1] In violation of D.C.Code § 22-4505(a) (2001).
[2] In violation of D.C.Code § 7-2502.01(a) (2001).
[3] Detective Timlick recalled: "What I told the mother, I said, ma'am, if we have to get a search warrant, then we have to search the whole house. I don't want to put you in that situation where we have to search the whole house for the shotgun. I told her, I said the witnesses stated they saw your son bring the shotgun in. I said we have a consent to search form that you can sign. And we can get the shotgun and leave the scene. But if you don't give us the shotgun and we have to get an emergency search warrant, then we have to search the whole house. And that's not what I'm here for to make you a victim. . . ."
[4] Ms. Martin confirmed that the police did not threaten to damage her house. But her testimony suggests that she may mistakenly believed that her signature on the form acknowledged that the police would not search the home if Martin turned over the shotgun.
[5] Appellant also moved to suppress certain statements he made to the police prior to his arrest. Appellant has not appealed the trial court's decision regarding those statements.
[6] This protection applies only to governmental action; "it is wholly inapplicable `to a search or seizure, even an unreasonable one, effected by a private individual not acting as an agent of the government or with the participation or knowledge of any governmental official.'" Jacobsen, supra, 466 U.S. at 113-14, 104 S. Ct. 1652,(quoting Walter v. United States, 447 U.S. 649, 662, 100 S. Ct. 2395, 65 L. Ed. 2d 410 (1980) (Blackmun, J., dissenting)).
[7] In another case, this court concluded that no search had taken place where a police officer had been invited inside the home and observed contraband in plain view. See United States v. Gaskin, 368 A.2d 1138, 1139 (D.C. 1977). In that case, however, "[t]he crucial factual consideration [was] that the officer was responding to a call that there was `found property' on the premises. He was not sent to the premises for the purposes of investigating criminal activity there nor to make an arrest." Id. Agreeing that the police conduct constituted community caretaking, rather than criminal investigation, this court "view[ed] the entry into the apartment at the invitation of the complainant, [] as permissible police action." Id. "Since the officer was lawfully inside the apartment and then almost immediately observed the [contraband], we conclude that no search took place within the scope of the Fourth Amendment in this unusual set of circumstances." Id. In this case, by contrast, the police intended to search the appellant's dwelling for the shotgun clearly a criminal investigation. See id. at 1139 n. 4 (internal citation and quotation omitted) ("A search implies an examination of one's premises or person with a view to the discovery of contraband or evidence of guilt to be used in prosecution of a criminal action."). Thus, we view Gaskin as confined to the "unusual set of circumstances" where the police do not intend to conduct a criminal investigation and where the resident invites the police into the home and the contraband is in plain view.
[8] In supplemental briefing, the government concedes as it must that the entry constitutes a search. Yet the government argues that the search was reasonable. Because the trial court found that there had been no search conducted at all, it never determined whether the police reasonably entered the home.
[9] But police need not seek out a non-present co-resident to see if he or she refuses to consent. 547 U.S. at 122, 126 S. Ct. 1515.
[10] There is also at least some evidence that the police may have prevented Martin from speaking to his mother when she arrived on the scene. Ms. Martin testified that Martin tried to talk to her, but "the police officer told him he couldn't speak with [her]." In Randolph, the Court noted that while the police need not invite a co-resident, even one who is nearby, to participate in a request for consent to enter the home, this applies only "[s]o long as there is no evidence that the police have removed the potentially objecting tenant from the entrance for the sake of avoiding a possible objection. . . ." 547 U.S. at 121, 126 S. Ct. 1515.
[11] We note that while his later act of surrendering the shotgun appears to have been voluntary cooperation in response to a valid police ultimatum (i.e., "hand over the weapon or we will get a search warrant"), Martin had declined the exact same ultimatum outside the home, that is, before the police ignored his denied consent.
[1] Nor was there evidence that his privacy expectation in the home was limited to a particular room or rooms, as in the case of a boarder or room-renter.
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Texacan, Inc. v. Reid
IN THE COURT OF APPEALS, THIRD DISTRICT OF TEXAS,
AT AUSTIN
NO. 3-91-373-CV
TEXACAN, INC.,
APPELLANT
vs.
DANNY REID D/B/A BURNET MINI STORAGE,
APPELLEE
FROM THE DISTRICT COURT OF BURNET COUNTY, 33RD JUDICIAL DISTRICT,
NO. 13,321, HONORABLE CLAYTON E. EVANS, JUDGE
PER CURIAM
The issue in this cause is the validity of actions taken by an alleged corporate
officer who profited from transactions with the corporation. Appellee Danny Reid ("Reid"), d/b/a
Burnet Mini Storage, sued appellant Texacan, Inc. under theories of unjust enrichment, quantum
meruit, and breach of contract for damages in excess of $20,000 and attorney's fees for Texacan's
failure to pay rent on three self-service storage units. In a bench trial the district court awarded
Reid judgment for $9639.00 in damages, $1215.30 in prejudgment interest, and $3000.00 in
attorney's fees.
In three points of error Texacan alleges that the district court erred in: (1) failing
to find that Reid was in a fiduciary relationship with Texacan because the evidence established the
fiduciary relationship as a matter of law; (2) admitting in evidence testimony of a compromise
settlement in violation of Texas Rule of Civil Evidence 408; and (3) finding that Reid had a
statutory lien on Texacan's property because the evidence is insufficient. We will affirm.
Reid is the only child of Texacan's founder. Reid sat on Texacan's board of
directors and became vice president and general manager of Texacan in 1987. Reid also owns
Burnet Mini Storage where Texacan stored property beginning in 1987. The monthly rent for the
January 1987 lease was $195.00, and Reid signed the lease for Texacan.
Reid inherited half of Texacan's stock on his mother's death in December 1987,
and Reid and his father had disputes over business and personal matters. Texacan stopped paying
the $195.00 monthly rent in the summer of 1988. A verbal agreement was allegedly made in
March 1989 under which Texacan agreed to pay Reid $1459.00 and vacate the self-service storage
units by March 15, 1989, or if the property was not moved, Texacan allegedly agreed to pay a
reasonable storage rate. Reid's father died later in 1989, leaving the father's half of Texacan's
stock to Reid's stepmother.
In point of error one, Texacan alleges that the district court erred in failing to find
that Reid was in a fiduciary relationship with Texacan because the evidence established the
fiduciary relationship as a matter of law. We interpret this to be a legal-sufficiency point of error
arguing that Texacan established Reid's fiduciary relationship as a matter of law. This point of
error appears to be directed solely at Reid's actions in charging rent after March 1989.
In deciding a legal-sufficiency point attempting to overcome an adverse fact finding
as a matter of law, we must first consider only the evidence and inferences tending to support the
finding of the trier of fact and disregard all evidence and inferences to the contrary. If there is
no evidence to support the finding, we must then examine the entire record to see if the contrary
proposition is established as a matter of law. Sterner v. Marathon Oil Co., 767 S.W.2d 686, 690
(Tex. 1989); Holley v. Watts, 629 S.W.2d 694, 696 (Tex. 1982); Texas & N.O. R.R. v. Burden,
203 S.W.2d 522, 528-31 (Tex. 1947). See generally William Powers, Jr. & Jack Ratliff, Another
Look at "No Evidence" and "Insufficient Evidence", 69 Tex. L. Rev. 515, 523 (1991); Michol
O'Connor, Appealing Jury Findings, 12 Hous. L. Rev. 65, 78-80 (1974). There is some evidence
in the record that Reid was removed as vice president and general manager of Texacan as late as
August 1988, and Texacan failed to introduce any evidence at trial that Reid was still a director
of Texacan during the time the disputed actions occurred. Point of error one is overruled.
In point of error two, Texacan alleges that the district court erred in admitting in
evidence testimony of the March 1989 agreement because it was a compromise settlement. See
Tex. R. Civ. Evid. Ann. 408 (Pamph. 1992). Rule 408 applies to negotiations or offers to
compromise, but does not apply to completed offers for compromise. Tag Resources, Inc. v.
Petroleum Well Servs., Inc., 791 S.W.2d 600, 606 (Tex. App. 1990, no writ). The district court
found that both Reid and Texacan agreed to the March 1989 compromise. Point of error two is
overruled.
In point of error three, Texacan alleges that the district court erred in rendering
judgment because the court's finding that Reid had a statutory lien on Texacan's property is
erroneous as a matter of law. See Tex. Prop. Code Ann. §§ 59.021-.046 (1984 & Supp. 1992).
Texacan bases its argument on the evidence that Reid allowed his relatives to use the stored
property and that Texacan did not have possession of the keys to the self-service storage units.
See Tex. Prop. Code Ann. §§ 59.001(3), .001(4) (1984) ("self-service storage facility" defined
as "real property that is rented to be used exclusively for storage of property and is cared for and
controlled by the tenant"; "tenant" defined as "person entitled under a rental agreement to the
exclusive use of storage space at a self-service storage facility").
Reid testified that he had the only key to the locks. As previously discussed, the
record indicates that Reid was vice president and general manager of Texacan at least as late as
August 1988, and he may have been a director of Texacan after that time. Although Reid was in
the unusual situation of being both lessor and tenant, Texacan did have possession of the keys at
least until the time of its default on the lease payments. Texacan also cites to Reid and his
daughter's testimony to show Reid allowed relatives to use the stored property; however, both sets
of testimony state that Reid's father authorized the use. Point of error three is overruled.
The judgment of the district court is affirmed.
[Before Chief Justice Carroll, Justices Aboussie and B. A. Smith]
Affirmed
Filed: August 12, 1992
[Do Not Publish]
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IN THE COURT OF APPEALS, THIRD DISTRICT OF TEXAS,
AT AUSTIN
NO. 03-90-271-CV
DIRECTOR, STATE EMPLOYEES WORKERS' COMPENSATION
DIVISION, STATE OF TEXAS,
APPELLANT
vs.
JESSIE MAE BLAINE,
APPELLEE
FROM THE DISTRICT COURT OF TRAVIS COUNTY, 345TH JUDICIAL DISTRICT
NO. 447,875, HONORABLE JERRY DELLANA, JUDGE
The Director of the State Employees Workers' Compensation Division (hereafter
"the Director") appeals an adverse judgment in this workers' compensation case involving an
occupational disease. We will affirm the trial court's judgment.
THE CONTROVERSY
The Austin State School employed Jessie Mae Blaine in its medical unit from 1973
through July 1983 and again from June 1984 until February 1988. The School tested Blaine
annually for tuberculosis. After several negative skin tests, in 1978 Blaine tested positively,
revealing that she had been exposed to tuberculosis. In 1988, Blaine began to exhibit flu-like
symptoms and in February her doctor diagnosed her as suffering from tuberculosis. As a result,
her doctor performed a lobectomy, removing a portion of her left lung.
On March 11, 1989, Blaine injured her back in a fall she claims resulted from the
effects of isoniazid (INH), a medication prescribed for the treatment of her tuberculosis. Blaine
filed a claim for workers' compensation, alleging that shortness of breath and back problems she
attributes to her fall render her unable to work.
The Director defended the claim on the theory that Blaine also suffers from non-compensable arthritis, chronic obstructive pulmonary disease (COPD), and Hepatitis B, which
contribute to her incapacity and require a proportionate reduction in benefits. See 1947 Tex. Gen.
Laws, ch. 113, § 4, at 178 (Tex. Rev. Civ. Stat. Ann. art. 8306, § 22, since repealed).
The jury returned a verdict for Blaine, finding that she sustained an occupational
disease in the course and scope of her employment which was a producing cause of her total and
permanent incapacity, and failing to find contribution due to COPD, arthritis, or Hepatitis B. The
trial court rendered judgment on the verdict.
The Director appeals, raising eleven points of error. He complains in the first nine
points of the legal and factual sufficiency of the evidence and in the last two points of the manner
in which the case was submitted to the jury. We will address the jury-charge complaints first.
THE JURY CHARGE
The Director tendered jury questions on contribution proposing to ask the jury:
Did Plaintiff have any C.O.P.D. separate and distinct from her tuberculosis that
aggravated her occupational disease?
Did Plaintiff's C.O.P.D. aggravate, prolong, accelerate, or in any way contribute
to her incapacity from her occupational disease?
(Emphasis added). The Director proposed similar questions regarding arthritis and Hepatitis B.
Instead, the trial court submitted the questions as follows:
9. Did Plaintiff have C.O.P.D. separate and distinct from her tuberculosis that
aggravated her tuberculosis disease?
10. Did Plaintiff's C.O.P.D. aggravate, prolong, accelerate, or in any way
contribute to her incapacity from her tuberculosis?
(Emphasis added). The trial court submitted similar questions numbered twelve, thirteen and
fifteen regarding arthritis and Hepatitis B. The jury answered "no" to all of these questions.
The Director complains in point of error ten that the trial court erred by using the
words "tuberculosis" and "tuberculosis disease" instead of the words "occupational disease" in
these questions. On this point, the Director failed to preserve error.
At trial the Director objected to the wording of the contribution questions stating:
Defendants would object to the use of occupational disease in . . . question nine
through sixteen as the term tuberculosis is used in place of occupational disease,
and the fact that I think it would confuse the jury and lead to possibly an erroneous
verdict and judgment.
(Emphasis added.) The Director argues on appeal that the wording constitutes a comment on the
weight of the evidence. This ground was not specifically raised at trial and, as a consequence,
is waived on appeal. See Russell v. Campbell, 725 S.W.2d 739 (Tex. App. 1987, writ ref'd
n.r.e.).
The Director also argues on appeal that the questions, as worded, confused the jury
and led to an improper verdict. Although this argument may comport with the Director's
objection at trial, the stated ground for the objection is too general. To preserve error, a party
must point out distinctly the error and the legal basis of the objection. See Tex. R. Civ. P. Ann.
274 (Supp. 1992); Wright Way Const. Co., Inc. v. Harlingen Mall Co., 799 S.W.2d 415 (Tex.
App. 1990, writ denied); see also Tex. R. App. P. Ann. 52(a) (Pamph. 1992). An objection must
be specific enough to support the conclusion that the trial court was fully cognizant of the grounds
of complaint and deliberately chose to overrule it. Chrysler Corp. v. Roberson, 619 S.W.2d 451
(Tex. App. 1981, no writ). The Director's ground, that the wording of the question "may confuse
the jury," does not comply with Rule 274 because it does not explain why the question is legally
incorrect or how it would confuse the jury. See Castleberry v. Branscum, 721 S.W.2d 270, 277
(Tex. 1986). We overrule point of error ten.
In point of error eleven, the Director complains that the trial court abused its
discretion by incorrectly submitting the definition of occupational disease to include "aggravation,
acceleration or incitement of any disease," because article 8306, section 22, expressly reduces
recovery of workers' compensation benefits if: (1) the occupational disease is aggravated by a
non-compensable condition, or (2) incapacity or death from a non-compensable condition is
aggravated, prolonged, accelerated or in anyway contributed to by an occupational disease. See
1947 Tex. Gen. Laws, ch 113, §4, at 178 (Tex. Rev. Civ. Stat. Ann. art. 8306, § 22, since
repealed).
We recognize that the courts disagree whether it is erroneous to define occupational
disease as including aggravation, acceleration or incitement of a non-compensable disease or
condition. Compare Mason v. Texas Employers' Ins. Ass'n, 628 S.W.2d 806 (Tex. App. 1981,
writ ref'd n.r.e.), with Leal v. Employers Mut. Liab. Ins. Co., 605 S.W.2d 328 (Tex. Civ. App.
1980, no writ); see U.S. Fidelity & Guar. Co. v. Bearden, 700 S.W.2d 247, 250 (Tex. App.
1985, no writ) (permitting recovery for aggravation of a non-occupational disease where section
22 defenses were waived); Home Ins. Co. v. Davis, 642 S.W.2d 268, 269 (Tex. App. 1982, no
writ) ( stating that aggravation, acceleration, or incitement of a non-occupational disease does not
constitute a compensable injury under our Workers' Compensation Act) (citing Texas Employers'
Ins. Ass'n v. Schaefer, 598 S.W.2d 924, 928-29 (Tex. Civ. App.), aff'd on other grounds, 612
S.W.2d 199 (Tex. 1980)); see also City of Bridgeport v. Barnes, 591 S.W.2d 939, 940 (Tex. Civ.
App. 1979, writ ref'd n.r.e.); Lubbock Indep. Sch. Dist. v. Bradley, 579 S.W.2d 78, 81-82 (Tex.
Civ. App. 1979, writ ref'd n.r.e.); Standard Fire Ins. Co. v. Ratcliff, 537 S.W.2d 355, 359-60
(Tex. Civ. App. 1976, no writ) (all tacitly approving instructions that occupational disease
includes aggravation, acceleration, or incitement of previously or subsequently existing disease,
infirmity, or condition); see generally T.P. Sartwelle, Annual Survey of Texas Law, 32 Sw.L.J.
291, 351-52 (1978). However, this court approved this form of submission in Teague v. Charter
Oak Fire Ins. Co., 548 S.W.2d 957 (Tex. Civ. App. 1977, writ ref'd n.r.e.). Accordingly,
following Teague, we find no error in the court's definition and overrule the Director's eleventh
point of error.
SUFFICIENCY OF THE EVIDENCE
The Director's first nine points of error complain of the legal and factual
sufficiency of the evidence to support the jury's findings. (1) Points one through six address the
jury's negative answers to defensive questions nine, ten, twelve, thirteen and fifteen. Specifically
the Director complains in these six points that the trial court erred in overruling the motion for
new trial because either the jury's failure to find contribution is against the great weight and
preponderance of the evidence or contribution is proven as a matter of law.
The standard of review for failure to find on an issue on which the appellant had
the burden of proof is the same as that for an adverse finding on such an issue; the appellant
attacking the legal sufficiency of the evidence must demonstrate that the evidence conclusively
established all vital facts in support of the issue. Sterner v. Marathon Oil Co., 767 S.W.2d 686,
690 (Tex. 1989). The reviewing court will first examine the record for evidence that supports the
finding, while ignoring all evidence to the contrary. Id. If there is no evidence to support the
finding, the reviewing court will then examine the entire record to determine if the contrary
proposition is established as a matter of law. Id.; see also Holley v. Watts, 629 S.W.2d 694, 696
(Tex. 1982). A party challenging the factual sufficiency of the evidence to support a failure to
find on an issue on which he had the burden of proof must demonstrate the failure to find was
against the great weight and preponderance of the evidence. Parrish v. Hunt, 331 S.W.2d 304
(Tex. 1960). In reviewing a factual-sufficiency challenge, this Court must examine all the
evidence in the record to determine if there is some evidence to support the finding; if the finding
is so contrary to the overwhelming weight and preponderance of the evidence as to be clearly
wrong and manifestly unjust; or if the great preponderance of the evidence supports its non-existence. See Cain v. Bain, 709 S.W.2d 175, 176 (Tex. 1986); In re King's Estate, 244 S.W.2d
660, 661 (Tex. 1951). The granting or denial of a new trial is within the trial court's discretion
and will not be disturbed on appeal absent an abuse of discretion. Jackson v. Van Winkle, 660
S.W.2d 807, 809 (Tex. 1983).
After reviewing the statement of facts, we find the evidence does not conclusively
establish that COPD, arthritis, or Hepatitis B aggravated Blaine's tuberculosis or contributed to
her incapacity. Nor is the failure to find aggravation or contribution against the great weight of
the evidence. Both Blaine and her supervisor, Sally Bell, testified that before Blaine contracted
tuberculosis she had no problem performing her work; Blaine testified that before she had no
shortness of breath and no physical problems with her feet or back.
Blaine also testified that Dr. Lengel diagnosed her tuberculosis and prescribed INH.
She took INH from February through June of 1988; Dr. Lengel took her off the INH when she
began experiencing numbness in her feet and hands. Blaine testified that the numbness caused her
knees to buckle and, as a result, she frequently fell. One fall in March 1989 injured her lower
back.
Dr. Lengel, Blaine's treating physician, testified that the numbness and tingling in
Blaine's legs could have been a side effect of the INH. Lengel's progress note of January 5,
1989, stated that Blaine had "[p]eripheral neuropathy, probably isoniazid related." Dr. Michael
Kelly, the Director's expert medical witness, explained that peripheral neuropathy is derangement
of the nerve function; one side effect of INH is that it causes peripheral neuropathy.
Dr. Jane Berry, who treated Blaine's back injury, diagnosed severe arthritis also.
Lengel testified that back x-rays showed some degenerative arthritis and that Blaine's treatment
did not cause the arthritis. However, Dr. Kelly testified that simply having degenerative or
osteoarthritis does not necessarily mean a person is going to have symptoms from that arthritis,
but that an injury from a fall could aggravate or cause it to become symptomatic. In that instance,
Kelly said, it would be hard to say whether the symptoms were from the injury, the fall, or the
arthritis.
Lengel testified that he could not rule out the possibility that the arthritis could
affect the nerves to the leg, causing Blaine's numbness and tingling, or the cause could be a
combination of the arthritis and the INH. In addition, for unrelated reasons, Blaine has previously
had her thyroid removed and she was at one time "low in her thyroid" which Lengel testified can
also potentially cause peripheral neuropathy.
In a letter from Dr. Lengel to an insurer dated January 21, 1990, Lengel stated:
Ms. Blaine is disabled by virtue of severe degenerative joint disease in her back.
Her disability essentially started in January of 1988 when she was admitted with
an unresponsive pneumonia that turned out to be pulmonary tuberculosis. This
tuberculosis was complicated by a lung abscess requiring a left lung lobe resection
with underlying COPD. This left her with more symptoms of emphysema, which
was treated with medication, including bronchodilator and Theo-Dur.
She subsequently developed a peripheral neuropathy thought in part
due to isoniazid for the pulmonary tuberculosis, but largely because of severe
degenerative arthritis. The back has been very difficult . . . to get to respond to
treatment.
Lengel testified, "[M]y initial concern was that it was possibly a side effect of the isoniazid
medication, yet it was such that that wasn't the only explanation. And I'm not sure to date I still
can tell you which possibility that was doing it. But that probably is a combination of factors."
Lengel could not say with reasonable medical probability that INH was a contributing factor to
the peripheral neuropathy.
Dr. Lengel also diagnosed COPD and Hepatitis B. He testified that neither he nor
Dr. Clark, who first examined Blaine, noted a history of COPD or associated wheezing symptoms
after their initial examination of Blaine. However, a breathing test administered June 16, 1988,
after Blaine's lobectomy, showed some evidence of COPD. Blaine's doctors believed she had
some obstructive problems in her lungs before her lobectomy; they presumed she had emphysema
because she smoked cigarettes for thirty-two years before she quit smoking in 1987.
Neither did Lengel or Clark note a history of Hepatitis B or yellow jaundice after
Blaine's initial examination, and both noted Blaine's liver was not enlarged or tender. All of these
symptoms should have been present if Blaine had hepatitis. Dr. Lengel testified that Blaine's
hepatitis was not secondary to the tuberculosis. To the contrary, Dr. Kelly testified that INH can
cause hepatitis; in fact, he said, INH is more commonly known for this side effect than for
neuropathy.
Blaine testified at trial that she experiences shortness of breath, pain in her back
and chest, numbness in her feet and left arm, and she tires easily. In addition, Dr. Jane Berry
restricted Blaine to lifting no more than five to ten pounds. Lengel testified that Blaine's shortness
of breath, fatigue and restricted physical activity are the combined effect of the COPD, arthritis,
"the INH factor with her back," Blaine's age and high blood pressure. He could not say which
of these was the primary cause but "it seemed like the most trouble she was having was with her
back." Lengel agreed that COPD as well as the lobectomy must be considered possible causes
of Blaine's incapacity, but there is no way to tell how much COPD contributed to the incapacity;
tests indicate Blaine's lung incapacity is mild when she is on medication. Lengel also testified that
Blaine complained of a tightness in her chest which occurred after the onset of shortness of breath.
He attributed this tightness to emphysema or COPD. Lengel stated that Blaine's presumed
emphysema would "likely and potentially" make her more short of breath.
Lengel's opinion, based on reasonable medical probability, is that Blaine's
tuberculosis was the first in a string of events that led to her inability to work, but that very little
of Blaine's incapacity to work was a result of her tuberculosis. He summarized his opinion by
saying that a moderate degree of Blaine's incapacity was arguably caused by the tuberculosis
further compromising her lung function, possibly making it easier for her to get other lung
infections. Arguably, part of her numbness in her feet was due to the treatment for tuberculosis,
but this is inconclusive; the degree of arthritis in her spine contributes to leg symptoms, causing
her fall, which undoubtedly strained or potentially further injured her back.
Regarding the cause of Blaine's contracting tuberculosis, Lengel testified it is a
theoretical possibility that Hepatitis B could lower a person's resistance, increasing the risk of
reactivation of inactive tuberculosis, but he could not say this was a certainty. Lengel's theory
is that hepatitis could reactivate tuberculosis because it causes a person to eat less, leading to
malnutrition, which is one of the risk factors for reactivation. But, Lengel doubts Blain's hepatitis
was as severe as that. Lengel also testified that smoking is not listed in the internal medicine,
infectious disease, and pulmonary textbooks as a risk factor for reinfection from tuberculosis, but
Lengel would assume smoking would be a risk factor.
Although the evidence is conflicting, there is some evidence to support the jury's
verdict. In addition, considering all of the evidence in the record, we do not find that the
evidence of contribution from COPD, arthritis, or Hepatitis B is so overwhelming as to render
the jury findings wrong or unjust. We therefore find no abuse of discretion and overrule the
Director's first six points of error.
The Director's three remaining points address jury questions on which Blaine bore
the burden of proof. In points seven and eight, the Director complains that there is either no
evidence or insufficient evidence to support the jury's finding that Blaine's occupational disease
is the producing cause of total incapacity. In point nine, the Director complains that the evidence
is insufficient to support the jury's finding that Blaine's total incapacity was permanent.
In reviewing "no evidence" points, we consider only the evidence and inferences
that tend to support the finding and disregard all evidence and inferences to the contrary. Garza
v. Alviar, 295 S.W.2d 821, 923 (Tex. 1965). If there is any evidence of probative value, we must
overrule the point. Id. In reviewing an "insufficient evidence" point, we consider all of the
evidence both supporting and contrary to the jury's finding to determine if the finding is so against
the weight of the evidence as to be manifestly unjust. In re King's Estate, 244 S.W.2d 660, 661
(Tex. 1951); see also Pool v. Ford Motor Co., 715 S.W.2d 629 (Tex. 1986). The Director
argues that Blaine's back problems, rather than her tuberculosis, cause her incapacity, and that
her tuberculosis has been cured. Therefore, the Director claims, the evidence is insufficient to
support findings of total and permanent incapacity. However, Blaine's theory of the case is that
her back problems are the result of a fall caused by peripheral neuropathy which resulted from
the INH prescribed for her tuberculosis. As the jury was instructed, occupational disease includes
any other diseases or infections that may naturally result from having an occupational disease and
the effects of treatment for the disease. See 1971 Tex. Gen. Laws, ch. 834, § 1, at 2539 (Tex.
Rev. Civ. Stat. Ann. art. 8306, § 20, since repealed); Texas Employers' Ins. Ass'n v. Eskue, 574
S.W.2d 814, 818 (Tex. Civ. App. 1978, no writ); Hartford Accident & Indem. Co. v. Thurmond,
527 S.W.2d 180, 190 (Tex. Civ. App. 1975, writ ref'd n.r.e.). Thus, the evidence summarized
above is legally and factually sufficient to support the jury's finding of total incapacity. We
overrule the Director's seventh, eighth and ninth points of error.
Finding no error, we affirm the trial court's judgment.
Marilyn Aboussie, Justice
[Before Chief Justice Carroll, Justices Aboussie and Kidd]
Affirmed
Filed: July 8, 1992
[Do Not Publish]
1. Blaine argues that the Director has waived points of error one through nine by failing to
timely file the trial exhibits. These exhibits were not filed until June 5, 1991, after the March
21, 1991, deadline for filing the Transcript and Statement of Facts, See Tex. R. App. P. Ann.
54(a) (Pamph. 1992), but before submission of the case on January 15, 1992. Blaine is
mistaken. Rule 54(a) applies only to the Statement of Facts and the Transcript; exhibits may
be filed at any time up to submission without leave of court.
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IN THE COURT OF APPEALS, THIRD DISTRICT OF TEXAS,
AT AUSTIN
NO. 3-92-175-CR
EX PARTE: XAVIER CAMPBELL,
APPELLANT
FROM THE DISTRICT COURT OF MILAM COUNTY, 20TH JUDICIAL DISTRICT
NO. 18,207, HONORABLE CHARLES E. LANCE, JUDGE
PER CURIAM
This is an appeal from an order of the district court, entered following a hearing
on appellant's writ of habeas corpus, refusing appellant's request for a reduction in the amount
of pretrial bail. Appellant is incarcerated in the Milam County jail awaiting trial on an indictment
accusing him of possessing less than 28 grams of cocaine. Bail in this cause is presently set at
$100,000.
At the time of his arrest for this offense, appellant was free on bond in another case
in which he is charged with possession of cocaine. Bail in that case was set at $25,000.
Appellant was also on bond in four misdemeanor cases: one for possession of marihuana ($2000
bail) and three for evading arrest ($2000 bail in two, $5000 in the third).
Appellant is eighteen years old and a resident of Cameron. When not incarcerated,
he lives part of the time with his grandparents and the remainder with his mother. Neither
appellant nor his mother testified at the hearing.
Appellant's grandmother, Dorothy Smith, testified that appellant has no money or
assets. Appellant's grandparents have an income of approximately $1000 per month. Smith
testified that she purchased the bonds in appellant's other cases, and was presently paying the
surety $300 per month. She testified that she could not afford to pay $10,000 for a $100,000
bond, but acknowledged that she could continue to make monthly payments in the present amount.
The surety, Erma Taylor, testified that she was not prepared to write a $100,000
bond for appellant. In Taylor's opinion, based on her knowledge of Smith's financial situation,
Smith could not afford to pay for a bond in that amount. Taylor stated that she would be willing
to write a bond for no more than $15,000. At the time of the hearing, Smith still owed Taylor
$1600 for the other bonds. According to Taylor, Smith generally paid her only $100 per month.
The district court stated that its refusal to order bail reduced was based on the
applicable law and appellant's "track record." The court stated, "I reduced the bond last time
when you were up on possession of cocaine. To say that you are a disappointment is an
understatement."
The right to release on reasonable bail is guaranteed by the constitution. Tex.
Const. art. I, §§ 11, 13. Although bail must be set sufficiently high to give reasonable assurance
that the undertaking will be complied with, the power to require bail is not to be used so as to
make it an instrument of oppression. Tex. Code Crim. Proc. Ann. art. 17.15 (Supp. 1992).
Among the factors to be considered in setting bail are the nature of the offense and the
circumstances under which it was committed, and the ability of the defendant to make bail. Id.
The ability of the accused to make bail, however, does not of itself control the amount of bail.
Ex parte Gentry, 615 S.W.2d 228 (Tex. Crim. App. 1981).
This Court accords great deference to trial courts in the matter of bail, but we
conclude that the district court abused its discretion in this cause. That court, when appellant was
previously arrested for possession of cocaine, saw fit to set bail at $25,000. There is nothing in
the record to show a change of circumstances sufficient to warrant a quadrupling of the amount
of bail in this cause. The district court was understandably and justifiably angered by appellant's
alleged repeated criminal behavior. But the State did not request that bail be denied in the present
cause pursuant to Tex. Const. art. I, § 11a, and it is not proper to set bail in an amount calculated
to be more than the accused can afford in order to guarantee his continued incarceration. See Ex
parte Harris, 733 S.W.2d 712, 714 (Tex. App. 1987, no pet.)
The order of the district court denying relief is reversed, bail is ordered set at
$25,000, and the cause is remanded to the district court for further proceedings. No motion for
rehearing will be entertained.
[Before Justices Powers, Jones and Kidd; Justice Powers not participating]
Reversed and Remanded; Bail set at $25,000
Filed: July 1, 1992
[Do Not Publish]
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IN THE COURT OF APPEALS, THIRD DISTRICT OF TEXAS,
AT AUSTIN
NO. 3-91-330-CR
PAUL ANTHONY SCALES,
APPELLANT
vs.
THE STATE OF TEXAS,
APPELLEE
FROM THE DISTRICT COURT OF TRAVIS COUNTY, 147TH JUDICIAL DISTRICT
NO. 0910921, HONORABLE WILFORD FLOWERS, JUDGE
PER CURIAM
A jury found appellant guilty of possessing less than twenty-eight grams of cocaine,
a controlled substance, with intent to deliver. Tex. Health & Safety Code Ann. § 481.112 (West
1992). The jury assessed punishment, enhanced by two previous felony convictions, at
imprisonment for fifty-five years.
In four points of error, appellant contends that the district court erroneously
admitted in evidence a tape-recorded statement taken from appellant in violation of his
constitutional right to counsel and that the evidence is insufficient to sustain the judgment. We
find these contentions to be without merit.
On November 14, 1990, Austin police officers went to appellant's residence to
execute a search and arrest warrant. Appellant fled in his car, pursued by officers assigned to this
task. During the ensuing chase, an officer saw appellant remove something from the sun visor
of his automobile. Later, appellant almost lost control of his vehicle as he turned at an
intersection. Shortly thereafter, appellant stopped and surrendered to the police. After appellant's arrest, an officer returned to the intersection where appellant had his near-accident.
As he suspected he would, the officer found in the street a pill bottle containing seventeen rocks
of crack cocaine. It is for the possession of this cocaine that appellant was convicted in this cause.
The officers who searched appellant's house found crack cocaine, marihuana, and
a large amount of cash. Charges were filed against appellant accusing him of possessing the
controlled substances found in the house. Because no one had seen appellant throw the pill bottle
from his car, and because the bottle bore no legible fingerprints or other link to appellant, no
charges were filed at that time accusing appellant of possessing the cocaine in the bottle.
In January 1991, while appellant was in jail awaiting trial, an informer told the
police that appellant was trying to hire someone to kill an assistant district attorney. Hoping to
learn more about these alleged threats on the life of the assistant district attorney, two undercover
officers wearing recording devices were placed in a holding cell with appellant. The undercover
officers knew that appellant had been arrested on drug charges growing out of a search warrant,
but did not know any details of the case. The officer who testified at appellant's trial stated that
he was investigating only the alleged threats and that he was not seeking to learn more about the
drug charges pending against appellant. (1) While talking to the undercover officers, appellant
described his arrest saying, "I ran because I had dope in the car. I threw it out of the car. Then
I let them stop me like a mile away from the dope."
Thus supplied with this evidence linking appellant to the pill bottle found lying in
the street, the State obtained the instant indictment. That portion of the tape recording quoted
above was admitted in evidence at trial and is the subject of appellant's first two points of error.
The Sixth Amendment prohibits the police from deliberately seeking incriminating
statements from the accused outside the presence of counsel. Maine v. Moulton, 474 U.S. 159
(1985); Massiah v. United States, 377 U.S. 201 (1964). The Sixth Amendment right to counsel
does not attach, however, until formal adversary judicial proceedings have been initiated.
Michigan v. Jackson, 475 U.S. 625 (1986); Kirby v. Illinois, 406 U.S. 682 (1972). Moreover,
the Sixth Amendment is "offense-specific" and cannot be invoked once for all future prosecutions.
McNeil v. Wisconsin, ___ U.S. ___, ___; 115 L. Ed. 2d 158, 166 (1991). At the time the
undercover officers talked to appellant and recorded the challenged statement, appellant had been
indicted for possessing the controlled substances found in his house. Thus, his Sixth Amendment
right to counsel had attached in that proceeding. But because the instant cause had not been
formally initiated at the time of the statement, appellant's Sixth Amendment right to counsel had
not attached in this cause. Appellant urges that the Sixth Amendment should be deemed to have
attached in this cause because it grows out of the same transaction for which he had been indicted,
but this argument is contrary to the cited Supreme Court authority.
"[T]o exclude evidence pertaining to charges as to which the Sixth Amendment
right to counsel had not attached at the time the evidence was obtained, simply because other
charges were pending at that time, would unnecessarily frustrate the public's interest in the
investigation of criminal activities." Maine v. Moulton, 474 U.S. at 180. Because appellant's
Sixth Amendment right to counsel had not attached in this cause when he made the incriminating
statement to the undercover officers, the statement was admissible. Id. at 180 n. 16. Point of
error one is overruled.
In his second point of error, appellant contends that the admission of the statement
violated his right to counsel under the Texas Constitution. Tex. Const. art. I, § 10. Again, he
urges this Court to hold that when formal adversary proceedings have been initiated, the right to
counsel attaches to all offenses committed during the same transaction and not merely to the
offense charged. In Forte v. State, 759 S.W.2d 128 (Tex. Crim. App. 1988), the court announced
that the right to counsel under the Texas Constitution would not be deemed to attach at some
arbitrary point in time. Instead, each case would be judged on whether the particular pretrial
confrontation necessitated counsel's presence in order to protect a known right or safeguard. Id.
at 138. One year later, however, the Court of Criminal Appeals abandoned the Forte rule,
concluding that "the classification of a period in the criminal process as `critical' on a case by
case basis is ambiguous, vague, and thus unworkable." McCambridge v. State, 778 S.W.2d 70,
75 (Tex. Crim. App. 1989). Instead, the court held that under Tex. Const. art. I, § 10, a critical
stage in the criminal process does not occur, and thus the right to counsel does not attach, until
formal charges are brought against the suspect. Id. at 76. Appellant's proposed "same
transaction" test for the right to counsel is contrary, we believe, to both the letter and spirit of the
holding in McCambridge. By requiring the police and the courts to speculate about whether a
particular offense was or was not part of the same transaction, it would reintroduce the ambiguity
that the McCambridge court sought to end by adopting a bright line rule.
We hold that because this cause had not been formally initiated when appellant
made the incriminating statement to the undercover officers, his right to counsel under the Texas
Constitution had not attached. Point of error two is overruled.
In point of error three, appellant urges that the evidence fails to prove that he
possessed the cocaine. To recapitulate, the cocaine in question was in a pill bottle found in the
street at the intersection where appellant briefly lost control of his car during his flight from the
officers. No one saw appellant throw this bottle from his car and there is no physical evidence
linking the bottle to appellant. The only link between appellant and the cocaine is his statement
to the undercover officers.
In essence, appellant's argument under this point of error is that the word "dope"
is too ambiguous to link him to the cocaine. Appellant testified that he threw a baggie of
marihuana from his car, and that this was the "dope" he referred to in his conversation with the
undercover officers. Of course, the jury was free to disbelieve appellant's testimony.
In determining the legal sufficiency of the evidence to support a criminal
conviction, the question is whether, after viewing all the evidence in the light most favorable to
the verdict, any rational trier of fact could have found the essential elements of the offense beyond
a reasonable doubt. Jackson v. Virginia, 443 U.S. 307 (1979); Griffin v. State, 614 S.W.2d 155
(Tex. Crim. App. 1981). Appellant's observed behavior on the afternoon in question is entirely
consistent with and explained by his statement to the undercover officers. He fled in his
automobile ("I ran because I had dope in the car"), he reached for something in the sun visor and
skidded through an intersection ("I threw [the dope] out of the car"), he then stopped and
surrendered ("I let them stop me like a mile away from the dope"). The bottle containing the
crack cocaine was found in the intersection. Under the circumstances, it would be a remarkable
coincidence indeed if someone else, whether by accident or deliberately, left a bottle containing
seventeen rocks of crack cocaine in that intersection.
A rational trier of fact could find from the evidence that appellant exercised care,
custody, and control over the bottle of cocaine with knowledge of its contents. The third point
of error is overruled.
Appellant's last point of error is that the State failed to prove that he possessed the
cocaine with intent to deliver. Appellant argues that under the evidence it is equally possible that
he possessed the cocaine for personal use only.
Austin police officer Dennis Clark testified that he had been a narcotics officer for
six years. In his experience, pill bottles of the sort involved in this cause are used by crack
dealers because the top can be flipped off easily and the contents dumped on the ground. Clark
also testified that while it was possible for a serious addict to use seventeen rocks of crack cocaine
over a period of a few days, he believed that this amount indicated possession for the purpose of
distribution.
The jury also heard testimony concerning the controlled substances found in
appellant's residence. Twenty-two rocks of crack cocaine, twenty-two small packages of
marihuana, a large bag of bulk marihuana, and two $1000 bundles of cash were found in
appellant's closet. Appellant denied any knowledge of these items, suggesting that they were the
property of his roommate, but he admitted that the suit he wore at trial was shown in a photograph
of the items in the closet.
From the large amount of cash and controlled substances, much of it packaged as
if for sale, shown to be in appellant's possession, a rational trier of fact could find that appellant
possessed the cocaine with the intent to deliver. The fourth point of error is overruled.
The judgment of conviction is affirmed.
[Before Chief Justice Carroll, Justices Aboussie and B. A. Smith]
Affirmed
Filed: September 16, 1992
[Do Not Publish]
1. The other undercover officer was an agent with the Bureau of Alcohol, Tobacco and
Firearms, and was no longer in Austin at the time of trial.
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952 A.2d 1174 (2008)
Lisa BILLHIME, Appellant
v.
Darin BILLHIME, Appellee.
No. 1134 MDA 2007.
Superior Court of Pennsylvania.
Submitted February 27, 2008.
Filed June 3, 2008.
Reargument Denied August 15, 2008.
*1175 Joy R. McCoy, Williamsport, for appellant.
Thomas E. Leipold, Bloomsburg, for appellee.
BEFORE: FORD ELLIOTT, P.J., DONOHUE, and POPOVICH, JJ.
OPINION BY DONOHUE, J.:
¶ 1 Lisa Billhime Nistri ("Mother") appeals from the order of the Court of Common Pleas of Montour County denying her motion to relinquish jurisdiction in this custody action to the state of Florida. After careful review, we reverse and remand.
¶ 2 Mother and Darin Billhime ("Father") are the parents of twin boys born in Orlando, Florida on December 3, 1996. The family remained in Florida until 2001, when they relocated to Montour County, Pennsylvania. Mother and Father separated in early 2004, at which time a custody action was filed in the Court of Common Pleas of Montour County. The trial court subsequently awarded primary physical custody of the children to the Mother and partial physical custody to the Father. In March 2005, Mother and the children moved back to Orlando, Florida,[1] where they continue to live at this time. Following the relocation to Florida, the trial court modified the custodial arrangement, with Mother retaining primary physical custody but permitting Father to enjoy custody during the boys' spring, Thanksgiving and Christmas vacations, as well as nearly all of their summer vacation.
¶ 3 Unfortunately, the transition to this custodial schedule proved difficult and multiple petitions for contempt were filed and adjudicated in the trial court in Montour County. On June 8, 2006, Father filed a petition with the trial court seeking primary custody of the children. On February 28, 2007, Mother responded by filing a motion requesting that the trial court relinquish jurisdiction over this child custody action to the Circuit Court for the 9th Judicial Circuit in and for Orange County, Florida. Following an evidentiary hearing, the trial court denied Mother's motion *1176 to relinquish jurisdiction, ruling that "[c]ontinuing jurisdiction over the custody case above captioned shall remain with the courts of the Commonwealth of Pennsylvania." Order, 6/15/07. In its written opinion dated June 19, 2007, the trial court explained that it denied Mother's motion because "there exists evidence that the children and one of the parents continues to have a significant connection with this Commonwealth." Trial Court Opinion, 6/19/07, at 3.
¶ 4 This timely appeal followed. In accordance with our standard of review, this Court will not disturb a decision to exercise or decline jurisdiction absent an abuse of discretion by the trial court. Wagner v. Wagner, 887 A.2d 282, 285 (Pa.Super.2005). An abuse of discretion occurs when the court has overridden or misapplied the law, when its judgment is manifestly unreasonable, or when there is insufficient evidence of record to support the court's findings. Id. Based on our careful review of the record, we conclude that the trial court abused its discretion and that its decision to deny Mother's motion to relinquish jurisdiction must be reversed.
¶ 5 In its written opinion, the trial court found that it retained exclusive continuing jurisdiction to modify custody orders in this case pursuant to section 5422(a) of the Uniform Child Custody Jurisdiction and Enforcement Act ("UCCJEA"), 23 Pa. C.S.A. § 5401 et seq. Section 5422(a) provides as follows:
§ 5422. Exclusive, continuing jurisdiction
(a) General rule. Except as otherwise provided in section 5424 (relating to temporary emergency jurisdiction), a court of this Commonwealth which has made a child custody determination consistent with section 5421 (relating to initial child custody jurisdiction) or 5423 (relating to jurisdiction to modify determination) has exclusive, continuing jurisdiction over the determination until:
(1) a court of this Commonwealth determines that neither the child, nor the child and one parent, nor the child and a person acting as a parent have a significant connection with this Commonwealth and that substantial evidence is no longer available in this Commonwealth concerning the child's care, protection, training and personal relationships;
(2) a court of this Commonwealth or a court of another state determines that the child, the child's parents and any person acting as a parent do not presently reside in this Commonwealth.
23 Pa.C.S.A. § 5422(a).
¶ 6 Subsection 5422(a)(1) thus provides that the courts of this Commonwealth will exercise exclusive continuing jurisdiction to modify child custody orders originally entered here unless the child, or a child and at least one parent (or a person acting as a parent), no longer have a "significant connection" with Pennsylvania.[2] For the child, the lack of a continuing "significant connection" with the Commonwealth is established if the court finds that substantial evidence concerning the child's "care, protection, training and personal relationships" is no longer available here.
¶ 7 In denying mother's motion to relinquish jurisdiction, the trial court relied almost exclusively on Father's continuing "significant connection" with Pennsylvania. The trial court found that Father is the fifth-generation owner of a farm in Montour County, retains a Pennsylvania driver's *1177 license, has an active equitable distribution action pending in the local court, and enjoys the majority of visitation time with his children in the state. Trial Court Opinion, 6/19/07, at 2.
¶ 8 In contrast, however, the trial court's opinion does not focus in any detail on whether the children continue to maintain a "significant connection" to Pennsylvania, noting only that the boys visit here on three occasions per year and spend time with their father, friends and paternal grandfather. Trial Court Opinion, 6/19/07, at 2-3. A review of the record of the evidentiary hearing reveals that little evidence was introduced regarding the continuing availability in Pennsylvania of "substantial evidence concerning the child's care, protection, training and personal relationships," as is expressly required by section 5422(a)(1) of the UCCJEA.
¶ 9 In fact, essentially all of the evidence presented at the evidentiary hearing demonstrates that information relating to the children's welfare is now located in the state of Florida. For example, the children's medical care is provided in Florida, including by their pediatrician, dentist and orthodontist. They attend a private school in Florida, performing well, earning high grades and regularly being named to the honor roll and the headmaster's list. Through their school, they are involved in basketball, football, soccer, baseball, golf, safety patrols and extracurricular art classes. The boys also participate in Cub Scouts in Florida and are actively involved in their Orlando-based church. They have good friends and significant family in the Orlando area, including a grandmother, aunts and uncles, and cousins. N.T., 4/30/07, at 2-8.
¶ 10 Based upon the above evidence, the record in this case does not support a finding that the children retain a "significant connection" with Pennsylvania, as required by subsection 5422(a)(1) of the UCCJEA. As a result, the Court of Common Pleas of Montour County no longer has exclusive continuing jurisdiction to modify its previously entered child custody orders.
¶ 11 In the absence of exclusive continuing jurisdiction, a Pennsylvania court may nevertheless modify a child custody order it previously issued if it has jurisdiction to make an initial determination under section 5421 of the UCCJEA. 23 Pa.C.S.A. § 5422(b); Wagner v. Wagner, 887 A.2d 282, 287 (Pa.Super.2005). Because the trial court did not address the applicability of section 5421 in connection with its initial consideration of Mother's motion to relinquish jurisdiction, we remand for consideration and decision on this issue. In the event the trial court determines that it lacks jurisdiction to make an initial custody determination pursuant to section 5421, it should grant Mother's motion and relinquish jurisdiction of custody matters relating to these two children to the courts of the state of Florida.
¶ 12 Order reversed. Case remanded. Jurisdiction relinquished.
NOTES
[1] In July 2004, Mother filed a Petition to Relocate to Florida with the children. The trial court denied the Petition, but in March 2005 this Court reversed that decision, permitting the relocation of Mother and children to Florida.
[2] Subsection 5422(a)(2) does not apply in this case, as the trial court found that Father remains a resident of Pennsylvania despite his frequent trips to California. The record supports this finding. Notes of Testimony ("N.T."), 4/30/07, at 23-24.
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687 S.W.2d 803 (1985)
The ATTORNEY GENERAL OF TEXAS, Appellant,
v.
ALLSTATE INSURANCE COMPANY, Appellee.
No. 05-84-00957-CV.
Court of Appeals of Texas, at Dallas.
February 27, 1985.
Rehearing Denied April 8, 1985.
*804 Jim Mattox, Atty. Gen. of Texas, David Richards, Executive Asst., Atty. General's Office, Paul D. Rich, Chief Antitrust Div., Atty. General's Office, Marianne Woodard, Christine Beck, Asst. Attys. Gen., Austin, Tex., for appellant.
E. Thomas Bishop, P. Michael Jung, Mark Donheiser, of Strasburger & Price, Dallas, Tex., for appellee.
Before AKIN, DEVANY and McCLUNG, JJ.
AKIN, Justice.
The Attorney General of Texas appeals from an order setting aside a civil investigative demand ("the C.I.D.") served by the Attorney General on Allstate Insurance Company ("Allstate"). The C.I.D. was issued by the Attorney General pursuant to TEX.BUS. & COM.CODE ANN. §§ 15.01-15.26 (Vernon Supp.1985), the Texas Free Enterprise and Antitrust Act of 1983 ("the Act"). Pursuant to section 15.10(f) of the Act, Allstate petitioned the district court to have the C.I.D. set aside or modified. The district court rendered an order setting aside the C.I.D. in its entirety, from which the Attorney General appeals.
On appeal, the Attorney General contends that the district court erred in setting aside the C.I.D. because: (1) Allstate's status as an insurance company does not exempt it from the Attorney General's investigative authority under the Act; (2) the description in the C.I.D. of the nature of the activities that are the subject of the Attorney General's investigation complies with the Act's requirements; and (3) the information sought by the C.I.D. is discoverable as required by the Act. We agree with the Attorney General's first and second contentions. Consequently, we hold that Allstate is not exempt from the Attorney General's investigative authority under the Act. Further, we hold that the C.I.D.'s description of the nature of the activities that are the subject of the investigation complies with the requirements of the Act. However, we cannot determine whether the information sought is discoverable. Such a determination should be made, in the first instance, by the district court. Accordingly, we reverse the district court's order setting aside the C.I.D. and remand the cause for further proceedings consistent with this opinion.
*805 The Attorney General first contends that Allstate's status as an insurance company does not exempt it from the Attorney General's investigative authority under the Act. In this respect, Allstate first argues that the legislature has expressly delegated to the State Board of Insurance the exclusive authority to regulate all activities affecting the business of insurance.[1] We do not agree with Allstate's argument. TEX. INS.CODE ANN. art. 21.21 (Vernon 1981), which concerns regulation by the State Board of Insurance of trade practices in the business of insurance, supports our position. Section 8 of article 21.21 provides:
No order of the Board under this Act or order of a court to enforce the same shall in any way relieve or absolve any person affected by such order from any liability under any other laws of this state. (Emphasis added).
This provision indicates that the legislature did not intend for the State Board of Insurance to have exclusive regulatory authority in this area. See Dodd v. Commercial Union Insurance Co., 373 Mass. 72, 365 N.E.2d 802 (1977) (court, construing provision in Massachusetts insurance law virtually identical to article 21.21, section 8, held that such provision "clearly contemplates concurrent application" of a more general statute concerning unfair and deceptive trade practices).
Moreover, the language of the Act leads us to conclude that Allstate is not exempt from the Attorney General's investigative authority thereunder. Section 15.02(a) provides:
(a) The provisions of this Act are cumulative of each other and of any other provision of law of this state in effect relating to the same subject. Among other things, the provisions of this Act preserve the constitutional and common law authority of the attorney general to bring actions under state and federal law. (Emphasis added).
Additionally, we note that section 15.03(2) expressly provides that, as used in the Act, the term "goods" includes insurance. The purpose of the Act, as set forth in section 15.04, "is to maintain and promote economic competition in trade and commerce" in Texas; the terms "trade" and "commerce" are defined in section 15.03(5) as, inter alia, "the sale, purchase, lease, exchange, or distribution of any goods or services." (Emphasis added). Further, we observe that among the anti-competitive practices prohibited by section 15.05 of the Act are the following:
(a) Every contract, combination, or conspiracy in restraint of trade or commerce is unlawful.
(b) It is unlawful for any person to monopolize, attempt to monopolize, or conspire to monopolize any part of trade or commerce.
(c) It is unlawful for any person to sell, lease, or contract for the sale or lease of any goods, whether patented or unpatented, for use, consumption, or resale or to fix a price for such use, consumption, or resale or to discount from or rebate upon such price, on the condition, agreement, or understanding that the purchaser or lessee shall not use or deal in the goods of a competitor or competitors of the seller or lessor, where the effect of the condition, agreement, or understanding may be to lessen competition substantially in any line of trade or commerce. (Emphasis added).
These provisions clearly establish that the Attorney General has the authority under the Act to investigate possible anticompetitive practices within, or connected with, the insurance industry.
Allstate also argues that it is exempt from the Attorney General's investigative authority because it falls within the "business of insurance" exemption from federal antitrust law which is incorporated in the Act. Section 15.05(g) provides that "[n]othing in this section shall be construed *806 to prohibit activities that are exempt from the operation of the Federal antitrust laws...." The federal "business of insurance" exemption is contained within the McCarran-Ferguson Act, 15 U.S.C.A. §§ 1011-1015 (West 1976). Section 1012(b) provides:
No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance, or which imposes a fee or tax upon such business, unless such Act specifically relates to the business of insurance: Provided, that after June 30, 1948, the Act of July 2, 1890, as amended, known as the Sherman Act, and the Act of October 15, 1914, as amended, known as the Clayton Act, and the Act of September 26, 1914, known as the Federal Trade Commission Act, as amended, shall be applicable to the business of insurance to the extent that such business is not regulated by State law. (Emphasis in original).
Section 1013(b) provides that "[n]othing contained in this chapter shall render the said Sherman Act inapplicable to any agreement to boycott, coerce, or intimidate, or any act of boycott, coercion, or intimidation." (Emphasis added). Thus, there are three requirements that must be met in order for the federal "business of insurance" exemption to be applicable: (1) the activity at issue must be part of the "business of insurance"; (2) the activity must be regulated by the state; and (3) the activity must not be a boycott. We need address only the third requirement.[2] The C.I.D. states that it was issued because the Attorney General "is investigating the possibility of a group boycott" of certain providers of health care services to Texas workers' compensation claimants. Such alleged activity is clearly encompassed within the broad definition of "boycott" as that term is used in section 1013(b) of the McCarran-Ferguson Act. See St. Paul Fire & Marine Insurance Co. v. Barry, 438 U.S. 531, 541-550, 98 S. Ct. 2923, 57 L. Ed. 932 (1978). We conclude, therefore, that the activities about which the C.I.D. inquiries are not within the scope of the federal "business of insurance" exemption. Consequently, we hold that Allstate is not exempt from the Attorney General's investigative authority under the Act.
Next, the Attorney General contends that the description in the C.I.D. of the nature of the activities that are the subject of the Attorney General's investigation complies with the Act's requirements. Section 15.10(c)(1) of the Act provides:
Each demand shall describe the nature of the activities that are the subject of the investigation and shall set forth each statute and section of that statute that may have been or may be violated as a result of such activities. Each demand shall advise the person upon whom the demand is to be served that the person has the right to object to the demand as provided for in this section. (Emphasis added).
Allstate does not dispute that the C.I.D. sets forth the statute and section thereof that may have been violated. The issue before us, then, is whether the C.I.D. adequately "describe[s] the nature of the activities that are the subject of the investigation." The description in the C.I.D. states that the Attorney General "is investigating the possibility of a group boycott of certain providers of health care services to workers' compensation claimants in the State of Texas."
Section 15.04 of the Act directs us to construe the Act's provisions "in harmony with federal judicial interpretations of comparable federal antitrust statutes." Section *807 15.10 of the Act, concerning civil investigative demands, is very similar to the federal Antitrust Civil Process Act ("the A.C.P.A."), 15 U.S.C.A. §§ 1311-1314 (West 1982). Consequently, we must construe section 15.10 in harmony with federal judicial interpretations of the A.C.P.A.
A leading case interpreting the A.C.P.A. is Petition of Gold Bond Stamp Co., 221 F. Supp. 391 (D.Minn.1963), aff'd per curiam, 325 F.2d 1018 (8th Cir.1964). There that court stated that the purposes of the A.C.P.A. were two-fold: (1) to enable the Attorney General to determine whether there has been a violation of the antitrust laws, and if so (2) to enable the Attorney General to properly allege the violations in a civil complaint. Gold Bond, 221 F.Supp. at 397.
Gold Bond held that the test of the adequacy of a civil investigative demand's description of the nature of the activities which are the subject of the investigation
must be whether the statement in the demand as to the nature of the conduct under investigation is sufficient to inform adequately the person being investigated and sufficient to determine the relevancy of the documents demanded for inspection. (Emphasis in original).
Gold Bond, 221 F.Supp. at 397. We conclude that the description at issue in the present case adequately informs Allstate of the intent and scope of the demand served upon it. See Gold Bond, 221 F.Supp. at 398. It is clear that the Attorney General is investigating the possibility of a group boycott of entities that provide health care services to workers' compensation claimants in Texas. This description is sufficient to allow Allstate to determine, in light of the fact that Allstate is an active workers' compensation insurer in Texas, the relevancy of the documents demanded for inspection. Accordingly, we hold that the description in the C.I.D. of the nature of the activities that are the subject of the Attorney General's investigation complies with the requirements of the Act.
Finally, the Attorney General contends that the information sought by the C.I.D. is discoverable, as required by section 15.10(d)(1) of the Act.[3] Allstate, of course, asserts that the information is not discoverable. We decline to determine whether the information sought is discoverable because such a determination should first be made by the trial court. Indeed, we are unable to pass on this question because the information claimed to be privileged was neither before the trial judge nor is before us. In this respect, we note that any requested document which Allstate believes to be privileged may be submitted to the district court in camera for a ruling to be made thereon. Finnell v. United States Department of Justice, 535 F. Supp. 410, 412 (D.Kan.1982); Gold Bond, 221 F.Supp. at 399.
We reverse the order of the district court setting aside the C.I.D. and remand the cause to the district court for further proceedings not inconsistent with this opinion.
NOTES
[1] For the purposes of addressing Allstate's argument, we assume, without deciding, that the activities about which the C.I.D. inquires are within the definition of "business of insurance." See footnote 2 of this opinion.
[2] We note that the Supreme Court has identified three criteria relevant in determining whether a particular practice is part of the "business of insurance": (1) whether the practice has the effect of transferring or spreading a policyholder's risk; (2) whether the practice is an integral part of the policy relationship between insurer and insured; and (3) whether the practice is limited to entities within the insurance industry. Union Labor Life Insurance Co. v. Pireno, 458 U.S. 119, 102 S. Ct. 3002, 73 L. Ed. 2d 647 (1982). Although we need not reach the issue in our disposition of the instant case, it is our view that a boycott of providers of health care services is unlikely to be part of the "business of insurance."
[3] Section 15.10(d)(1) provides: "A demand may require the production of documentary material, the submission of answers to written interrogatories, or the giving of oral testimony only if the material or information sought would be discoverable under the Texas Rules of Civil Procedure or other state law relating to discovery."
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552 F. Supp. 37 (1982)
Malvin CRIM, Jr., et al., Plaintiffs,
v.
Rose D. HARRISON, et al., Defendants.
No. DC 81-44-WK-O.
United States District Court, N.D. Mississippi, Delta Division.
December 13, 1982.
*38 Christian T. Goeldner, Southaven, Miss., for plaintiffs.
Jim R. Bruce, Jackson, Miss., for defendants Harrison, Gale, Turbeville, Hutson, Townsend, Tollison, Voorhees and Markham.
William W. Ballard, Hernando, Miss., for Genia Mauney.
Orma R. Smith, Jr., Corinth, Miss., for Rose D. Harrison.
MEMORANDUM ORDER
KEADY, District Judge.
In this action brought under 42 U.S.C. § 1983, plaintiffs Malvin and Nancy Crim and their adopted daughter May Lou sue various officials of the Mississippi Department of Public Welfare and the DeSoto County, Mississippi, sheriff's department for each defendant's part in the removal of Sharon Lynn Thomas (the Crims' foster child) from the Crim household and the refusal to allow the adoption of Sharon Lynn by the Crims. On July 8, 1981, this court denied defendants' motion to dismiss for failure to state a claim since the case was not found to be in a posture for determining whether plaintiffs had a legitimate liberty interest by virtue of the foster parent-foster child relationship. Following months of discovery, all defendants now move to dismiss or in the alternative for summary judgment. The court has previously granted summary judgment in favor of Marsh and Deidre Pickett.
I. FACTUAL BACKGROUND
Viewing the evidence in the light most favorable to plaintiffs, as required by Rule 56 of the Federal Rules of Civil Procedure, the undisputed material facts of the case are as follows. Plaintiffs Malvin and Nancy Crim were licensed by the DeSoto County Public Welfare Department as foster parents. Pursuant to this license, plaintiffs received placement of Sharon Lynn Thomas, aged two at the time, and her half-sister Mary Lou Reisinger, at that time aged eleven, as foster children. Mary Lou had on an earlier occasion been placed in the Crim home as a foster child but had subsequently been returned to her natural parents.
*39 On June 13, 1980, defendant Jere Gale, DeSoto County Welfare Director, notified plaintiffs of the decision to remove Sharon Lynn from their home. Plaintiffs requested a local hearing to challenge the administrative decision. This hearing was held on June 23, 1980. On the same day, Sharon Lynn was taken by defendants Tollison and Mauney from the home of plaintiffs' baby sitter and placed with Marsh and Deidre Pickett, another licensed foster family.
Plaintiffs received notice of the local hearing decision on June 25, 1980, and because it was adverse to their interests, plaintiffs immediately requested a de novo state hearing pursuant to Mississippi Department of Public Welfare procedures. The state hearing was held August 22, 1980, and on October 15, 1980, the Mississippi Department of Public Welfare ordered the return of Sharon Lynn to the plaintiffs' home.
This order was never carried out since on October 31, 1980, the Picketts filed an action in Carroll County Chancery Court seeking a permanent injunction against the Department prohibiting the removal of Sharon Lynn from the Picketts' home. The Crims were allowed to intervene in the chancery suit, and following a hearing on November 6, 1980, the chancellor entered the injunctive order requested by the Picketts. The Crims' appeal of that decision to the Mississippi Supreme Court was voluntarily dismissed.
On December 6, 1980, the Chancery Court of DeSoto County gave custody of Mary Lou Reisinger to plaintiffs, who legally adopted her on February 19, 1981. On March 13, 1981, this action was filed for vindication of federally protected rights.
II. STATEMENT OF APPLICABLE LAW
Plaintiffs bring this action pursuant to 42 U.S.C. § 1983 and therefore must present a claim of deprivation of a right protected by the Constitution or laws of the United States.[1] Although plaintiffs allege numerous claims against defendants, only the allegation that defendants deprived plaintiffs of their due process rights secured under the fifth and fourteenth amendments to the Constitution can be characterized as a federal right.
To make out a claim of deprivation of due process rights, plaintiffs must show first that they have been deprived of liberty or property in the constitutional sense, and second, that the procedure used to deprive them of that interest was constitutionally deficient. Board of Regents v. Roth, 408 U.S. 564, 92 S. Ct. 2701, 33 L. Ed. 2d 548 (1972); Drummond v. Fulton City Dept. of Family & Children's Serv., 563 F.2d 1200 (5 Cir.1977), cert. denied 437 U.S. 910, 98 S. Ct. 3103, 57 L. Ed. 2d 1141. Plaintiffs allege the removal of Sharon Lynn from their home and the refusal of defendants to allow them to adopt Sharon Lynn deprive them of a liberty interest of constitutional proportions.[2]
It has been abundantly clear since the Supreme Court's decision in Smith v. Organization of Foster Families for Equality and Reform, 431 U.S. 816, 97 S. Ct. 2094, 53 L. Ed. 2d 14 (1977), that there are manifest *40 legal differences between natural and foster families. Of particular interest to the court was the fact that in foster families any claimed interest derives from "state law and contractual arrangements." 431 U.S. at 845, 97 S.Ct. at 2110, 53 L.Ed.2d at 35. The court went on to state that in foster parent situations "it is appropriate to ascertain from state law the expectations and entitlements of the parties." 431 U.S. at 845-46, 97 S.Ct. at 2110, 53 L.Ed.2d at 36.
This is precisely the analysis used by the Fifth Circuit in Drummond, supra. There the court looked to state statutes and the foster parents' contract with the county child services department and concluded "there is no such constitutionally protected interest in the context of this case." Although such a determination requires a case by case analysis, we are now able to reach the same conclusion in the case sub judice.
Under Mississippi law the "right" of adoption is not a fundamental one, but rather a right created by state statute. See Miss.Code Ann. § 93-17-3 et seq. (1972) (adoption rights and procedures for State of Mississippi). The foster parent-child relationship also has its origins in state law. See Miss.Code Ann. § 43-15-1 et seq. (1972) (Administration of Child Welfare Law). Pursuant to its authority under state law, the Mississippi Department of Public Welfare enters into licensing agreements with numerous foster parents around the state. This agreement, as well as state statutes, makes clear the foster parent-child relationship is merely a temporary one.
In the instant case, Sharon Lynn was placed in the Crim home pursuant to a license agreement. Plaintiffs admit they knew it was the welfare department's policy that children should be returned to their natural parents if at all possible and that foster care relationship was a temporary one. (Deposition of Nancy Crim, pp. 158-59; Malvin Crim, pp. 65-66, 20, lines 3-22). Plaintiffs had had six different children in their home on the same basis, each of whom had been returned to their parents or transferred to another foster home. In fact, Mary Lou Reisinger (Crim) had been one of those children and was subsequently returned to her parents. (Nancy Crim, pp. 32, 157-59; Malvin Crim, pp. 14-21).
Apart from these admissions, the license agreement entered into with the welfare department makes clear that plaintiffs could have no expectations of a more permanent arrangement. It expressly provided the "actual permanent legal custody of the children" was to remain in the Department of Public Welfare and did not confer any right of custody of a child placed in the Crims' home. The agreement also provided that the plaintiffs waived any right to the custody of a child placed in their home and that they agreed not to attempt to adopt any child placed in their home. Finally, by entering into the agreement, the Crims agreed to cooperate with the welfare department in carrying out its plan for any foster child placed in their home, including the return of the child to its parents or a transfer of the child to another foster home.
In the recent case of J.C. v. Natural Parents, 417 So. 2d 529 (Miss.1982), the Mississippi Supreme Court considered the issue of whether the waiver of adoption contained in the Department's standard foster home licensing agreement automatically precluded foster parents from adopting a foster child. In that case, the foster parents filed in chancery court a petition for adoption, which was opposed by both the welfare department and the approved prospective adoptive parents who intervened. Id. at 530. The chancellor dismissed the petition on the basis of the license agreement which he ruled automatically precluded foster parents from consideration in adoption proceedings. Id. at 530-31. In ruling on that issue, Justice Dan Lee, writing for the majority, held that "the chancellor was manifestly in error when he excluded the [foster parents] from consideration as adoptive parents." Id. at 531-32 (emphasis added). The case was reversed and remanded presumably to allow the foster parents to be considered as adoptive parents. In effect, the court held that, notwithstanding its terms, the license agreement did not disqualify the foster parents *41 from consideration. Thus, they as petitioners in chancery court were on the same footing as any other prospective adoptive parent. The court gave no indication that foster parents had an expectation or entitlement to adopt a foster child arising from the mere placement of the child in their home pursuant to a license agreement. It is manifestly clear that not every prospective adoptive parent has an expectation or entitlement sufficient for the recognition of a constitutional liberty interest in the right to adopt a child. See Smith and Drummond, supra. In our view, J.C. v. Natural Parents, supra, changes nothing in the analysis of whether plaintiffs had an expectation or entitlement of adoption in the case sub judice.
Nor were other written or verbal assurances made to the plaintiffs that they would be allowed permanent custody of Sharon Lynn. As Mrs. Crim conceded, any expectation that Mary Lou or Sharon Lynn might be permanently placed in their home was a misapprehension on their part and not the result of assurance or policy of the state welfare department. (Nancy Crim, p. 159).
Under these circumstances, we conclude there could have been no expectation or entitlement on the part of plaintiffs that Sharon Lynn would remain permanently in their home. We therefore conclude that plaintiffs have no liberty or property interests which are entitled due process protection under the fifth or fourteenth amendment. See Drummond, supra, at 1206; Kyees v. County Dept. of Public Welfare, 600 F.2d 693, 698-99 (7 Cir.1979) (state law and contractual agreement preclude liberty interest under facts of case). The remaining claims asserted by plaintiffs are at best pendent state law claims and therefore must also be dismissed. Therefore, it is
ORDERED
That the motion for summary judgment of all defendants remaining in the case is hereby granted, and plaintiffs' complaint is hereby dismissed with prejudice.
NOTES
[1] 42 U.S.C. § 1983 states in pertinent part:
Every person who, under color of any statute, ordinance, regulation, custom, or usage, of any State or Territory or the District of Columbia, subjects or causes to be subjected, any citizen of the United States ... to the deprivation of rights, privileges, or immunities secured by the Constitution and laws, shall be liable to the party injured....
[2] Plaintiffs also allege Mary Lou Crim was deprived of her liberty interest of "close association" with her biological half-sister Sharon Lynn. We note initially that plaintiffs have failed to present, and we have been unable to find, any cases which recognize the right of siblings whose custody has been granted to the state to reside together. Additionally, plaintiffs fail to attack the original determination to grant custody of the seven Reisinger/Thomas siblings to the state to be temporarily placed in various foster homes. It was this determination, not the subsequent removal of Sharon Lynn from the Crim household, which denied Mary Lou of any "associational rights" she may have had. Therefore, Mary Lou's legal position with respect to Sharon Lynn's departure is on same footing as that of the foster parents.
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952 A.2d 357 (2008)
180 Md. App. 626
HILL CONSTRUCTION
v.
SUNRISE BEACH, LLC.
No. 1230, Sept. Term, 2007.
Court of Special Appeals of Maryland.
July 2, 2008.
Ramsay M. Whitworth (Kenneth R. Rhoad, Gebhardt & Smith LLP on the brief), Baltimore, for Appellant.
Bruce F. Bright (Guy Ayres, III, Ayres, Jenkins, Gordy & Almand, PA on the brief), Ocean City, for Appellee.
Panel: JAMES R. EYLER, BARBERA and WOODWARD, JJ.
JAMES R. EYLER, Judge.
This case has a long history but we need not go into great detail because we need only to explain why we are dismissing the appeal. Hill Construction Company, Inc., a Maryland corporation, appellant, filed a complaint in the Circuit Court for Worcester County against Sunrise Beach, LLC ("the LLC"), Gerald T. Day ("Day"), and J. Wesley Hughes ("Hughes"), appellees. The circuit court entered judgment in favor of appellees on the ground that appellant's corporate charter had been forfeited, and thus, it had no standing to maintain the suit. Appellees have filed a motion to dismiss the appeal on the ground that, because appellant's charter was forfeited when it noted an appeal, the notice of appeal was a nullity. We agree and, consequently, shall dismiss the appeal.
*359 Factual Background
On November 1, 2001, appellant entered into an agreement with Day, Hughes, and the LLC, pursuant to which appellant became a member of the LLC. Prior to that time, Day, Hughes, and Donald C. Hoen were the members of the LLC, with Day owning a 52% interest, Hughes owning an 8% interest, and Hoen owning a 40% interest. Also prior to November 1, 2001, Hoen had transferred his interest in the LLC to Day. Pursuant to the November agreement, Day transferred a 40% interest in the LLC to appellant, in exchange for appellant's agreement to construct a project in Ocean City, known as Sunset Beach, on a cost basis. The project, consisting of four condominium units, was to be completed by June 1, 2002. Upon the sale of all four units, the profits were to be divided among the members of the LLC, as stated in the November 1 agreement. Pursuant to a preexisting operating agreement, Day was the general manager of the LLC. At all relevant times, Mark Hill was appellant's president, sole shareholder, and sole director.
Appellant did not complete the project by June 1, 2002, but by March, 2003, appellant had substantially completed the project. In May, 2003, a certificate of occupancy was issued. Subsequently, all four units were sold, one of them to Day.
A dispute arose between the members of the LLC with respect to the timeliness of the work by appellant, a need for further work by others, after March, 2003, to complete the project, the propriety of the sale of the unit to Day, and the distribution of profits.
On November 18, 2003, appellant filed its complaint, containing various counts, in which it alleged breach of contract, breach of fiduciary duty, fraud, conversion, fraudulent conveyance, and civil conspiracy. Appellant sought a constructive trust, an accounting, and compensatory, restitutionary, and punitive damages. During the course of the litigation, the court entered partial summary judgment in favor of appellees with respect to some of the counts and some of the damage claims.
On October 8, 2004, appellant's charter was forfeited by the Comptroller of the Treasury, for nonpayment of personal property taxes. On September 18, 2006, appellees filed a motion to dismiss based on the status of appellant's charter. On February 14, 2007, the court granted appellees' motion to dismiss based on the forfeiture of the charter and the consequent lack of standing by appellant to maintain the suit.
On July 24, 2007, appellant noted an appeal to this Court. Appellant raises eight contentions which, in essence, are that the court erred in granting appellees' motion to dismiss and erred in its prior partial summary judgment rulings.
Appellees, in addition to responding to the merits of appellants' contentions, have moved to dismiss the appeal based on the forfeiture of the charter.
According to documents contained in the appendix to appellant's reply brief, on April 29, 2008, appellant filed articles of revival and reinstated its charter.
Discussion
As indicated above, we shall dismiss the appeal, but in doing so, we shall also address appellant's first contention, whether the circuit court erred in dismissing the complaint because appellant's charter had been forfeited. The circuit court, in dismissing the complaint, considered matters outside of the complaint, and thus, as appellant expressly recognizes, the dismissal was in fact a summary judgment. See Maryland Rule 2-322(c). In order to determine whether the appeal is viable, it *360 is necessary for us to go outside of the complaint as well, and thus, we shall review the propriety of the entry of summary judgment.
In reviewing the grant of summary judgment, we determine whether there is a genuine dispute of material facts or reasonable inferences that may be drawn from those facts. Dashiell v. Meeks, 396 Md. 149, 163, 913 A.2d 10 (2006). If no such dispute exists, we determine the issue of law. Id.
It is undisputed that appellant's charter was forfeited on October 8, 2004. While acknowledging that appellant could not initiate a lawsuit while its charter was forfeited, appellant argues that there is no authority that a corporation cannot maintain an action, initiated when its charter was in good standing but forfeited during the pendency of the litigation, relying primarily on Maryland Code (2007 Repl.Vol.), § 3-515 of the Corporations & Associations Article ("C.A."). Based on that section, appellant contends that Mark Hill, as a director winding up the affairs of the corporation, can maintain the suit, including this appeal.
Section 3-515 provides:
(a) When the charter of a Maryland corporation has been forfeited, until a court appoints a receiver, the directors of the corporation become the trustees of its assets for purposes of liquidation.
(b) The director-trustees are vested in their capacity as trustees with full title to all the assets of the corporation. They shall:
(1) Collect and distribute the assets, applying them to the payment, satisfaction, and discharge of existing debts and obligations of the corporation, including necessary expenses of liquidation; and
(2) Distribute the remaining assets among the stockholders.
(c) The director-trustees may:
(1) Carry out the contracts of the corporation;
(2) Sell all or any part of the assets of the corporation at public or private sale;
(3) Sue or be sued in their own names as trustees or in the name of the corporation; and
(4) Do all other acts consistent with law and the charter of the corporation necessary or proper to liquidate the corporation and wind up its affairs.
(d) The director-trustees govern by majority vote.
Three other statutory provisions are relevant to our analysis, and thus, we shall briefly discuss them at this time. Section 3-503(d) provides that when the charter of a corporation is forfeited, "the powers conferred by law on the corporation[] are inoperative, null, and void. . . ." Section 3-507 provides that the charter of a corporation which has been forfeited may be revived upon compliance with certain procedures. Section 3-512 provides that,
. . . the revival of a corporation's charter under § 3-507 of this subtitle has the following effects:
(1) If otherwise done within the scope of its charter, all contracts or other acts done in the name of the corporation while the charter was void are validated, and the corporation is liable for them; and
(2) All the assets and rights of the corporation, except those sold or those of which it was otherwise divested while the charter was void, are restored to the corporation to the same extent that they were held by the corporation before the expiration or forfeiture of the charter.
*361 Appellant argues that, historically, the law recognized a distinction between the initiation of a law suit and the maintenance of a law suit by a corporation that has had its charter forfeited. Appellant, citing former Maryland Rule 222, former Maryland Code (1957) Article 23, § 82(a), and cases decided before and after the repeal of those provisions, contends that C.A. § 3-515 incorporates the underlying purpose of former Rule 222 and former Article 23, § 82(a) and that Mark Hill must be permitted to maintain this law suit to liquidate appellant's assets.
We shall set forth the relevant history of C.A. § 3-515, Rule 222, and Article 23, § 82(a) and, for completeness of analysis, do the same for C.A. § 3-512. It is important to bear in mind that, from time to time, the law has changed substantively and, in addition, the organization and relative placement of various provisions in the Maryland Code have changed. For example, sometimes forfeiture of a corporate charter for nonpayment of taxes has been addressed separately from forfeiture for other reasons. There has always been a distinction between voluntary or involuntary dissolution and forfeiture, but the statutory provisions have not always addressed each separately and consistently.[1]
Appellant argues that C.A. § 3-515 is a successor to Article 23, § 82(a) and Rule 222. Article 23, § 82(a) in the 1957 Code, as it existed prior to 1975, and which was substantively the same as Article 23, § 78 in the 1951 Code,[2] provided:
The dissolution of a corporation shall not relieve its stockholders, directors, or officers from any obligations and liabilities imposed on them by law; nor shall such dissolution abate any pending suit or procedure by or against the corporation and all such suits may be continued with such substitution of parties, if any, as the court directs. The provisions of this section shall be retroactive so as to apply to any dissolution occurring prior to June 1, 1963.
In the 1957 Code, this section was part of the subtitle which addressed dissolution. It was not part of the separate subtitle which addressed forfeiture and revival. In this same time period, Article 23, § 84 addressed forfeiture of corporate charters for misuse or abuse of powers, but Article 81, § 204 addressed forfeiture of corporate charters for nonpayment of taxes. Article 81 contained no provision similar to Article 23, § 82(a). Article 23, § 82(a) was repealed in 1975 when the C.A. Article was enacted. See Laws of Maryland 1975, chapter 311. The substance of present CA § 3-515 was not part of the law at that time. Later in 1975, §§ 3-516 through 3-519 were added to the C.A. Article. See Laws of Maryland 1975, chapter 506. Section 3-516, as then enacted, is substantively the same as present § 3-515.
Rule 222 tracked the language in Article 23, § 82(a) and its predecessor and provided that dissolution of a corporation would not abate a pending suit but would continue with such substitution of parties as may be directed by the court. Rule 222 was repealed in 1985 as part of major changes *362 to the Maryland Rules. Its successor, although substantively different, appears in Rule 2-241(a). Unlike former Rule 222, present Rule 2-241(a) provides, in pertinent part:
(a) Substitution The proper person may be substituted for a party who
(1) dies, if the action survives,
(2) becomes incompetent,
(3) transfers an interest in the action, whether voluntarily or involuntarily,
(4) if a corporation, dissolves, forfeits its charter, merges, or consolidates,
(5) if a public officer, ceases to hold office, or
(6) if a guardian, personal representative, receiver, or trustee, resigns, is removed, or dies.
(b) Procedure Any party to the action, any other person affected by the action, the successors or representatives of the party, or the court may file a notice in the action substituting the proper person as a party.
* * *
(d) Failure to Substitute If substitution is not made as provided in this Rule, the court may dismiss the action, continue the trial or hearing, or take such other action as justice may require.
(Emphasis added).
The current Rule requires a substitution and, if not made, authorizes a court to dismiss the action.
With respect to appellant's argument under C.A. § 3-515, accepting the premise that it permits maintenance of a suit by the directors of a corporation after forfeiture of its charter, it is "for purposes of liquidation." C.A. § 3-515(a). The directors do not become trustees for the purpose of continuing to operate the business. Compare C.A. § 3-514(a) ("Any person who transacts business in the name or for the account of a corporation knowing that its charter has been forfeited and has not been revived is guilty of a misdemeanor and on conviction is subject to fine of not more than $500".).
The result in this case is controlled by the Court of Appeals' decision in Dual, Inc. v. Lockheed Martin, 383 Md. 151, 857 A.2d 1095 (2004). In that case, the charter of Dual, Inc. was forfeited. While forfeited, Dual filed a complaint in the name of the corporation and in his name as president and sole shareholder. The charter was later revived, after limitations had run, and the question was whether the relation back doctrine operated to save the suit. The Court held that the complaint was a nullity when filed and ineffective for purposes of tolling the statute of limitations. Id. at 163, 857 A.2d 1095. The Court noted that all powers of the corporation were extinguished when the charter was forfeited, citing C.A. § 2-103(2) (powers of corporation include right to sue and be sued); § 3-503(d) (powers of corporation after charter forfeited "inoperative, null and void"); and Stein v. Smith, 358 Md. 670, 675, 751 A.2d 504 (2000) (upon forfeiture of charter, a corporation loses the power to sue).
In response to Dual's argument that he was proceeding as a trustee under C.A. § 3-515, the Court noted there was no allegation of that fact, and moreover, the record indicated that the corporation was in fact doing business. Dual, 383 Md. at 164, 857 A.2d 1095. The same is true in the case before us.
In this case, the corporation brought suit in its own name. It alleged that it "is primarily engaged in the business of commercial construction, development and contracting. . . ." The complaint was never amended, and thus, there is no allegation that Mark Hill is winding up the *363 affairs of the corporation. In fact, the record is to the contrary.
On July 13, 2006, appellant filed a voluntary petition in bankruptcy under chapter 11, to reorganize, not to liquidate. On September 12, 2006, the bankruptcy court dismissed the petition for failure to make required filings. In October, 2006, in a response to appellees' motion to dismiss, appellant stated that it intended to revive its charter prior to a hearing on the motion. That was not done, and at the hearing on the motion, on November 29, 2006, appellant stated that it intended to revive its charter by the end of the year. That was not done, and as stated above, in February, 2007, the court dismissed the complaint. There was no representation that Mark Hill was winding up the affairs of the corporation. Moreover, in the deposition of Mark Hill, taken on February 4, 2005, he testified that, while appellant was "pretty much" out of business, he stated, "I mean, we're still up and running, I mean, still a company." Subsequent to the above, on April 29, 2008, appellant's charter was revived.
As was true in Dual, on this record, the case before us does not come within C.A. § 3-515. In order for C.A. § 3-515 to apply, the facts must fit within it, and that is true whether the question is initiation of a law suit or the maintenance of a law suit. In either situation, when the corporation's charter is forfeited, it loses all powers and its actions are null and void. The directors become trustees of its assets only for the purpose of liquidating and winding up its affairs. Consequently, the notice of appeal filed by appellant had no legal force and effect.
Had the charter been revived prior to filing the notice of appeal but after dismissal of the case, the notice of appeal would have been valid but the ultimate result would be the same. In that situation, we would affirm the circuit court's judgment on the same ground as was stated abovethe failure to bring the case within C.A. § 3-515 and Rule 2-241(a).
The cases relied on by appellant are not inconsistent with Dual and the result in this case. See Stein, 358 Md. at 677, 751 A.2d 504 (after charter forfeited, corporation filed suit; amended complaint by shareholder did not relate back; C.A. § 3-515 did not apply because the suit was not an asset of the corporation and the shareholder did not sue as sole director-trustee); Gibraltar Construction & Engineering, Inc. v. State National Bank of Bethesda, 265 Md. 530, 536, 290 A.2d 789 (1972) (Article 23, § 82(a) applicable only to domestic corporations); Parkside Terrace Apartments v. Lindner, 252 Md. 271, 274, 249 A.2d 717 (1969) (plaintiff corporation voluntarily dissolved and then filed a suit; reliance on former Rule 222 and Art. 23, § 82(a) misplaced because power to sue had been extinguished prior to filing suit, and suit not brought by directors pursuant to Art. 23, § 78). Kroop & Kurland, P.A. v. Lambros, 118 Md.App. 651, 665-66, 703 A.2d 1287 (1998) (notice of renewal of a judgment filed after the judgment creditor's corporate charter had been forfeited was null and void; the judgment lien expired 12 years after its entry, and later revival of charter did not resurrect the lien); Baltimore Luggage Co. v. Holtzman, 80 Md.App. 282, 285, 301, 562 A.2d 1286 (1989) (status of corporation unclear after transfer of its assets and liabilities; treated as a voluntary dissolution under C.A. § 3-410).
Finally, we address the fact that appellant revived its charter during the pendency of this appeal. The decision in Redwood Hotel v. Korbien, 197 Md. 514, 521, 80 A.2d 28 (1951), decided under Maryland Code (1939, Supp.1947), Article 81, § 153, suggests that the appeal is viable. *364 In our view, that decision is no longer good law.
Article 81, § 153(e), in the 1939 Code, provided that, after forfeiture of a corporate charter for nonpayment of taxes and subsequent revival:
(e) Such revival of the charter of the corporation shall validate all contracts, acts, matters and things made, done and performed within the scope of its charter by such corporation, its officers and agents during the time when such charter was void, with the same force and effect and to all intents and purposes as if said charter had at all times remained in full force and effect; and all real and personal property, rights and credit of said corporation at the time its charter became void and which were not disposed of prior to the time of such revival shall be vested in such corporation, after such revival, as fully and amply as they were held by said corporation at and before the time its charter became void, and said corporation after such revival shall be as exclusively liable for all contracts, acts, matters and things made, done or performed in its name and on its behalf by its officers and agents prior to such reinstatement, as if its charter had at all times remained in full force and effect.
(Emphasis added).
In the 1951 Code, the successor provision appeared in Article 23, § 81(d). The language was the same except that, instead of the italicized words above, § 81(d) contained the words "and of which it was not divested." In the 1957 Code, the successor to § 81(d), without substantive change, appeared at Article 23, § 85(d). In 1975, as part of the enactment of the C.A. Article, § 3-512 was enacted,[3] containing the same language as today.
Section 3-512 does not validate corporate action taken during forfeiture of its charter, which action was a nullity, if the corporation's right to take action was divested while the charter was forfeited. This was not part of the law in 1951, when Redwood Hotel was decided. Given the numerous decisions since 1951 holding that an act by a corporation while its charter is forfeited is null and void, and given the decisions holding that a subsequent act after the charter has been revived do not relate back to cure the loss of a right divested during the time that the charter was forfeited, see Dual, Inc., 383 Md. at 163, 857 A.2d 1095; Stein, 358 Md. at 676-79, 751 A.2d 504; Kroop & Kurland, P.A., 118 Md.App. at 667, 703 A.2d 1287, we conclude that revival of the charter pending appeal would not save the appeal. In that scenario, the filing of the notice of appeal was a nullity, and while the charter was forfeited, the time for noting a valid appeal expired, and the right was lost.
APPEAL DISMISSED. COSTS TO BE PAID BY APPELLANT.
NOTES
[1] In the 2007 Repl.Vol. of the C.A. Article, the structure is as follows. Title 3, subtitle 4 addresses dissolution. In that subtitle, § 3-410 addresses the powers of directors in voluntary dissolution. Its provisions are substantively the same as § 3-515. Title 3, subtitle 5 addresses forfeiture and revival of charters. Section 3-503 addresses forfeiture for nonpayment of taxes and failure to file reports. Section 3-513 addresses forfeiture for misuse of powers. Sections 3-507 through 3-510 address revival, and § 3-512 addresses the effect of revival.
[2] The last sentence addressing retroactivity did not appear in the 1951 Code.
[3] Originally, § 3-512 appeared as § 3-513. It was later renumbered.
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687 S.W.2d 191 (1985)
James J. DAKE and Velva Fausett, Plaintiffs-Appellants,
v.
Eldon TUELL and Robin Hubbard, Defendants-Respondents.
No. 66541.
Supreme Court of Missouri, En Banc.
April 2, 1985.
*192 John E. Chick, Jr., Kansas City, for plaintiffs-appellants.
Eldon Tuell, Robin Hubbard, pro se.
Michael E. Kaemmerer, Thomas W. McCarthy, Diana K. Wieland, St. Louis, for amicus curiae Missouri Merchants & Manuf. Ass'n.
W. James Foland, William E. Quirk, Kansas City, for amicus curiae Westmo Def. Lawyers Ass'n.
Paul Schroeder, St. Louis, for amicus curiae Missouri Hosp. Ass'n.
BILLINGS, Judge.
The sole issue in this case is whether discharged at will employees can maintain a suit for wrongful discharge against their former employers by cloaking their claims in the misty shroud of prima facie tort. The trial court dismissed plaintiffs' petitions for failure to state a cause of action. We affirm.
Defendants Eldon Tuell and Robin Hubbard are the owners of a Lowrey Organ Center where plaintiffs were employed. Plaintiff Dake was employed as a manager and plaintiff Fausett as an organ instructor. In June of 1982, plaintiffs were fired after informing defendants that other employees at the store were making fraudulent misrepresentations to customers.
Plaintiffs each brought suit against defendants in the Circuit Court of Clay Countyalleging in count one of each petition that their dismissals were intended to cause injury and were without justification and in reckless disregard of plaintiffs' rights. The second count in each petition repeated these allegations, along with the additional averment that defendants had discharged plaintiffs in complete disregard of their state and federal constitutional rights.
Defendants moved for dismissal under Rule 55.27(a)(6)arguing that both petitions had failed to state claims upon which relief could be granted. This motion was sustained, and plaintiffs sought review in the Missouri Court of Appeals, Western District.[1] The court of appeals held that plaintiffs had stated claims upon which relief could be granted and reversed the trial court's dismissal orders. However, a dissenting judge transferred the case to this Court because he viewed the principal opinion as being in conflict with prior decisions of this Court. We now decide the case as if originally appealed to this Court. Mo. Const. art. V, § 10.
In Missouri it is firmly established that absent a contrary statutory provision, an at will employee[2] cannot maintain an *193 action for wrongful discharge against his former employer.[3]Amaan v. City of Eureka, 615 S.W.2d 414, 415 (Mo. banc 1981), cert. denied, 454 U.S. 1084, 102 S. Ct. 642, 70 L. Ed. 2d 619 (1981). Accord, Howe v. St. Louis Union Trust Company, 392 S.W.2d 625, 627 (Mo.1965). See also Carr v. Montgomery Ward & Company, 363 S.W.2d 571, 574 (Mo.1963).
Here, plaintiffs would have us render near impotent this long standing legal principle by establishing a rule that would permit an at will employee to bring an action for wrongful discharge under the guise of the prima facie tort doctrine.[4] This we decline to do.
Under Missouri's employment at will doctrine an employer can discharge for cause or without causean at will employee who does not otherwise fall within the protective reach of a contrary statutory provision and still not be subject to liability for wrongful discharge. Amaan v. City of Eureka, supra, at 415. Therefore, it follows that unless there is a contrary statutory provision upon which to base his claim, an at will employee must set forth in his petition for wrongful discharge "the essential elements of a valid contract, and a discharge in violation thereof." Maddock v. Lewis, 386 S.W.2d 406, 409 (Mo.1965), cert. denied, 381 U.S. 929, 85 S. Ct. 1569, 14 L. Ed. 2d 688 (1965).
In the present case, it is conceded by all that plaintiffs were at will employees. Their pleadings are completely barren of any allegations concerning the existence of an employment contract and a discharge in violation of its provisions. Nor have plaintiffs attempted to ground their claims on a contrary statutory provision. Absent such allegations, the petitions do not invoke substantive principles of law sufficient to entitle them to relief in a Missouri court of law.
Judgments affirmed.
*194 RENDLEN, C.J., and WELLIVER, HIGGINS, GUNN and DONNELLY, JJ., concur.
BLACKMAR, J., concurs in result in separate opinion filed.
BLACKMAR, Judge, concurring in result.
The alleged reason for the discharge of plaintiff Dake is set forth in his petition as follows:
Plaintiff had reported improper sales practices and fraudulent misrepresentations being made by another employee of the defendants.
Plaintiff Fausett's petition contains similar allegations.
I agree that the alleged discharges for "whistle blowing" should not give rise to a claim for damages for wrongful termination. Such a holding is supported by the great weight of modern authority. See Krauskopf, "Employment Discharge: Survey and Critique of the Modern At Will Rule," 51 UMKC Law Review 190, 237-239. The principal opinion need go no further than this.
The principal opinion, however, purports to establish an ironclad rule that there may be no action for wrongful termination in the absence of contract or statute. I do not believe that it is desirable to circumscribe future courts in this manner. Professor Krauskopf, in the article cited above, sets forth numerous exceptions to the "common law rule" of discharge at will. I want to be free to consider these situations as they arise.
In Lucas v. Brown and Root, Inc., 736 F.2d 1202 (8th Cir.1984) Judge Richard Arnold analyzed Arkansas law, which seems to maintain the "at will" rule just as ours does, and held that a complaint alleging that the female plaintiff was discharged because she refused to sleep with her foreman stated a claim. To the extent that the sweeping pronouncements of the principal opinion would preclude a claim such as this under our law, I disagree.
The principal opinion cites Amaan v. City of Eureka, 615 S.W.2d 414 (Mo. banc 1981), as the recent authoritative case on the point. Amaan was grossly overwritten. There the record showed that a police officer was discharged because of a reduction in force. All that needed to be said was that the law did not guarantee him continued employment.
Our Court has been very willing to consider modern developments in the law of torts and to overrule or distinguish earlier cases which seemed to stand in the way. See, e.g., Keener v. Dayton Electric Manufacturing Co., 445 S.W.2d 362 (Mo.1969) and Elmore v. Owens-Illinois, Inc., 673 S.W.2d 434 (Mo. banc 1984), products liability; Abernathy v. Sisters of St. Mary's, 446 S.W.2d 599 (Mo. banc 1969), charitable immunity; Gustafson v. Benda, 661 S.W.2d 11 (Mo. banc 1983), comparative negligence; Jones v. State Highway Commission, 557 S.W.2d 225 (Mo. banc 1977), sovereign immunity.[1] This list is not complete. The principal opinion may tend to inhibit the common law process with regard to wrongful termination by its unnecessarily broad pronouncements. I hope that future courts realize that it is authoritative only on the facts now before us.
NOTES
[1] The court of appeals, for purposes of appellate review, ordered the two cases consolidated.
[2] See generally, Maddock v. Lewis, 386 S.W.2d 406, 409 (Mo.1965), cert. denied, 381 U.S. 929, 85 S. Ct. 1569, 14 L. Ed. 2d 688 (1965); Culver v. Kern, 354 Mo. 1158, 193 S.W.2d 602 (1946). Martucci, Recent Developments in Missouri: Labor and Employment Law, 52 U.M.K.C.L.Rev. 501 (1984); Heinsz, The Assault On The Employment At Will Doctrine: Management Considerations, 48 Mo.L.Rev. 855 (1983); and Note, Fire At Will: An Analysis of the Missouri At Will Employment Doctrine, 25 St. Louis U.L.J. 845 (1982).
[3] Section 287.780, RSMo 1978 gives an employee including an at will employeea cause of action for damages against his former employer if the employee has been discharged or discriminated against for exercising the rights afforded him under Missouri Workman's Compensation Act. Hansome v. Northwestern Cooperage Co., 679 S.W.2d 273 (Mo. banc 1984), Arie v. Intertherm, Inc., 648 S.W.2d 142, 149 (Mo.App.1983).
Missouri's Service Letter Statute, § 290.140, RSMo Supp.1984, gives the employees of corporations that employ seven or more workers a cause of action if the following elements exist: (1) the employee has worked for the employer for at least 90 days; (2) the employee requested in writing by certified mail a service letter and made a specific reference to the statute; (3) the employer fails to comply with the requirements of the statute or fails to supply a service letter within the prescribed time period.
[4] The prima facie tort doctrine was first recognized in Missouri in Porter v. Crawford & Co., 611 S.W.2d 265 (Mo.App.1980). Porter, however, was an action brought against an insurance carrier who had stopped payment on a settlement draft before giving prior notice to the payee; it was not a suit for wrongful discharge brought by an at will employee.
In Lundberg v. Prudential Insurance Company of America, 661 S.W.2d 667 (Mo.App.1983), the plaintiff, an at will employee, attempted to rely on a prima facie tort theory to sue his former employer for wrongful discharge. At the close of plaintiff's evidence, the defendant successfully moved for a directed verdictwhich was affirmed on appeal. Plaintiffs argue that Lundberg implicitly recognizes the right of a discharged at will employee to rely upon the prima facie tort doctrine to state a viable cause of action against the former employer. Their reliance on Lundberg is misplaced.
It should be noted that in deciding the narrow question before itwhether the plaintiff's evidence warranted submitting the case to the jury on a prima facie tort theorythe court of appeals expressed serious doubts about the wisdom of allowing an at will employee to freely avail himself of a prima facie tort theory in circumvention of the well-established employment at will doctrine. The court of appeals recognized that "judicial invasion of management decisions and impingement upon agreed terms of employment emerge, when as here, the prima facie tort doctrine is resorted to by a discharged employee to impose liability against an employer where the employment is terminable at will." 661 S.W.2d at 671. In light of our decision today, the doubts expressed in Lundberg should no longer remain.
[1] It makes no difference that the legislature, in its wisdom, superseded the Court's opinion. That is its privilege in the constitutional scheme.
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25 B.R. 729 (1982)
In the Matter of KALEIDOSCOPE, INC.,
Frank W. SCROGGINS, Trustee in Chapter X of Kaleidoscope, Inc., Plaintiff/Appellee,
v.
POWELL, GOLDSTEIN, FRAZER & MURPHY, a Georgia General Partnership, Defendant/Appellant.
No. C81-2360A.
United States District Court, N.D. Georgia, Atlanta Division.
December 3, 1982.
*730 *731 Jack M. McLaughlin, Robert E. Hicks, Atlanta, Ga., for plaintiff/appellee.
Emmet J. Bondurant, II, Atlanta, Ga., for defendant/appellant.
ORDER
RICHARD C. FREEMAN, District Judge.
Defendant, the law firm of Powell, Goldstein, Frazer & Murphy (Powell, Goldstein), appeals from a turnover order issued by Judge A.D. Kahn of the United States Bankruptcy Court for the Northern District of Georgia. Plaintiff, the Trustee in reorganization (Trustee) for the debtor, Kaleidoscope, Inc. (Kaleidoscope), has moved that this court reconsider its order of May 25, 1982, granting Powell, Goldstein's motion to supplement the record and granting in part and denying in part the Trustee's motion to supplement the record. Because this appeal requires consideration of proceedings in several courts, throughout the present order the phrase "this court" will refer to the United States District Court for the Northern District of Georgia. For the reasons that follow, this court will deny the Trustee's motion for reconsideration, will reverse the order of the bankruptcy court, and will remand this case to the bankruptcy court with instructions to stay proceedings on the Trustee's turnover complaint and to order the Trustee to present to the courts of the state of Georgia the issue of ownership of certain materials amassed in Powell, Goldstein's files as the result of its representation of Kaleidoscope.
I. FACTS
Between December 1977 and February 1979, Powell, Goldstein, as counsel for several persons, including Kaleidoscope, participated in various negotiations, agreements, and transactions that resulted in the transfer of most of Kaleidoscope's assets to another corporation and in Kaleidoscope's eventual bankruptcy. In lawsuits in both state and federal court, the Trustee has consistently asserted that the actions of Powell, Goldstein and its clients were wrongful and that the transfer of Kaleidoscope's assets is therefore void. Although this appeal presents only one of the many legal questions spawned during Powell, Goldstein's representation of Kaleidoscope, the resolution of that one issue requires a detailed summary of facts.
In 1977, Susan Edmondson and Charles Edmondson, formerly wife and husband, each owned one-half of the stock of Kaleidoscope, which the two of them had founded in 1974. In December 1977, Susan Edmondson employed Powell, Goldstein to represent her in negotiations with Charles Edmondson that resulted in the signing of a "Stock Redemption Agreement." This agreement, which became effective on February 2, 1978, permitted Charles Edmondson to redeem his shares in exchange for $200,000 cash and a promissory note for $550,000, which was secured by a security interest in most of Kaleidoscope's assets. Once those shares were redeemed, Susan Edmondson became the president and sole shareholder of Kaleidoscope. Thereafter, Powell, Goldstein continued to represent both Susan Edmondson and Kaleidoscope throughout 1978.
In December 1978, Powell, Goldstein incorporated the MOA Corporation (MOA), thirty percent of whose capital stock was issued to Susan Edmondson. The remaining seventy percent of MOA's capital stock *732 was issued to Theodore Munchak, whom Powell, Goldstein had represented previously in other matters. In January 1979, Powell, Goldstein represented Kaleidoscope, Susan Edmondson, and Theodore Munchak during the time that Charles Edmondson "foreclosed" on his note and took possession of Kaleidoscope's assets, which he then sold to Theodore Munchak for $312,000. Mr. Munchak in turn transferred those assets to MOA. On January 17, 1979, Powell, Goldstein apparently ceased representing Kaleidoscope; however, the law firm continued for some time to represent Susan Edmondson, Theodore Munchak, and MOA.
On February 1, 1979, an involuntary bankruptcy petition was filed against Kaleidoscope by three of its creditors. The involuntary proceeding was converted into a voluntary Chapter XI proceeding on February 5, 1979, and the Trustee was appointed receiver. Later, on September 14, 1979, the Chapter XI proceeding was converted into a Chapter X reorganization, and the Trustee was appointed to his present position.
The Trustee has steadfastly maintained that the execution of the February 1978 stock redemption agreement violated Georgia Code Ann. § 22-513 [now Official Code of Georgia Ann. § 14-2-92], which prohibits a corporation from purchasing its own shares when the corporation is insolvent or when the purchase would, in effect, render the corporation insolvent. Therefore, the Trustee contends, the redemption of shares, Charles Edmondson's retention of a security interest in Kaleidoscope's assets, his subsequent foreclosure, Theodore Munchak's purchase of the foreclosed property, and the transfer of that property to MOA are all void. The Trustee has also asserted in state court that Powell, Goldstein's involvement in these transactions on behalf of its clients embroiled it in conflicts of interest that amount to legal malpractice and breach of its fiduciary and contractual duties to Kaleidoscope.
The Trustee first made his claims that the transfers of assets were void in a complaint filed in bankruptcy court on February 16, 1979, naming as defendants Susan Edmondson, Charles Edmondson, Theodore Munchak, MOA, and several others who had been involved in the transfers. On June 19, 1979, the bankruptcy court dismissed the Trustee's complaint, holding that resolution of the issues presented would require the court to determine whether Kaleidoscope was solvent when the stock redemption agreement was executed, that it was doubtful whether the bankruptcy court had jurisdiction to determine "solvency" within the meaning of the Georgia statute, and that it was therefore appropriate under the circumstances to dismiss the complaint without prejudice and to authorize the Trustee to bring a complaint against the same defendants in a state court, which would undoubtedly have jurisdiction to consider the merits of all the claims made in the complaint. The Trustee thereafter instituted an action (first state court suit), asserting the same claims and naming the same defendants, in the Superior Court of Fulton County, Georgia.
Powell, Goldstein represented Susan Edmondson, Theodore Munchak, and MOA Corporation in their defense to both the February 16, 1979, bankruptcy complaint and the first state court sut, but later withdrew as their counsel. Although the record does not disclose the reason for the law firm's withdrawal, it appears that Powell, Goldstein ceased representing those clients not long before October 31, 1980, the date that the superior court granted the Trustee's motion to add as defendants in the first state court suit Wayne Shortridge and Walter Moeling, the two Powell, Goldstein partners who were primarily responsible for rendering legal services to those clients and to Kaleidoscope in the transactions challenged by the Trustee in that suit.
The present action began on August 29, 1979, with the Trustee's filing of a bankruptcy complaint against Powell, Goldstein, seeking (1) a turnover order requiring the law firm to relinquish possession of a corporate minute book and any other property of Kaleidoscope held by Powell, Goldstein, (2) a determination of the validity and extent of Powell, Goldstein's asserted attorney's *733 lien, and (3) an examination of all payments of money and transfers of property by Kaleidoscope to the law firm, some of which, the Trustee alleges, were made in contemplation of bankruptcy. In response, Powell, Goldstein argued that because of the pendency of the closely related first state court suit, the bankruptcy court either should dismiss the complaint for lack of jurisdiction, or, if it had jurisdiction, should nevertheless in its discretion decline to rule upon the plaintiff's complaint. Powell, Goldstein also asserted that ruling on the Trustee's complaint would require the bankruptcy court to resolve unsettled questions of state law, in violation of the rule of bankruptcy court abstention established in Thompson v. Magnolia Petroleum Co., 309 U.S. 478, 60 S. Ct. 628, 84 L. Ed. 876 (1942) (discussed infra).
In an order dated March 3, 1980, the bankruptcy court denied Powell, Goldstein's motion to dismiss, holding, first, that its exclusive jurisdiction to determine the reasonableness of pre-bankruptcy payments of attorney's fees was well-settled, citing section 60d of the Bankruptcy Act of 1898, 11 U.S.C. § 96, and Rule 220, Fed.R.Bankr.P., and, second, that the defendant had not identified sufficiently substantial state interests to justify abstention. In re Kaleidoscope, 3 B.R. 7, 9 n. 2 (Bkrtcy.N.D.Ga.1979). Powell, Goldstein subsequently filed an appeal of that order but later obtained a voluntary dismissal of the appeal in a consent order signed by this court on June 4, 1980.
On January 30, 1981, the Trustee filed a complaint against Powell, Goldstein in the superior court (second state court suit) seeking to recover all legal fees paid by Kaleidoscope to Powell, Goldstein, on the grounds that Powell, Goldstein had committed malpractice and had breached fiduciary and contractual duties owed to Kaleidoscope during the time it was represented by Powell, Goldstein.
In the course of discovery in the first state court suit, the Trustee sought to inspect and copy all of the legal files maintained by Powell, Goldstein in connection with its prior representation of Kaleidoscope, Susan Edmondson, Theodore Munchak and MOA. Powell, Goldstein voluntarily permitted the Trustee and the defendants in that suit access to most of the material in those files but refused to produce "internal documents which contained Powell, Goldstein lawyers' mental impressions, legal theories, or research notes which were not sent to clients or otherwise disclosed to individuals outside of the law firm," Brief of Appellant at 9, on the grounds that those documents, which the law firm termed "work product," were absolutely immune or privileged from discovery. On October 27, 1981, at a hearing on the Trustee's motion to compel and on Powell, Goldstein's motion for a protective order, the superior court agreed with Powell, Goldstein and issued an oral order that, among other things, provided for in camera inspection of the disputed material to determine which documents in Powell, Goldstein's files merited protection as work product. On December 1, 1981, in a written order evidencing and clarifying its previous oral order, the superior court held
that a claim of "work product" belongs to the law firm, and not to the former client, and that the client is not, therefore, entitled to the production of "work product" of its former counsel created during the course of the former representation.
Scroggins v. Edmondson, No. C-52741, Order on Pending Motions at 5. (Superior Court of Fulton County December 1, 1981).
On September 22, 1981, before the state court had ruled on the discovery dispute in the first state court suit, the Trustee filed a motion for leave to amend his bankruptcy complaint against Powell, Goldstein. In the amendment, the Trustee sought a turnover order requiring Powell, Goldstein to relinquish permanent possession of various books and records of Kaleidoscope and all material in Powell, Goldstein's Kaleidoscope files. At a hearing in bankruptcy court on October 26, 1981, the day before the discovery hearing was held in the first state court suit, Powell, Goldstein agreed to turn *734 over to the Trustee any of Kaleidoscope's corporate books or records in the law firm's possession upon the entry of an order preserving Powell, Goldstein's lien for attorney's fees. At the same time, the bankruptcy court allowed Powell, Goldstein ten days in which to file a written brief addressing the merits of the question of ownership of the materials in its Kaleidoscope files.
In its brief, submitted after the superior court had orally ruled in Powell, Goldstein's favor on October 27, 1981, in the discovery dispute in the first state court suit, Powell, Goldstein asserted a plethora of defenses to the turnover complaint, arguing (1) that the turnover complaint was so broadly worded that compliance with the requested order would require Powell, Goldstein to relinquish possession of files generated on behalf of Susan Edmondson, Theodore Munchak, and MOA, who were not parties to the bankruptcy complaint against Powell, Goldstein and whose files the plaintiff could assert no colorable claim of a right to possess; (2) that many of the files of those former clients were so "intermixed and overlapping" that it would be "virtually impossible" to separate the Kaleidoscope files from the other clients' files; (3) that the bankruptcy court should refrain from ruling on the merits of the turnover request until it had held "an evidentiary hearing, in which all the parties are represented, to determine which files are which, if, indeed, such a determination is possible"; (4) that the disputed material in the Kaleidoscope files was the property of Powell, Goldstein and that the state court had so held in its oral order of October 27, 1981; (5) that the disputed material was protected from a turnover order by the work product doctrine; (6) that the bankruptcy court, in its order of June 19, 1979, had "ceded" jurisdiction of the dispute to the Georgia state courts and should not interfere by granting the motion and turnover order, with the state court's control over the first state court suit; and (7) that the ruling by the state court in the discovery dispute rendered the question of possession of the disputed material res judicata. Powell, Goldstein's Response to the Plaintiff's Motion for a Turnover Order, filed on November 5, 1981, at 3-8.
On November 13, 1981, the bankruptcy court granted the Trustee's motion to amend his complaint and ordered Powell, Goldstein to turn over all of the legal files of Kaleidoscope, which, it held, included
all papers, documents, and other tangible things which came into the possession of or were created by Powell, Goldstein during the course of its representation of Kaleidoscope, and . . . all internal memoranda, correspondence, notes, records, and the like prepared by or otherwise generated by the attorneys and employees of Powell, Goldstein in the course of their representation of Kaleidoscope.
Bankruptcy Court Order of November 13, 1981, at ¶ 1. The bankruptcy court held further that Kaleidoscope owned not only those files, but also
all legal files in the possession of [Powell, Goldstein] created or amassed during the joint representation of Kaleidoscope, Inc. and any other person, including Susan L. Edmondson, Theodore J. Munchak, [and] MOA Corporation . . . with regard to matters within the scope of the subject matter of the joint representation.
Id. at ¶ 2, and ordered that Powell, Goldstein turn over those files as well. The bankruptcy court specifically rejected "any `work product' or other exception" to Kaleidoscope's ownership of those files. In the same order the bankruptcy court recognized and preserved Powell, Goldstein's asserted attorney's lien, treating it as an administrative claim subject to later approval or denial by that court. The bankruptcy court's order also established a schedule for copying of the disputed documents by Powell, Goldstein at its expense and for turnover of the originals to the Trustee. The bankruptcy court's order was accompanied by a lengthy Memorandum of Opinion, which was subsequently published at 15 B.R. 232 (Bkrtcy.N.D.Ga.1981).
On November 24, 1981, the bankruptcy court granted partial supersedeas of the *735 above order of November 13, 1981, allowing Powell, Goldstein to submit the originals of the disputed materials to the state court for in camera inspection, in accord with the state court's oral order of October 26, 1981, and to file "a full, complete, accurate, and legible set of those documents" with the bankruptcy court pending the outcome of this appeal.
II. ISSUES ON APPEAL
In the brief it has submitted on this appeal from the bankruptcy court's turnover order of November 13, 1981, Powell, Goldstein asserts, in addition to many of the same arguments it raised in bankruptcy court, first, that the bankruptcy court should have abstained, on principles of comity, from deciding the merits of the request for a turnover order granting the plaintiff possession of the same documents that the state court had previously permitted Powell, Goldstein to withhold from inspection; and, second, that the bankruptcy court committed reversible procedural errors when it determined ownership of matter that arguably belongs either to Powell, Goldstein or to persons who were not made parties to the present complaint, when it entered its order without conducting the requested evidentiary hearing, when it took judicial notice of the "general practice of the bar," when it made findings of fact that are unsupported by the record, and when it issued its findings of fact and conclusions of law in an order and a memorandum prepared by the plaintiff and signed by the bankruptcy court without providing an opportunity for Powell, Goldstein to object to the language in the order. During oral argument before this court, Powell, Goldstein raised squarely for the first time on appeal an additional question, only alluded to in its brief, of whether the issue of ownership of the files is within the bankruptcy court's summary jurisdiction or is a matter that must be resolved in a plenary proceeding in either state court or a federal district court.
In response, the trustee argues (1) that the bankruptcy court has exclusive jurisdiction of a debtor's property and does not cede or transfer its jurisdiction when it directs a trustee or receiver to proceed with his claims in state court; (2) that since the state court's work product ruling was made in an order resolving a discovery dispute, that order disposes of only the question of whether the disputed materials are discoverable and not the issue of ownership of those materials; (3) that the bankruptcy court correctly concluded that Kaleidoscope owns those materials and that a client's possession of his own files cannot be thwarted by a work product privilege asserted by his attorney; (4) that the question of title to the legal files "is clearly a question of federal law, which must, of necessity, be decided by the bankruptcy court in the first instance"; (5) that Powell, Goldstein has admitted all of the facts necessary to resolution of the dispute as to possession of the legal files, and has thus obviated any need for an evidentiary hearing; (6) that since the question of ownership is one of law, not of fact, it was appropriate for the bankruptcy court to take juridical notice of the practice of local counsel in turning over clients' files upon the withdrawal of one attorney and the substitution of another; (7) that there was no impropriety involved in the bankruptcy court's use of the order and memorandum prepared by the plaintiff; and (8) that the bankruptcy court possessed summary jurisdiction because the files were Kaleidoscope's property held for its benefit by its agent and because Powell, Goldstein has no colorable claim of title to the files.
III. THE TRUSTEE'S MOTION TO RECONSIDER THIS COURT'S ORDER OF MAY 25, 1982
During the pendency of this appeal, both the Trustee and Powell, Goldstein have sought to supplement the record with various documents. In an order dated May 25, 1982, this court permitted Powell, Goldstein to submit a certified copy of the December 1, 1981, order of the superior court in the first state court suit, which held that the work product doctrine permits Powell, Goldstein to refuse to produce some of the disputed documents in its files, and the *736 affidavit of Mr. Frank Love, Jr., a partner in the Powell, Goldstein firm. In the same order, this court permitted the Trustee to submit a certified copy of a stipulated order entered in the first state court suit on November 25, 1981, and a certified copy of a February 8, 1982, order in that same suit, in which the superior court identified the specific documents that it found, after its in camera inspection, to be work product.
This court refused, however, to allow the plaintiff to supplement the record with either the affidavit of Mr. Robert Bartlett or the documents attached to it, which were apparently among those examined by the superior court and found not to be work product. This court held that the Trustee's use of those documents in this appeal would violate the terms of the stipulated order, in which Theodore Munchak, MOA, and Donald Chapman who apparently acted as Mr. Munchak's agent during negotiations (referred to collectively in the stipulated order as the "MOA Defendants") agreed to waive any claims of privilege based on their relationship with Powell, Goldstein with regard to any communications related to the transactions alleged in the Trustee's complaint. In that stipulated order, the MOA defendants also authorized Powell Goldstein to produce documents under certain conditions, among them a prohibition of any use of confidential information for any purpose other than preparation for trial or trial of the first state court suit.
This court has reviewed the documents attached to the affidavit of Robert Bartlett and finds that only Exhibit A bears even an arguable relevance to the issue before this court. That document is a copy of a January 20, 1978, memorandum written by Wayne Shortridge and addressed to the Kaleidoscope file. The memorandum contains references to Powell, Goldstein's plans for receipt and use of the corporate files of Kaleidoscope that were then in the possession of the corporation's former counsel. Some of the statements tend to contradict, albeit only arguably, the assertions made in the Frank Love affidavit. Nothing indicates that this memorandum was prepared in anticipation of this or any other litigation and this court therefore rejects, for the purposes of ruling on this motion, Powell, Goldstein's assertion that the memorandum constitutes work product. This court also finds that the stipulated order does not prevent this court's consideration of the memorandum. The stipulated order merely establishes the conditions upon which the MOA Defendants waived any attorney-client privilege that they may have asserted with respect to the documents sought by the Trustee. On its face, the memorandum has no connection with Powell, Goldstein's representation of the MOA Defendants, and therefore the terms of the stipulated order can bear no relation to the Trustee's use of this document.
The remaining documents, Exhibits B through T, however, are clearly irrelevant to the question of ownership of Powell, Goldstein's Kaleidoscope files. This court will therefore modify its previous order to permit the Trustee to supplement the record with the affidavit of Roger Bartlett and with Exhibit A, but will deny permission to add to the record Exhibits B through T.
IV. POWELL, GOLDSTEIN'S APPEAL FROM THE BANKRUPTCY COURT'S ORDER OF NOVEMBER 13, 1982
In reviewing the order of a bankruptcy court on appeal, a district court must accept the bankruptcy court's findings of fact unless they are clearly erroneous. In re Perimeter Park Investment Associates, 616 F.2d 150, 151 (5th Cir.1980). Decisions made in the exercise of a bankruptcy court's discretion will not be set aside unless there is plain error or abuse of discretion. In re Ken Boatman, Inc., 359 F. Supp. 1062, 1063 (W.D.La.1973), aff'd, 504 F.2d 924 (5th Cir.1974). The bankruptcy court's conclusions of law, however, are freely reviewable, United States v. Mississippi Valley Generating Co., 364 U.S. 520, 526, 81 S. Ct. 294, 297, 5 L. Ed. 2d 268 (1961), and a reviewing court therefore must independently determine the correctness of the bankruptcy court's legal conclusions.
*737 A. Questions Presented in Bankruptcy Court and in State Court
To resolve the numerous arguments made by the parties on this appeal, this court must identify initially the questions presented to this court and determine their relation to the issues that have been presented to and decided by the superior court in the first state court suit.
Only two general questions were raised in bankruptcy court by the Trustee's turnover complaint: first, whether Powell, Goldstein has possession of property that belongs to Kaleidoscope, and second, if so, whether Powell, Goldstein has an interest other than ownership of the property that permits the law firm to retain possession? The later question has not been raised on this appeal. Although Powell, Goldstein asserted in the bankruptcy court that the law firm has an attorney's lien that permits it to retain possession of Kaleidoscope's property until the law firm's claims against the estate are satisfied, Powell, Goldstein has not questioned in this court the part of the bankruptcy court's turnover order that in effect preserves Powell, Goldstein's assertion of the lien on the materials in its possession pending latter determination of the lien's validity. As to the first question, the precise issue presented is whether the documents that were amassed in Powell, Goldstein's files as a result of its representation of Kaleidoscope are the property of Kaleidoscope, and therefore part of its bankruptcy estate, or the property of Powell, Goldstein, and therefore not properly the subject of the bankruptcy court's turnover order.
What appears to be a relatively straightforward question of "ownership" or "title," has become somewhat clouded by Powell, Goldstein's reliance upon cases that deal with the "work product" doctrine. Powell, Goldstein asserts that
it should be clear, as a matter of law, that an attorney's legal files, as opposed to client documents which may be in an attorney's possession, are the property of the attorney, not the client. As a result neither the [Trustee] nor Kaleidoscope nor any other client of Powell, Goldstein is entitled to possession of Powell, Goldstein's files relating to that client.
Brief of Appellant at 17 (emphasis omitted). Powell, Goldstein supports its assertion of ownership with the following argument: The work product doctrine, which permits a lawyer to withhold from discovery any documents that contain his mental impressions, analyses, and legal conclusions, belongs to the lawyer and not the client; to allow a client to own the lawyer's work product is inconsistent with the lawyer's right to keep that information confidential. Powell, Goldstein thus relies on the work product doctrine not as a grounds for retaining documents that Kaleidoscope owns, but as support for its assertion that as a matter of law the attorney, not the client, must be considered the owner of the files.
The Trustee maintains, and the bankruptcy court agreed, that a lawyer's mental impressions are precisely what a lawyer has to sell and what a client pays for and that therefore the client owns any documents that record those impressions. Responding to Powell, Goldstein's arguments, the Trustee asserts that the privilege to maintain the confidentiality of a lawyer's work product exists for the benefit of the client, and not of the lawyer, that to be considered work product a document must have been created in anticipation of litigation against someone other than the client, and that, in any event, the work product doctrine is a discovery doctrine that is irrelevant to the question of title. Powell, Goldstein is in effect, the Trustee contends, asking the court to recognize a "new privilege" that "creates a wall between an attorney and his client, beyond which a client cannot pass, and in the shadow of which an attorney can shield documents created during the course of that client's representation from the view of that client." Revised Brief of Appellee at 25.
In the first state court suit, Powell, Goldstein relied upon the work product doctrine in its defense against the Trustee's motion to compel. Although the record on appeal contains an incomplete account of the superior court's proceedings, it appears *738 that the dispute in that court was only a discovery dispute and that Powell, Goldstein relied upon the work product doctrine in that instance to support not a claim of ownership, but a claim of immunity from compelled disclosure. Identifying the questions resolved in its December 1, 1981, order, the superior court described the issues that involved Powell, Goldstein as
(d) whether the Powell, Goldstein, Frazer & Murphy law firm and Defendants Shortridge and Moeling should be required to produce documents in their possession which they contend constitute confidential communications between the law firm and former clients of the law firm, namely, Mr. Munchak and MOA Corporation, which Powell, Goldstein, Frazer & Murphy had been instructed by attorneys for their former clients to withhold from production on grounds of attorney/client privilege, [and]
(e) whether the law firm of Powell, Goldstein, Frazer & Murphy and Defendants Shortridge and Moeling should be required to produce internal memoranda and notes prepared by attorneys at Powell, Goldstein, Frazer & Murphy which they contend contain the mental impressions, legal theories and research notes of Powell, Goldstein's attorneys from their files regarding the transactions and events at issue in this litigation and which they further contend constitute attorney work product prepared in anticipation of possible litigation, with respect to which they contend no compelling need has been shown by the Plaintiff, and as to which they assert that mental impressions, legal theories and research notes of lawyers are protected from discovery by Section 26(c) of the Civil Practice Act.
Superior Court Order of December 1, 1981, at 2. Although the superior court's holding on the protection afforded by the work product doctrine under the Georgia procedural rules does support one of Powell, Goldstein's contentions to the extent that it clarifies the nature of the work product discovery doctrine applied under Georgia law, the superior court's order makes no mention of, and therefore cannot be presumed to have resolved, questions of ownership.
Even if the superior court's ruling is deemed clear state court precedent for the proposition that under Georgia law the work product privilege belongs to the lawyer and not to the client, it is doubtful that such a holding makes the work product doctrine a principle of property law merely because of the possibility of inconsistency between the outcome of the title dispute and the superior court's resolution of the question of whether particular documents are discoverable and cannot be presumed to call a court's attention to questions of title. Nor is there clear evidence in the record to suggest that the Trustee relied upon a right of ownership in seeking possession of these documents in the superior court. This court will not presume, therefore, that the superior court considered the possibility of inconsistent results that Powell, Goldstein relies upon here. Thus, the superior court's ruling can have no res judicata effect in this bankruptcy action.
B. Jurisdiction
Powell, Goldstein challenges the bankruptcy court's jurisdiction of the Trustee's turnover complaint on two grounds. First, Powell, Goldstein asserts that "the Bankruptcy Court's [turnover] order directly infringes upon the jurisdiction which was ceded to the Superior Court by the Bankruptcy Court's order of June 19, 1979 directing the [Trustee] to prosecute his claims against Powell, Goldstein's former clients . . . in that forum." Brief of Appellant at 36. It is true, as Powell, Goldstein notes, that when a bankruptcy trustee resorts to state court for the prosecution of a claim, the state court has jurisdiction of everything within the scope of that claim, and that the trustee will be bound by the state court's adjudication. Some courts have held that a bankruptcy court has no discretion to decide questions that are identical to the issues presented in a state court action that was pending before the filing of the bankruptcy complaint. E.g., In re Terrace Lawn Memorial Gardens, 256 F.2d 398, 402 (9th Cir.1958).
*739 This court does not agree, however, that the bankruptcy court has "ceded" or somehow transferred to the state courts all issues that the Trustee could conceivably bring to the bankruptcy court as a result of Powell, Goldstein's representation of Kaleidoscope. The bankruptcy court's June 19, 1979, order did not relinquish, transfer, or "cede" jurisdiction over the administration of the Kaleidoscope estate. Rather, the bankruptcy court referred to the state courts the Trustee's claim that the transfer of Kaleidoscope's assets to MOA violated, among other things, a recently enacted state statute. Powell, Goldstein has not demonstrated how its claim of ownership of the disputed materials can be deemed to be within the scope of the Trustee's claims in the first state court suit, which the record on appeal indicates has to date presented to the superior court only two questions: whether the transfer of Kaleidoscope's assets to MOA are invalid and whether under Georgia law the work product discovery doctrine protects any of the material in Powell, Goldstein's files from pretrial discovery. Neither of those issues need be resolved in order for the bankruptcy court to rule upon the Trustee's turnover complaint. Nor does it appear that resolution of the issues before the superior court in the first state court suit requires a determination of ownership of the files. Thus, the bankruptcy court's turnover order does not interfere with the state court proceedings that resulted from the bankruptcy court's order of June 19, 1979.
As its second ground for challenging the bankruptcy court's jurisdiction, Powell, Goldstein argues that its claim of title to the documents in the files deprives the bankruptcy court of summary jurisdiction and that the conflicting claims of ownership therefore must be adjudicated in a plenary proceeding.
In an action brought under the Bankruptcy Act of 1898, 11 U.S.C. § 1 et seq., which was in effect both when the bankruptcy petition was filed in this action and when the Trustee filed his original complaint against Powell, Goldstein, a bankruptcy court possesses only limited jurisdiction.
A bankruptcy court has the power to adjudicate summarily rights and claims to property which is in the actual or constructive possession of the court. If the property is not in the court's possession and a third person asserts a bona fide claim adverse to the receiver or trustee in bankruptcy, he has the right to have the merits of his claim adjudicated "in suits of the ordinary character, with the rights and remedies incident thereto." But the mere assertion of an adverse claim does not oust a court of bankruptcy of its jurisdiction. It has both the power and the duty to examine a claim adverse to the bankrupt estate to the extent of ascertaining whether the claim is ingenuous and substantial. Once it is established that the claim is not colorable nor frivolous, the claimant has the right to have the merits of his claim passed on in a plenary suit and not summarily. Of such a claim the bankruptcy court cannot retain further jurisdiction unless the claimant consents to its adjudication in the bankruptcy court.
Cline v. Kaplan, 323 U.S. 97, 98-99, 65 S. Ct. 155, 156, 89 L. Ed. 97 (1944) (citations omitted). The Fifth Circuit has held that a party to a bankruptcy proceeding who asserts a substantial claim of title to the property at issue necessarily presents a substantial claim of legal right to maintain possession and therefore must be afforded an opportunity to have the dispute heard in a plenary proceeding. In re Dinkins, 610 F.2d 367, 370 (5th Cir.1980) (citing American Mannex Corp. v. Huffstutler, 329 F.2d 449, 451 (5th Cir.1964)).
In response to Powell, Goldstein's challenge to the bankruptcy court's summary jurisdiction, the Trustee argues the merits of the ownership question, apparently considering the rule stated in In re Dinkins to require that the party claiming a right to plenary proceedings demonstrate conclusively that it has title. However, it is well-established that to oust the bankruptcy court of summary jurisdiction Powell, Goldstein *740 need show only that its claim is more than "merely colorable or frivolous." 610 F.2d at 370. Regardless of the merits of the law firm's assertions of title, its claims are at least substantial. The Trustee himself cites only one case, In re Calestini, 321 F. Supp. 1313 (N.D.Cal.1971), in support of his claim of ownership. In that case, the district court affirmed a bankruptcy court's order requiring an attorney to turn over to a bankruptcy trustee all of the attorney's legal files that related to a personal injury action which the attorney had initiated on behalf of his client prior to the client's bankruptcy. The facts of that case are distinguishable from the facts presented on this appeal in that the files at issue in In re Calestini pertained only to a particular cause of action that the district court held was the property of the client. Nevertheless, even if In re Calestini directly supports the Trustee's contentions, the conclusion of that one district court, which applied California law to determine the client's property right to the cause of action and looked to federal bankruptcy law only to determine whether documents were among the items considered "property," does not render Powell, Goldstein's contrary assertion frivolous or insubstantial.
The Trustee also relies upon the well-established rule, cited in In re Calestini, 321 F.Supp. at 1316, that a bankruptcy court has constructive possession of a debtor's property in the hands of its agent. See, e.g., May v. Henderson, 268 U.S. 111, 115, 45 S. Ct. 456, 458, 69 L. Ed. 870 (1925); In re Naviera Azta, S.A., 500 F.2d 390, 391 (5th Cir.1974). In the present action, however, application of the rule of constructive possession by an agent to support summary jurisdiction merely begs the jurisdictional question. The bankruptcy court cannot support its jurisdiction to decide the question of title under this rule by deciding the merits of the dispute, that is, that the property in the agent's hands is in fact the debtor's property. The application of that rule in In re Calestini, to the extent it was necessary to support the bankruptcy court's jurisdiction in that case, is rejected by this court.
The Trustee also asserts that since there is no dispute as to the relevant facts, even if the bankruptcy court lacked summary jurisdiction, the appropriate remedy would be for this court to consider the merits of the ownership issue as a matter of law in the first instance rather than as an appellate court, pursuant to Rule 10-103(b), Fed. R.Bankr.P., which authorizes a district court to "at any time, for the convenience of the parties or other cause, withdraw a case in whole or in part from a referee and either act himself or assign the case or part thereof to another referee in the district." However, the remedy for a bankruptcy court's improper exercise of summary jurisdiction is to allow the aggrieved party an opportunity to raise its claims or defenses in the course of a plenary proceeding, in which all parties must be allowed to proceed as if the bankruptcy court had made no findings. Moreover, given Powell, Goldstein's continued assertions that some facts remain disputed and that the bankruptcy court erred in denying its request for an evidentiary hearing, this court cannot agree with the Trustee's assertion that all of the relevant facts are sufficiently beyond dispute to make plenary proceedings unnecessary.
For these reasons, this court concludes that the bankruptcy court lacked summary jurisdiction to determine the question of title to the documents in Powell, Goldstein's files. However, despite its lack of summary jurisdiction over the Trustee's claim of ownership of the files, the bankruptcy court nevertheless retains jurisdiction over the original complaint against Powell, Goldstein filed on August 29, 1979. Whatever objection Powell, Goldstein had to the summary jurisdiction over the claims raised by that complaint must be deemed waived by the law firm's request for and consent to the dismissal of its appeal of the bankruptcy court's March 3, 1980, order denying Powell, Goldstein's motion to dismiss. The bankruptcy court therefore had jurisdiction to enter the part of its November 13, 1981, order that preserved for later determination Powell, Goldstein's assertion of an attorney's lien on Kaleidoscope's property *741 other than the disputed documents in the files. Furthermore, once the question of ownership of the disputed documents is resolved, the bankruptcy court may still exercise summary jurisdiction over any claim by the Trustee to property that has been finally determined to belong to Kaleidoscope.
C. Abstention
Having determined that Powell, Goldstein has a right to present in a plenary proceeding its claim of title to the documents in its files, this court must now determine the appropriate forum to conduct such a proceeding.
In support of its argument that principles of comity require this court to abstain from deciding the question of ownership, Powell, Goldstein relies upon its assertions that this bankruptcy action and the first state court suit involve "virtually identical" issues, an assertion this court has rejected in the context of Powell, Goldstein's res judicata argument. Cases holding that a district court should abstain from considering issues that are already pending before initiation of a bankruptcy action do not control here; it appears from the record that no state court is presently considering the conflicting claims of ownership advanced by Powell, Goldstein and the Trustee. Thus, the maintenance of two suits against Powell, Goldstein in the superior court does not, of itself, make abstention appropriate in this case. Nevertheless, this court finds it both appropriate and necessary to abstain, on other grounds, from deciding the question of title to the disputed materials.
The Supreme Court has held that federal district courts must abstain from deciding "difficult questions of state law bearing on policy problems of substantial public import whose importance transcends the result in the case then at bar." Colorado River Water Conservation District v. United States, 424 U.S. 800, 814, 96 S. Ct. 1236, 1244-1245, 47 L. Ed. 2d 483 (1976) (citing Louisiana Power & Light Co. v. City of Thibodaux, 360 U.S. 25, 79 S. Ct. 1070, 3 L. Ed. 2d 1058 (1959). The abstention doctrine is not automatically invoked by the presence of a doubtful issue of state law. Rather, a district court's decision to abstain involves a discretionary exercise of its equity powers and therefore requires that a court ascertain on a case-by-case basis whether there exist the requisite special circumstances that mandate abstention. Baggett v. Bullitt, 377 U.S. 360, 375, 84 S. Ct. 1316, 1324, 12 L. Ed. 2d 377 (1964).
The fundamental rule of abstention in bankruptcy actions was established in Thompson v. Magnolia Petroleum Co., 309 U.S. 478, 60 S. Ct. 628, 84 L. Ed. 876 (1940), in which the Supreme Court held that a district court, sitting in that case as a bankruptcy court and exercising summary jurisdiction, should have abstained from deciding the question of whether conveyances of certain railroad right of way lands had granted an Illinois railroad a mere easement permitting use of only the surface or had transferred fee-simple ownership with the right to exploit the oil that had been discovered beneath those lands. The Court held that the debtor railroad's "possession of those lands under a claim of fee-simple ownership by the railroad and later by the trustee was an adequate basis for the district court's summary jurisdiction." Id. at 482, 60 S.Ct. at 630. The district court therefore had jurisdiction to protect the interests of all who claimed ownership and did not abuse its discretion in authorizing the trustee to extract and sell the oil and to impound the proceeds pending a final determination of title. However, although the court's summary jurisdiction extended to adjudication of that question of title, the Supreme Court concluded that the exercise of that jurisdiction was inappropriate in that case.
A court of bankruptcy has an exclusive and nondelegable control over the administration of an estate in its possession. But the proper exercise of that control may, where the interests of the estate and the parties will best be served, lead the bankruptcy court to consent to submission to State courts of particular controversies involving unsettled questions of State property law and arising in the *742 course of bankruptcy administration. And, under the circumstances of this case, we conclude that it is desirable to have the litigation proceed in the State courts of Illinois. An order to the trustee to proceed in the Illinois courts for a decision on the ownership of the fee to the right of way lands will be comparable to one in which the bankruptcy court, preserving the status quo the while, orders a trustee to determine in a plenary State court suit the legal right to property alleged by the trustee to have been fraudulently transferred by the bankrupt. Decision with which the federal court of bankruptcy is here faced calls for interpretation of instruments of conveyance in accordance with Illinois law. Neither statutes nor decisions of Illinois have been pointed to which are clearly applicable. And the difficulties of determining just what should be the decision under the law of that State are persuasively indicated by the different results reached by the two Circuit Courts of Appeal that have attempted the determination. Unless the matter is referred to the State courts, upon subsequent decision by the Supreme Court of Illinois it may appear that rights in local property of parties to this proceeding have by the accident of federal jurisdiction been determined contrary to the law of the State which in such matters is supreme.
Id. at 483-84, 60 S.Ct. at 630-631 (citations omitted). The Court remanded the action to the district court with instructions to modify its order to provide for submission of the title question to the Illinois courts.
Federal courts that have been asked to follow the Thompson rule of abstention have made it clear that although bankruptcy courts may in the exercise of their discretion refer many issues to state courts, see In re Jewel Terrace Corp., 3 B.R. 36, 38-39 (Bkrtcy.E.D.N.Y.1980), only in an exceptional case will an appeals court deem a failure to abstain an abuse of discretion. In re Chicago, Milwaukee, St. Paul and Pacific R.R. Co., 654 F.2d 1218, 1223 (7th Cir.1981).
It is now a settled rule that bankruptcy abstention is required only if resolution of the state law question will involve the bankruptcy court in matters of substantial public import, see, e.g., In re Kaleidoscope, 3 B.R. 7, 9 n. 2 (Bkrtcy.N.D.Ga.1979) (order in this action denying Powell, Goldstein's motion to dismiss the Trustee's original complaint), and only if there exists no state court precedent that either answers the precise question presented or enables the bankruptcy court to predict with reasonable certainty the conclusion that the state courts will reach when ultimately presented with the question. In re Boston and Maine Corp., 596 F.2d 2, 8 (1st Cir. 1979); In re Chicago & North Western Ry. Co., 127 F.2d 1001, 1004 (7th Cir.1942).
Some courts have suggested as well that a federal court should not abstain from deciding difficult state law questions when there is available no procedure by which a party can present the question to the state court. See, First National Bank of White River Junction v. Reed, 306 F.2d 481, 488 (2d Cir.1962) (noting availability of declaratory judgment action). However, a bankruptcy court should decline to abstain for this reason only if absolutely certain that attempts to present the question to the state courts will be futile.
Applied to the facts of this action, the bankruptcy rule of abstention clearly requires that a plenary proceeding to determine ownership of the disputed files be brought in state rather than federal court. First, although a determination of whether a particular item or interest is "property" within the meaning of section 70 of the Bankruptcy Act presents a federal bankruptcy law question, see, e.g., Segal v. Rochelle, 382 U.S. 375, 379, 86 S. Ct. 511, 515, 15 L. Ed. 2d 428 (1966); In re Calestini, 321 F.Supp. at 1316, to determine whether a particular party has any interest at all, a bankruptcy court would have to apply state property law. See Thompson v. Magnolia Petroleum Co., 309 U.S. at 483-84, 60 S.Ct. at 630-631.
Second, resolution of the issue of ownership would undoubtedly involve this court in matters of great public import. The *743 abundant attention the parties have paid to the work product doctrine not only presents intriguing questions, but also demonstrates the substantial effect a decision of the issue will have upon the relations of attorneys and their clients. This dispute calls for a weighing of policy considerations that are best addressed by the state courts, which have primary responsibility for the regulation of the practice of law in Georgia. At stake is the protection of both a lawyer's right to think and practice freely and the client's right to demand an accounting of the actions of his agent. On the one hand, a lawyer who cannot record freely all of his ideas without fear of later examination by his client may be less likely to consider fully what both lawyer and client should do in particular situations and may therefore provide less-informed or ill-considered representation. Thus, the argument runs, unless the lawyer's recorded thoughts are protected, the lawyer will not provide effective legal services; therefore, to protect the client's interest in effective representation the law must uphold the confidentiality of the lawyer, even to the extent of denying the client access to written evidence of some of the thoughts he has arguably paid for. On the other hand, such a rule presents great potential for abuse, making it far too easy for a lawyer to hide not only his thoughts, but any breach of the fiduciary duties he owes to his client. And, the latter argument continues, the lawyer should not fear the disclosure of thoughts that are not evidence of a breach of duty. Thus, for a court to decide the merits of the title question, substantial state interests must be considered.
Third, the parties have cited no clear state court precedent upon which this court can base a reasonably well-informed guess as to the conclusion the Georgia courts will ultimately reach when they are someday faced with the ownership question. In re Calestini, a decision by a California district court, cannot be considered clear precedent likely to be accorded substantial weight by the Georgia courts. And the evaluation of Powell, Goldstein's argument that the ownership of an attorney's files is analogous to an accountant's title to certain property in the latter's files would engage this court in interpreting and predicting unsettled Georgia law as to the property rights not only of lawyers, but of accountants as well.
Finally, it does not appear from the record that any rule of Georgia procedure precludes the Trustee from taking his claim of ownership to state court, in which there are now pending two suits between the Trustee and either Powell, Goldstein or two of its partners. For all of the above reasons, abstention under the rule of Thompson is required in this case.
Accordingly, the Trustee's motion for reconsideration is GRANTED IN PART and DENIED IN PART. The turnover order of the bankruptcy court of November 13, 1981, as modified by the bankruptcy court's supersedeas order of November 24, 1981, is REVERSED as set forth in this order. This action is REMANDED to the bankruptcy court with instructions to stay further proceedings on the Trustee's turnover complaint and to direct the Trustee to present in the courts of the state of Georgia the question of title to the documents created by Powell, Goldstein and placed in its files as a result of representation of Kaleidoscope.
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952 A.2d 1179 (2008)
COMMONWEALTH of Pennsylvania
v.
Michael S. ZAMPIER, Appellant.
No. 1208 Middle District Appeal 2007.
Superior Court of Pennsylvania.
Submitted April 14, 2008.
Filed June 26, 2008.
*1180 Arthur D. Agnellino, Athens, for appellant.
Daniel J. Barrett, Asst. Dist. Atty., Towanda, for Commonwealth, appellee.
BEFORE: FORD ELLIOTT, P.J., SHOGAN and COLVILLE,[*] JJ.
OPINION BY FORD ELLIOTT, P.J.:
¶ 1 Michael S. Zampier appeals from the judgment of sentence dated July 2, 2007, and entered July 3, 2007, in the Court of Common Pleas of Bradford County. The sole issue presented on appeal is whether the trial court correctly determined that the instant offense was appellant's second driving under the influence ("DUI") violation for gradation and sentencing purposes in accordance with 75 Pa.C.S.A. § 3806. We affirm.
¶ 2 A review of the case history is crucial in our determination of the outcome. On April 18, 1996, appellant entered the accelerated rehabilitative disposition ("ARD") program as a result of being charged with DUI. On January 17, 1997, the ARD was revoked. Appellant entered a guilty plea on March 18, 1997 and was sentenced on April 14, 1997.
¶ 3 Thereafter, on October 28, 2006, he was charged with the instant DUI offense. On February 15, 2007, pursuant to a plea agreement, appellant entered a guilty plea to DUI (general impairment, refusal) and possession of a small amount of marijuana. One of the terms of the plea was that there were no other DUI convictions within the ten year look-back period. The court ordered a pre-sentence report and scheduled a sentencing hearing. Both parties filed briefs stating appellant's acceptance of ARD on April 18, 1996 should be considered the date of his conviction and this date is outside the ten year look-back period. (See Dockets # 13, # 14.)[1] On May 1, 2007, the trial court disagreed and found the 2006 offense must be graded as a misdemeanor of the first degree, being a second offense within the ten year look-back period. Thus, the court refused to accept the plea and deemed the plea withdrawn. (Docket #16.)
¶ 4 A bench trial was held on May 24, 2007. Based upon the parties' stipulated facts, the court found appellant guilty of DUI (general impairment, refusal) and guilty of possession of a small amount of marijuana. By order filed May 25, 2007, the court found as a matter of law that the DUI should be graded as a misdemeanor of the first degree.[2] (Docket # 22.) On July 2, 2007, appellant was sentenced as a second time offender to a term of imprisonment of nine months to three years. He was also directed to pay fines and costs. (Docket #4.) Appellant filed a notice of appeal on July 13, 2007. Pursuant to the trial court's order, appellant filed a timely concise statement of matters complained of on appeal on July 24, 2007. The trial court filed a Rule 1925(a) opinion on December 31, 2007.
¶ 5 On appeal, appellant argues the trial court erred sentencing him as a second time offender applying the ten-year "look back period" under 75 Pa.C.S.A. § 3806(b). Appellant posits that for purposes of calculating his repeat offender status, the court should have used the date of his acceptance into ARD, April 18, 1996, *1181 rather than the date when he was sentenced on the revoked ARD, April 14, 1997. (Appellant's brief at 4.) We agree with the trial court that appellant should not benefit from a bargain that he could not adhere to; the trial court properly considered appellant's conviction on April 14, 1997 on the revoked ARD when it sentenced him as a second time offender. (See trial court opinion, 12/31/07 at 2.)
¶ 6 Generally, the "[i]mposition of sentence is vested within the discretion of the sentencing court and will not be disturbed by an appellate court absent a manifest abuse of discretion." Commonwealth v. Griffin, 804 A.2d 1, 7 (Pa.Super.2002) (citation omitted). Appellant's issue, however, challenges the legality of his sentence. See Commonwealth v. Sanchez, 848 A.2d 977, 986 (Pa.Super.2004) (stating allegation of improper gradation of offense implicates legality of sentence). "[T]he determination as to whether the trial court imposed an illegal sentence is a question of law; our standard of review in cases dealing with questions of law is plenary." Commonwealth v. Williams, 868 A.2d 529, 532 (Pa.Super.2005), appeal denied, 586 Pa. 726, 890 A.2d 1059 (2005) (citations omitted). Therefore, his failure to file post-sentence motions does not result in waiver of his issue on appeal. See Commonwealth v. Dinoia, 801 A.2d 1254, 1257 (Pa.Super.2002) (explaining that inquiry into the legality of a sentence is nonwaivable).
¶ 7 This case concerns the sentencing court's interpretation of the mandatory minimum sentencing provisions set forth in Section 3806 of the Vehicle Code. In relevant part, the section provides:
(a) General rule. Except as set forth in subsection (b), the term `prior offense' as used in this chapter shall mean a conviction, adjudication of delinquency, juvenile consent decree, acceptance of Accelerated Rehabilitative Disposition or other form of preliminary disposition before the sentencing on the present violation for any of the following:
(1) an offense under section 3802 (relating to driving under influence of alcohol or controlled substance);
. . . .
(b) Repeat offenses within ten years. The calculation of prior offenses for purposes of sections 1553(d.2) (relating to occupational limited license), 3803 (relating to grading) and 3804 (relating to penalties) shall include any conviction, adjudication of delinquency, juvenile consent decree, acceptance of Accelerated Rehabilitative Disposition or other form of preliminary disposition within the ten years before the present violation occurred for any of the following:
(1) an offense under section 3802;
75 Pa.C.S.A. § 3806(a), (b) (emphasis added). The purpose of Section 3806(b) is to provide courts with a means to determine whether the defendant has prior offenses within the look-back period and, therefore, whether the mandatory sentences relating to the prior offenses apply. We find that a plain reading of the statute indicates the trial court correctly treated this case as a second DUI offense for sentencing purposes as appellant has a conviction on his record due to the revocation of his ARD placement, and it is as if ARD never occurred.
¶ 8 Appellant relies on Commonwealth v. Becker, 366 Pa.Super. 54, 530 A.2d 888 (1987), appeal denied, 520 Pa. 586, 551 A.2d 213 (1988), wherein an en banc court, in interpreting the sentencing provisions of the Drunk Driving Act, 75 Pa.C.S.A. § 3731, held that one who has been accepted *1182 into, but has not completed, an ARD program is deemed to have a "conviction" for purposes of sentencing in the event of a later offense. The Becker court held that pursuant to the express terms of 75 Pa.C.S.A. § 3731(e)(2), "a defendant who is convicted of drunk driving after having accepted ARD to avoid prosecution for an earlier drunk driving charge must be sentenced as a repeat offender whether or not he has ever completed the ARD program." Id. at 893. Appellant therefore argues that his acceptance into the ARD program should be used for purposes of the look-back period, and his acceptance is outside the ten-year window.
¶ 9 We find the factual pattern of Becker to be significantly different from the case sub judice, and therefore find the case inapplicable. Becker, like appellant, accepted ARD in relation to his first DUI offense. However, within one week after acceptance into ARD, Becker was again arrested and charged with driving under the influence of alcohol. He pleaded guilty to the most recent offense and, as a consequence, faced possible expulsion from the ARD program and could have been forced to stand trial in connection with the first incident. At sentencing for the most recent offense, Becker was sentenced as a first time offender.
¶ 10 On appeal, this court reversed and found that Becker's acceptance into ARD prior to the commission of the principal offense had the effect of a prior conviction pursuant to the plain reading of the statute. The court explained that the statute clearly equates "acceptance of ARD" with a "conviction" for recidivist sentencing purposes. Id. at 894. See also Lihota v. Commonwealth, 811 A.2d 1117 (Pa. Cmwlth.2002) (ARD acceptance, even if revoked and subsequently resulting in an acquittal, has been held to be a "prior conviction" for a habitual offender determination for driving license suspension).
¶ 11 Instantly, appellant was actually expelled from the ARD program and pled guilty to his 1996 offense. Thereafter, he was sentenced accordingly before he committed the most recent DUI. Thus, unlike the situation in Becker, there was an actual conviction to be accounted for within the ten year look-back period not just the possibility of expulsion and/or acquittal. Herein, it is as if appellant had not participated in the ARD program once he was expelled and later pled guilty to the 1995 infraction. He was sentenced for his prior DUI offense, and the court need only look to his prior conviction rather than his ARD participation to trigger the imposition of a mandatory minimum sentence. The plain language of the statute mandates that acceptance of ARD constitutes the equivalent of a conviction for purposes of determining whether a person would be designated a habitual offender. Herein, we need not look to the equivalent as appellant has an actual conviction within the ten year look-back period.
¶ 12 Again, appellant violated the term of ARD and was put back into the criminal justice system as though ARD had never occurred. To agree with appellant's theory on appeal would be to ignore his conviction which resulted from his ARD being revoked. The court explained in Becker the actual "exchange" or "deal" inherent in accepting the ARD program.
When [Becker] entered ARD, he struck a deal with the state in order to avoid prosecution on the initial drunk driving charge. He stood ready to accept the benefits of participating in ARD. He then violated the terms of ARD. He now seeks to avoid the predictable consequences of his actions.
Becker, supra at 892-893. Common sense dictates that appellant should not receive *1183 the benefit of the 1996 bargain he could not uphold.
¶ 13 Judgment of sentence affirmed.
NOTES
[*] Retired Senior Judge assigned to the Superior Court.
[1] The Commonwealth has since changed its position. (See Commonwealth's brief at 5.)
[2] By a separate order, also filed May 25, 2007, the trial court granted the Commonwealth's motion to dismiss six additional counts that had been filed against appellant.
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687 S.W.2d 2 (1985)
Phillip Michael BEIER, Appellant,
v.
The STATE of Texas, Appellee.
No. 647-84.
Court of Criminal Appeals of Texas, En Banc.
March 27, 1985.
Charles Rice Young, Houston, for appellant.
John B. Holmes, Jr., Dist. Atty. and Calvin A. Hartmann, Asst. Dist. Atty., Houston, Robert Huttash, State's Atty., Alfred Walker, First Asst. State's Atty., and Cathleen R. Riedel, Asst. State's Atty., Austin, for the State.
Before the court en banc.
OPINION ON APPELLANT'S PETITION FOR DISCRETIONARY REVIEW
CAMPBELL, Judge.
Appellant was convicted for the misdemeanor offense of selling obscene material. V.T.C.A. Penal Code, Sec. 43.23(c)(1). The jury assessed punishment at fifteen days confinement in the Harris County jail and a one thousand dollar fine. The Fourteenth Court of Appeals affirmed his conviction in a published opinion. Beir v. State, 681 S.W.2d 124 (Tex.App.Houston [14th] 1984). We granted appellant's petition for discretionary review to determine the sufficiency of the evidence supporting appellant's conviction. After reviewing the record, we have concluded that the evidence *3 is insufficient to sustain appellant's conviction.
Since we are examining the sufficiency of the evidence, a recitation of the facts is in order. On January 6, 1982, members of the Houston Police Department vice squad, acting pursuant to a tip from an employee that the manager would be there at 6:00 p.m. to collect the days receipts, went to the Ball Park, an "adult" bookstore in Houston. Appellant arrived at the predicted time carrying what appeared to the officers to be a zippered bank bag. Appellant was unknown to the police. Vice squad officers inside the bookstore observed appellant enter the store, whereupon he proceeded directly to the cash register and proceeded to clear the register. As appellant was clearing the cash register he was seen conversing with a clerk employed at the bookstore. The record is silent as to the substance of their conversation. While appellant was clearing the register, one of the officers attempted to purchase a film, but was told by the clerk[1] that he would have to wait until the register was cleared. After the register was cleared, another officer purchased from the clerk the film which is the subject of this prosecution. All of the officers testified that appellant was going out the front door at the time the film was purchased. The police subsequently obtained a warrant for appellant's arrest for his alleged involvement in the transaction. When appellant was searched incident to his arrest, two pieces of paper were found on his person. One purported to be an employee list[2]; the other was a list of names and phone numbers with a notation on it that read: "[I]nstruct clerks to cooperatedo not interfere with vice going into arcadetotally cooperative."[3] Other evidence was introduced to show that the clerk had knowledge of the character and content of the film he sold to the police officer.
As the court of appeals correctly recognized, the evidence is insufficient to show that appellant acting alone sold obscene material as alleged in the information. If appellant is guilty, it is as a party under V.T.C.A. Penal Code, Sec. 7.02(a)(2), which reads in pertinent part:
"(a) A person is criminally responsible for an offense committed by the conduct of another if:
"....
"(2) acting with intent to promote or assist the commission of the offense, he solicits, encourages, directs, aids, or attempts to aid the other person to commit the offense...."
Where the evidence shows that the defendant was not a "primary actor," but at most responsible for the actions of the "primary actor," the State must prove conduct constituting an offense plus an act by the defendant done with the intent to promote or assist such conduct. Herring v. State, 633 S.W.2d 905 (Tex.App.Dallas 1982); aff'd on other grounds 659 S.W.2d 391 (Tex.Cr.App.1983). See also, Morrison v. State, 608 S.W.2d 233 (Tex.Cr.App.1980); Apodaca v. State, 589 S.W.2d 696 (Tex.Cr. App.1979).
Evidence is sufficient to convict the defendant under the law of parties where he is physically present at the commission of the offense, and encourages the commission of the offense either by words or other agreement. Tarpley v. State, 565 S.W.2d 525 (Tex.Cr.App.1978). The agreement, if any, must be before or contemporaneous *4 with the criminal event. Urtado v. State, 605 S.W.2d 907 (Tex.Cr.App.1980). Mere presence alone without evidence of intentional participation is insufficient. Acy v. State, 618 S.W.2d 362 (Tex.Cr.App. 1981). In determining whether the accused participated as a party, the court may look to events occurring before, during and after the commission of the offense, and may rely on actions of the defendant which show an understanding and common design to do the prohibited act. Medellin v. State, 617 S.W.2d 229 (Tex.Cr.App.1981); Ex parte Prior, 540 S.W.2d 723 (Tex.Cr.App. 1976). Circumstantial evidence may be used to prove one is a party to an offense. Wygal v. State, 555 S.W.2d 465 (Tex.Cr. App.1977).
As stated in the court of appeals' opinion:
"Whether there was sufficient evidence to convict Beier [appellant] as a party to distribution [sale] of obscenity is governed by Griffin v. State, 614 S.W.2d 155 (Tex.Cr.App.1981). The relevant question is whether, after viewing the evidence in the light most favorable to the verdict, any rational fact-finder could have found the essential elements of the offense beyond a reasonable doubt." 681 S.W.2d at 128.
The court of appeals concluded that the essential elements of the offense are that appellant "intentionally and knowingly assisted a common undertaking to promote obscenity, and that distribution, exhibition, or sale of obscenity took place as a part of the common undertaking." Id. at 128. Were these the essential elements of the offense, we have no doubt that the evidence would be sufficient to support appellant's conviction. However, these are not the essential elements of the offense.
The information in this case alleges, in pertinent part, that appellant "knowing the content and character of the material, [did] intentionally sell obscene material to W.L. HAYDEN..., namely, a film entitled "THE MEN'S ROOM" which depicts patently offensive representations of actual and simulated sodomy." Applying the law of parties as set forth in V.T.C.A. Penal Code, Sec. 7.02(a)(2) to the allegations in the information, the essential elements of the offense are that appellant solicited, encouraged, directed, aided or attempted to aid the clerk in the sale of the film "THE MEN'S ROOM," and that he did so, not inadvertently, but with the intent to promote or assist the sale of said film, and that appellant had knowledge of the character and content of the film.[4]
As is easily observed, the court of appeal's identification of the essential elements of the offense is much broader than the allegations in the information. While clearing the cash register may be an act by which appellant "intentionally and knowingly assisted a common undertaking to promote obscenity, it escapes us how it can be construed as an act that solicited, encouraged, directed, aided, or attempted to aid the sale of the film "THE MEN'S ROOM." The opinion of the court of appeals comes dangerously close to authorizing appellant's conviction based upon proof of his status as the manager of an enterprise, so long as he knew that the enterprise had criminal potential. This concept contravenes one of the basic tenets of our penal code: that a person commits an offense only if he voluntarily engages in conduct which is proscribed by the Penal Code. See V.T.C.A. Penal Code, Sec. 6.01(a). Conduct means an act or omission and its accompanying mental state. V.T.C.A. Penal Code, Sec. 1.07(a)(8). Under our law a person is not punished for his status, but for his conduct. See also Robinson v. California, 370 U.S. 660, 82 S. Ct. 1417, 8 L. Ed. 2d 758 (1962) (status offense violative of Fourteenth *5 Amendment.) Cf. Powell v. Texas, 392 U.S. 514, 88 S. Ct. 2145, 20 L. Ed. 2d 1254 (1968).
The argument by the State's Prosecuting Attorney in his brief also suffers from this malady. He argues that since the evidence, construed in a light most favorable to the verdict, established that appellant was the manager of the Ball Park, it was reasonable for the jury to infer that appellant had general power and control of the Ball Park and that he was in fact operating it. The State's Prosecuting Attorney is essentially arguing that appellant be punished for his status, not his conduct. He has also overlooked our opinion in Goodman v. State, 667 S.W.2d 135, 137 (Tex.Cr. App.1984), a case in which the defendants were also charged with the promotion of obscenity. We there stated that we will not infer the duties of a manager when the evidence has not established what those duties are. Since the State's Prosecuting Attorney does not specify what conduct forms the basis of appellant's conviction, his argument must fail.
The State's Prosecuting Attorney also directs our attention to Volkland v. State, 510 S.W.2d 585 (Tex.Cr.App.1974) (hereinafter Volkland,) wherein we stated:
"It need not be shown that appellant personally placed the particular magazine on display for sale, nor that he was at the premises at the time the particular magazine was purchased by the officer. A manager cannot avoid all responsibility by directing that all operations be carried out by his employees." at pg. 587
He contends that Volkland authorizes the affirmance of appellant's conviction. His reliance on Volkland is misplaced.
In that cause there was evidence that the defendant was the manager of an adult bookstore in Dallas; that he instructed employees in wrapping the individual books and magazines displayed for sale in cellophane; that he wrapped them for the purpose of exhibiting them for sale; and that he looked through a few of them that had the type of pictures found in the magazine admitted into evidence. Furthermore, the defendant in Volkland was charged with exhibiting, not selling,[5] the obscene material, which is why his presence at the time of the sale of a specific magazine was immaterial. The State was not required to prove that he had personally placed the particular magazine on sale because he was guilty as a party, not as a principal.[6]
In Volkland the State proved several acts on the part of the manager that connected him as a participant in the exhibition of obscene material. In the case sub judice, it is exactly this type of proof that is lacking. Since the State failed to prove an act by appellant that directed, aided, encouraged, or assisted in the commission of the offense, no rational trier of fact could have found the essential elements of the offense beyond a reasonable doubt. Therefore, the evidence is insufficient to support appellant's conviction. Griffin, supra.
Having found that reversal must result in the instant cause due to insufficiency of the evidence, the decisions of the United States Supreme Court in Burks v. United States, 437 U.S. 1, 98 S. Ct. 2141, 57 L. Ed. 2d 1 (1978), and Greene v. Massey, 437 U.S. 19, 98 S. Ct. 2151, 57 L. Ed. 2d 15 (1978), dictate that no further prosecution be had in this cause.
The judgments of the court of appeals and the trial court are reversed and this cause is remanded to the trial court to enter an order of acquittal.
NOTES
[1] All emphasis is supplied by the author of this opinion unless otherwise indicated.
[2] The officer that testified that the document in question was an employee list admitted on cross-examination that he only recognized one name out of the thirty on the list. He knew that name because it was the name of the clerk that sold the film "THE MEN'S ROOM." This is the entire factual basis for the officer's conclusion that the list was an employee list.
[3] These two pieces of paper were not offered to prove the truth of the statements they contained. They were offered to show appellant's status as the manager of the Ball Park and his awareness of its activities. The court of appeals so held, 681 S.W.2d at 129; and we have not granted discretionary review on this ground. Thus, we will only consider the lists as having probative value on those two issues.
[4] One cannot have the intent to promote or assist the sale of obscene material unless he has knowledge of the content and character of the material. Since selling obscene material is an offense only if the seller had knowledge of the content and character of the material, no person lacking this knowledge can possess the intent to promote or assist the sale of obscene material. See V.T.C.A. Penal Code, Secs. 7.02, 42.23. See also Davis v. State, 658 S.W.2d 572 (Tex.Cr.App. 1983). (First Amendment safeguards require knowledge of content and character of printed material before its sale may be punished.)
[5] Sec. 43.23(c)(1), supra, under which appellant was prosecuted in the case sub judice, proscribes the promotion of obscene materials. There are no fewer than seventeen different ways to promote obscenity. V.T.C.A. Penal Code, Sec. 43.21(a)(5). Since the State alleged that appellant promoted obscene material by selling it, it bound itself to prove that particular method of promotion at trial.
[6] Volkland was prosecuted under the old Penal Code, which drew no distinction between principals and accomplices in misdemeanors. Volkland, 510 S.W.2d at 587-588.
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01-03-2023
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10-30-2013
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